CHAPTER 355 Uniform Commercial Code

Article 1. General Provisions

Compiler’s Notes.

Article 1 of Chapter 355 was revised by the Kentucky General Assembly during its 2006 Regular Session by 2006 Ky. Acts ch. 242, §§ 1–24 and 64, effective July 12, 2006. The revision is based on the 2001 revision of Article 1 of the Uniform Commercial Code as promulgated by the National Conference of Commissioners of Uniform State Laws. The previous version of Article 1 of Chapter 355 was based on 1958 Ky. Acts, ch. 77.

The official comments in this article are copyrighted by the National Conference of Commissioners of Uniform State Laws and the American Law Institute, and are reproduced by permission.

Part 1. Short Title — Construction, Application and Subject Matter of This Chapter

355.1-101. Short titles.

  1. This chapter shall be known and may be cited as Uniform Commercial Code.
  2. This article may be cited as Uniform Commercial Code - General Provisions.

History. Enact. Acts 1958, ch. 77, § 1-101, effective July 1, 1960; 2006, ch. 242, § 1, effective July 12, 2006.

Official Comment

Source:

Former Section 1-101.

Changes from former law:

Subsection (b) is new. It is added in order to make the structure of Article 1 parallel with that of the other articles of the Uniform Commercial Code.

  1. Each other article of the Uniform Commercial Code (except Articles 10 and 11) may also be cited by its own short title. See Sections 2-101, 2A-101, 3-101, 4-101, 4A-101, 5-101, 6-101, 7-101, 8-101, and 9-101.

NOTES TO DECISIONS

Cited:

Commonwealth v. Hallahan, 391 S.W.2d 378, 1965 Ky. LEXIS 305 ( Ky. 1965 ); Dalton v. First Nat’l Bank, 712 S.W.2d 954, 1986 Ky. App. LEXIS 1165 (Ky. Ct. App. 1986); Son v. Coal Equity, Inc., 293 B.R. 392, 2003 U.S. Dist. LEXIS 6941 (W.D. Ky. 2003 ).

Research References and Practice Aids

Kentucky Bench & Bar.

Gardner, Ten Traps for the Unwary in International Transactions, Vol. 60, No. 4, Fall 1996, Ky. Bench & Bar 26.

Kentucky Law Journal.

Young, Scope, Purpose, and Functions of the Uniform Commercial Code, 48 Ky. L.J. 191 (1960).

Weber, The Extension of the Voidable Title Principle Under the Code, 49 Ky. L.J. 437 (1961).

Smith, Uniform Commercial Code — Assignments — Conditional Sales Contracts — Waiver of Defense Clauses, 58 Ky. L.J. 850 (1970).

The Eroding Uniformity of the Uniform Commercial Code, 65 Ky. L.J. 799 (1976-77).

Lawson, Security Interests in Motor Vehicles: A Conflict in Kentucky Law, 66 Ky. L.J. 924 (1977-1978).

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Northern Kentucky Law Review.

Notes, Torts — Products Liability — Should Contract or Tort Provide the Cause of Action When a Plaintiff Seeks Recovery Only for Damage to the Defective Product Itself — C & S Fuel, Inc. v. Clark Equip. Co.,10 N. Ky. L. Rev. 489 (1983).

355.1-102. Scope of article.

This article applies to a transaction to the extent that it is governed by another article of the Uniform Commercial Code.

History. Enact. Acts 1958, ch. 77, § 1-102, effective July 1, 1960; repealed and reenact., Acts 2006, ch. 242, § 2, effective July 12, 2006.

Compiler’s Notes.

The former section (Enact. Acts 1958, ch. 77, § 1-102, effective July 1, 1960) relating to purposes, rules of construction, and variation by agreement, was repealed and reenacted by Acts 2006, ch. 242, § 2. For comparable provisions, see KRS 355.1-103 and 355.1-302 .

Official Comment

Source:

  1. This section is intended to resolve confusion that has occasionally arisen as to the applicability of the substantive rules in this article. This section makes clear what has always been the case — the rules in Article 1 apply to transactions to the extent that those transactions are governed by one of the other articles of the Uniform Commercial Code. See also Comment 1 to Section 1-301.

NOTES TO DECISIONS

1.Priority of Creditor Against Reclaiming Seller.

Since the Kentucky Commercial Code does not contain any provision defining the relative priorities of a creditor as against a reclaiming seller the relevant common law of Kentucky will apply. In re Mel Golde Shoes, Inc., 403 F.2d 658, 1968 U.S. App. LEXIS 4652 (6th Cir. Ky. 1968 ).

2.Lien of Unpaid Seller of Personal Property.

Both at common law and under the Uniform Sales Act the implied lien of an unpaid seller of personal property depended on possession and was lost by delivery to the buyer and both the Uniform Sales Act and its successor the Uniform Commercial Code provide that unless displaced by the statutes the principles of common law and equity relative to fraud and other invalidating circumstances continue to apply. Greater Louisville Auto Auction, Inc. v. Ogle Buick, Inc., 387 S.W.2d 17, 1965 Ky. LEXIS 457 ( Ky. 1965 ).

3.Breach of Implied Warranty.

In Kentucky privity of contract between plaintiff and defendant is essential to cause of action for breach of implied warranty. Schultz v. Tecumseh Products, 310 F.2d 426, 1962 U.S. App. LEXIS 3505 (6th Cir. Mich. 1962).

4.Existing Laws.

Laws existing when the Uniform Commercial Code was adopted are supplemental to the Uniform Commercial Code unless displaced by it; thus KRS 446.060(1) was not displaced by the Uniform Commercial Code, but is supplemental to the Code. R. C. Durr Co. v. Bennett Industries, Inc., 590 S.W.2d 338, 1979 Ky. App. LEXIS 484 (Ky. Ct. App. 1979).

5.Negligent Paying on Instrument.

While the Uniform Commercial Code as adopted in Kentucky does not expressly state that a collecting or payor bank is liable for negligently paying on an instrument, this section and KRS 355.3-419 (3), 355.3-406 and 355.4-103 (1) indirectly indicate that this is so. Bullitt County Bank v. Publishers Printing Co., 684 S.W.2d 289, 1984 Ky. App. LEXIS 568 (Ky. Ct. App. 1984).

6.Jury Trier of Facts.

There is no special rule that ultimate or conclusory facts are for the courts to decide in commercial transactions; unless reasonable minds cannot differ on the conclusions, the ultimate facts are for the jury to decide. McCoy v. American Fidelity Bank & Trust Co., 715 S.W.2d 228, 1986 Ky. LEXIS 311 ( Ky. 1986 ).

Research References and Practice Aids

Kentucky Law Journal.

Weber, The Extension of the Voidable Title Principle Under the Code, 49 Ky. L.J. 437 (1961).

Brickey, Products Liability in Kentucky: The Doctrinal Dilemma, 65 Ky. L.J. 593 (1976-77).

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Weinberg, Pleading and Practice in Commercial Paper Cases: Burdens of Proof, 72 Ky. L.J. 575 (1983-84).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Nowka and Taylor, Kentucky Employees’ Wage Liens: A Sneak Attack on Creditors, but Beware of the Bankruptcy Trustee, 84 Ky. L.J. 317 (1995-96).

355.1-103. Construction of code to promote its purposes and policies — Applicability of supplemental principles of law — Use of official comments.

  1. The Uniform Commercial Code shall be liberally construed and applied to promote its underlying purposes and policies, which are:
    1. To simplify, clarify, and modernize the law governing commercial transactions;
    2. To permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and
    3. To make uniform the law among the various jurisdictions.
  2. Unless displaced by the particular provisions of the Uniform Commercial Code, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other validating or invalidating cause, supplement its provisions.
  3. Official comments to the Uniform Commercial Code, as published from time to time by the National Conference of Commissioners on Uniform State Laws, represent the express legislative intent of the General Assembly and shall be used as a guide for interpretation of this chapter, except that if the text and the official comments conflict, the text shall control.

History. Enact. Acts 1958, ch. 77, §§ 1-103, effective July 1, 1960; repealed and reenact., Acts 2006, ch. 242, § 3, effective July 12, 2006.

Compiler’s Notes.

The former section (Enact. Acts 1958, ch. 77, § 1-103, effective July 1, 1960) relating to supplementary general principles of law, was repealed and reenacted by Acts 2006, ch. 242, § 3.

Official Comment

Source:

Former Section 1-102 (1)-(2); Former Section 1-103.

Changes from former law:

This section is derived from subsections (1) and (2) of former Section 1-102 and from former Section 1-103. Subsection (a) of this section combines subsections (1) and (2) of former Section 1-102. Except for changing the form of reference to the Uniform Commercial Code and minor stylistic changes, its language is the same as subsections (1) and (2) of former Section 1-102. Except for changing the form of reference to the Uniform Commercial Code and minor stylistic changes, subsection (b) of this section is identical to former Section 1-103. The provisions have been combined in this section to reflect the interrelationship between them.

  1. The Uniform Commercial Code is drawn to provide flexibility so that, since it is intended to be a semi-permanent and infrequently-amended piece of legislation, it will provide its own machinery for expansion of commercial practices. It is intended to make it possible for the law embodied in the Uniform Commercial Code to be applied by the courts in the light of unforeseen and new circumstances and practices. The proper construction of the Uniform Commercial Code requires, of course, that its interpretation and application be limited to its reason.

    Even prior to the enactment of the Uniform Commercial Code, courts were careful to keep broad acts from being hampered in their effects by later acts of limited scope. See Pacific Wool Growers v. Draper & Co. , 158 Or. 1, 73 P.2d 1391 (1937), and compare Section 1-104. The courts have often recognized that the policies embodied in an act are applicable in reason to subject-matter that was not expressly included in the language of the act, Commercial Nat. Bank of New Orleans v. Canal-Louisiana Bank & Trust Co. , 239 U.S. 520, 36 S. Ct. 194, 60 L. Ed. 417 (1916) (bona fide purchase policy of Uniform Warehouse Receipts Act extended to case not covered but of equivalent nature), and did the same where reason and policy so required, even where the subject-matter had been intentionally excluded from the act in general. Agar v. Orda , 264 N.Y. 248, 190 N.E. 479 (1934) (Uniform Sales Act change in seller’s remedies applied to contract for sale of choses in action even though the general coverage of that Act was intentionally limited to goods “other than things in action.”) They implemented a statutory policy with liberal and useful remedies not provided in the statutory text. They disregarded a statutory limitation of remedy where the reason of the limitation did not apply. Fiterman v. J. N. Johnson & Co. , 156 Minn. 201, 194 N.W. 399 (1923) (requirement of return of the goods as a condition to rescission for breach of warranty; also, partial rescission allowed). Nothing in the Uniform Commercial Code stands in the way of the continuance of such action by the courts.

    The Uniform Commercial Code should be construed in accordance with its underlying purposes and policies. The text of each section should be read in the light of the purpose and policy of the rule or principle in question, as also of the Uniform Commercial Code as a whole, and the application of the language should be construed narrowly or broadly, as the case may be, in conformity with the purposes and policies involved.

  2. Applicability of supplemental principles of law . Subsection (b) states the basic relationship of the Uniform Commercial Code to supplemental bodies of law. The Uniform Commercial Code was drafted against the backdrop of existing bodies of law, including the common law and equity, and relies on those bodies of law to supplement it provisions in many important ways. At the same time, the Uniform Commercial Code is the primary source of commercial law rules in areas that it governs, and its rules represent choices made by its drafters and the enacting legislatures about the appropriate policies to be furthered in the transactions it covers. Therefore, while principles of common law and equity may supplement provisions of the Uniform Commercial Code, they may not be used to supplant its provisions, or the purposes and policies those provisions reflect, unless a specific provision of the Uniform Commercial Code provides otherwise. In the absence of such a provision, the Uniform Commercial Code preempts principles of common law and equity that are inconsistent with either its provisions or its purposes and policies.

    The language of subsection (b) is intended to reflect both the concept of supplementation and the concept of preemption. Some courts, however, had difficulty in applying the identical language of former Section 1-103 to determine when other law appropriately may be applied to supplement the Uniform Commercial Code, and when that law has been displaced by the Code. Some decisions applied other law in situations in which that application, while not inconsistent with the text of any particular provision of the Uniform Commercial Code, clearly was inconsistent with the underlying purposes and policies reflected in the relevant provisions of the Code. See, e.g., Sheerbonnet, Ltd. v. American Express Bank, Ltd. , 951 F. Supp. 403 (S.D.N.Y. 1995). In part, this difficulty arose from Comment 1 to former Section 1-103, which stated that “this section indicates the continued applicability to commercial contracts of all supplemental bodies of law except insofar as they are explicitly displaced by this Act.” The “explicitly displaced” language of that Comment did not accurately reflect the proper scope of Uniform Commercial Code preemption, which extends to displacement of other law that is inconsistent with the purposes and policies of the Uniform Commercial Code, as well as with its text.

  3. Application of subsection (b) to statutes . The primary focus of Section 1-103 is on the relationship between the Uniform Commercial Code and principles of common law and equity as developed by the courts. State law, however, increasingly is statutory. Not only are there a growing number of state statutes addressing specific issues that come within the scope of the Uniform Commercial Code, but in some States many general principles of common law and equity have been codified. When the other law relating to a matter within the scope of the Uniform Commercial Code is a statute, the principles of subsection (b) remain relevant to the court’s analysis of the relationship between that statute and the Uniform Commercial Code, but other principles of statutory interpretation that specifically address the interrelationship between statutes will be relevant as well. In some situations, the principles of subsection (b) still will be determinative. For example, the mere fact that an equitable principle is stated in statutory form rather than in judicial decisions should not change the court’s analysis of whether the principle can be used to supplement the Uniform Commercial Code - under subsection (b), equitable principles may supplement provisions of the Uniform Commercial Code only if they are consistent with the purposes and policies of the Uniform Commercial Code as well as its text. In other situations, however, other interpretive principles addressing the interrelationship between statutes may lead the court to conclude that the other statute is controlling, even though it conflicts with the Uniform Commercial Code. This, for example, would be the result in a situation where the other statute was specifically intended to provide additional protection to a class of individuals engaging in transactions covered by the Uniform Commercial Code.
  4. Listing not exclusive . The list of sources of supplemental law in subsection (b) is intended to be merely illustrative of the other law that may supplement the Uniform Commercial Code, and is not exclusive. No listing could be exhaustive. Further, the fact that a particular section of the Uniform Commercial Code makes express reference to other law is not intended to suggest the negation of the general application of the principles of subsection (b). Note also that the word “bankruptcy” in subsection (b), continuing the use of that word from former Section 1-103, should be understood not as a specific reference to federal bankruptcy law but, rather as a reference to general principles of insolvency, whether under federal or state law.

NOTES TO DECISIONS

1.Purpose.

The purpose in adopting the Uniform Commercial Code was to join other states in achieving uniformity and the realization of this purpose demands that so far as possible the meaning of the law be gathered from the instrument itself, unfettered by anachronisms indigenous to the respective jurisdictions in which it is in force. Lincoln Bank & Trust Co. v. Queenan, 344 S.W.2d 383, 1961 Ky. LEXIS 223 ( Ky. 1961 ).

2.Construction.

The court adopted a rule of construction that the code was plenary and exclusive except where the legislature clearly indicated otherwise. Lincoln Bank & Trust Co. v. Queenan, 344 S.W.2d 383, 1961 Ky. LEXIS 223 ( Ky. 1961 ).

A period of indulgence should be granted in connection with cases arising under the Uniform Commercial Code. Alloway v. Stuart, 385 S.W.2d 41, 1964 Ky. LEXIS 109 ( Ky. 1964 ).

Kentucky would follow the “economic loss doctrine” and would not allow recovery of commercial buyer in tort under either theories of negligence or strict liability where the subject damage is limited to the product itself, but would permit recovery in tort for damage to buyer’s other property; motion of defendant who manufactured defective utility poles to dismiss claims of utility company to recover in tort for the cost of identifying, repairing, or replacing defective poles was granted. Bowling Green Mun. Utils. v. Thomasson Lumber Co., 902 F. Supp. 134, 1995 U.S. Dist. LEXIS 15341 (W.D. Ky. 1995 ).

3.Effective Date.

When the effective date of this code is prior to the filing of an instrument which purports to create a security interest in personalty, both the instrument and the filing must comply with the terms of this code. In re Leckie Freeburn Coal Co., 405 F.2d 1043, 1969 U.S. App. LEXIS 9150 (6th Cir. Ky.), cert. denied, 395 U.S. 960, 89 S. Ct. 2101, 23 L. Ed. 2d 746, 1969 U.S. LEXIS 3173 (U.S. 1969).

Assignment by one partner to another of the right to collect money due and owing to the copartners was not an assignment of a “contract right” as contemplated by the Uniform Commercial Code since the right had already been earned by performance but was assignment of an “account” which was not a “security interest” requiring filing under subsection (1)(b) of KRS 355.9-301 to perfect the interest and the assignment had priority over a subsequent attachment by judgment creditor of assigning partner. Spurlin v. Sloan, 368 S.W.2d 314, 1963 Ky. LEXIS 41 ( Ky. 1963 ).

No part of the Uniform Commercial Code applies to a written assignment of funds presently due and owing for the purpose of liquidation or satisfying a prior existing obligation. Spurlin v. Sloan, 368 S.W.2d 314, 1963 Ky. LEXIS 41 ( Ky. 1963 ).

4.Equipment Leasing Transactions.

The UCC is applicable to equipment leasing transactions. Hertz Commercial Leasing Corp. v. Joseph, 641 S.W.2d 753, 1982 Ky. App. LEXIS 262 (Ky. Ct. App. 1982).

Cited in:

Cole v. Warren Cnty., 2015 Ky. App. LEXIS 157 (Nov. 13, 2015); Versailles Farm v. Haynes, 2021 Ky. App. LEXIS 17 (Ky. Ct. App. Feb. 12, 2021).

Research References and Practice Aids

Journal of Mineral Law & Policy.

Comments, Injected Gas: Realty or Personalty, 3 J.M.L. & P. 571 (1988).

Kentucky Law Journal.

Young, Scope, Purposes and Functions of the Uniform Commercial Code, 48 Ky. L.J. 191 (1960).

Weber, The Extension of the Voidable Title Principle Under the Code, 49 Ky. L.J. 437 (1961).

Whiteside, Lewis, Kentucky’s Commercial Code — Some Initial Problems in Security, 50 Ky. L.J. 61 (1961).

Whiteside, Amending the Uniform Commercial Code, 51 Ky. L.J. 3 (1962).

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

Comments, The Role of Negligence in Section 3-405 of the Uniform Commercial Code: Owensboro National Bank v. Crisp, 69 Ky. L.J. 143 (1980-81).

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Northern Kentucky Law Review.

Notes, Torts — Products Liability — Should Contract or Tort Provide the Cause of Action When a Plaintiff Seeks Recovery Only for Damage to the Defective Product Itself — C & S Fuel, Inc. v. Clark Equip. Co.,10 N. Ky. L. Rev. 489 (1983).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Sales, § 190.00.

355.1-104. Construction against implicit repeal.

The Uniform Commercial Code being a general act intended as a unified coverage of its subject matter, no part of it shall be deemed to be impliedly repealed by subsequent legislation if such construction can reasonably be avoided.

History. Enact. Acts 1958, ch. 77, § 1-104, effective July 1, 1960; 2006, ch. 242, § 4, effective July 12, 2006.

Official Comment

Source:

Former Section 1-104.

Changes from former law:

Except for changing the form of reference to the Uniform Commercial Code, this section is identical to former Section 1-104.

  1. This section embodies the policy that an act that bears evidence of carefully considered permanent regulative intention should not lightly be regarded as impliedly repealed by subsequent legislation. The Uniform Commercial Code, carefully integrated and intended as a uniform codification of permanent character covering an entire “field” of law, is to be regarded as particularly resistant to implied repeal.

NOTES TO DECISIONS

1.Repeals by Implication.

Repeals by implication were not favored, and a statute would not be construed as repealing a prior statute unless it was so clearly repugnant as to admit of no other reasonable construction. Tipton v. Brown, 277 Ky. 625 , 126 S.W.2d 1067, 1939 Ky. LEXIS 690 ( Ky. 1939 ); Demunbrun v. Browning, 311 Ky. 71 , 223 S.W.2d 372, 1949 Ky. LEXIS 1058 ( Ky. 1949 ).

Cited:

Home Lumber Co. v. Appalachian Regional Hospitals, Inc., 722 S.W.2d 912, 1987 Ky. App. LEXIS 425 (Ky. Ct. App. 1987).

Research References and Practice Aids

Kentucky Law Journal.

Whiteside, Lewis, Kentucky’s Commercial Code — Some Initial Problems in Security, The Lincoln Bank Case, 50 Ky. L.J. 61 (1961).

355.1-105. Severability.

If any provision or clause of the Uniform Commercial Code or its application to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of the Uniform Commercial Code which can be given effect without the invalid provision or application, and to this end the provisions of the Uniform Commercial Code are severable.

History. Enact. Acts 1958, ch. 77, § 1-105, effective July 1, 1960; 1986, ch. 118, § 1, effective July 1, 1987; 1990, ch. 363, § 79, effective January 1, 1991; 1992, ch. 116, § 62, effective July 14, 1992; 1996, ch. 130, § 179, effective January 1, 1997; 2000, ch. 408, § 19, effective July 1, 2001; repealed and reenact., Acts 2006, ch. 242, § 5, effective July 12, 2006.

Compiler’s Notes.

The former section (Enact. Acts 1958, ch. 77, § 1-105, effective July 1, 1960; 1986, ch. 118, § 1, effective July 1, 1987; 1990, ch. 363, § 79, effective January 1, 1991; 1992, ch. 116, § 62, effective July 14, 1992; 1996, ch. 130, § 179, effective January 1, 1997; 2000, ch. 408, § 19, effective July 1, 2001) relating to territorial application and parties’ choice of law, was repealed and reenacted by Acts 2006, ch. 242, § 5. For comparable provisions, see KRS 355.1-301 .

Official Comment

Source:

Former Section 1-108.

Changes from former law:

Except for changing the form of reference to the Uniform Commercial Code, this section is identical to former Section 1-108.

  1. This is the model severability section recommended by the National Conference of Commissioners on Uniform State Laws for inclusion in all acts of extensive scope.

NOTES TO DECISIONS

1.Multiple Acts.

Although an act was multiple, if it could be dissolved into its constituent parts and these separated from each other and one eliminated without defeating the legislative intention that part should be stricken and the rest allowed to stand. Owensboro v. Hazel, 229 Ky. 752 , 17 S.W.2d 1031, 1929 Ky. LEXIS 843 ( Ky. 1929 ).

355.1-106. Use of singular and plural — Gender.

In the Uniform Commercial Code, unless the statutory context otherwise requires:

  1. Words in the singular number include the plural, and those in the plural include the singular; and
  2. Words of any gender also refer to any other gender.

History. Enact. Acts 1958, ch. 77, § 1-106, effective July 1, 1960; repealed and reenact., Acts 2006, ch. 242, § 6, effective July 12, 2006.

Compiler’s Notes.

The former section (Enact. Acts 1958, ch. 77, § 1-106, effective July 1, 1960) relating to remedies liberally administered, was repealed and reenacted by Acts 2006, ch. 242, § 6. For comparable provisions, see KRS 355.1-305 .

Official Comment

Source:

Former Section 1-102(5). See also 1 U.S.C. Section 1.

Changes from former law:

Other than minor stylistic changes, this section is identical to former Section 1-102(5).

  1. This section makes it clear that the use of singular or plural in the text of the Uniform Commercial Code is generally only a matter of drafting style - singular words may be applied in the plural, and plural words may be applied in the singular. Only when it is clear from the statutory context that the use of the singular or plural does not include the other is this rule inapplicable. See, e.g., Section 9-322.

355.1-107. Section headnotes.

Section headnotes are part of the Uniform Commercial Code.

History. Enact. Acts 1958, ch. 77, § 1-107, effective July 1, 1960; repealed and reenact., Acts 2006, ch. 242, § 7, effective July 12, 2006.

Compiler’s Notes.

The former section (Enact. Acts 1958, ch. 77, § 1-107, effective July 1, 1960) relating to waiver or renunciation of claim or right after breach, was repealed and reenacted by Acts 2006, ch. 242, § 7. For comparable provisions, see KRS 355.1-306 .

Official Comment

Source:

Former Section 1-109.

Changes from former law:

None.

  1. Section captions are a part of the text of the Uniform Commercial Code, and not mere surplusage. This is not the case, however, with respect to subsection headings appearing in Article 9. See Comment 3 to Section 9-101 (“subsection headings are not a part of the official text itself and have not been approved by the sponsors.”).

355.1-108. Relation to Electronic Signatures in Global and National Commerce Act.

This chapter modifies, limits, and supersedes the federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C. sec. 7001 et seq., except that nothing in this chapter modifies, limits, or supersedes Section 7001(c) of that Act or authorizes electronic delivery of any of the notices described in Section 7003(b) of that Act.

History. Enact. Acts 1958, ch. 77, § 1-108, effective July 1, 1960; repealed and reenact., Acts 2006, ch. 242, § 8, effective July 12, 2006.

Compiler’s Notes.

The former section (Enact. Acts 1958, ch. 77, § 1-108, effective July 1, 1960) relating to severability, was repealed and reenacted by Acts 2006, ch. 242, § 8. For comparable provisions, see KRS 355.1-105 .

Legislative Research Commission Note.

(7/12/2006). Section 102(a)(2)(B) of the federal Electronic Signatures in Global and National Commerce Act of 2000, 15 U.S.C. sec. 7002 , provides: “A State statute, regulation, or other rule of law may modify, limit, or supersede the provisions of section 7001 of this title with respect to State law only if such statute, regulation, or rule of law . . . enacted or adopted after June 30, 2000, makes specific reference tot this chapter.”

Official Comment

Source:

New

  1. The federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C. Section 7001et seq became effective in 2000. Section 102(a) of that Act provides that a State statute may modify, limit, or supersede the provisions of section 101 of that Act with respect to state law if such statute, inter alia, specifies the alternative procedures or requirements for the use or acceptance (or both) of electronic records or electronic signatures to establish the legal effect, validity, or enforceability of contracts or other records, and (i) such alternative procedures or requirements are consistent with Titles I and II of that Act, (ii) such alternative procedures or requirements do not require, or accord greater legal status or effect to, the implementation or application of a specific technology or technical specification for performing the functions of creating, storing, generating, receiving, communicating, or authenticating electronic records or electronic signatures; and (iii) if enacted or adopted after the date of the enactment of that Act, makes specific reference to that Act. Article 1 fulfills the first two of those three criteria; this Section fulfills the third criterion listed above.
  2. As stated in this section, however, Article 1 does not modify, limit, or supersede Section 101(c) of the Electronic Signatures in Global and National Commerce Act (requiring affirmative consent from a consumer to electronic delivery of transactional disclosures that are required by state law to be in writing); nor does it authorize electronic delivery of any of the notices described in Section 103(b) of that Act.

355.1-109. Section captions. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 1-109, effective July 1, 1960) was repealed by Acts 2006, ch. 242, § 64, effective July 12, 2006. For comparable provisions, see KRS 355.1-107 .

355.1-110. Comments of National Conference of Commissioners on Uniform State Laws and American Law Institute may be consulted in construction and application of chapter. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1990, ch. 478, § 5, effective July 13, 1990) was repealed by Acts 2006, ch. 242, § 64, effective July 12, 2006. For comparable provisions, see KRS 355.1-103 .

Part 2. General Definitions and Principles of Interpretation

355.1-201. General definitions.

  1. Unless the context otherwise requires, words or phrases defined in this section, or in the additional definitions contained in other articles of the Uniform Commercial Code that apply to particular articles or parts thereof, have the meanings stated.
  2. Subject to definitions contained in other articles of the Uniform Commercial Code that apply to particular articles or parts thereof:
    1. “Action,” in the sense of a judicial proceeding, includes recoupment, counterclaim, set-off, suit in equity, and any other proceeding in which rights are determined;
    2. “Aggrieved party” means a party entitled to pursue a remedy;
    3. “Agreement,” as distinguished from “contract,” means the bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade as provided in KRS 355.1-303 ;
    4. “Bank” means a person engaged in the business of banking and includes a savings bank, savings and loan association, credit union, and trust company;
    5. “Bearer” means a person in control of a negotiable electronic document of title or a person in possession of a negotiable instrument, a negotiable tangible document of title, or certificated security that is payable to bearer or indorsed in blank;
    6. “Bill of lading” means a document of title evidencing the receipt of goods for shipment issued by a person engaged in the business of directly or indirectly transporting or forwarding goods. The term does not include a warehouse receipt;
    7. “Branch” includes a separately incorporated foreign branch of a bank;
    8. “Burden of establishing” a fact means the burden of persuading the trier of fact that the existence of the fact is more probable than its nonexistence;
    9. “Buyer in ordinary course of business” means a person that buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind. A person buys goods in the ordinary course if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller’s own usual or customary practices. A person that sells oil, gas, or other minerals at the wellhead or minehead is a person in the business of selling goods of that kind. A buyer in ordinary course of business may buy for cash, by exchange of other property, or on secured or unsecured credit, and may acquire goods or documents of title under a preexisting contract for sale. Only a buyer that takes possession of the goods or has a right to recover the goods from the seller under Article 2 of this chapter may be a buyer in ordinary course of business. “Buyer in ordinary course of business” does not include a person that acquires goods in a transfer in bulk or as security for or in total or partial satisfaction of a money debt;
    10. “Conspicuous,” with reference to a term, means so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it. Whether a term is “conspicuous” or not is a decision for the court. Conspicuous terms include the following:
      1. A heading in capitals equal to or greater in size than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same or lesser size; and
      2. Language in the body of a record or display in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from surrounding text of the same size by symbols or other marks that call attention to the language;
    11. “Consumer” means an individual who enters into a transaction primarily for personal, family, or household purposes;
    12. “Contract,” as distinguished from “agreement,” means the total legal obligation that results from the parties’ agreement as determined by the Uniform Commercial Code as supplemented by any other applicable laws;
    13. “Creditor” includes a general creditor, a secured creditor, a lien creditor, and any representative of creditors, including an assignee for the benefit of creditors, a trustee in bankruptcy, a receiver in equity, and an executor or administrator of an insolvent debtor’s or assignor’s estate;
    14. “Defendant” includes a person in the position of defendant in a counterclaim, cross-claim, or third-party claim;
    15. “Delivery,” with respect to an electronic document of title means voluntary transfer of control and with respect to an instrument, document of title, or chattel paper, means voluntary transfer of possession;
    16. “Document of title” means a record that:
      1. In the regular course of business or financing is treated as adequately evidencing that the person in possession or control of the record is entitled to receive, control, hold, and dispose of the record and the goods the record covers; and
      2. Purports to be issued by or addressed to a bailee and to cover goods in the bailee’s possession which are either identified or are fungible portions of an identified mass. The term includes a bill of lading, transport document, dock warrant, dock receipt, warehouse receipt and order for delivery of goods. An electronic document of title is evidenced by a record consisting of information stored in an electronic medium. A tangible document of title is evidenced by a record consisting of information that is inscribed on a tangible medium;
    17. “Fault” means a default, breach, or wrongful act or omission;
    18. “Fungible goods” means:
      1. Goods of which any unit, by nature or usage of trade, is the equivalent of any other like unit; or
      2. Goods that by agreement are treated as equivalent;
    19. “Genuine” means free of forgery or counterfeiting;
    20. “Good faith,” except as otherwise provided in Article 5 of this chapter, means honesty in fact and the observance of reasonable commercial standards of fair dealing;
    21. “Holder” means:
      1. The person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession;
      2. The person in possession of a document of title if the goods are deliverable either to bearer or to the order of the person in possession; or
      3. A person in control of a negotiable electronic document of title;
    22. “Insolvency proceeding” includes an assignment for the benefit of creditors or other proceeding intended to liquidate or rehabilitate the estate of the person involved;
    23. “Insolvent” means:
      1. Having generally ceased to pay debts in the ordinary course of business other than as a result of bona fide dispute;
      2. Being unable to pay debts as they become due; or
      3. Being insolvent within the meaning of federal bankruptcy law;
    24. “Money” means a medium of exchange currently authorized or adopted by a domestic or foreign government. The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two (2) or more countries;
    25. “Organization” means a person other than an individual;
    26. “Party,” as distinguished from “third party,” means a person that has engaged in a transaction or made an agreement subject to the Uniform Commercial Code;
    27. “Person” means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, public corporation, or any other legal or commercial entity;
    28. “Present value” means the amount as of a date certain of one (1) or more sums payable in the future, discounted to the date certain by use of either an interest rate specified by the parties if that rate is not manifestly unreasonable at the time the transaction is entered into or, if an interest rate is not so specified, a commercially reasonable rate that takes into account the facts and circumstances at the time the transaction is entered into;
    29. “Purchase” means taking by sale, lease, discount, negotiation, mortgage, pledge, lien, security interest, issue or reissue, gift, or any other voluntary transaction creating an interest in property;
    30. “Purchaser” means a person that takes by purchase;
    31. “Record” means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form;
    32. “Remedy” means any remedial right to which an aggrieved party is entitled with or without resort to a tribunal;
    33. “Representative” means a person empowered to act for another, including an agent, an officer of a corporation or association, and a trustee, executor, or administrator of an estate;
    34. “Right” includes remedy;
    35. “Security interest” means an interest in personal property or fixtures which secures payment or performance of an obligation. “Security interest” includes any interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction that is subject to Article 9 of this chapter. “Security interest” does not include the special property interest of a buyer of goods on identification of those goods to a contract for sale under KRS 355.2-401 , but a buyer may also acquire a “security interest” by complying with Article 9 of this chapter. Except as otherwise provided in KRS 355.2-505 , the right of a seller or lessor of goods under Article 2 or 2A of this chapter to retain or acquire possession of the goods is not a “security interest,” but a seller or lessor may also acquire a “security interest” by complying with Article 9 of this chapter. The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer under KRS 355.2-401 is limited in effect to a reservation of a “security interest.” Whether a transaction in the form of a lease creates a “security interest” is determined pursuant to KRS 355.1-203 ;
    36. “Send” in connection with a writing, record, or notice means:
      1. To deposit in the mail or deliver for transmission by any other usual means of communication with postage or cost of transmission provided for and properly addressed and, in the case of an instrument, to an address specified thereon or otherwise agreed, or if there be none to any address reasonable under the circumstances; or
      2. In any other way to cause to be received any record or notice within the time it would have arrived if properly sent;
    37. “Signed” includes using any symbol executed or adopted with present intention to adopt or accept a writing;
    38. “State” means a State of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States;
    39. “Surety” includes a guarantor or other secondary obligor;
    40. “Term” means a portion of an agreement that relates to a particular matter;
    41. “Unauthorized signature” means a signature made without actual, implied, or apparent authority. The term includes a forgery;
    42. “Warehouse receipt” means a document of title issued by a person engaged in the business of storing goods for hire; and
    43. “Writing” includes printing, typewriting, or any other intentional reduction to tangible form. “Written” has a corresponding meaning.

History. Enact. Acts 1958, ch. 77, § 1-201, effective July 1, 1960; 1964, ch. 130, § 1; 1986, ch. 118, § 2, effective July 1, 1987; 1990, ch. 363, § 80, effective January 1, 1991; 1996, ch. 130, § 70, effective January 1, 1997; 2000, ch. 408, § 157, effective July 1, 2001; repealed and reenact., Acts 2006, ch. 242, § 9, effective July 12, 2006; 2012, ch. 132, § 44, effective July 12, 2012.

Compiler’s Notes.

The former section (Enact. Acts 1958, ch. 77, § 1-201, effective July 1, 1960; 1964, ch. 130, § 1; 1986, ch. 118, § 2, effective July 1, 1987; 1990, ch. 363, § 80, effective January 1, 1991; 1996, ch. 130, § 70, effective January 1, 1997; 2000, ch. 408, § 157, effective July 1, 2001) was repealed and reenacted by Acts 2006, ch. 242, § 9.

Official Comment

Source:

Former Section 1-201.

Changes from former law:

In order to make it clear that all definitions in the Uniform Commercial Code (not just those appearing in Article 1, as stated in former Section 1-201, but also those appearing in other Articles) do not apply if the context otherwise requires, a new subsection (a) to that effect has been added, and the definitions now appear in subsection (b). The reference in subsection (a) to the “context” is intended to refer to the context in which the defined term is used in the Uniform Commercial Code. In other words, the definition applies whenever the defined term is used unless the context in which the defined term is used in the statute indicates that the term was not used in its defined sense. Consider, for example, Sections 3-103(a)(9) (defining “promise,” in relevant part, as “a written undertaking to pay money signed by the person undertaking to pay)” and 3-303(a)(1) (indicating that an instrument is issued or transferred for value if “the instrument is issued or transferred for a promise of performance, to the extent that the promise has been performed.” It is clear from the statutory context of the use of the word “promise” in Section 3-303(a)(1) that the term was not used in the sense of its definition in Section 3-103(a)(9). Thus, the Section 3-103(a)(9) definition should not be used to give meaning to the word “promise” in Section 3-303(a).

Some definitions in former Section 1-201 have been reformulated as substantive provisions and have been moved to other sections. See Sections 1-202 (explicating concepts of notice and knowledge formerly addressed in Sections 1-201(25)-(27)), 1-204 (determining when a person gives value for rights, replacing the definition of “value” in former Section 1-201(44)), and 1-206 (addressing the meaning of presumptions, replacing the definitions of “presumption” and “presumed” in former Section 1-201(31)). Similarly, the portion of the definition of “security interest” in former Section 1-201(37) which explained the difference between a security interest and a lease has been relocated to Section 1-203.

Two definitions in former Section 1-201 have been deleted. The definition of “honor” in former Section 1-201(21) has been moved to Section 2-103(1)(b), inasmuch as the definition only applies to the use of the word in Article 2. The definition of “telegram” in former Section 1-201(41) has been deleted because that word no longer appears in the definition of “conspicuous.”

Other than minor stylistic changes and renumbering, the remaining definitions in this section are as in former Article 1 except as noted below.

  1. “Action.” Unchanged from former Section 1-201, which was derived from similar definitions in Section 191, Uniform Negotiable Instruments Law; Section 76, Uniform Sales Act; Section 58, Uniform Warehouse Receipts Act; Section 53, Uniform Bills of Lading Act.
  2. “Aggrieved party.” Unchanged from former Section 1-201.
  3. “Agreement.” Derived from former Section 1-201. As used in the Uniform Commercial Code the word is intended to include full recognition of usage of trade, course of dealing, course of performance and the surrounding circumstances as effective parts thereof, and of any agreement permitted under the provisions of the Uniform Commercial Code to displace a stated rule of law. Whether an agreement has legal consequences is determined by applicable provisions of the Uniform Commercial Code and, to the extent provided in Section 1-103, by the law of contracts.
  4. “Bank.” Derived from Section 4A-104.
  5. “Bearer.” Unchanged, except in one respect, from former section 1-201, which was derived from Section 191, Uniform Negotiable Instruments Law. The term bearer applies to negotiable documents of title and has been broadened to include a person in control of an electronic negotiable document of title. Control of an electronic document of title is defined in Article 7 (Section 7-106).
  6. “Bill of Lading.” Derived from former Section 1-201. The reference to, and definition of, an “airbill” has been deleted as no longer necessary. A bill of lading is one type of document of title as defined in subsection (16). This definition should be read in conjunction with the definition of carrier in Article 7 (Section 7-102).
  7. “Branch.” Unchanged from former Section 1-201.
  8. “Burden of establishing a fact.” Unchanged from former Section 1-201.
  9. “Buyer in ordinary course of business.” Except for minor stylistic changes, identical to former Section 1-201 (as amended in conjunction with the 1999 revisions to Article 9). The major significance of the phrase lies in Section 2-403 and in the Article on Secured Transactions (Article 9).

    The first sentence of paragraph (9) makes clear that a buyer from a pawnbroker cannot be a buyer in ordinary course of business. The second sentence explains what it means to buy “in the ordinary course.” The penultimate sentence prevents a buyer that does not have the right to possession as against the seller from being a buyer in ordinary course of business. Concerning when a buyer obtains possessory rights, see Sections 2-502 and 2-716. However, the penultimate sentence is not intended to affect a buyer’s status as a buyer in ordinary course of business in cases (such as a “drop shipment”) involving delivery by the seller to a person buying from the buyer or a donee from the buyer. The requirement relates to whether as against the seller the buyer or one taking through the buyer has possessory rights.

  10. “Conspicuous.” Derived from former Section 1-201(10). This definition states the general standard that to be conspicuous a term ought to be noticed by a reasonable person. Whether a term is conspicuous is an issue for the court. Subparagraphs (A) and (B) set out several methods for making a term conspicuous. Requiring that a term be conspicuous blends a notice function (the term ought to be noticed) and a planning function (giving guidance to the party relying on the term regarding how that result can be achieved). Although these paragraphs indicate some of the methods for making a term attention-calling, the test is whether attention can reasonably be expected to be called to it. The statutory language should not be construed to permit a result that is inconsistent with that test.
  11. “Consumer.” Derived from Section 9-102(a)(25).
  12. “Contract.” Except for minor stylistic changes, identical to former Section 1-201.
  13. “Creditor.” Unchanged from former Section 1-201.
  14. “Defendant.” Except for minor stylistic changes, identical to former Section 1-201, which was derived from Section 76, Uniform Sales Act.
  15. “Delivery.” Derived from former Section 1-201. The reference to certificated securities has been deleted in light of the more specific treatment of the matter in Section 8-301. The definition has been revised to accommodate electronic documents of title. Control of an electronic document of title is defined in Article 7 (Section 7-106).
  16. “Document of title.” Derived from former Section 1-201, which was derived from Section 76, Uniform Sales Act. This definition makes explicit that the obligation or designation of a third party as “bailee” is essential to a document of title and clearly rejects any such result as obtained in  Hixson v. Ward, 254 Ill.App. 505 (1929), which treated a conditional sales contract as a document of title. Also the definition is left open so that new types of documents may be included, including documents which gain commercial recognition in the international arena. See UNCITRAL Draft Instrument on the Carriage of Goods By Sea. It is unforeseeable what documents may one day serve the essential purpose now filled by warehouse receipts and bills of lading. The definition is stated in terms of the function of the documents with the intention that any document which gains commercial recognition as accomplishing the desired result shall be included within its scope. Fungible goods are adequately identified within the language of the definition by identification of the mass of which they are a part.

    Dock warrants were within the Sales Act definition of document of title apparently for the purpose of recognizing a valid tender by means of such paper. In current commercial practice a dock warrant or receipt is a kind of interim certificate issued by shipping companies upon delivery of the goods at the dock, entitling a designated person to be issued a bill of lading. The receipt itself is invariably nonnegotiable in form although it may indicate that a negotiable bill is to be forthcoming. Such a document is not within the general compass of the definition, although trade usage may in some cases entitle such paper to be treated as a document of title. If the dock receipt actually represents a storage obligation undertaken by the shipping company, then it is a warehouse receipt within this Section regardless of the name given to the instrument.

    The goods must be “described”, but the description may be by marks or labels and may be qualified in such a way as to disclaim personal knowledge of the issuer regarding contents or condition. However, baggage and parcel checks and similar “tokens” of storage which identify stored goods only as those received in exchange for the token are not covered by this Article. The definition is broad enough to include an airway bill.

    A document of title may be either tangible or electronic. Tangible documents of title should be construed to mean traditional paper documents. Electronic documents of title are documents that are stored in an electronic medium instead of in tangible form. The concept of an electronic medium should be construed liberally to include electronic, digital, magnetic, optical, electromagnetic, or any other current or similar emerging technologies. As to reissuing a document of title in an alternative medium, see Article 7, Section 7-105. Control for electronic documents of title is defined in Article 7 (Section 7-106).

  17. “Fault.” Derived from former Section 1-201. “Default” has been added to the list of events constituting fault.
  18. “Fungible goods.” Derived from former Section 1-201. References to securities have been deleted because Article 8 no longer uses the term “fungible” to describe securities. Accordingly, this provision now defines the concept only in the context of goods.
  19. “Genuine.” Unchanged from former Section 1-201.
  20. “Good faith.” Former Section 1-201(19) defined “good faith” simply as honesty in fact; the definition contained no element of commercial reasonableness. Initially, that definition applied throughout the Code with only one exception. Former Section 2-103(1)(b) provided that “ in this Article… good faith in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.” This alternative definition was limited in applicability in three ways. First, it applied only to transactions within the scope of Article 2. Second, it applied only to merchants. Third, strictly construed it applied only to uses of the phrase “good faith”  in Article 2; thus, so construed it would not define “good faith” for its most important use- the obligation of good faith imposed by former Section 1-203.

    Over time, however, amendments to the Uniform Commercial Code brought the Article 2 merchant concept of good faith (subjective honesty and objective commercial reasonableness) into other Articles. First, Article 2A explicitly incorporated the Article 2 standard. See Section 2A-103(7). Then, other Articles broadened the applicability of that standard by adopting it for all parties rather than just for merchants. See, e.g ., Sections 3-103(a)(4), 4A-105(a)(6), 8-102(a)(10), and 9-102(a)(43). All of these definitions are comprised of two elements—honesty in fact and the observance of reasonable commercial standards of fair dealing. Only revised Article 5 defines “good faith” solely in terms of subjective honesty, and only Article 6 and Article 7 are without definitions of good faith. (It should be noted that, while revised Article 6 did not define good faith, Comment 2 to revised Section 6-102 states that “this Article adopts the definition of ‘good faith’ in Article 1 in all cases, even when the buyer is a merchant.”) Given these developments, it is appropriate to move the broader definition of “good faith” to Article 1. Of course, this definition is subject to the applicability of the narrower definition in revised Article 5.

  21. “Holder.” Derived from former Section 1-201. The definition has been reorganized for clarity and amended to provide for electronic negotiable documents of title.
  22. “Insolvency proceedings.” Unchanged from former Section 1-201.
  23. “Insolvent.” Derived from former Section 1-201. The three tests of insolvency—“generally ceased to pay debts in the ordinary course of business other than as a result of a bona fide dispute as to them,” “unable to pay debts as they become due,” and “insolvent within the meaning of the federal bankruptcy law”—are expressly set up as alternative tests and must be approached from a commercial standpoint.
  24. “Money.” Substantively identical to former Section 1-201. The test is that of sanction of government, whether by authorization before issue or adoption afterward, which recognizes the circulating medium as a part of the official currency of that government. The narrow view that money is limited to legal tender is rejected.
  25. “Organization.” The former definition of this word has been replaced with the standard definition used in acts prepared by the National Conference of Commissioners on Uniform State Laws.
  26. “Party.” Substantively identical to former Section 1-201. Mention of a party includes, of course, a person acting through an agent. However, where an agent comes into opposition or contrast to the principal, particular account is taken of that situation.
  27. “Person.” The former definition of this word has been replaced with the standard definition used in acts prepared by the National Conference of Commissioners on Uniform State Laws.
  28. “Present value.” This definition was formerly contained within the definition of “security interest” in former Section 1-201(37).
  29. “Purchase.” Derived from former Section 1-201. The form of definition has been changed from “includes” to “means.”
  30. “Purchaser.” Unchanged from former Section 1-201.
  31. “Record.” Derived from Section 9-102(a)(69).
  32. “Remedy.” Unchanged from former Section 1-201. The purpose is to make it clear that both remedy and right (as defined) include those remedial rights of “self help” which are among the most important bodies of rights under the Uniform Commercial Code, remedial rights being those to which an aggrieved party may resort on its own.
  33. “Representative.” Derived from former Section 1-201. Reorganized, and form changed from “includes” to “means.”
  34. “Right.” Except for minor stylistic changes, identical to former Section 1-201.
  35. “Security Interest.” The definition is the first paragraph of the definition of “security interest” in former Section 1-201, with minor stylistic changes. The remaining portion of that definition has been moved to Section 1-203. Note that, because of the scope of Article 9, the term includes the interest of certain outright buyers of certain kinds of property.
  36. “Send.” Derived from former Section 1-201. Compare “notifies.”
  37. “Signed.” Derived from former Section 1-201. Former Section 1-201 referred to “intention to authenticate”; because other articles now use the term “authenticate,” the language has been changed to “intention to adopt or accept.” The latter formulation is derived from the definition of “authenticate” in Section 9-102(a)(7). This provision refers only to writings, because the term “signed,” as used in some articles, refers only to writings. This provision also makes it clear that, as the term “signed” is used in the Uniform Commercial Code, a complete signature is not necessary. The symbol may be printed, stamped or written; it may be by initials or by thumbprint. It may be on any part of the document and in appropriate cases may be found in a billhead or letterhead. No catalog of possible situations can be complete and the court must use common sense and commercial experience in passing upon these matters. The question always is whether the symbol was executed or adopted by the party with present intention to adopt or accept the writing.
  38. “State.” This is the standard definition of the term used in acts prepared by the National Conference of Commissioners on Uniform State Laws.
  39. “Surety.” This definition makes it clear that “surety” includes all secondary obligors, not just those whose obligation refers to the person obligated as a surety. As to the nature of secondary obligations generally, see  Restatement (Third), Suretyship and Guaranty Section1 (1996).
  40. “Term.” Unchanged from former Section 1-201.
  41. “Unauthorized signature.” Unchanged from former Section 1-201.
  42. “Warehouse receipt.” Derived from former Section 1-201, which was derived from Section 76(1), Uniform Sales Act; Section 1, Uniform Warehouse Receipts Act. Receipts issued by a field warehouse are included, provided the warehouseman and the depositor of the goods are different persons. The definition makes clear that the receipt must qualify as a document of title under subsection (16).
  43. “Written” or “writing.” Unchanged from former Section 1-201.

NOTES TO DECISIONS

1.Bearer.

One in possession under a blank indorsement was a “bearer.” Doherty v. First Nat'l Bank, 170 Ky. 810 , 186 S.W. 937, 1916 Ky. LEXIS 142 ( Ky. 1916 ).

Indorsee, who had possession of a note and had taken under blank indorsement, was a “bearer.” Ohio Valley Banking & Trust Co. v. Great Southern Fire Ins. Co., 176 Ky. 694 , 197 S.W. 399, 1917 Ky. LEXIS 105 ( Ky. 1917 ).

2.Buyer in Ordinary Course of Business.

An employee of an automobile dealership who refinances a car with a bank while knowing that the car involved was included in a floor plan financing arrangement by the dealer with another lender does not meet the “good faith” requirement to qualify as “a buyer in the ordinary course of business.” Universal C. I. T. Credit Corp. v. Middlesboro Motor Sales, Inc., 424 S.W.2d 409, 1968 Ky. LEXIS 455 ( Ky. 1968 ).

A dealer may be a buyer in the ordinary course of business from another dealer in the same goods provided he meets the other requirements of subdivision (9) of this section. Cessna Finance Corp. v. Skyways Enterprises, Inc., 580 S.W.2d 491, 1979 Ky. LEXIS 249 ( Ky. 1979 ).

Recycling firm failed to qualify as a buyer in the ordinary course of business pursuant to KRS 355.1-201 (2)(i) because a coal company owner was not in the business of selling mining equipment, but in the business of mining; the owner’s earlier sale of underground mining equipment and subsequent sale of mechanized underground roof supports that were eventually bought by the recycling firm did not make the owner a seller of mining equipment in the ordinary course of business. Madison Capital Co., LLC v. S & S Salvage, LLC, 765 F. Supp. 2d 923, 2011 U.S. Dist. LEXIS 4791 (W.D. Ky. 2011 ).

Where a debtor and/or his landscaping company sold a piece of equipment to a purchaser, a creditor’s security interest in the equipment continued despite the sale pursuant to KRS 355.9-315 (1)(a), as the sale was made without the creditor’s consent or knowledge. Even if the purchaser had no knowledge of the creditor’s security interest, which was belied by judicial admissions that he made in his complaint, the exception in KRS 355.9-320 for a buyer in the ordinary course of business did not apply, as neither the debtor nor his company was in the business of selling equipment of this kind. Teague v. Taylor (In re Taylor), 2012 Bankr. LEXIS 2825 (Bankr. E.D. Ky. June 19, 2012).

3.Conspicuous.

Where the attempted exclusion of implied warranties was on the back of the contract and the exclusionary language was in the same size type as the general contract, the attempted exclusion was not valid or effective because it was not “conspicuous” within the meaning of the statute. Massey-Ferguson, Inc. v. Utley, 439 S.W.2d 57, 1969 Ky. LEXIS 353 ( Ky. 1969 ).

Where in a conditional sales contract it was stated on the back side of the contract that there were no implied warranties and reference was made to this clause on the front of the contract in larger than normal print, the buyer was bound by the contract. Childers & Venters, Inc. v. Sowards, 460 S.W.2d 343, 1970 Ky. LEXIS 582 ( Ky. 1970 ).

The fact that an exclusion of any warranty appears on the back of a contract will not per se render the exclusion ineffective. Cline v. Allis-Chalmers Corp., 690 S.W.2d 764, 1985 Ky. App. LEXIS 578 (Ky. Ct. App. 1985).

Where, on the back side of the contract, the exclusions were clearly stated in bold-face, entirely capitalized type, twice as large as the other type, the exclusions were conspicuous. Gooch v. Dowell, Inc., 743 S.W.2d 38, 1988 Ky. App. LEXIS 4 (Ky. Ct. App. 1988).

A disclaimer was conspicuous where it appeared in an offset boxed section, the heading was written in a bold typesetting, and the specific language disclaiming all the implied and express warranties appeared in all capital letters. Gooch v. E.I. DuPont de Nemours & Co., 40 F. Supp. 2d 863, 1999 U.S. Dist. LEXIS 10211 (W.D. Ky. 1999 ).

A retailer successfully disclaimed its obligations regarding implied warranties of fitness and of merchantability where the disclaimer was located on the front of the invoice in readable size print, the disclaimer language was printed in a type size that contrasted with the remaining printed information, the disclaimer was segregated from the rest of the invoice information, and the language plainly disclaimed all implied warranties including any implied warranty of merchantability or fitness for a particular use. Brown Sprinkler Corp. v. Plumbers Supply Co., 265 S.W.3d 237, 2007 Ky. App. LEXIS 347 (Ky. Ct. App. 2007).

4.Contract.

An option was not a contract for the purchase of property, but an offer to sell. Caskey v. Williams Bros., 227 Ky. 73 , 11 S.W.2d 991, 1928 Ky. LEXIS 459 ( Ky. 1928 ).

Bank and its president were properly granted summary judgment on a company’s breach of contract action because the company failed to meet its burden to show that a deposit from its former owner was a loan as the former owner never accepted and possessed the company’s promissory notes, the notes themselves did not establish the existence of a contract governing the deposit, and there was considerable evidence that the parties understood that there was no contract between the parties as to the deposit; because the company failed to establish that the deposit was a loan, the transfer of the funds was unauthorized and the bank properly cancelled and returned them. Wholesale Petro. Partners, L.P. v. South Cent. Bank of Daviess County, Inc., 565 Fed. Appx. 361, 2014 FED App. 0336N, 2014 U.S. App. LEXIS 8256 (6th Cir. Ky. 2014 ).

Court of Appeals erred in affirming a circuit court’s dismissal of a creditor’s claim against a decedent’s heirs because the creditor was a creditor of the decedent and his estate where he filed his tort action prior to the decedent’s death, timely revived the action against the estate administrator, proceeded to obtain a judgment in that action, and filed a judgment lien, which established his status as a creditor of the decedent’s estate and entitlement to a remedy. Gregory v. Hardgrove, 562 S.W.3d 911, 2018 Ky. LEXIS 523 ( Ky. 2018 ).

5.Delivery.

Indorsement of a note by cashier of a bank, and the placing of it in customer’s safety deposit box without customer’s knowledge was not delivery. Hughes v. West, 217 Ky. 40 , 288 S.W. 1011, 1926 Ky. LEXIS 4 ( Ky. 1926 ).

Retirement system’s refusal to allow a retiree to change his retirement payment option was improper because, although the first retirement check had been produced by the time the retiree notified the retirement system of the change, the check had not been delivered to the retiree, and thus the request was timely for purposes of KRS 61.590(3), which limited changes to the time before the first retirement allowance payment had been issued by the Kentucky state treasurer; under KRS 355.3-105 (1), “issue” meant delivery, under KRS 355.1-201 (2)(o), “delivery” meant transfer of possession, and thus, printing a retirement check at some unknown point in time did not make it issued, but rather, it had to have been delivered to the beneficiary to have been a “payment.” Lawson v. Ky. Ret. Sys., 291 S.W.3d 679, 2009 Ky. LEXIS 82 ( Ky. 2009 ).

6.Good Faith.

Mere suspicion was not to be regarded as bad faith. Montenegro-Riehm Music Co. v. Illinois Trust & Sav. Bank, 164 Ky. 608 , 176 S.W. 32, 1915 Ky. LEXIS 430 ( Ky. 1915 ).

Failure of a purchaser to act as an “ordinary prudent person under the same circumstances” was not proof of bad faith. Citizens' State Bank v. Johnson County, 182 Ky. 531 , 207 S.W. 8, 1918 Ky. LEXIS 419 ( Ky. 1918 ).

Where marks, apparently indicating cancellation, appeared on an instrument but were not reasonably discoverable in usual course of business, the purchaser took the instrument without bad faith. Citizens' State Bank v. Johnson County, 182 Ky. 531 , 207 S.W. 8, 1918 Ky. LEXIS 419 ( Ky. 1918 ).

Where nothing appeared which should have excited his suspicion, purchaser was not required to consult records of county fiscal court to prevent his buying in bad faith. Citizens' State Bank v. Johnson County, 182 Ky. 531 , 207 S.W. 8, 1918 Ky. LEXIS 419 ( Ky. 1918 ).

Generally, the good or bad faith of the purchaser of a negotiable instrument was a question for the jury, that of course was conditioned upon there being a conflict in evidence, but where the facts were undisputed on the controlling points it was the duty of the court to apply the law to the facts. Kentucky Rock Asphalt Co. v. Mazza's Adm'r, 264 Ky. 158 , 94 S.W.2d 316, 1936 Ky. LEXIS 283 ( Ky. 1936 ).

Where a purchaser had actual knowledge of suspicious circumstances or facts coupled with the means of informing himself of the facts and wilfully refrained from making inquiries, his intentional ignorance could have amounted to bad faith. Kentucky Rock Asphalt Co. v. Mazza's Adm'r, 264 Ky. 158 , 94 S.W.2d 316, 1936 Ky. LEXIS 283 ( Ky. 1936 ).

Generally suspicious circumstances or gross negligence at the time of acquisition would not defeat the title yet gross negligence was evidence of bad faith. Kentucky Rock Asphalt Co. v. Mazza's Adm'r, 264 Ky. 158 , 94 S.W.2d 316, 1936 Ky. LEXIS 283 ( Ky. 1936 ).

This section requires the submission to the jury of the issue of good faith unless the evidence relating to it is no more than a scintilla, or lacks probative value having fitness to induce conviction in the minds of reasonable men. Ft. Knox Nat'l Bank v. Gustafson, 385 S.W.2d 196, 1964 Ky. LEXIS 148 ( Ky. 1964 ).

The definition of good faith in subdivision (19) of this section does not include negligence; thus, the bank’s negligence in not ascertaining the guarantor’s lack of authority was not bad faith. Enzweiler v. Peoples Deposit Bank, 742 S.W.2d 569, 1987 Ky. App. LEXIS 607 (Ky. Ct. App. 1987).

“Good faith” is a subjective determination. Star Bank v. Parnell, 992 S.W.2d 189, 1998 Ky. App. LEXIS 82 (Ky. Ct. App. 1998).

Negligence not to be considered when determining “good faith.” Star Bank v. Parnell, 992 S.W.2d 189, 1998 Ky. App. LEXIS 82 (Ky. Ct. App. 1998).

7.— Bonds.

Where a company knew that certain of its bonds had been stolen from their owner, and it purchased such bonds without seeing them or asking the seller to specifically identify them, and the company’s agent who handled the purchase was also the one who was engaged in a search for the bonds, such company purchased under circumstances amounting to bad faith. Kentucky Rock Asphalt Co. v. Mazza's Adm'r, 264 Ky. 158 , 94 S.W.2d 316, 1936 Ky. LEXIS 283 ( Ky. 1936 ).

Though one had received actual notice, if by forgetfulness or negligence he did not have it in mind when he acquired a bond, he could still have been a good faith purchaser. Kentucky Rock Asphalt Co. v. Mazza's Adm'r, 264 Ky. 158 , 94 S.W.2d 316, 1936 Ky. LEXIS 283 ( Ky. 1936 ).

8.— Checks.

Where, despite evidence of a custom among bankers to look to their immediate indorser in suing on a check and of the solvency of such immediate indorser, the ultimate holder insisted upon suing the maker, there was no evidence of bad faith. Choteau Trust & Banking Co. v. Smith, 133 Ky. 418 , 118 S.W. 279, 1909 Ky. LEXIS 186 ( Ky. 1909 ).

Where maker proved business connection between payee and holder in several similar prior isolated transactions, such was not basis to infer bad faith on holder’s part as to check in suit. Asbury v. Taube, 151 Ky. 142 , 151 S.W. 372, 1912 Ky. LEXIS 768 ( Ky. 1912 ).

Where check had “For three sound mules” written across face, bank which cashed such check was not acting in bad faith. Roberts v. Drovers' Nat'l Bank, 199 Ky. 439 , 251 S.W. 198, 1923 Ky. LEXIS 852 ( Ky. 1923 ).

9.— Notes.

Where corporate president issued corporate note to himself and indorsed it to bank in payment of his personal debt owed the bank, such bank purchased in bad faith when it failed to ascertain president’s authority in the matter. Kenyon Realty Co. v. National Deposit Bank, 140 Ky. 133 , 130 S.W. 965, 1910 Ky. LEXIS 181 ( Ky. 1910 ).

Where person who sought to collect note was attorney of the holder and stockholder of payee, no knowledge of payee’s fraud was imputed to holder. Robertson v. Commercial Sec. Co., 152 Ky. 336 , 153 S.W. 450, 1913 Ky. LEXIS 660 ( Ky. 1913 ).

Where a holder bought note at 25 percent discount and had bought similar notes as an established practice, there was not sufficient evidence for a finding of bad faith. Pratt v. Rounds, 160 Ky. 358 , 169 S.W. 848, 1914 Ky. LEXIS 465 ( Ky. 1914 ).

That cashier of plaintiff bank knew that note in suit was given for stock sold, and that he received fee for suggesting name of purchaser, was not sufficient to prove that the bank’s taking was in bad faith. Farmers' Bank of Lynnville v. First Nat'l Bank, 164 Ky. 548 , 175 S.W. 1019, 1915 Ky. LEXIS 410 ( Ky. 1915 ).

Proof that plaintiff purchased the notes before maturity and for value, was insufficient to prove that he purchased without knowledge of fraud. Commercial Sec. Co. v. Archer, 179 Ky. 842 , 201 S.W. 479, 1918 Ky. LEXIS 300 ( Ky. 1918 ).

Where indorsee was auditor for indorser, his attorney was hired by indorser, costs of litigation borne by indorser, indorser collected notes, indorsee was familiar with indorser’s business and was a “very reticent witness,” there was sufficient evidence for jury to find that indorser’s purchase was in bad faith. Harrison v. Perry, 184 Ky. 722 , 212 S.W. 911, 1919 Ky. LEXIS 118 ( Ky. 1919 ).

Where holder was notified that the maker of a note believed that acreage of a farm purchased with note in suit was short and he intended to sue therefor, such party had sufficient notice to prevent his purchasing in good faith. Cockrill v. First Nat'l Bank, 208 Ky. 755 , 271 S.W. 1054, 1925 Ky. LEXIS 383 ( Ky. 1925 ).

Failure of plaintiff bank to introduce as witnesses members of the finance committee, who approved the note in suit, was sufficient evidence to show bad faith. Bedinger v. Citizens' Nat'l Bank, 212 Ky. 486 , 279 S.W. 622, 1926 Ky. LEXIS 180 ( Ky. 1926 ).

10.Security Interest.

Assignment by one partner to another of the right to collect money due and owing to the copartners was not an assignment of a “contract right” as contemplated by the Uniform Commercial Code since the right had already been earned by performance but was an assignment of an “account” which was not a “security interest” requiring filing under subsection (1)(b) of KRS 355.9-301 to perfect the interest and the assignment had priority over a subsequent attachment by judgment creditor of assigning partner. Spurlin v. Sloan, 368 S.W.2d 314, 1963 Ky. LEXIS 41 ( Ky. 1963 ).

Although there are many similarities between a mortgage and security interest there are many dissimilarities also. Corbin Deposit Bank v. King, 384 S.W.2d 302, 1964 Ky. LEXIS 83 ( Ky. 1964 ).

A lease of restaurant equipment, the terms of which specifically provided that upon expiration or earlier termination lessee would return the equipment to lessor, was not a security agreement. Diaz v. Goodwin Bros. Leasing, Inc., 511 S.W.2d 680, 1974 Ky. LEXIS 510 ( Ky. 1974 ).

Where a lease did not constitute a security agreement under subdivision (37) of this section, subsection (3) of KRS 355.9-504 was inapplicable. Diaz v. Goodwin Bros. Leasing, Inc., 511 S.W.2d 680, 1974 Ky. LEXIS 510 ( Ky. 1974 ).

A debtor’s tender of consideration to a bank in return for the bank’s assignment of its security interest in effect satisfied the debt owed the bank by the debtor, and extinguished the security interest. Bank of Lexington v. Jack Adams Aircraft Sales, Inc., 570 F.2d 1220, 1978 U.S. App. LEXIS 11865 (5th Cir. Miss. 1978).

In determining whether a document or set of documents constitute a valid security agreement, a court must first resolve, as a question of law, whether the language embodied in the writing objectively indicates that the parties may have intended to create or provide for a security interest, and secondly, a court must determine whether the parties actually intended to create a security interest. In re Owensboro Canning Co., 46 B.R. 607, 1985 Bankr. LEXIS 6683 (Bankr. W.D. Ky. 1985 ), aff'd, 82 B.R. 450, 1988 U.S. Dist. LEXIS 1109 (W.D. Ky. 1988 ).

Section 355.9-102 (2) specifically applies Article 9 to a lease intended as security; thus, the provisions of KRS 355.9-504 (3) apply only if a lease between parties was intended as security, and this intent is to be determined by the facts of each case. Ford Motor Credit Co. v. Webb-Elkhorn Coal Corp., 775 S.W.2d 945, 1989 Ky. App. LEXIS 111 (Ky. Ct. App. 1989).

Where the assignment of a mortgage to the bank was recorded after the bankruptcy was filed, because of an indorsement in blank, the note was negotiated by transfer alone pursuant to KRS 355.3-205 (2),and the bank’s possession of the note, coupled with its status as a bona fide purchaser rendered it a bearer, pursuant to KRS 355.1-201 (2) and KRS 355.3-301 , that was able to enforce the note against the debtors under KRS 355.9-330 (4); moreover the bank did not violate the automatic stay because it simply recorded its equitable interest in the property, which did not belong to the debtors. Rogan v. Bank One, N.A. (In re Cook), 457 F.3d 561, 2006 FED App. 0284P, 2006 U.S. App. LEXIS 20377 (6th Cir. Ky. 2006 ).

11.— Document of Title.

A warehouse receipt held by a bank was a document of title vesting a valid security interest in the bank. Lofton v. Mooney, 452 S.W.2d 617, 1970 Ky. LEXIS 370 ( Ky. 1970 ).

12.Holder.

Transferee, without indorsement of a note payable to order, was not a “holder.” Foster's Adm'r v. Metcalfe, 144 Ky. 385 , 138 S.W. 314, 1911 Ky. LEXIS 633 ( Ky. 1911 ).

An assignee for collection only was a “holder.” Harrison v. Pearcy & Coleman, 174 Ky. 485 , 192 S.W. 513, 1917 Ky. LEXIS 203 ( Ky. 1917 ).

Indorsee, who had possession of a note and had taken under blank indorsement, was a “holder.” Ohio Valley Banking & Trust Co. v. Great Southern Fire Ins. Co., 176 Ky. 694 , 197 S.W. 399, 1917 Ky. LEXIS 105 ( Ky. 1917 ).

Holder of check remained such, even though payment was stopped. Thomson v. Peck, 217 Ky. 766 , 290 S.W. 722, 1927 Ky. LEXIS 79 ( Ky. 1927 ).

Drawee of a check was not a “holder.” Louisa Nat'l Bank v. Kentucky Nat'l Bank, 239 Ky. 302 , 39 S.W.2d 497, 1931 Ky. LEXIS 776 ( Ky. 1931 ).

Bank was the holder of a mortgage note and could enforce it because the note contained a valid allonge with a properly executed indorsement in blank and the bank had provided sufficient proof that it acquired possession of the note approximately two years prior to the bankruptcy. Rogan v. EquiFirst Corp. (In re Vickers), 2013 Bankr. LEXIS 1596 (Bankr. E.D. Ky. Apr. 15, 2013).

Trial court erred in granting a mortgage servicer summary judgment because the evidence was insufficient to establish whether it was the holder of the mortgagors’ original note and thus, the real party in interest at the time the foreclosure action was filed; where a plaintiff attempts to enforce bearer paper as the holder, and a defendant raises an issue as to actual possession of the original note, the purported holder has a duty to establish such as required by the Uniform Commercial Code. Acuff v. Wells Fargo Bank, N.A., 460 S.W.3d 335, 2014 Ky. App. LEXIS 72 (Ky. Ct. App. 2014).

Chapter 13 debtor's complaint alleging that a creditor's security interest in her real property was void as against the trustee did not survive summary judgment; as she did not provide evidence for her claim that the note and mortgage were separated, the creditor was entitled to enforce the note and the mortgage because it was the holder of these instruments. Jernigan v. Household Fin. Corp. II (In re Jernigan), 2015 Bankr. LEXIS 2412 (Bankr. W.D. Ky. July 22, 2015).

13.Holder in Due Course.

Where X loaned money on Y corporation’s note, which loan was less than the limit of indebtedness permitted by Y’s articles of incorporation but together with other indebtedness of Y exceeded such limitation, X had no notice of facts which would prevent X being a holder in due course. Citizens' Bank v. Bank of Waddy, 126 Ky. 169 , 103 S.W. 249, 31 Ky. L. Rptr. 365 , 1907 Ky. LEXIS 32 (Ky. Ct. App. 1907).

Where officer of state bank was not only the cashier of the bank but was perhaps the most active of all concerned in the reorganization of that bank to a national bank of which he was a vice-president, his knowledge that note transferred from state bank to national bank was usurious was imputed to the national bank and the national bank was not a holder in due course. Manchester Nat'l Bank v. Herndon, 181 Ky. 117 , 203 S.W. 1055, 1918 Ky. LEXIS 492 ( Ky. 1918 ).

Knowledge of a defective title to a note gained after a transferee has accepted it, did not prevent his being a holder in due course. Gibson v. First Nat'l Bank, 196 Ky. 119 , 244 S.W. 290, 1922 Ky. LEXIS 459 ( Ky. 1922 ). See Worden v. Kennedy, 246 Ky. 716 , 56 S.W.2d 329, 1933 Ky. LEXIS 12 ( Ky. 1933 ).

Where payee set up a corporation and retained control thereof for the sole purpose of negotiating paper obtained by him, and creating such corporation a holder in due course, corporation was regarded as having notice of payee’s activities in obtaining the paper. Traders' Sec. Co. v. Pennington, 236 Ky. 110 , 32 S.W.2d 713, 1930 Ky. LEXIS 687 ( Ky. 1930 ).

Although a corporate officer was ignorant of defenses against a note payable to the corporation indorsed to him by the corporation he was not a holder in due course. Hughett v. Shain, 253 Ky. 330 , 69 S.W.2d 688, 1934 Ky. LEXIS 657 ( Ky. 1934 ).

Where street improvement bonds were purchased from contractor before maturity and without notice of payments having been made on the bonds purchaser was a holder in due course free from the defense of prior payments having been made on the bonds. Irvine v. Wallace, 254 Ky. 564 , 71 S.W.2d 974, 1934 Ky. LEXIS 91 ( Ky. 1934 ).

Where bonds were stolen from an owner it was justly presumed that the thief was not a holder in due course and that the bonds continued in the hands of a holder in the same class as the thief until the contrary was proven. Kentucky Rock Asphalt Co. v. Mazza's Adm'r, 264 Ky. 158 , 94 S.W.2d 316, 1936 Ky. LEXIS 283 ( Ky. 1936 ).

14.Signed.

The definition of “signed” contained in the Uniform Commercial Code relates to what constitutes a valid signature, not to where the signature must be placed. R. C. Durr Co. v. Bennett Industries, Inc., 590 S.W.2d 338, 1979 Ky. App. LEXIS 484 (Ky. Ct. App. 1979).

15.Purchase.

The buyer who was cloaked with indicia of ownership could pledge the vehicle as collateral on a loan, something that an owner of a vehicle may do. Foley v. Production Credit Asso. of Fourth Dist., 753 S.W.2d 876, 1988 Ky. App. LEXIS 87 (Ky. Ct. App. 1988).

Although “purchase” is not defined in the Kentucky Consumer Protection Act, KRS 367.110 et seq., even if the definition of purchase as reflected in Kentucky’s version of the Uniform Commercial Code is applicable, the plaintiffs were eligible to bring an action as purchasers since they took the car, at least for a time, following a period of negotiations and after giving value. Craig & Bishop, Inc. v. Piles, 247 S.W.3d 897, 2008 Ky. LEXIS 61 ( Ky. 2008 ).

16.Warehouse Receipts.

Purchaser bought warehouse receipts with knowledge of facts which should have put him on notice and he was not a holder in due course where the warehouse receipts issued by officer of distillery which has ceased to act as a warehouseman showed on their face that the whiskey was stored in a bonded government warehouse owned by another company. Old '76 Distillery Co. v. Wiechelman, 266 Ky. 533 , 99 S.W.2d 725, 1936 Ky. LEXIS 706 ( Ky. 1936 ).

Cited:

In re Mel Golde Shoes, Inc., 403 F.2d 658, 1968 U.S. App. LEXIS 4652 (6th Cir. 1968); Blake v. Woodford Bank & Trust Co., 555 S.W.2d 589, 1977 Ky. App. LEXIS 790 (Ky. Ct. App. 1977); United Road Machinery Co. v. Jasper, 568 S.W.2d 242, 1978 Ky. App. LEXIS 550 (Ky. Ct. App. 1978); McKenzie v. Oliver, 571 S.W.2d 102, 1978 Ky. App. LEXIS 586 (Ky. Ct. App. 1978); Wahba v. Don Corlett Motors, Inc., 573 S.W.2d 357, 1978 Ky. App. LEXIS 608 (Ky. Ct. App. 1978); Parton v. Robinson, 574 S.W.2d 679, 1978 Ky. App. LEXIS 628 (Ky. Ct. App. 1978); In re Wathen’s Elevators, Inc., 32 B.R. 912, 1983 Bankr. LEXIS 5427 (Bankr. W.D. Ky. 1983 ); Central Bank & Trust Co. v. Metcalfe, 663 S.W.2d 957, 1984 Ky. App. LEXIS 449 (Ky. Ct. App. 1984); Placer Coal, Inc. v. Rhondale Coal Services Co., 684 S.W.2d 25, 1984 Ky. App. LEXIS 615 (Ky. Ct. App. 1984); Bartelt Aviation, Inc. v. Dry Lake Coal Co., 682 S.W.2d 796, 1985 Ky. App. LEXIS 493 (Ky. Ct. App. 1985); Revenue Cabinet Kentucky v. Saylor, 738 S.W.2d 426, 1987 Ky. App. LEXIS 585 (Ky. Ct. App. 1987).

Opinions of Attorney General.

Where a check was cashed by a forged indorsement, the drawer’s proper remedy is against the drawee bank and the bank is responsible for any collection from prior indorsers. OAG 63-825 .

The financing statement, or copy of the security agreement in lieu thereof, must be actually, physically and manually signed by the debtor and the secured party and a copy or reproduction of such signing is not sufficient. OAG 64-708 .

Since the signature on a carbon copy is made at the same time and by the same physical act as the signature on the original, the intent to authenticate the original financing statement, or security agreement, is also present as to the carbon itself, and therefore the carbon is signed within the meaning of subdivision (39) of this section and, consequently, within the meaning of KRS 355.9-402 . OAG 79-246 .

Research References and Practice Aids

Kentucky Bench & Bar.

Treatment of Leases in Bankruptcy, Vol. 69, No. 3, May 2005, Ky. Bench & Bar 15.

Kentucky Law Journal.

Young, Scope, Purposes and Functions of the Uniform Commercial Code, 48 Ky. L.J. 191 (1960).

Dorsey, Bulk Transfers, Subject Transfers — Compliance, 48 Ky. L.J. 244 (1960).

Whiteside, Uniform Commercial Code — Major Changes in Sales Law, 49 Ky. L.J. 165 (1960).

Weber, The Extension of the Voidable Title Principle Under the Code, 49 Ky. L.J. 437 (1961).

Viles, The Uniform Commercial Code v. The Bankruptcy Act, 55 Ky. L.J. 636 (1967).

Comments, What Chance for the New Car Purchaser of a “Lemon”?, 62 Ky. L.J. 557 (1973-1974).

Comments, The Role of Negligence in Section 3-405 of the Uniform Commercial Code: Owensboro National Bank v. Crisp, 69 Ky. L.J. 143 (1980-81).

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Weinberg, Pleading and Practice in Commercial Paper Cases: Burdens of Proof, 72 Ky. L.J. 575 (1983-84).

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Nowka and Taylor, Kentucky Employees’ Wage Liens: A Sneak Attack on Creditors, but Beware of the Bankruptcy Trustee, 84 Ky. L.J. 317 (1995-96).

Northern Kentucky Law Review.

Cox, Lender Liability in the Bluegrass: Are New Theories Emerging Under Kentucky Law?, 16 N. Ky. L. Rev. 43 (1988).

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Sales, § 190.00.

355.1-202. Notice — Knowledge.

  1. Subject to subsection (6) of this section, a person has “notice” of a fact if the person:
    1. Has actual knowledge of it;
    2. Has received a notice or notification of it; or
    3. From all the facts and circumstances known to the person at the time in question, has reason to know that it exists.
  2. “Knowledge” means actual knowledge. “Knows” has a corresponding meaning.
  3. “Discover,” “learn,” or words of similar import refer to knowledge rather than to reason to know.
  4. A person “notifies” or “gives” a notice or notification to another person by taking such steps as may be reasonably required to inform the other person in ordinary course, whether or not the other person actually comes to know of it.
  5. Subject to subsection (6) of this section, a person “receives” a notice or notification when:
    1. It comes to that person’s attention; or
    2. It is duly delivered in a form reasonable under the circumstances at the place of business through which the contract was made or at another location held out by that person as the place for receipt of such communications.
  6. Notice, knowledge, or a notice or notification received by an organization is effective for a particular transaction from the time it is brought to the attention of the individual conducting that transaction and, in any event, from the time it would have been brought to the individual’s attention if the organization had exercised due diligence. An organization exercises due diligence if it maintains reasonable routines for communicating significant information to the person conducting the transaction and there is reasonable compliance with the routines. Due diligence does not require an individual acting for the organization to communicate information unless the communication is part of the individual’s regular duties or the individual has reason to know of the transaction and that the transaction would be materially affected by the information.

History. Enact. Acts 1958, ch. 77, § 1-202, effective July 1, 1960; repealed and reenact., Acts 2006, ch. 242, § 10, effective July 12, 2006.

Compiler’s Notes.

The former section (Enact. Acts 1958, ch. 77, § 1-202, effective July 1, 1960) relating to prima facie evidence by third party documents, was repealed and reenacted by Acts 2006, ch. 242, § 10. For comparable provisions, see KRS 355.1-307 .

Official Comment

Source:

Derived from former Section 1-201(25)-(27).

Changes from former law:

These provisions are substantive rather than purely definitional. Accordingly, they have been relocated from Section 1-201 to this section. The reference to the “forgotten notice” doctrine has been deleted.

  1. Under subsection (a), a person has notice of a fact when, inter alia, the person has received a notification of the fact in question.
  2. As provided in subsection (d), the word “notifies” is used when the essential fact is the proper dispatch of the notice, not its receipt. Compare “Send.” When the essential fact is the other party’s receipt of the notice, that is stated. Subsection (e) states when a notification is received.
  3. Subsection (f) makes clear that notice, knowledge, or a notification, although “received,” for instance, by a clerk in Department A of an organization, is effective for a transaction conducted in Department B only from the time when it was or should have been communicated to the individual conducting that transaction.

NOTES TO DECISIONS

1.In General.

To constitute notice of a defect in title of the person negotiating the instruments, it was not necessary that the person have actual notice but it was sufficient if he had knowledge of such facts that his action in taking the bonds amounted to bad faith. Kentucky Rock Asphalt Co. v. Mazza's Adm'r, 264 Ky. 158 , 94 S.W.2d 316, 1936 Ky. LEXIS 283 ( Ky. 1936 ).

Sellers had superior rights to proceeds from sale of automobiles where auction company stopped payment on checks it had given buyer for acquisition of automobiles sold at auction when auction company had notice of buyer’s manner of operation and that their stop payment order would probably result in dishonor of buyer’s checks to sellers. Greater Louisville Auto Auction, Inc. v. Ogle Buick, Inc., 387 S.W.2d 17, 1965 Ky. LEXIS 457 ( Ky. 1965 ).

Question of whether bank who bought promissory notes from transferee to whom notes had been transferred by prior holder knew or should have known that maker had claims against transferror and defenses against payment of the notes was a question of fact and was not appropriate for summary judgment. J.P. Morgan Delaware v. Onyx Arabians II, Ltd., 825 F. Supp. 146, 1993 U.S. Dist. LEXIS 8694 (W.D. Ky. 1993 ).

355.1-203. Lease distinguished from security interest.

  1. Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case.
  2. A transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and:
    1. The original term of the lease is equal to or greater than the remaining economic life of the goods;
    2. The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods;
    3. The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement; or
    4. The lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.
  3. A transaction in the form of a lease does not create a security interest merely because:
    1. The present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or is greater than the fair market value of the goods at the time the lease is entered into;
    2. The lessee assumes risk of loss of the goods;
    3. The lessee agrees to pay, with respect to the goods, taxes, insurance, filing, recording, or registration fees, or service or maintenance costs;
    4. The lessee has an option to renew the lease or to become the owner of the goods;
    5. The lessee has an option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market rent for the use of the goods for the term of the renewal at the time the option is to be performed; or
    6. The lessee has an option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed.
  4. Additional consideration is nominal if it is less than the lessee’s reasonably predictable cost of performing under the lease agreement if the option is not exercised. Additional consideration is not nominal if:
    1. When the option to renew the lease is granted to the lessee, the rent is stated to be the fair market rent for the use of the goods for the term of the renewal determined at the time the option is to be performed; or
    2. When the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.
  5. The “remaining economic life of the goods” and “reasonably predictable” fair market rent, fair market value, or cost of performing under the lease agreement must be determined with reference to the facts and circumstances at the time the transaction is entered into.

History. Enact. Acts 1958, ch. 77, § 1-203, effective July 1, 1960; repealed and reenact., Acts 2006, ch. 242, § 11, effective July 12, 2006.

Compiler’s Notes.

The former section (Enact. Acts 1958, ch. 77, § 1-203, effective July 1, 1960) relating to obligations of good faith, was repealed and reenacted by Acts 2006, ch. 242, § 11. For comparable provisions, see KRS 355.1-304 .

Official Comment

Source:

Former Section 1-201(37).

Changes from former law:

This section is substantively identical to those portions of former Section 1-201(37) that distinguished “true” leases from security interests, except that the definition of “present value” formerly embedded in Section 1-201(37) has been placed in Section 1-201(28).

  1. An interest in personal property or fixtures which secures payment or performance of an obligation is a “security interest.” See Section 1-201(37). Security interests are sometimes created by transactions in the form of leases. Because it can be difficult to distinguish leases that create security interests from those that do not, this section provides rules that govern the determination of whether a transaction in the form of a lease creates a security interest.
  2. One of the reasons it was decided to codify the law with respect to leases was to resolve an issue that created considerable confusion in the courts: what is a lease? The confusion existed, in part, due to the last two sentences of the definition of security interest in the 1978 Official Text of the Act, Section 1-201(37). The confusion was compounded by the rather considerable change in the federal, state and local tax laws and accounting rules as they relate to leases of goods. The answer is important because the definition of lease determines not only the rights and remedies of the parties to the lease but also those of third parties. If a transaction creates a lease and not a security interest, the lessee’s interest in the goods is limited to its leasehold estate; the residual interest in the goods belongs to the lessor. This has significant implications to the lessee’s creditors. “On common law theory, the lessor, since he has not parted with title, is entitled to full protection against the lessee’s creditors and trustee in bankruptcy….” 1 G. Gilmore, Security Interests in Personal Property Section3.6, at 76 (1965).

    Under pre-UCC chattel security law there was generally no requirement that the lessor file the lease, a financing statement, or the like, to enforce the lease agreement against the lessee or any third party; the Article on Secured Transactions (Article 9) did not change the common law in that respect. Coogan, Leasing and the Uniform Commercial Code, in Equipment Leasing-Leveraged Leasing 681, 700 n.25, 729 n.80 (2d ed.1980). The Article on Leases (Article 2A) did not change the law in that respect, except for leases of fixtures. Section 2A-309. An examination of the common law will not provide an adequate answer to the question of what is a lease. The definition of security interest in Section 1-201(37) of the 1978 Official Text of the Act provided that the Article on Secured Transactions (Article 9) governs security interests disguised as leases, i.e. , leases intended as security; however, the definition became vague and outmoded.

    Lease is defined in Article 2A as a transfer of the right to possession and use of goods for a term, in return for consideration. Section 2A-103(1)(j). The definition continues by stating that the retention or creation of a security interest is not a lease. Thus, the task of sharpening the line between true leases and security interests disguised as leases continues to be a function of this Article.

    This section begins where Section 1-201(35) leaves off. It draws a sharper line between leases and security interests disguised as leases to create greater certainty in commercial transactions.

    Prior to enactment of the rules now codified in this section, the 1978 Official Text of Section 1-201(37) provided that whether a lease was intended as security (i.e., a security interest disguised as a lease) was to be determined from the facts of each case; however, (a) the inclusion of an option to purchase did not itself make the lease one intended for security, and (b) an agreement that upon compliance with the terms of the lease the lessee would become, or had the option to become, the owner of the property for no additional consideration, or for a nominal consideration, did make the lease one intended for security.

    Reference to the intent of the parties to create a lease or security interest led to unfortunate results. In discovering intent, courts relied upon factors that were thought to be more consistent with sales or loans than leases. Most of these criteria, however, were as applicable to true leases as to security interests. Examples include the typical net lease provisions, a purported lessor’s lack of storage facilities or its character as a financing party rather than a dealer in goods. Accordingly, this section contains no reference to the parties’ intent.

    Subsections (a) and (b) were originally taken from Section 1(2) of the Uniform Conditional Sales Act (act withdrawn 1943), modified to reflect current leasing practice. Thus, reference to the case law prior to the incorporation of those concepts in this article will provide a useful source of precedent. Gilmore, Security Law, Formalism and Article 9, 47 Neb.L.Rev. 659, 671 (1968). Whether a transaction creates a lease or a security interest continues to be determined by the facts of each case. Subsection (b) further provides that a transaction creates a security interest if the lessee has an obligation to continue paying consideration for the term of the lease, if the obligation is not terminable by the lessee (thus correcting early statutory gloss, e.g., In re Royer’s Bakery, Inc ., 1 U.C.C. Rep. Serv. (Callaghan) 342 (Bankr. E.D. Pa. 1963)) and if one of four additional tests is met. The first of these four tests, subparagraph (1), is that the original lease term is equal to or greater than the remaining economic life of the goods. The second of these tests, subparagraph (2), is that the lessee is either bound to renew the lease for the remaining economic life of the goods or to become the owner of the goods. In re Gehrke Enters ., 1 Bankr. 647, 651-52 (Bankr. W.D. Wis. 1979). The third of these tests, subparagraph (3), is whether the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration, which is defined later in this section. In re Celeryvale Transp ., 44 Bankr. 1007, 1014-15 (Bankr. E.D. Tenn. 1984). The fourth of these tests, subparagraph (4), is whether the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration. All of these tests focus on economics, not the intent of the parties. In re Berge , 32 Bankr. 370, 371-73 (Bankr. W.D. Wis. 1983).

    The focus on economics is reinforced by subsection (c). It states that a transaction does not create a security interest merely because the transaction has certain characteristics listed therein. Subparagraph (1) has no statutory derivative; it states that a full payout lease does not per se create a security interest. Rushton v. Shea , 419 F.Supp. 1349, 1365 (D. Del. 1976). Subparagraphs (2) and (3) provide the same regarding the provisions of the typical net lease. Compare All-States Leasing Co. v. Ochs , 42 Or. App. 319, 600 P.2d 899 (Ct.App.1979), with In re Tillery , 571 F.2d 1361 (5th Cir. 1978). Subparagraph (4) restates and expands the provisions of the 1978 Official Text of Section 1-201(37) to make clear that the option can be to buy or renew. Subparagraphs (5) and (6) treat fixed price options and provide that fair market value must be determined at the time the transaction is entered into. Compare Arnold Mach. Co. v. Balls , 624 P.2d 678 (Utah 1981), with Aoki v. Shepherd Mach. Co. , 665 F.2d 941 (9th Cir.1982).

    The relationship of subsection (b) to subsection (c) deserves to be explored. The fixed price purchase option provides a useful example. A fixed price purchase option in a lease does not of itself create a security interest. This is particularly true if the fixed price is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed. A security interest is created only if the option price is nominal and the conditions stated in the introduction to the second paragraph of this subsection are met. There is a set of purchase options whose fixed price is less than fair market value but greater than nominal that must be determined on the facts of each case to ascertain whether the transaction in which the option is included creates a lease or a security interest.

    It was possible to provide for various other permutations and combinations with respect to options to purchase and renew. For example, this section could have stated a rule to govern the facts of In re Marhoefer Packing Co., 674 F.2d 1139 (7th Cir.1982). This was not done because it would unnecessarily complicate the definition. Further development of this rule is left to the courts.

    Subsections (d) and (e) provide definitions and rules of construction

NOTES TO DECISIONS

1.In General.

The bright-line-test in KRS 355.1-203 focuses not on whether a lessee has a contractual right to terminate under the agreement in question, but rather on whether the consideration the lessee is to pay the lessor for the right to use and possession of the goods is an obligation for the term of the lease not subject to termination by the lessee. If the lease agreement requires the debtor to pay the lessors upon termination the present value of precisely what they would receive if the debtor made all required monthly payments for the full contract term and then exercised the purchase option, it is not a true lease. In re Consol. Energy, Inc., 2007 Bankr. LEXIS 3470 (Bankr. E.D. Ky. Oct. 16, 2007).

2.Applicability.

The provision in the lease agreement which gave the debtor the right to purchase the equipment did not make the agreement a security agreement under KRS 355.1-203 because it did not show the amount the debtor would have to pay to purchase the equipment; it was not enough for the debtor to say that it might exercise its purchase option when it was unable to demonstrate what it would have to pay and whether that amount would be a nominal sum. In re Consol. Energy, Inc., 2007 Bankr. LEXIS 3470 (Bankr. E.D. Ky. Oct. 16, 2007).

Under the Uniform Commercial Code, KRS 355.1-203 , an agreement between a trust and a debtor constituted a security interest rather than an unexpired lease, as the rental payments over the term of the agreement reflected a purchase price of the vehicles with interest; nor was the agreement an executory contract as defined by 11 U.S.C.S. 365, as the debtor had no continuing obligations under the agreement other than payment. Further, under the Motor Vehicle Registration Act, KRS 186.010(7)(b), a conditional lessee, such as the debtor, could be considered the owner for the purposes of registering the vehicle, which the undisputed evidence showed was done, rendering the trust’s reliance on KRS 186A.215 inapplicable. Magdovitz Family Trust v. KY USA Energy, Inc. (In re KY USA Energy, Inc.), 449 B.R. 745, 2011 Bankr. LEXIS 1993 (Bankr. W.D. Ky. 2011 ).

Bank that loaned money to a debtor before the debtor declared Chapter 12 bankruptcy had a secured interest in cows the debtor owned at the time that he declared bankruptcy that was superior to an interest an LLC held in the cows because it perfected its interest before the LLC perfected its interest, and it was also entitled under 11 U.S.C.S. § 552(b) to receive income the debtor derived from selling milk the cows produced postpetition. Although the LLC claimed that cows that were part of the debtor’s herd were not subject to the bank’s security interest because it leased the cows to the debtor, the court found that five “Dairy Cow Leases” the debtor and the LLC entered were secured transactions under Ariz. Rev. Stat. § 47-1203 and KRS 355.1-203 , not true leases. In re Purdy, 490 B.R. 530, 2013 Bankr. LEXIS 772 (Bankr. W.D. Ky. 2013 ).

3.Lease.

Parties’ agreement was not a security agreement and the agreement was a lease that the debtor had to assume or reject as: (1) “term” was not ambiguous since it was defined as one month and multiple terms were discussed; (2) the debtor’s reading of “term” as a 48-month period would render the debtor’s right to terminate the agreement meaningless; (3) the title of the agreement was modified by a subtitle indicating that it was month to month; and (4) the debtor could not own the property after the completion of the immediate “term” without paying a substantial pay-off amount. Cardinal Grp., LLC v. McQuaig (In re McQuaig), 2019 Bankr. LEXIS 930 (Bankr. S.D. Ga. Mar. 28, 2019).

355.1-204. Value.

Except as otherwise provided in Articles 3, 4, and 5 of this chapter, a person gives value for rights if the person acquires them:

  1. In return for a binding commitment to extend credit or for the extension of immediately available credit, whether or not drawn upon and whether or not a charge-back is provided for in the event of difficulties in collection;
  2. As security for, or in total or partial satisfaction of, a preexisting claim;
  3. By accepting delivery under a preexisting contract for purchase; or
  4. In return for any consideration sufficient to support a simple contract.

History. Enact. Acts 1958, ch. 77, § 1-204, effective July 1, 1960; repealed and reenact., Acts 2006, ch. 242, § 12, effective July 12, 2006.

Compiler’s Notes.

The former section (Enact. Acts 1958, ch. 77, § 1-204, effective July 1, 1960) relating to reasonable time, was repealed and reenacted by Acts 2006, ch. 242, § 12. For comparable provisions, see KRS 355.1-205 .

Official Comment

Source:

Former Section 1-201(44).

Changes from former law:

Unchanged from former Section 1-201, which was derived from Sections 25, 26, 27, 191, Uniform Negotiable Instruments Law; Section 76, Uniform Sales Act; Section 53, Uniform Bills of Lading Act; Section 58, Uniform Warehouse Receipts Act; Section 22(1), Uniform Stock Transfer Act; Section 1, Uniform Trust Receipts Act. These provisions are substantive rather than purely definitional. Accordingly, they have been relocated from former Section 1-201 to this section.

  1. All the Uniform Acts in the commercial law field (except the Uniform Conditional Sales Act) have carried definitions of “value.” All those definitions provided that value was any consideration sufficient to support a simple contract, including the taking of property in satisfaction of or as security for a pre-existing claim. Subsections (1), (2), and (4) in substance continue the definitions of “value” in the earlier acts. Subsection (3) makes explicit that “value” is also given in a third situation: where a buyer by taking delivery under a pre-existing contract converts a contingent into a fixed obligation.

    This definition is not applicable to Articles 3 and 4, but the express inclusion of immediately available credit as value follows the separate definitions in those Articles. See Sections 4-208, 4-209, 3-303. A bank or other financing agency which in good faith makes advances against property held as collateral becomes a bona fide purchaser of that property even though provision may be made for charge-back in case of trouble. Checking credit is “immediately available” within the meaning of this section if the bank would be subject to an action for slander of credit in case checks drawn against the credit were dishonored, and when a charge-back is not discretionary with the bank, but may only be made when difficulties in collection arise in connection with the specific transaction involved

NOTES TO DECISIONS

1.In General.

Holder of shares of stock for a pre-existing debt was not a holder for value. Schuster v. Jones, 58 S.W. 595, 22 Ky. L. Rptr. 568 , 1900 Ky. LEXIS 245 (Ky. Ct. App. 1900).

Creditor, who took instrument as collateral for a debt took as holder for value to amount of indebtedness. Wilkins v. Usher, 123 Ky. 696 , 97 S.W. 37, 29 Ky. L. Rptr. 1232 , 1906 Ky. LEXIS 200 ( Ky. 1906 ). See Melton v. Pensacola Bank & Trust Co., 190 F. 126, 1911 U.S. App. LEXIS 4430 (6th Cir. Ky. 1911 ); Citizens' Bank v. Bank of Waddy, 126 Ky. 169 , 103 S.W. 249, 31 Ky. L. Rptr. 365 , 1907 Ky. LEXIS 32 (Ky. Ct. App. 1907); Campbell v. Fourth Nat'l Bank, 137 Ky. 555 , 126 S.W. 114, 1910 Ky. LEXIS 598 ( Ky. 1910 ); Elk Valley Coal Co. v. Third Nat'l Bank, 157 Ky. 617 , 163 S.W. 766, 1914 Ky. LEXIS 344 ( Ky. 1914 ); Sparr v. Fulton Nat'l Bank, 179 Ky. 755 , 201 S.W. 310, 1918 Ky. LEXIS 286 ( Ky. 1918 ); Cockrill v. First Nat'l Bank, 208 Ky. 755 , 271 S.W. 1054, 1925 Ky. LEXIS 383 ( Ky. 1925 ); Bedinger v. Citizens' Nat'l Bank, 212 Ky. 486 , 279 S.W. 622, 1926 Ky. LEXIS 180 ( Ky. 1926 ); Roberts v. Allen, 244 Ky. 353 , 50 S.W.2d 965, 1932 Ky. LEXIS 429 ( Ky. 1932 ); Worden v. Kennedy, 246 Ky. 716 , 56 S.W.2d 329, 1933 Ky. LEXIS 12 ( Ky. 1933 ).

An agreement by directors to become jointly liable on all obligations of the corporation indorsed by them was for value where bank renewed obligations of corporation. First Nat'l Bank v. Doherty, 156 Ky. 386 , 161 S.W. 211, 1913 Ky. LEXIS 444 ( Ky. 1913 ).

Although bonds had been stolen an innocent purchaser for value was protected but the burden shifted to holder to show circumstances under which the bonds were acquired and that the circumstances made him a holder in due course. Cawood v. Madison Southern Nat'l Bank & Trust Co., 251 Ky. 637 , 65 S.W.2d 734, 1933 Ky. LEXIS 931 ( Ky. 1933 ); Kentucky Rock Asphalt Co. v. Mazza's Adm'r, 264 Ky. 158 , 94 S.W.2d 316, 1936 Ky. LEXIS 283 ( Ky. 1936 ).

2.Checks.

If check was actually discounted for value in due course by an innocent purchaser after service of writ of garnishment, debt evidenced by check was not subject to garnishment but where check was drawn by depositor to transfer amount in drawer’s account to a different bank it was not sold or discounted to another for value in due course and the fact the check was certified was immaterial. Boswell v. Citizens' Sav. Bank, 123 Ky. 485 , 96 S.W. 797, 29 Ky. L. Rptr. 988 , 1906 Ky. LEXIS 175 ( Ky. 1906 ).

Bank was holder for value where check was deposited and money was withdrawn before the bank received notice of dishonor. Choteau Trust & Banking Co. v. Smith, 133 Ky. 418 , 118 S.W. 279, 1909 Ky. LEXIS 186 ( Ky. 1909 ).

Where two checks were deposited in bank, one certified and one not certified, and both were dishonored but bank was not notified of the dishonor of the uncertified check and the depositor withdrew the amount of both checks, the bank was holder for value of both checks since it had the right to assume the certified check would be honored. First Nat'l Bank v. Bank of Ravenswood, 141 Ky. 671 , 133 S.W. 581, 1911 Ky. LEXIS 68 ( Ky. 1911 ).

Where holder of check deposited it in drawee bank and check was credited to his account, value had been paid. First Nat'l Bank v. Mammoth Blue Gem Coal Co., 194 Ky. 580 , 240 S.W. 78, 1922 Ky. LEXIS 211 ( Ky. 1922 ).

Where bank, on order of indorser at time of depositing check, credited account of third parties, value was given to extent of such credit. National Deposit Bank v. Ohio Oil Co., 250 Ky. 288 , 62 S.W.2d 1048, 1933 Ky. LEXIS 686 ( Ky. 1933 ).

Where bank took check for collection, crediting depositor’s account with agreement to charge back in case of dishonor, it was holder for value to extent depositor checked against such credit. National Deposit Bank v. Ohio Oil Co., 250 Ky. 288 , 62 S.W.2d 1048, 1933 Ky. LEXIS 686 ( Ky. 1933 ).

Where bank took check for collection, reserving the right to charge check back if uncollectable, bank gave value as to amount drawn against such check. National Deposit Bank v. Ohio Oil Co., 250 Ky. 288 , 62 S.W.2d 1048, 1933 Ky. LEXIS 686 ( Ky. 1933 ).

3.Notes.

Partial failure of consideration did not affect holder of lien notes payable to and indorsed by an assignee for benefit of creditors where holder had no notice. Hargis v. Louisville Trust Co., 30 S.W. 877, 17 Ky. L. Rptr. 218 (1895).

Covenant in deed that if certain things were not done notes would be returned did not affect a purchaser for value without notice of the covenant. McCarty v. Louisville Banking Co., 100 Ky. 4 , 37 S.W. 144, 18 Ky. L. Rptr. 569 , 1896 Ky. LEXIS 133 ( Ky. 1896 ).

Where payee indorsed notes, which he held in settlement of, or as collateral, for his pre-existing debt, the indorsee took for value. Wilkins v. Usher, 123 Ky. 696 , 97 S.W. 37, 29 Ky. L. Rptr. 1232 , 1906 Ky. LEXIS 200 ( Ky. 1906 ). See Melton v. Pensacola Bank & Trust Co., 190 F. 126, 1911 U.S. App. LEXIS 4430 (6th Cir. Ky. 1911 ); Campbell v. Fourth Nat'l Bank, 137 Ky. 555 , 126 S.W. 114, 1910 Ky. LEXIS 598 ( Ky. 1910 ); Montenegro-Riehm Music Co. v. Illinois Trust & Sav. Bank, 164 Ky. 608 , 176 S.W. 32, 1915 Ky. LEXIS 430 ( Ky. 1915 ); Harrison v. Nicholson-Foley Co., 179 Ky. 513 , 200 S.W. 929, 1918 Ky. LEXIS 245 ( Ky. 1918 ).

Where a note was given as collateral security for a pre-existing debt, the creditor took such note as a holder for value in respect to a joint maker, who signed the note subsequent to the contraction of the original debt but pre-existent to the creditor’s taking. Wilkins v. Usher, 123 Ky. 696 , 97 S.W. 37, 29 Ky. L. Rptr. 1232 , 1906 Ky. LEXIS 200 ( Ky. 1906 ).

Promise of surety on a note discharged from liability by failure to sue thereon within seven years was unenforceable unless based on a new consideration but where payee accepted renewal note in the same sum with the same maker and the same surety this extension of time given by payee to maker was consideration to support the surety’s obligation to pay the new note. Steger v. Jackson, 139 Ky. 491 , 102 S.W. 329, 31 Ky. L. Rptr. 434 , 1907 Ky. LEXIS 2 ( Ky. 1907 ).

A note due one day after date for a pre-existing indebtedness did not afford new consideration which would support payee’s claim that he was a holder for value of bonds given to secure such note. Walker v. Harris' Ex'rs, 114 S.W. 775 ( Ky. 1908 ).

Where a note was given upon the understanding that the payee would satisfy a judgment outstanding against the maker and such judgment was satisfied subsequently to the giving of the note, the payee was a holder for value as to a surety who signed prior to the giving of the note. Hermann's Ex'r v. Gregory, 131 Ky. 819 , 115 S.W. 809, 1909 Ky. LEXIS 65 ( Ky. 1909 ).

Where, creditor, feeling insecure, debtor indorsed note to him as collateral, such creditor was holder for value. Campbell v. Fourth Nat'l Bank, 137 Ky. 555 , 126 S.W. 114, 1910 Ky. LEXIS 598 ( Ky. 1910 ).

Bank was holder for value to the extent of its lien where it accepted notes as collateral to secure other debts and agreed to extend the time for payment of debts for agreement in collateral notes that notes pledged could be used to secure any other debt. American Nat'l Bank v. J. S. Minor & Son, 142 Ky. 792 , 135 S.W. 278, 1911 Ky. LEXIS 287 ( Ky. 1911 ).

Where X delivered note under agreement that Y would go surety on another obligation and become owner of note if required to pay off as surety, which Y had to do, Y was a holder for value. Jett v. Standafer, 143 Ky. 787 , 137 S.W. 513, 1911 Ky. LEXIS 503 ( Ky. 1911 ).

Where a note was executed in renewal of a previous note from which the sureties had been released and the sureties signed the renewal note without any fraud or deceit of any character they were bound by it as the extension of time to the principal was sufficient consideration to bind sureties and the holder of the note was a holder for value. Davis v. Bank of Clarkson, 144 Ky. 417 , 138 S.W. 246, 1911 Ky. LEXIS 606 ( Ky. 1911 ).

Purchaser of note for one third of its value was a holder in due course. Ham v. Merritt, 150 Ky. 11 , 149 S.W. 1131, 1912 Ky. LEXIS 829 ( Ky. 1912 ).

Where a holder bought notes at a 25 per cent discount, he purchased for value. Pratt v. Rounds, 160 Ky. 358 , 169 S.W. 848, 1914 Ky. LEXIS 465 ( Ky. 1914 ).

Where title was claimed through a holder in due course, who held note as collateral security, claimant could recover only to the amount of the lien of the prior holder when, with claimant’s knowledge, the note was originally issued in fraud since the holder in due course was a holder for value only to the amount of his lien. Thomas v. Siddens, 230 Ky. 651 , 20 S.W.2d 482, 1928 Ky. LEXIS 1 ( Ky. 1928 ).

Where X Bank took over notes of Y Bank under agreement to use them to pay depositors of Y Bank, it was holder for value. First Nat'l Bank v. Combs, 237 Ky. 834 , 36 S.W.2d 644, 1931 Ky. LEXIS 703 ( Ky. 1931 ).

Extension of time in which to pay note with privilege of renewal of it on the payment of interest was a sufficient consideration to support father’s indemnity against loss through son’s nonpayment of instalments on first mortgage on property on which transferee had several mortgages and transferee was a holder for value. Bank of Blaine v. Hanshaw, 255 Ky. 825 , 75 S.W.2d 529, 1934 Ky. LEXIS 339 ( Ky. 1934 ).

355.1-205. Reasonable time — Seasonableness.

  1. Whether a time for taking an action required by the Uniform Commercial Code is reasonable depends on the nature, purpose, and circumstances of the action.
  2. An action is taken seasonably if it is taken at or within the time agreed or, if no time is agreed, at or within a reasonable time.

History. Enact. Acts 1958, ch. 77, § 1-205, effective July 1, 1960; repealed and reenact., Acts 2006, ch. 242, § 13, effective July 12, 2006.

Compiler’s Notes.

The former section (Enact. Acts 1958, ch. 77, § 1-205, effective July 1, 1960) relating to course of dealing and usage of trade, was repealed and reenacted by Acts 2006, ch. 242, § 13. For comparable provisions, see KRS 355.1-303 .

Official Comment

Source:

Former Section 1-204(2)-(3).

Changes from former law:

This section is derived from subsections (2) and (3) of former Section 1-204. Subsection (1) of that section is now incorporated in Section 1-302(b).

  1. Subsection (a) makes it clear that requirements that actions be taken within a “reasonable” time are to be applied in the transactional context of the particular action.
  2. Under subsection (b), the agreement that fixes the time need not be part of the main agreement, but may occur separately. Notice also that under the definition of “agreement” (Section 1-201) the circumstances of the transaction, including course of dealing or usages of trade or course of performance may be material. On the question what is a reasonable time these matters will often be important.

NOTES TO DECISIONS

1.Acceptance.
2.— Revocation.

A buyer’s actions do not necessarily have to be detrimental to the seller’s interest to preclude revocation, only inconsistent with any intention to revoke. Chernick v. Casares, 759 S.W.2d 832, 1988 Ky. App. LEXIS 179 (Ky. Ct. App. 1988).

Although a buyer is entitled to rely on a seller’s assurances, once put on notice he or she should not be allowed to wait indefinitely for a defect to materialize before revoking acceptance. Chernick v. Casares, 759 S.W.2d 832, 1988 Ky. App. LEXIS 179 (Ky. Ct. App. 1988).

Where the buyer was put on notice of the possibility of a defect in a mare three (3) months after he purchased her and while she was still in his possession, three (3) years between the purchase of the mare and the attempted revocation of her was clearly unreasonable as a matter of law, and the attempted revocation was properly determined to be untimely because a thoroughbred horse, particularly a broodmare, has a limited useful life. Chernick v. Casares, 759 S.W.2d 832, 1988 Ky. App. LEXIS 179 (Ky. Ct. App. 1988).

The buyer’s attempt to breed the mare three (3) years after he was put on notice of the possibility of a breeding defect, was an act of dominion which precluded revocation. Chernick v. Casares, 759 S.W.2d 832, 1988 Ky. App. LEXIS 179 (Ky. Ct. App. 1988).

3.Excessive Delay.

While ordinarily “reasonable time” for taking action is a question of fact to be submitted to the jury, there are situations in which a buyer has delayed so excessively that his or her actions become untimely as a matter of law. Chernick v. Casares, 759 S.W.2d 832, 1988 Ky. App. LEXIS 179 (Ky. Ct. App. 1988).

4.Reasonable Time.

A reasonable time was such time “as may be necessary in the circumstances of the case for a reasonably prudent and diligent person to do what the contract or duty requires should be done, having due regard for the rights and possibility of loss to the other party.” Carhartt Holding Co. v. Mitchell, 261 Ky. 297 , 87 S.W.2d 360, 1935 Ky. LEXIS 616 ( Ky. 1935 ).

5.— Check.

Two days after issuance was a reasonable time in which to negotiate a check. Asbury v. Taube, 151 Ky. 142 , 151 S.W. 372, 1912 Ky. LEXIS 768 ( Ky. 1912 ).

Nine months after date was an unreasonable time for a bank to cash a check. Fayette Nat'l Bank v. Meyers, 211 Ky. 185 , 277 S.W. 292, 1925 Ky. LEXIS 842 ( Ky. 1925 ).

6.— Presentment of Demand Note.

Where it was established that it was the custom among banks of the locality to not allow demand paper to remain outstanding for more than four months, presentment for payment of a demand note six months after date was an unreasonable time. Frazee v. Phoenix Nat'l Bank, 161 Ky. 175 , 170 S.W. 532, 1914 Ky. LEXIS 28 ( Ky. 1914 ).

7.— Presentment of Draft by Insured.

Reinsurer agreed to be bound for all unsettled claims of insurer, but insured was not appraised of this fact. Insurer issued draft to pay a claim and reinsurer reimbursed insurer. Insured did not present draft for three (3) months, during which time insurer went bankrupt, but this was not an unreasonable time as reinsurer would have suffered no loss had reinsurer chosen financially responsible agent. Stewart v. Inter-Ocean Reinsurance Corp., 260 Ky. 787 , 86 S.W.2d 703, 1935 Ky. LEXIS 554 ( Ky. 1935 ).

8.— Husband’s Approval of Wife’s Note.

Where a wife signed and delivered a note upon the condition that her husband approve the transaction and he did not notify of his disapproval for two weeks, such was an unreasonable time. Carhartt Holding Co. v. Mitchell, 261 Ky. 297 , 87 S.W.2d 360, 1935 Ky. LEXIS 616 ( Ky. 1935 ).

9.— Filling in Payee’s Name.

Where the joint makers were still alive, the note had not been negotiated, and there was no other evidence of prejudice to any rights of the makers, but the original payee had died, seven years after that death was not an unreasonable time for the payee’s administrator to fill in the payee’s name in an instrument blank in that respect. Finley v. Rose, 189 Ky. 359 , 224 S.W. 1059, 1920 Ky. LEXIS 431 ( Ky. 1920 ). See Fayette Nat'l Bank v. Meyers, 211 Ky. 185 , 277 S.W. 292, 1925 Ky. LEXIS 842 ( Ky. 1925 ).

10.Type of Goods.

The type of goods involved may be dispositive of what constitutes a reasonable time in which to revoke acceptance; perishable or seasonable goods demand prompter action than, for instance, a long-term fixture. Chernick v. Casares, 759 S.W.2d 832, 1988 Ky. App. LEXIS 179 (Ky. Ct. App. 1988).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

355.1-206. Presumptions.

Whenever the Uniform Commercial Code creates a “presumption” with respect to a fact, or provides that a fact is “presumed,” the trier of fact must find the existence of the fact unless and until evidence is introduced that supports a finding of its nonexistence.

History. Enact. Acts 1958, ch. 77, § 1-206, effective July 1, 1960; 1996, ch. 130, § 180, effective January 1, 1997; repealed and reenact., Acts 2006, ch. 242, § 14, effective July 12, 2006.

Compiler’s Notes.

The former section (Enact. Acts 1958, ch. 77, § 1-206, effective July 1, 1960; 1996, ch. 130, § 180, effective January 1, 1997) relating to statutes of frauds for personal property not otherwise covered, was repealed and reenacted by Acts 2006, ch. 242, § 14.

Official Comment

Source:

Former Section 1-201(31).

Changes from former law:

None, other than stylistic changes.

  1. Several sections of the Uniform Commercial Code state that there is a “presumption” as to a certain fact, or that the fact is “presumed.” This section, derived from the definition appearing in former Section 1-201(31), indicates the effect of those provisions on the proof process.

355.1-207. Performance or acceptance under reservation of rights. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 1-207, effective July 1, 1960; 1996, ch. 130, § 71, effective January 1, 1997) was repealed by Acts 2006, ch. 242, § 64, effective July 12, 2006.

355.1-208. Option to accelerate at will. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 1-208, effective July 1, 1960) was repealed by Acts 2006, ch. 242, § 64, effective July 12, 2006.

355.1-209. Subordinated obligations. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1986, ch. 118, § 3, effective July 1, 1987) was repealed by Acts 2006, ch. 242, § 64, effective July 12, 2006.

Part 3. Applicability and General Rules

355.1-301. Parties’ power to choose applicable law — Exceptions.

  1. This section applies to a transaction to the extent that it is governed by another article of the Uniform Commercial Code.
  2. Except as otherwise provided in this section, when a transaction bears a reasonable relation to this state and also to another state or nation, the parties may agree that the law of either this state or such other state or nation shall govern their rights and duties.
  3. In the absence of an agreement effective under subsection (2) of this section, the rights and obligations of the parties are determined by the law that would be selected by application of this state’s conflict-of-laws principles.
  4. To the extent that the Uniform Commercial Code governs a transaction, if one (1) of the following provisions of the Uniform Commercial Code specifies the applicable law, that provision governs and a contrary agreement is effective only to the extent permitted by the law so specified:
    1. KRS 355.2-402 ;
    2. KRS 355.2A-105 and 355.2A-106 ;
    3. KRS 355.4-102 ;
    4. KRS 355.4A-507 ;
    5. KRS 355.5-116 ;
    6. KRS 355.8-110 ;
    7. KRS 355.9-301 to 355.9-307 .

History. Enact. Acts 2006, ch. 242, § 15, effective July 12, 2006.

Official Comment

Source:

Former Section 1-105.

Summary of changes from former law:

This section is substantively identical to former Section 1-105. Changes in language are stylistic only.

  1. Subsection (a) states affirmatively the right of the parties to a multi state transaction or a transaction involving foreign trade to choose their own law. That right is subject to the firm rules stated in the sections listed in subsection (c), and is limited to jurisdictions to which the transaction bears a “reasonable relation.”  In general, the test of “reasonable relation” is similar to that laid down by the   Supreme Court in Seeman v. Philadelphia Warehouse Co., 274 U.S. 403, 47 S. Ct. 626, 71 L. Ed. 1123 (1927).  Ordinarily the law chosen must be that of a jurisdiction where a significant enough portion of the making or performance of the contract is to occur or occurs.  But an agreement as to choice of law may sometimes take effect as a shorthand expression of the intent of the parties as to matters governed by their agreement, even though the transaction has no significant contact with the jurisdiction chosen.
  2. Where there is no agreement as to the governing law, the Act is applicable to any transaction having an “appropriate” relation to any state which enacts it.  Of course, the Act applies to any transaction which takes place in its entirety in a state which has enacted the Act.  But the mere fact that suit is brought in a state does not make it appropriate to apply the substantive law of that state.  Cases where a relation to the enacting state is not “appropriate” include, for example, those where the parties have clearly contracted on the basis of some other law, as where the law of the place of contracting and the law of the place of contemplated performance are the same and are contrary to the law under the Code.
  3. Where a transaction has significant contacts with a state which has enacted the Act and also with other jurisdictions, the question what relation is “appropriate” is left to judicial decision.  In deciding that question, the court is not strictly bound by precedents established in other contexts.  Thus a conflict of laws decision refusing to apply a purely local statute or rule of law to a particular multi state transaction may not be valid precedent for refusal to apply the Code in an analogous situation.  Application of the Code in such circumstances may be justified by its comprehensiveness, by the policy of uniformity, and by the fact that it is in large part a reformulation and restatement of the law merchant and of the understanding of a business community which transcends state and even national boundaries.  Compare   Global Commerce Corp. v. Clark Babbitt Industries, Inc., 239 F.2d 716, 719 (2d Cir. 1956).  In particular, where a transaction is governed in large part by the Code, application of another law to some detail of performance because of an accident of geography may violate the commercial understanding of the parties.
  4. Subsection (c) spells out essential limitations on the parties’ right to choose the applicable law.  Especially in Article 9 parties taking a security interest or asked to extend credit which may be subject to a security interest must have sure ways to find out whether and where to file and where to look for possible existing filings.
  5. Sections 9-301 through 9-307 should be consulted as to the rules for perfection of security interests and agricultural liens and the effect of perfection and nonperfection and priority.
  6. This section is subject to Section 1-102, which states the scope of Article 1.  As that section indicates, the rules of Article 1, including this section, apply to a transaction to the extent that transaction is governed by one of the other Articles of the Uniform Commercial Code.

NOTES TO DECISIONS

1.In General.

KRS 355.1-105 does not require that an “as is” disclaimer of warranty only be honored when reasonable or appropriate; rather, the statute concerns the parties’ power to choose Kentucky law or the law of another jurisdiction to govern their contract. Thornton v. Deere & Co., 2001 U.S. Dist. LEXIS 15676 (W.D. Ky. Sept. 28, 2001).

Where a propane gas purchaser produced only an exemplary purchase order and not the actual purchase orders, there was no meeting of the minds between the purchaser and the supplier on the forum selection clause that was on back of the purchaser’s purchase order. The purchaser’s attempt to prove the supplier’s assent to the forum selection clause by circumstantial evidence, including course of dealing, failed. United Propane Gas, Inc. v. Harsco Corp., 2006 U.S. Dist. LEXIS 63568 (W.D. Ky. Sept. 1, 2006).

2.Contracts.

Matters bearing upon the execution, the interpretation, and the validity of a contract were determined by the law of the place where the contract was made. Matters connected with its performance were regulated by the law prevailing at the place of performance. Matters respecting the remedy, such as the bringing of suits, admissibility of evidence, statutes of limitation, depended upon the law of the place where the suit was brought. Scudder v. Union Nat'l Bank, 91 U.S. 406, 23 L. Ed. 245, 1875 U.S. LEXIS 1382 (U.S. 1875).

While there was occasional conflict of authority as to which law prevailed where the contract was made in one state and was to be performed in another, the authorities were uniform that where the contract was not only made in one state but by its terms was to be performed there, its validity had to be determined by the laws of the state where it was made and was to be performed. Arnett v. Pinson, 108 S.W. 852, 33 Ky. L. Rptr. 36 (1908).

In an action brought in Kentucky attempting to hold a person liable on a contract made in another state, the particular statute under which it was sought to make the party liable had to be pleaded as any other fact, so the court could judge from the law as set out in the pleading what was its meaning and effect. Wettlaufer v. Baxter, 137 Ky. 362 , 125 S.W. 741, 1910 Ky. LEXIS 579 ( Ky. 1910 ).

3.Conditional Sales Contracts.

Where Kentucky required recording of conditional sales contract and creditors procured attachment on machinery located in Kentucky sold under a conditional sales contract made in Illinois which was not recorded in Kentucky the creditors were without notice of seller’s right under the conditional sales contract and their attachment prevailed over the seller. Johnson v. Sauerman Bros., Inc., 243 Ky. 587 , 49 S.W.2d 331, 1932 Ky. LEXIS 152 ( Ky. 1932 ).

4.Indorsements.

A note made, payable, indorsed and transferred in New York was to be determined by the laws of New York and the indorsement being a new contract fixed the rights and liabilities under the law of the place of indorsement. Wettlaufer v. Baxter, 137 Ky. 362 , 125 S.W. 741, 1910 Ky. LEXIS 579 ( Ky. 1910 ).

Where the place of indorsement was established, the law of that place governed such indorsement and not the law of the place of execution of the instrument. Fogarty v. Neal, 201 Ky. 85 , 255 S.W. 1049, 1923 Ky. LEXIS 237 ( Ky. 1923 ).

5.Reasonable Relation Test.

Where a physician residing in Kentucky entered into a loan agreement disguised as a sale/leaseback agreement with a leasing corporation in California, with the agreement specifying that California law would control, it was clear that California law should apply in determining if the agreement was an executory contract, since the contract came into existence in California upon its acceptance there by the leasing company and, thus, a reasonable relation existed with California. In re Velasco, 13 B.R. 872, 1981 Bankr. LEXIS 3028 (Bankr. W.D. Ky. 1981 ), disapproved, Limor v. Weinstein & Sutton (In re SMEC, Inc.), 160 B.R. 86, 1993 U.S. Dist. LEXIS 15232 (M.D. Tenn. 1993).

Research References and Practice Aids

Kentucky Law Journal.

Young, Scope, Purpose, and Functions of the Uniform Commercial Code, 48 Ky. L.J. 191 (1960).

Cullen, Conflict of Laws Problems Under the Uniform Commercial Code, 48 Ky. L.J. 417 (1960).

Gilbert, Choice of Forum Clauses in International and Interstate Contracts, Part VI, Other Influencing Factors, 65 Ky. L.J. 29 (1976-77).

355.1-302. Variation by agreement.

  1. Except as otherwise provided in subsection (2) of this section or elsewhere in the Uniform Commercial Code, the effect of provisions of the Uniform Commercial Code may be varied by agreement.
  2. The obligations of good faith, diligence, reasonableness, and care prescribed by the Uniform Commercial Code may not be disclaimed by agreement. The parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable. Whenever the Uniform Commercial Code requires an action to be taken within a reasonable time, a time that is not manifestly unreasonable may be fixed by agreement.
  3. The presence in certain provisions of the Uniform Commercial Code of the phrase “unless otherwise agreed,” or words of similar import, does not imply that the effect of other provisions may not be varied by agreement under this section.

History. Enact. Acts 2006, ch. 242, § 16, effective July 12, 2006.

Official Comment

Source:

Former Sections 1-102(3)-(4) and 1-204(1).

Changes:

This section combines the rules from subsections (3) and (4) of former Section 1-102 and subsection (1) of former Section 1-204. No substantive changes are made.

  1. Subsection (a) states affirmatively at the outset that freedom of contract is a principle of the Uniform Commercial Code: “the effect” of its provisions may be varied by “agreement.” The meaning of the statute itself must be found in its text, including its definitions, and in appropriate extrinsic aids; it cannot be varied by agreement. But the Uniform Commercial Code seeks to avoid the type of interference with evolutionary growth found in pre-Code cases such as Manhattan Co. v. Morgan, 242 N.Y. 38, 150 N.E. 594 (1926). Thus, private parties cannot make an instrument negotiable within the meaning of Article 3 except as provided in Section 3-104; nor can they change the meaning of such terms as “bona fide purchaser,” “holder in due course,” or “due negotiation,” as used in the Uniform Commercial Code. But an agreement can change the legal consequences that would otherwise flow from the provisions of the Uniform Commercial Code. “Agreement” here includes the effect given to course of dealing, usage of trade and course of performance by Sections 1-201 and 1-303; the effect of an agreement on the rights of third parties is left to specific provisions of the Uniform Commercial Code and to supplementary principles applicable under Section 1-103. The rights of third parties under Section 9-317 when a security interest is unperfected, for example, cannot be destroyed by a clause in the security agreement.

    This principle of freedom of contract is subject to specific exceptions found elsewhere in the Uniform Commercial Code and to the general exception stated here. The specific exceptions vary in explicitness: the statute of frauds found in Section 2-201, for example, does not explicitly preclude oral waiver of the requirement of a writing, but a fair reading denies enforcement to such a waiver as part of the “contract” made unenforceable; Section 9-602, on the other hand, is a quite explicit limitation on freedom of contract. Under the exception for “the obligations of good faith, diligence, reasonableness and care prescribed by [the Uniform Commercial Code],” provisions of the Uniform Commercial Code prescribing such obligations are not to be disclaimed. However, the section also recognizes the prevailing practice of having agreements set forth standards by which due diligence is measured and explicitly provides that, in the absence of a showing that the standards manifestly are unreasonable, the agreement controls. In this connection, Section 1-303 incorporating into the agreement prior course of dealing and usages of trade is of particular importance.

    Subsection (b) also recognizes that nothing is stronger evidence of a reasonable time than the fixing of such time by a fair agreement between the parties. However, provision is made for disregarding a clause which whether by inadvertence or overreaching fixes a time so unreasonable that it amounts to eliminating all remedy under the contract. The parties are not required to fix the most reasonable time but may fix any time which is not obviously unfair as judged by the time of contracting.

  2. An agreement that varies the effect of provisions of the Uniform Commercial Code may do so by stating the rules that will govern in lieu of the provisions varied. Alternatively, the parties may vary the effect of such provisions by stating that their relationship will be governed by recognized bodies of rules or principles applicable to commercial transactions. Such bodies of rules or principles may include, for example, those that are promulgated by intergovernmental authorities such as UNCITRAL or Unidroit (see, e.g., Unidroit Principles of International Commercial Contracts), or non-legal codes such as trade codes.
  3. Subsection (c) is intended to make it clear that, as a matter of drafting, phrases such as “unless otherwise agreed” have been used to avoid controversy as to whether the subject matter of a particular section does or does not fall within the exceptions to subsection (b), but absence of such words contains no negative implication since under subsection (b) the general and residual rule is that the effect of all provisions of the Uniform Commercial Code may be varied by agreement.

NOTES TO DECISIONS

1.In General.

A coal supply agreement, as an instrument for the sale of goods, does trigger the UCC. However, two (2) sophisticated parties with able and learned legal counsel, contracted away from the UCC, its definitions and interpretations which the parties were legally entitled to do. The coal supply agreement provided for the risk allocation agreed to by the parties and the contractual standard was not based on whether the events or conditions could or should have been forseen, but required only a factual determination that the events or conditions were not forseen. The contractual standard was a negotiated provision for period price review, not an excuse from performance clause. Kentucky Utilities Co. v. South East Coal Co., 836 S.W.2d 392, 1992 Ky. LEXIS 96 ( Ky. 1992 ), cert. dismissed, 506 U.S. 1090, 113 S. Ct. 1147, 122 L. Ed. 2d 498, 1993 U.S. LEXIS 1038 (U.S. 1993).

355.1-303. Course of performance — Course of dealing — Usage of trade.

  1. A “course of performance” is a sequence of conduct between the parties to a particular transaction that exists if:
    1. The agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and
    2. The other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection.
  2. A “course of dealing” is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.
  3. A “usage of trade” is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law.
  4. A course of performance or course of dealing between the parties or usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware is relevant in ascertaining the meaning of the parties’ agreement, may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement. A usage of trade applicable in the place in which part of the performance under the agreement is to occur may be so utilized as to that part of the performance.
  5. Except as otherwise provided in subsection (6) of this section, the express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade must be construed whenever reasonable as consistent with each other. If such a construction is unreasonable:
    1. Express terms prevail over course of performance, course of dealing, and usage of trade;
    2. Course of performance prevails over course of dealing and usage of trade; and
    3. Course of dealing prevails over usage of trade.
  6. Subject to KRS 355.2-209 , a course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance.
  7. Evidence of a relevant usage of trade offered by one (1) party is not admissible unless that party has given the other party notice that the court finds sufficient to prevent unfair surprise to the other party.

History. Enact. Acts 2006, ch. 242, § 17, effective July 12, 2006.

Official Comment

Source:

Former Sections 1-205, 2-208, and Section 2A-207.

Changes from former law:

This section integrates the “course of performance” concept from Articles 2 and 2A into the principles of former Section 1-205, which deals with course of dealing and usage of trade. In so doing, the section slightly modifies the articulation of the course of performance rules to fit more comfortably with the approach and structure of former Section 1-205. There are also slight modifications to be more consistent with the definition of “agreement” in former Section 1-201(3). It should be noted that a course of performance that might otherwise establish a defense to the obligation of a party to a negotiable instrument is not available as a defense against a holder in due course who took the instrument without notice of that course of performance.

  1. The Uniform Commercial Code rejects both the “lay-dictionary” and the “conveyancer’s” reading of a commercial agreement. Instead the meaning of the agreement of the parties is to be determined by the language used by them and by their action, read and interpreted in the light of commercial practices and other surrounding circumstances. The measure and background for interpretation are set by the commercial context, which may explain and supplement even the language of a formal or final writing.
  2. “Course of dealing,” as defined in subsection (b), is restricted, literally, to a sequence of conduct between the parties previous to the agreement. A sequence of conduct after or under the agreement, however, is a “course of performance.” “Course of dealing” may enter the agreement either by explicit provisions of the agreement or by tacit recognition.
  3. The Uniform Commercial Code deals with “usage of trade” as a factor in reaching the commercial meaning of the agreement that the parties have made. The language used is to be interpreted as meaning what it may fairly be expected to mean to parties involved in the particular commercial transaction in a given locality or in a given vocation or trade. By adopting in this context the term “usage of trade,” the Uniform Commercial Code expresses its intent to reject those cases which see evidence of “custom” as representing an effort to displace or negate “established rules of law.” A distinction is to be drawn between mandatory rules of law such as the Statute of Frauds provisions of Article 2 on Sales whose very office is to control and restrict the actions of the parties, and which cannot be abrogated by agreement, or by a usage of trade, and those rules of law (such as those in Part 3 of Article 2 on Sales) which fill in points which the parties have not considered and in fact agreed upon. The latter rules hold “unless otherwise agreed” but yield to the contrary agreement of the parties. Part of the agreement of the parties to which such rules yield is to be sought for in the usages of trade which furnish the background and give particular meaning to the language used, and are the framework of common understanding controlling any general rules of law which hold only when there is no such understanding.
  4. A usage of trade under subsection (c) must have the “regularity of observance” specified. The ancient English tests for “custom” are abandoned in this connection. Therefore, it is not required that a usage of trade be “ancient or immemorial,” “universal,” or the like. Under the requirement of subsection (c) full recognition is thus available for new usages and for usages currently observed by the great majority of decent dealers, even though dissidents ready to cut corners do not agree. There is room also for proper recognition of usage agreed upon by merchants in trade codes.
  5. The policies of the Uniform Commercial Code controlling explicit unconscionable contracts and clauses (Sections 1-304, 2-302) apply to implicit clauses that rest on usage of trade and carry forward the policy underlying the ancient requirement that a custom or usage must be “reasonable.” However, the emphasis is shifted. The very fact of commercial acceptance makes out a prima facie case that the usage is reasonable, and the burden is no longer on the usage to establish itself as being reasonable. But the anciently established policing of usage by the courts is continued to the extent necessary to cope with the situation arising if an unconscionable or dishonest practice should become standard.
  6. Subsection (d), giving the prescribed effect to usages of which the parties “are or should be aware,” reinforces the provision of subsection (c) requiring not universality but only the described “regularity of observance” of the practice or method. This subsection also reinforces the point of subsection (c) that such usages may be either general to trade or particular to a special branch of trade.
  7. Although the definition of “agreement” in Section 1-201 includes the elements of course of performance, course of dealing, and usage of trade, the fact that express reference is made in some sections to those elements is not to be construed as carrying a contrary intent or implication elsewhere. Compare Section 1-302(c).
  8. In cases of a well established line of usage varying from the general rules of the Uniform Commercial Code where the precise amount of the variation has not been worked out into a single standard, the party relying on the usage is entitled, in any event, to the minimum variation demonstrated. The whole is not to be disregarded because no particular line of detail has been established. In case a dominant pattern has been fairly evidenced, the party relying on the usage is entitled under this section to go to the trier of fact on the question of whether such dominant pattern has been incorporated into the agreement.
  9. Subsection (g) is intended to insure that this Act’s liberal recognition of the needs of commerce in regard to usage of trade shall not be made into an instrument of abuse.

NOTES TO DECISIONS

1.Applicability.

“Course of dealing between parties” and “any usage of trade” may be competent to explain any ambiguities in a contract but this does not mean that a course of dealing or trade usage may be used to make a contract between parties and where the whole issue was whether or not there was an agreement to give ten percent (10%) discount on purchases, the term ten percent (10%) was a plain term requiring no trade usage or custom to determine its meaning. Martin v. Ben P. Eubank Lumber Co., 395 S.W.2d 385, 1965 Ky. LEXIS 146 ( Ky. 1965 ).

Where a propane gas purchaser produced only an exemplary purchase order and not the actual purchase orders, there was no meeting of the minds between the purchaser and the supplier on the forum selection clause that was on back of the purchaser’s purchase order. The purchaser’s attempt to prove the supplier’s assent to the forum selection clause by circumstantial evidence, including course of dealing, failed. United Propane Gas, Inc. v. Harsco Corp., 2006 U.S. Dist. LEXIS 63568 (W.D. Ky. Sept. 1, 2006).

2.Express Terms of Agreement.

Express terms of an agreement and an applicable course of dealing or trade usage shall be construed as being consistent with each other whenever reasonable, but whenever such construction is unreasonable, the express terms control both a course of dealing and trade usage, and the same considerations and principles apply to a course of performance. Savannah Sugar Refinery, Div. of Savannah Foods & Industries, Inc. v. RC Canada Dry Bottling Co., Div. of Beatrice Foods Co., 593 S.W.2d 880, 1979 Ky. App. LEXIS 509 (Ky. Ct. App. 1979).

Fact that bank had previously accepted a promisor’s late payments on a loan did not constitute a waiver of its right to accelerate the loan when the promisor again defaulted on a payment, and in any event, under former KRS 355.1-205 (4) (now this section), if the course of dealing between the parties and the express terms of their agreement could not reasonably be construed as consistent with each other, the express terms of the agreement controlled. Catron v. Citizens Union Bank, 229 S.W.3d 54, 2006 Ky. App. LEXIS 273 (Ky. Ct. App. 2006).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

355.1-304. Obligation of good faith.

Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement.

History. Enact. Acts 2006, ch. 242, § 18, effective July 12, 2006.

Official Comment

Source:

Former Section 1-203.

Changes from former law:

Except for changing the form of reference to the Uniform Commercial Code, this section is identical to former Section 1-203.

  1. This section sets forth a basic principle running throughout the Uniform Commercial Code. The principle is that in commercial transactions good faith is required in the performance and enforcement of all agreements or duties. While this duty is explicitly stated in some provisions of the Uniform Commercial Code, the applicability of the duty is broader than merely these situations and applies generally, as stated in this section, to the performance or enforcement of every contract or duty within this Act. It is further implemented by Section 1-303 on course of dealing, course of performance, and usage of trade. This section does not support an independent cause of action for failure to perform or enforce in good faith. Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.
  2. “Performance and enforcement” of contracts and duties within the Uniform Commercial Code include the exercise of rights created by the Uniform Commercial Code.

NOTES TO DECISIONS

1.In General.

Court dismissed a buyer’s claim for consequential damages where the complaint failed to allege bad faith by a seller in its performance under a contract, pursuant to KRS 355.2-719 (3) and KRS 355.1-203 ; the buyer’s only allegation of bad faith related to the negotiations surrounding the contract, rather than to the performance of the contract. Strathmore Web Graphics v. Sanden Mach., Ltd., 2000 U.S. Dist. LEXIS 22618 (W.D. Ky. May 16, 2000).

Father's claim against a custody evaluator under Ky. Rev. Stat. Ann. § 355.1-304 failed because (1) the Uniform Commercial Code did not apply, and (2) the statute did not create an independent cause of action for breach of good faith. J.S. v. Berla, 456 S.W.3d 19, 2015 Ky. App. LEXIS 14 (Ky. Ct. App. 2015).

2.Duty of Banks to Customers.

This section and KRS 355.4-103 impose a duty of good faith and fair dealing on banks, and implied in this duty of good faith and fair dealing is a duty on the part of a bank to provide its former customers with records of their accounts. Ousley v. First Commonwealth Bank, 8 S.W.3d 45, 1999 Ky. App. LEXIS 11 (Ky. Ct. App. 1999).

3.Failure to Demand Payment.

In claim and delivery action to enforce lien on automobiles, where there was no specific assurance of an extension of time for payment and the defendant company had not shown that they relied on any specific assurances to their detriment, there had been no breach of the obligation of good faith as would prevent enforcement and failure to demand immediate payment or to refuse anything less than full payment would not amount to bad faith. Universal C. I. T. Credit Corp. v. Middlesboro Motor Sales, Inc., 424 S.W.2d 409, 1968 Ky. LEXIS 455 ( Ky. 1968 ).

4.Notice.

Where the subordination agreement did not contain any provision which prohibited additional loans from the bank nor specify that any payments received would be used first to reduce the original secured portion of the renewed promissory note, the bank did not breach the subordination agreement when it renewed the note and approved an additional unsecured loan, but did breach its implied covenant of good faith and fair dealing when it failed to give notice to the private lender of its subsequent loan and when it unilaterally applied the payments it received first to the unsecured portion of the new promissory note. Ranier v. Mt. Sterling Nat'l Bank, 812 S.W.2d 154, 1991 Ky. LEXIS 78 ( Ky. 1991 ).

5.Force Majeure.

Utility company was obligated under this section to use good faith in invoking force majeure against coal company so that utility company could refuse to take delivery of coal. Good faith is “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.” Utility company was also under a contractual obligation to eliminate the disabling effect of such force majeure as soon as, and to the extent, possible. Kentucky Utilities Co. v. South East Coal Co., 836 S.W.2d 392, 1992 Ky. LEXIS 96 ( Ky. 1992 ), cert. dismissed, 506 U.S. 1090, 113 S. Ct. 1147, 122 L. Ed. 2d 498, 1993 U.S. LEXIS 1038 (U.S. 1993).

6.Mortgage Contract.

Mortgage contract contained such a covenant of good faith and fair dealing and neither the loan delinquency nor the foreclosure process impaired its validity. This covenant imposed upon the bank, as mortgagee, the duty to act in a bona fide manner throughout the foreclosure proceedings and the breach of this duty resulted in extinguishing the mortgagor’s obligation to the bank when the bank contracted with third parties to sell the mortgaged property during the foreclosure action and, in fact, ultimately sold the property for an amount which would have wholly satisfied the debt owed by mortgagor. Pearman v. West Point Nat'l Bank, 887 S.W.2d 366, 1994 Ky. App. LEXIS 135 (Ky. Ct. App. 1994).

Research References and Practice Aids

Kentucky Law Journal.

Young, Scope, Purposes, and Functions of the Uniform Commercial Code, 48 Ky. L.J. 191 (1960).

Harvey and Wiseman, First Party Bad Faith: Common Law Remedies and a Proposed Legislative Solution, 72 Ky. L.J. 141 (1983-84).

Northern Kentucky Law Review.

Cox, Lender Liability in the Bluegrass: Are New Theories Emerging Under Kentucky Law?, 16 N. Ky. L. Rev. 43 (1988).

Treatises

Kentucky Instructions To Juries (Civil), 5th Ed., Conversion, § 29.03.

355.1-305. Remedies to be liberally administered.

  1. The remedies provided by the Uniform Commercial Code must be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed, but neither consequential or special damages nor penal damages may be had except as specifically provided in the Uniform Commercial Code or by other rule of law.
  2. Any right or obligation declared by the Uniform Commercial Code is enforceable by action unless the provision declaring it specifies a different and limited effect.

History. Enact. Acts 2006, ch. 242, § 19, effective July 12, 2006.

Official Comment

Source:

Former Section 1-106.

Changes from former law:

Other than changes in the form of reference to the Uniform Commercial Code, this section is identical to former Section 1-106.

  1. Subsection (a) is intended to effect three propositions. The first is to negate the possibility of unduly narrow or technical interpretation of remedial provisions by providing that the remedies in the Uniform Commercial Code are to be liberally administered to the end stated in this section. The second is to make it clear that compensatory damages are limited to compensation. They do not include consequential or special damages, or penal damages; and the Uniform Commercial Code elsewhere makes it clear that damages must be minimized. Cf. Sections 1-304, 2-706(1), and 2-712(2). The third purpose of subsection (a) is to reject any doctrine that damages must be calculable with mathematical accuracy. Compensatory damages are often at best approximate: they have to be proved with whatever definiteness and accuracy the facts permit, but no more. Cf. Section 2-204(3).
  2. Under subsection (b), any right or obligation described in the Uniform Commercial Code is enforceable by action, even though no remedy may be expressly provided, unless a particular provision specifies a different and limited effect. Whether specific performance or other equitable relief is available is determined not by this section but by specific provisions and by supplementary principles. Cf. Sections 1-103, 2-716.
  3. “Consequential” or “special” damages and “penal” damages are not defined in the Uniform Commercial Code; rather, these terms are used in the sense in which they are used outside the Uniform Commercial Code.

NOTES TO DECISIONS

1.Construction in Favor of Remedy.

It was a well-adopted principle and rule that statutory enactment should be liberally construed in respect of the purpose for which it was enacted, and, where there was a doubt as to the construction, the statute should be construed always in favor of the remedy. Nall v. Commonwealth, 299 Ky. 792 , 187 S.W.2d 443, 1945 Ky. LEXIS 803 ( Ky. 1945 ).

2.Punitive Damages.

The Uniform Commercial Code grants no new right to punitive damages. Ford Motor Co. v. Mayes, 575 S.W.2d 480, 1978 Ky. App. LEXIS 649 (Ky. Ct. App. 1978).

Punitive damages were not usually recoverable for a breach of contract. Cumberland Tel. & Tel. Co. v. Sutton, 156 Ky. 191 , 160 S.W. 949, 1913 Ky. LEXIS 409 ( Ky. 191 3).

Research References and Practice Aids

Northern Kentucky Law Review.

Notes, U.C.C. — Consumer Protection Act — Limited Warranties — Automobile Manufac- turer’s Refusal to Recognize Buyers’ Rights Under the U.C.C. When a Limited Warranty Fails of Its Essential Purpose Constitutes an Unfair Trade Practice Under the Consumer Protection Act,6 N. Ky. L. Rev. 403 (1979).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Sales, § 190.00.

355.1-306. Waiver or renunciation of claim or right after breach.

A claim or right arising out of an alleged breach may be discharged in whole or in part without consideration by agreement of the aggrieved party in an authenticated record.

History. Enact. Acts 2006, ch. 242, § 20, effective July 12, 2006.

Official Comment

Source:

Former Section 1-107.

Changes from former law:

This section changes former law in two respects. First, former Section 1-107, requiring the “delivery” of a “written waiver or renunciation” merges the separate concepts of the aggrieved party’s agreement to forego rights and the manifestation of that agreement. This section separates those concepts, and explicitly requires agreement of the aggrieved party. Second, the revised section reflects developments in electronic commerce by providing for memorialization in an authenticated record. In this context, a party may “authenticate” a record by (i) signing a record that is a writing or (ii) attaching to or logically associating with a record that is not a writing an electronic sound, symbol or process with the present intent to adopt or accept the record. See Sections 1-201(b)(37) and 9-102(a)(7).

  1. This section makes consideration unnecessary to the effective renunciation or waiver of rights or claims arising out of an alleged breach of a commercial contract where the agreement effecting such renunciation is memorialized in a record authenticated by the aggrieved party. Its provisions, however, must be read in conjunction with the section imposing an obligation of good faith. (Section 1-304).

Research References and Practice Aids

Kentucky Law Journal.

Young, Scope, Purposes and Functions of the Uniform Commercial Code, 48 Ky. L.J. 191 (1960).

Whiteside, Uniform Commercial Code — Major Changes in Sales Law, The Contract of Sale, 49 Ky. L.J. 165 (1960).

355.1-307. Prima Facie evidence by third-party documents.

A document in due form purporting to be a bill of lading, policy or certificate of insurance, official weigher’s or inspector’s certificate, consular invoice, or any other document authorized or required by the contract to be issued by a third party is prima facie evidence of its own authenticity and genuineness and of the facts stated in the document by the third party.

History. Enact. Acts 2006, ch. 242, § 21, effective July 12, 2006.

Official Comment

Source:

Former Section 1-202.

Changes from former law:

Except for minor stylistic changes, this Section is identical to former Section 1-202.

  1. This section supplies judicial recognition for documents that are relied upon as trustworthy by commercial parties.
  2. This section is concerned only with documents that have been given a preferred status by the parties themselves who have required their procurement in the agreement, and for this reason the applicability of the section is limited to actions arising out of the contract that authorized or required the document. The list of documents is intended to be illustrative and not exclusive.
  3. The provisions of this section go no further than establishing the documents in question as prima facie evidence and leave to the court the ultimate determination of the facts where the accuracy or authenticity of the documents is questioned. In this connection the section calls for a commercially reasonable interpretation.
  4. Documents governed by this section need not be writings if records in another medium are generally relied upon in the context.

355.1-308. Performance or acceptance under reservation of rights.

  1. A party that with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as “without prejudice,” “under protest,” or the like are sufficient.
  2. Subsection (1) of this section does not apply to an accord and satisfaction.

History. Enact. Acts 2006, ch. 242, § 22, effective July 12, 2006.

Official Comment

Source:

Former Section 1-207.

Changes from former law:

This section is identical to former Section 1-207.

  1. This section provides machinery for the continuation of performance along the lines contemplated by the contract despite a pending dispute, by adopting the mercantile device of going ahead with delivery, acceptance, or payment “without prejudice,” “under protest,” “under reserve,” “with reservation of all our rights,” and the like. All of these phrases completely reserve all rights within the meaning of this section. The section therefore contemplates that limited as well as general reservations and acceptance by a party may be made “subject to satisfaction of our purchaser,” “subject to acceptance by our customers,” or the like.
  2. This section does not add any new requirement of language of reservation where not already required by law, but merely provides a specific measure on which a party can rely as that party makes or concurs in any interim adjustment in the course of performance. It does not affect or impair the provisions of this Act such as those under which the buyer’s remedies for defect survive acceptance without being expressly claimed if notice of the defects is given within a reasonable time. Nor does it disturb the policy of those cases which restrict the effect of a waiver of a defect to reasonable limits under the circumstances, even though no such reservation is expressed.

    The section is not addressed to the creation or loss of remedies in the ordinary course of performance but rather to a method of procedure where one party is claiming as of right something which the other believes to be unwarranted.

  3. Subsection (b) states that this section does not apply to an accord and satisfaction. Section 3-311 governs if an accord and satisfaction is attempted by tender of a negotiable instrument as stated in that section. If Section 3-311 does not apply, the issue of whether an accord and satisfaction has been effected is determined by the law of contract. Whether or not Section 3-311 applies, this section has no application to an accord and satisfaction.

NOTES TO DECISIONS

1.In General.

Performance contemplates and encompasses such concepts as delivery and acceptance, as well as payment. Ditch Witch Trenching Co. v. C & S Carpentry Servs., Inc., 812 S.W.2d 171, 1991 Ky. App. LEXIS 52 (Ky. Ct. App. 1991).

2.Conditional Language.

Where creditor received a check with “payment in full” written on it and accepted the check, he did not lose his right to sue for the balance of the payment as he explicitly reserved those rights by crossing out the conditional language and notifying the debtor. Ditch Witch Trenching Co. v. C & S Carpentry Servs., Inc., 812 S.W.2d 171, 1991 Ky. App. LEXIS 52 (Ky. Ct. App. 1991).

Where an owner’s check contained a conspicuous statement that it was tendered as full satisfaction of a paver’s claim pursuant to KRS 355.3-311 (2), (4), when the check was cashed, the claim was discharged despite a notation of protest pursuant to former KRS 355.1-207 ; therefore, the trial court’s grant of summary judgment to the owner was proper. Morgan v. Crawford, 106 S.W.3d 480, 2003 Ky. App. LEXIS 103 (Ky. Ct. App. 2003).

3.Accord and Satisfaction.

A literal interpretation of the plain language contained in former UCC 1-207, not to mention a liberal construction, compels the conclusion that the common law doctrine of accord and satisfaction has been superseded by the passage of this statute. Ditch Witch Trenching Co. v. C & S Carpentry Servs., Inc., 812 S.W.2d 171, 1991 Ky. App. LEXIS 52 (Ky. Ct. App. 1991).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Accord and Satisfaction, § 211.00.

355.1-309. Option to accelerate at will.

A term providing that one (1) party or that party’s successor in interest may accelerate payment or performance or require collateral or additional collateral “at will” or when the party “deems itself insecure,” or words of similar import, means that the party has power to do so only if that party in good faith believes that the prospect of payment or performance is impaired. The burden of establishing lack of good faith is on the party against which the power has been exercised.

History. Enact. Acts 2006, ch. 242, § 23, effective July 12, 2006.

Official Comment

Source:

Former Section 1-208.

Changes from former law:

Except for minor stylistic changes, this section is identical to former Section 1-208.

  1. The common use of acceleration clauses in many transactions governed by the Uniform Commercial Code, including sales of goods on credit, notes payable at a definite time, and secured transactions, raises an issue as to the effect to be given to a clause that seemingly grants the power to accelerate at the whim and caprice of one party. This section is intended to make clear that despite language that might be so construed and which further might be held to make the agreement void as against public policy or to make the contract illusory or too indefinite for enforcement, the option is to be exercised only in the good faith belief that the prospect of payment or performance is impaired.

    Obviously this section has no application to demand instruments or obligations whose very nature permits call at any time with or without reason. This section applies only to an obligation of payment or performance which in the first instance is due at a future date.

NOTES TO DECISIONS

1.Sufficient Evidence to Accelerate.

Evidence showing financial difficulties of maker of security agreement and note was sufficient to authorize acceleration of payment or performance of the note and so authorize foreclosure of the security agreement. Ft. Knox Nat'l Bank v. Gustafson, 385 S.W.2d 196, 1964 Ky. LEXIS 148 ( Ky. 1964 ).

Mortgage loan was properly accelerated without a demand for payment, and subsequent payments were properly refused, because (1) the statute requiring good faith belief in an impaired prospect of payment or performance did not apply, given express mortgage terms setting out specific borrower requirements preventing acceleration, and (2) mortgagors defaulted due to missed payments and tax delinquency. Clay v. Wesbanco Bank, Inc., 589 S.W.3d 550, 2019 Ky. App. LEXIS 50 (Ky. Ct. App. 2019).

355.1-310. Subordinated obligations.

An obligation may be issued as subordinated to performance of another obligation of the person obligated, or a creditor may subordinate its right to performance of an obligation by agreement with either the person obligated or another creditor of the person obligated. Subordination does not create a security interest as against either the common debtor or a subordinated creditor.

History. Enact. Acts 2006, ch. 242, § 24, effective July 12, 2006.

Official Comment

Source:

Former Section 1-209.

Changes from former law:

This section is substantively identical to former Section 1-209. The language in that section stating that it “shall be construed as declaring the law as it existed prior to the enactment of this section and not as modifying it” has been deleted.

  1. Billions of dollars of subordinated debt are held by the public and by institutional investors. Commonly, the subordinated debt is subordinated on issue or acquisition and is evidenced by an investment security or by a negotiable or non-negotiable note. Debt is also sometimes subordinated after it arises, either by agreement between the subordinating creditor and the debtor, by agreement between two creditors of the same debtor, or by agreement of all three parties. The subordinated creditor may be a stockholder or other “insider” interested in the common debtor; the subordinated debt may consist of accounts or other rights to payment not evidenced by any instrument. All such cases are included in the terms “subordinated obligation,” “subordination,” and “subordinated creditor.”
  2. Subordination agreements are enforceable between the parties as contracts; and in the bankruptcy of the common debtor dividends otherwise payable to the subordinated creditor are turned over to the superior creditor. This “turn-over” practice has on occasion been explained in terms of “equitable lien,” “equitable assignment,” or “constructive trust,” but whatever the label the practice is essentially an equitable remedy and does not mean that there is a transaction “that creates a security interest in personal property…by contract” or a “sale of accounts, chattel paper, payment intangibles, or promissory notes” within the meaning of Section 9-109. On the other hand, nothing in this section prevents one creditor from assigning his rights to another creditor of the same debtor in such a way as to create a security interest within Article 9, where the parties so intend.
  3. The enforcement of subordination agreements is largely left to supplementary principles under Section 1-103. If the subordinated debt is evidenced by a certificated security, Section 8-202(a) authorizes enforcement against purchasers on terms stated or referred to on the security certificate. If the fact of subordination is noted on a negotiable instrument, a holder under Sections 3-302 and 3-306 is subject to the term because notice precludes him from taking free of the subordination. Sections 3-302(3)(a), 3-306, and 8-317 severely limit the rights of levying creditors of a subordinated creditor in such cases.

Article 2. Sales

Compiler’s Notes.

The official comments in this article are copyrighted by the National Conference of Commissioners of Uniform State Laws and the American Law Institute, and are reproduced by permission.

Part 1. Short Title, General Construction and Subject Matter

355.2-101. Short title.

This article shall be known and may be cited as Uniform Commercial Code — Sales.

History. Enact. Acts 1958, ch. 77, § 2-101, effective July 1, 1960.

Official Comment

This Article is a complete revision and modernization of the Uniform Sales Act which was promulgated by the National Conference of Commissioners on Uniform State Laws in 1906 and has been adopted in 34 states and Alaska, the District of Columbia and Hawaii.

The coverage of the present Article is much more extensive than that of the old Sales Act and extends to the various bodies of case law which have been developed both outside of and under the latter.

The arrangement of the present Article is in terms of contract for sale and the various steps of its performance. The legal consequences are stated as following directly from the contract and action taken under it without resorting to the idea of when property or title passed or was to pass as being the determining factor. The purpose is to avoid making practical issues between practical men turn upon the location of an intangible something, the passing of which no man can prove by evidence and to substitute for such abstractions proof of words and actions of a tangible character.

Research References and Practice Aids

Kentucky Law Journal.

Young, Scope, Purposes, and Functions of the Uniform Commercial Code, 48 Ky. L.J. 191 (1960).

Cullen, Conflict of Laws, Problems Under the Uniform Commercial Code, 48 Ky. L.J. 417 (1960).

Whiteside, Uniform Commercial Code — Major Changes in Sales Law, 49 Ky. L.J. 165 (1960).

Weber, The Extension of Voidable Title Principle Under the Code, 49 Ky. L.J. 437 (1961).

Viles, The Uniform Commercial Code v. The Bankruptcy Act, 55 Ky. L.J. 36l (1967).

355.2-102. Scope — Certain security and other transactions excluded from this article.

Unless the context otherwise requires, this article applies to transactions in goods; it does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this article impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.

History. Enact. Acts 1958, ch. 77, § 2-102, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 75, Uniform Sales Act.

Changes:

Section 75 has been rephrased.

Purposes of changes and new matter:

To make it clear that:

The Article leaves substantially unaffected the law relating to purchase money security such as conditional sale or chattel mortgage though it regulates the general sales aspects of such transactions. “Security transaction” is used in the same sense as in the Article on Secured Transactions (Article 9).

Cross reference:

Article 9.

Definitional cross references:

“Contract”. Section 1-201. “Contract for sale”. Section 2-106. “Present sale”. Section 2-106. “Sale”. Section 2-106.

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NOTES TO DECISIONS

1.Sale of Motor Vehicle.

Where a seller gave an absolute bill of sale to an automobile and the purchaser, as a part of the same transaction, executed a conditional sales contract reciting that title remained in the seller, the transaction was a sale and the conditional sales contract only created a lien on the automobile to secure the debt. (decided under prior law) Cartwright v. C. I. T. Corp., 253 Ky. 690 , 70 S.W.2d 388, 1934 Ky. LEXIS 729 ( Ky. 1934 ).

The sale of a motor vehicle and the rights and duties of the parties to such a sale are governed by this article. Lexington Mack, Inc. v. Miller, 555 S.W.2d 249, 1977 Ky. LEXIS 500 ( Ky. 1977 ).

Where the testimony and undisputed facts at a state court trial established that a creditor had legal title to a motorcycle when a Chapter 7 debtor exercised dominion and control over it and that debtor denied creditor his right to use and enjoy the motorcycle, then conversion was established under Kentucky law, and the state court judgment was nondischargeable. Dunn v. Campbell (In re Campbell), 2014 Bankr. LEXIS 1639 (Bankr. W.D. Ky. Apr. 15, 2014).

2.Equipment Leasing Transactions.

The UCC is applicable to equipment leasing transactions. Hertz Commercial Leasing Corp. v. Joseph, 641 S.W.2d 753, 1982 Ky. App. LEXIS 262 (Ky. Ct. App. 1982).

3.Goods.

Goods incorporated into a real estate construction contract are not goods. Wehr Constructors, Inc. v. Steel Fabricators, Inc., 769 S.W.2d 51, 1988 Ky. App. LEXIS 197 (Ky. Ct. App. 1988).

Where the predominate purpose of an agreement between a manufacturer and a distributor was for the distributor to service a new client, not to buy the manufacturer’s product, it was not governed by Article II of the Uniform Commercial Code, KRS 355.2-102 . MidAmerican Distrib. v. Clarification Tech., Inc., 807 F. Supp. 2d 646, 2011 U.S. Dist. LEXIS 89143 (E.D. Ky. 2011 ), aff'd, 485 Fed. Appx. 779, 2012 FED App. 671N, 2012 U.S. App. LEXIS 12886 (6th Cir. Ky. 2012 ).

4.Conditional Sales Contract.

In the conventional conditional sales contract, the “property” remained in the seller. (decided under prior law)Brown v. Woods Motor Co., 239 Ky. 312 , 39 S.W.2d 507, 1931 Ky. LEXIS 779 ( Ky. 1931 ), limited, Commonwealth v. Larson, 242 Ky. 317 , 46 S.W.2d 82, 1932 Ky. LEXIS 251 ( Ky. 1932 ).

Conditional sales contracts had to be recorded to be valid against innocent purchasers, even though there was no express requirement of recording in law regulating sales. (decided under prior law) Munz v. National Bond & Inv. Co., 243 Ky. 293 , 47 S.W.2d 1055, 1932 Ky. LEXIS 72 ( Ky. 1932 ).

Cited:

T-Birds, Inc. v. Thoroughbred Helicopter Service, Inc., 540 F. Supp. 548, 1982 U.S. Dist. LEXIS 14161 (E.D. Ky. 1982 ); Marley Cooling Tower Co. v. Caldwell Energy & Envtl., Inc., 280 F. Supp. 2d 651, 2003 U.S. Dist. LEXIS 15213 (W.D. Ky. 2003 ).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Thoroughbred Certificate Law: A Proposal, 78 Ky. L.J. 659 (1989-90).

355.2-103. Definitions and index of definitions.

  1. In this article unless the context otherwise requires:
    1. “Buyer” means a person who buys or contracts to buy goods;
    2. (Reserved)
    3. “Receipt” of goods means taking physical possession of them; and
    4. “Seller” means a person who sells or contracts to sell goods.
  2. Other definitions applying to this article or to specified parts thereof, and the sections in which they appear are:
    1. “Acceptance.” KRS 355.2-606 ;
    2. “Banker’s credit.” KRS 355.2-325 ;
    3. “Between merchants.” KRS 355.2-104 ;
    4. “Cancellation.” KRS 355.2-106 (4);
    5. “Commercial unit.” KRS 355.2-105 ;
    6. “Confirmed credit.” KRS 355.2-325 ;
    7. “Conforming to contract.” KRS 355.2-106 ;
    8. “Contract for sale.” KRS 355.2-106;
    9. “Cover.” KRS 355.2-712 ;
    10. “Entrusting.” KRS 355.2-403 ;
    11. “Financing agency.” KRS 355.2-104 ;
    12. “Future goods.” KRS 355.2-105 ;
    13. “Goods.” KRS 355.2-105;
    14. “Identification.” KRS 355.2-501 ;
    15. “Installment contract.” KRS 355.2-612 ;
    16. “Letter of credit.” KRS 355.2-325;
    17. “Lot.” KRS 355.2-105;
    18. “Merchant.” KRS 355.2-104;
    19. “Overseas.” KRS 355.2-323 ;
    20. “Person in position of seller.” KRS 355.2-707 ;
    21. “Present sale.” KRS 355.2-106;
    22. “Sale.” KRS 355.2-106;
    23. “Sale on approval.” KRS 355.2-326 ;
    24. “Sale or return.” KRS 355.2-326 ; and
    25. “Termination.” KRS 355.2-106.
  3. The following definitions in other articles apply to this article:
    1. “Check.” KRS 355.3-104 ;
    2. “Consignee.” KRS 355.7-102 ;
    3. “Consignor.” KRS 355.7-102 ;
    4. “Consumer goods.” KRS 355.9-102 ;
    5. “Control.” KRS 355.7-106 ;
    6. “Dishonor.” KRS 355.3-502 ; and
    7. “Draft.” KRS 355.3-104 .
  4. In addition, Article 1 contains general definitions and principles of construction and interpretation applicable throughout this article.

History. Enact. Acts 1958, ch. 77, § 2-103, effective July 1, 1960; 2000, ch. 408, § 158, effective July 1, 2001; 2006, ch. 242, § 25, effective July 12, 2006; 2012, ch. 132, § 45, effective July 12, 2012.

Legislative Research Commission Notes.

(7/12/2006). Under the authority of KRS 7.136(1), the Reviser of Statutes has added paragraph headings [(a), (b), etc.] before terms referenced in subsection (2) of this statute that are defined in other statutes. The words in the text were not changed.

Official Comment

Prior uniform statutory provision:

Subsection (1): Section 76, Uniform Sales Act.

Changes:

The definitions of “buyer” and “seller” have been slightly rephrased, the reference in Section 76 of the prior Act to “any legal successor in interest of such person” being omitted. The definition of “receipt” is new.

Purposes of changes and new matter:

  1. The phrase “any legal successor in interest of such person” has been eliminated since Section 2-210 of this Article, which limits some types of delegation of performance on assignment of a sales contract, makes it clear that not every such successor can be safely included in the definition. In every ordinary case, however, such successors are as of course included.
  2. “Receipt” must be distinguished from delivery particularly in regard to the problems arising out of shipment of goods, whether or not the contract calls for making delivery by way of documents of title, since the seller may frequently fulfill his obligations to “deliver” even though the buyer may never “receive” the goods. Delivery with respect to documents of title is defined in Article 1 and requires transfer of physical delivery of a tangible document of title and transfer of control of an electronic document of title. Otherwise the many divergent incidents of delivery are handled incident by incident.

Cross references:

Point 1: See Section 2-210 and Comment thereon.

Point 2: Section 1-201.

Definitional cross reference:

“Person”. Section 1-201.

NOTES TO DECISIONS

1.Seller.

Mechanical contracting firm which solicited an order for special machinery to be built by another firm, which guaranteed its work for a period of one (1) year, and which billed buyer and accepted payment for the machinery was a seller within the meaning of subsection (1)(d) of this section. Frantz, Inc. v. Blue Grass Hams, Inc., 520 S.W.2d 313, 1974 Ky. LEXIS 7 ( Ky. 1974 ).

The General Assembly has expressly adopted the privity requirement, and warranty protections are limited to those engaged in a buyer-seller relationship. Brown Sprinkler Corp. v. Plumbers Supply Co., 265 S.W.3d 237, 2007 Ky. App. LEXIS 347 (Ky. Ct. App. 2007).

2.Good Faith.

Utility company was obligated under KRS 355.1-203 to use good faith in invoking force majeure against coal company so that utility company could refuse to take delivery of coal. Good faith is “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.” Utility company was also under a contractual obligation to eliminate the disabling effect of such force majeure as soon as, and to the extent, possible. Kentucky Utilities Co. v. South East Coal Co., 836 S.W.2d 392, 1992 Ky. LEXIS 96 ( Ky. 1992 ), cert. dismissed, 506 U.S. 1090, 113 S. Ct. 1147, 122 L. Ed. 2d 498, 1993 U.S. LEXIS 1038 (U.S. 1993).

3.Buyer.

A son did not have an actionable claim for injuries against the manufacturer of a chair when the son claimed that the chair, which had been purchased by the son’s parents and kept in the parents’ home, collapsed when the son sat in it. Although the parents met the definition of buyers under KRS 355.2-103 (1)(a), they did not purchase the chair from the manufacturer, and KRS 355.2-318 did not provide grounds for the son’s claim. Compex Int'l Co. v. Taylor, 209 S.W.3d 462, 2006 Ky. LEXIS 253 ( Ky. 2006 ), modified, 2007 Ky. LEXIS 13 (Ky. Jan. 25, 2007).

Cited:

Leeper v. Banks, 487 S.W.2d 58, 1972 Ky. LEXIS 58 ( Ky. 1972 ).

Research References and Practice Aids

Journal of Mineral Law & Policy.

Comments, Injected Gas: Realty or Personalty, 3 J.M.L. & P. 571 (1988).

Kentucky Law Journal.

Comments, The Role of Negligence in Section 3-405 of the Uniform Commercial Code: Owensboro National Bank v. Crisp, 69 Ky. L.J. 143 (1980-81).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Northern Kentucky Law Review.

Cox, Lender Liability in the Bluegrass: Are New Theories Emerging Under Kentucky Law?, 16 N. Ky. L. Rev. 43 (1988).

355.2-104. Definitions: “merchant” — “Between merchants” — “Financing agency.”

  1. “Merchant” means a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill.
  2. “Financing agency” means a bank, finance company or other person who in the ordinary course of business makes advances against goods or documents of title or who by arrangement with either the seller or the buyer intervenes in ordinary course to make or collect payment due or claimed under the contract for sale, as by purchasing or paying the seller’s draft or making advances against it or by merely taking it for collection whether or not documents of title accompany or are associated with the draft. “Financing agency” includes also a bank or other person who similarly intervenes between persons who are in the position of seller and buyer in respect to the goods (KRS 355.2-707 ).
  3. “Between merchants” means in any transaction with respect to which both parties are chargeable with the knowledge or skill of merchants.

History. Enact. Acts 1958, ch. 77, § 2-104, effective July 1, 1960; 2012, ch. 132, § 46, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

None. But see Sections 15(2), (5), 16(c), 45(2) and 71, Uniform Sales Act, and Sections 35 and 37, Uniform Bills of Lading Act for examples of the policy expressly provided for in this Article.

Purposes:

  1. This Article assumes that transaction between professionals in a given field require special and clear rules which may not apply to a casual or inexperienced seller or buyer. It thus adopts a policy of expressly stating rules applicable “between merchants” and “as against a merchant” wherever they are needed instead of making them depend upon the circumstances of each case as in the statutes cited above. This section lays the foundation of this policy by defining those who are to be regarded as professionals or “merchants” and by stating when a transaction is deemed to be “between merchants”.
  2. The term “merchant” as defined here roots in the “law merchant” concept of a professional in business. The professional status under the definition may be based upon specialized knowledge as to the goods, specialized knowledge as to business practices, or specialized knowledge as to both and which kind of specialized knowledge may be sufficient to establish the merchant status is indicated by the nature of the provisions.

    The special provisions as to merchants appear only in this Article and they are of three kinds. Sections 2-201(2), 2-205, 2-207 and 2-209 dealing with the statute of frauds, firm offers, confirmatory memoranda and modification rest on normal business practices which are or ought to be typical of and familiar to any person in business. For purposes of these sections almost every person in business would, therefore, be deemed to be a “merchant” under the language “who … by his occupation holds himself out as having knowledge or skill peculiar to the practices … involved in the transaction …” since the practices involved in the transaction are non-specialized business practices such as answering mail. In this type of provision, banks or even universities, for example, well may be “merchants.” But even these sections only apply to a merchant in his mercantile capacity; a lawyer or bank president buying fishing tackle for his own use is not a merchant.

    On the other hand, in Section 2-314 on the warranty of merchantability, such warranty is implied only “if the seller is a merchant with respect to goods of that kind.” Obviously this qualification restricts the implied warranty to a much smaller group than everyone who is engaged in business and requires a professional status as to particular kinds of goods. The exception in Section 2-402(2) for retention of possession by a merchant-seller falls in the same class; as does Section 2-403(2) on entrusting of possession to a merchant “who deals in goods of that kind”.

    A third group of sections includes 2-103(1)(b), which provides that in the case of a merchant “good faith” includes observance of reasonable commercial standards of fair dealing in the trade; 2-327(1)(c), 2-603 and 2-605, dealing with responsibilities of merchant buyers to follow seller’s instructions, etc.; 2-509 on risk of loss, and 2-609 on adequate assurance of performance. This group of sections applies to persons who are merchants under either the “practices” or the “goods” aspect of the definition of merchant.

  3. The “or to whom such knowledge or skill may be attributed by his employment of an agent or broker …” clause of the definition of merchant means that even persons such as universities, for example, can come within the definition of merchant if they have regular purchasing departments or business personnel who are familiar with business practices and who are equipped to take any action required.

Cross references:

Point 1: See Sections 1-102 and 1-203.

Point 2: See Sections 2-314, 2-315 and 2-320 to 2-325, of this Article, and Article 9.

Definitional cross references:

“Bank”. Section 1-201. “Buyer”. Section 2-103. “Contract for sale”. Section 2-106. “Document of title”. Section 1-201. “Draft”. Section 3-104. “Goods”. Section 2-105. “Person”. Section 1-201. “Purchase”. Section 1-201. “Seller”. Section 2-103.

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Research References and Practice Aids

Kentucky Law Journal.

Comments, The Role of Negligence in Section 3-405 of the Uniform Commercial Code: Owensboro National Bank v. Crisp, 69 Ky. L.J. 143 (1980-81).

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

355.2-105. Definitions: transferability — “Goods” — “Future” goods — “Lot” — “Commercial unit.”

  1. “Goods” means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (Article 8) and things in action. “Goods” also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be severed from realty (KRS 355.2-107 ).
  2. Goods must be both existing and identified before any interest in them can pass. Goods which are not both existing and identified are “future” goods. A purported present sale of future goods or of any interest therein operates as a contract to sell.
  3. There may be a sale of a part interest in existing identified goods.
  4. An undivided share in an identified bulk of fungible goods is sufficiently identified to be sold although the quantity of the bulk is not determined. Any agreed proportion of such a bulk or any quantity thereof agreed upon by number, weight or other measure may to the extent of the seller’s interest in the bulk be sold to the buyer who then becomes an owner in common.
  5. “Lot” means a parcel or a single article which is the subject matter of a separate sale or delivery, whether or not it is sufficient to perform the contract.
  6. “Commercial unit” means such a unit of goods as by commercial usage is a single whole for purposes of sale and division of which materially impairs its character or value on the market or in use. A commercial unit may be a single article (as a machine) or a set of articles (as a suite of furniture or an assortment of sizes) or a quantity (as a bale, gross, or carload) or any other unit treated in use or in the relevant market as a single whole.

History. Enact. Acts 1958, ch. 77, § 2-105, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Subsections (1), (2), (3) and (4)—Sections 5, 6 and 76, Uniform Sales Act; Subsections (5) and (6)—none.

Changes:

Rewritten.

Purposes of changes and new matter:

  1. Subsection (1) on “goods”: The phraseology of the prior uniform statutory provision has been changed so that:

    The definition of goods is based on the concept of movability and the term “chattels personal” is not used. It is not intended to deal with things which are not fairly identifiable as movables before the contract is performed.

    Growing crops are included within the definition of goods since they are frequently intended for sale. The concept of “industrial” growing crops has been abandoned, for under modern practices fruit, perennial hay, nursery stock and the like must be brought within the scope of this Article. The young of animals are also included expressly in this definition since they, too, are frequently intended for sale and may be contracted for before birth. The period of gestation of domestic animals is such that the provisions of the section on identification can apply as in the case of crops to be planted. The reason of this definition also leads to the inclusion of a wool crop or the like as “goods” subject to identification under this Article.

    The exclusion of “money in which the price is to be paid” from the definition of goods does not mean that foreign currency which is included in the definition of money may not be the subject matter of a sales transaction. Goods is intended to cover the sale of money when money is being treated as a commodity but not to include it when money is the medium of payment.

    As to contracts to sell timber, minerals, or structures to be removed from the land Section 2-107(1) (Goods to be severed from realty: recording) controls.

    The use of the word “fixtures” is avoided in view of the diversity of definitions of that term. This Article in including within its scope “things attached to realty” adds the further test that they must be capable of severance without material harm thereto. As between the parties any identified things which fall within that definition become “goods” upon the making of the contract for sale.

    “Investment securities” are expressly excluded from the coverage of this Article. It is not intended by this exclusion, however, to prevent the application of a particular section of this Article by analogy to securities (as was done with the Original Sales Act in Agar v. Orda , 264 N.Y. 248, 190 N.E. 479, 99 A.L.R. 269 (1934)) when the reason of that section makes such application sensible and the situation involved is not covered by the Article of this Act dealing specifically with such securities (Article 8).

  2. References to the fact that a contract for sale can extend to future or contingent goods and that ownership in common follows the sale of a part interest have been omitted here as obvious without need for expression; hence no inference to negate these principles should be drawn from their omission.
  3. Subsection (4) does not touch the question of how far an appropriation of a bulk of fungible goods may or may not satisfy the contract for sale.
  4. Subsections (5) and (6) on “lot” and “commercial unit” are introduced to aid in the phrasing of later sections.
  5. The question of when an identification of goods takes place is determined by the provisions of Section 2-501 and all that this section says is what kinds of goods may be the subject of a sale.

Cross references:

Point 1: Sections 2-107, 2-201, 2-501 and Article 8.

Point 5: Section 2-501.

See also Section 1-201.

Definitional cross references:

“Buyer”. Section 2-103. “Contract”. Section 1-201. “Contract for sale”. Section 2-106. “Fungible”. Section 1-201. “Money”. Section 1-201. “Present sale”. Section 2-106. “Sale”. Section 2-106. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Goods.

Goods incorporated into a real estate construction contract are not goods. Wehr Constructors, Inc. v. Steel Fabricators, Inc., 769 S.W.2d 51, 1988 Ky. App. LEXIS 197 (Ky. Ct. App. 1988).

Stray voltage is not a “good,” because: (1) electricity is not a good; and/or (2) stray voltage does not pass through the customer’s meter. G & K Dairy v. Princeton Electric Plant Bd., 781 F. Supp. 485, 1991 U.S. Dist. LEXIS 20439 (W.D. Ky. 1991 ).

The Uniform Commercial Code was inapplicable to an insurer’s subrogation claim against a fire alarm company seeking damages arising from a house fire because the contract between the insureds and the fire alarm company was not for the sale of goods, but was for services; while the fire alarm company agreed to supply the alarm system, title to the control set remained with the fire alarm company. United Servs. Auto. Ass'n v. ADT Sec. Servs., 241 S.W.3d 335, 2006 Ky. App. LEXIS 284 (Ky. Ct. App. 2006).

Where plaintiffs brought an action against defendants, asserting that a fatal airplane crash resulted from the negligence of defendants and that defendants breached implied warranties associated with the purchase of an airline ticket, plaintiffs had no viable breach of warranty claim against defendants because the Uniform Commercial Code (U.C.C.) was inapplicable to contracts for services, and the state had declined to create common law rights that expanded on the parameters of implied warranty established in the U.C.C. In re Air Crash, 2008 U.S. Dist. LEXIS 51062 (E.D. Ky. July 2, 2008).

Purchasers of scratch-off game tickets that paid out $20 in winnings did not have a claim against the Kentucky Lottery Corporation for violation of the Consumer Protection Act, based on advertising that promised that the minimum prize was $25 dollars, because the tickets were not goods. Collins v. Ky. Lottery Corp., 399 S.W.3d 449, 2012 Ky. App. LEXIS 212 (Ky. Ct. App. 2012).

Research References and Practice Aids

Kentucky Bench & Bar.

An Overview of the Magnuson-Moss Warranty Act, Vol. 55, No. 3, Summer 1991, Ky. Bench & Bar 18.

Kentucky Law Journal.

Kentucky Law Survey, Weinberg, Commercial Law and Consumer Credit, 65 Ky. L.J. 370 (1976-77).

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Northern Kentucky Law Review.

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

355.2-106. Definitions: “contract” — “Agreement” — “Contract for sale” — “Sale” — “Present sale” — “Conforming” to contract — “Termination” — “Cancellation.”

  1. In this article unless the context otherwise requires “contract” and “agreement” are limited to those relating to the present or future sale of goods. “Contract for sale” includes both a present sale of goods and a contract to sell goods at a future time. A “sale” consists in the passing of title from the seller to the buyer for a price (KRS 355.2-401 ). A “present sale” means a sale which is accomplished by the making of the contract.
  2. Goods or conduct including any part of a performance are “conforming” or conform to the contract when they are in accordance with the obligations under the contract.
  3. “Termination” occurs when either party pursuant to a power created by agreement or law puts an end to the contract otherwise than for its breach. On “termination” all obligations which are still executory on both sides are discharged but any right based on prior breach or performance survives.
  4. “Cancellation” occurs when either party puts an end to the contract for breach by the other and its effect is the same as that of “termination” except that the canceling party also retains any remedy for breach of the whole contract or any unperformed balance.

History. Enact. Acts 1958, ch. 77, § 2-106, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Subsection (1)—Section 1 (1) and (2), Uniform Sales Act; Subsection (2)—none, but subsection generally continues policy of Sections 11, 44 and 69, Uniform Sales Act; Subsections (3) and (4)—none.

Changes:

Completely rewritten.

Purposes of changes and new matter:

  1. Subsection (1): “Contract for sale” is used as a general concept throughout this Article, but the rights of the parties do not vary according to whether the transaction is a present sale or a contract to sell unless the Article expressly so provides.
  2. Subsection (2): It is in general intended to continue the policy of requiring exact performance by the seller of his obligations as a condition to his right to require acceptance. However, the seller is in part safeguarded against surprise as a result of sudden technicality on the buyer’s part by the provisions of Section 2-508 on seller’s cure of improper tender or delivery. Moreover usage of trade frequently permits commercial leeways in performance and the language of the agreement itself must be read in the light of such custom or usage and also, prior course of dealing, and in a long term contract, the course of performance.
  3. Subsections (3) and (4): These subsections are intended to make clear the distinction carried forward throughout this Article between termination and cancellation.

Cross references:

Point 2: Sections 1-203, 1-205, 2-208 and 2-508.

Definitional cross references:

“Agreement”. Section 1-201. “Buyer”. Section 2-103. “Contract”. Section 1-201. “Goods”. Section 2-105. “Party”. Section 1-201. “Remedy”. Section 1-201. “Rights”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Sale.

Where customer called at store in Covington, Kentucky, and asked for cart displayed in catalogue and was advised by clerk that the article was out of stock but she would have one sent to him in Cincinnati, Ohio, and the customer paid for the cart while in the Kentucky store and the cart was sent to him in Cincinnati, Ohio, and received by him in due time, the article was held for sale and a sale consummated in Kentucky which gave the Federal District Court of Kentucky jurisdiction of a patent infringement action since, under law defining “sale,” a “sale” included a bargain and sale as well as a sale and delivery. (decided under prior law) Buer v. Montgomery Ward & Co., 85 F. Supp. 449, 1949 U.S. Dist. LEXIS 2480 (D. Ky. 1949 ), rev'd, 186 F.2d 614, 1951 U.S. App. LEXIS 4081 (6th Cir. Ky. 1951 ).

2.Option.

An option was not a contract for the purchase of property, but an offer to sell. (decided under prior law) Caskey v. Williams Bros., 227 Ky. 73 , 11 S.W.2d 991, 1928 Ky. LEXIS 459 ( Ky. 1928 ).

3.Termination.

Where contract for sale of 10,000 to 50,000 tons of coal was terminated in accordance with its terms after 10,000 tons were delivered, the seller was released from all executory obligations thereunder. United States v. P. & D. Coal Mining Co., 251 F. Supp. 1005, 1964 U.S. Dist. LEXIS 7891 (W.D. Ky. 1964 ), aff'd, 358 F.2d 619, 1966 U.S. App. LEXIS 6725 (6th Cir. Ky. 1966 ).

Cited:

In re Wathen’s Elevators, Inc., 32 B.R. 912, 1983 Bankr. LEXIS 5427 (Bankr. W.D. Ky. 1983 ).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Clark, Medical Malpractice, 65 Ky. L.J. 337 (1976-77).

355.2-107. Goods to be severed from realty — Recording.

  1. A contract for the sale of minerals or the like (including oil and gas) or a structure or its materials to be removed from realty is a contract for the sale of goods within this article if they are to be severed by the seller, but until severance a purported present sale thereof which is not effective as a transfer of an interest in land is effective only as a contract to sell.
  2. A contract for the sale apart from the land of growing crops or other things attached to realty and capable of severance without material harm thereto but not described in subsection (1) or of timber to be cut is a contract for the sale of goods within this article whether the subject matter is to be severed by the buyer or by the seller even though it forms part of the realty at the time of contracting, and the parties can by identification effect a present sale before severance.
  3. The provisions of this section are subject to any third party rights provided by the law relating to realty records, and the contract for sale may be executed and recorded as a document transferring an interest in land and shall then constitute notice to third parties of the buyer’s rights under the contract for sale.

History. Enact. Acts 1958, ch. 77, § 2-107, effective July 1, 1960; 1986, ch. 118, § 4, effective July 1, 1987.

Official Comment

Prior uniform statutory provision:

See Section 76, Uniform Sales Act on prior policy; Section 7, Uniform Conditional Sales Act.

Purposes:

  1. Subsection (1). Notice that this subsection applies only if the minerals or structures “are to be severed by the seller”. If the buyer is to sever, such transactions are considered contracts affecting land and all problems of the Statute of Frauds and of the recording of land rights apply to them. Therefore, the Statute of Frauds section of this Article does not apply to such contracts though they must conform to the Statute of Frauds affecting the transfer of interests in land.
  2. Subsection (2). “Things attached” to the realty which can be severed without material harm are goods within this Article regardless of who is to effect the severance. The word “fixtures” has been avoided because of the diverse definitions of this term, the test of “severance without material harm” being substituted.

    The provision in subsection (3) for recording such contracts is within the purview of this Article since it is a means of preserving the buyer’s rights under the contract of sale.

  3. The security phases of things attached to or to become attached to realty are dealt with in the Article on Secured Transactions (Article 9) and it is to be noted that the definition of goods in that Article differs from the definition of goods in this Article.

    However, both Articles treat as goods growing crops and also timber to be cut under a contract of severance.

Cross references:

Point 1: Section 2-201.

Point 2: Section 2-105.

Point 3: Articles 9 and 9-102(a)(44).

Definitional cross references:

“Buyer”. Section 2-103. “Contract”. Section 1-201. “Contract for sale”. Section 2-106. “Goods”. Section 2-105. “Party”. Section 1-201. “Present sale”. Section 2-106. “Rights”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

Cited:

Illinois Valley Asphalt, Inc. v. Harry Berry, Inc., 578 S.W.2d 244, 1979 Ky. LEXIS 230 ( Ky. 1979 ); Son v. Coal Equity, Inc., 293 B.R. 392, 2003 U.S. Dist. LEXIS 6941 (W.D. Ky. 2003 ), aff’d in part, rev’d in part, — F.3d —, 122 Fed. Appx. 797, 2004 U.S. App. LEXIS 24106 (6th Cir. Ky. 2004 ).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Part 2. Form, Formation and Readjustment of Contract

355.2-201. Formal requirements — Statute of frauds.

  1. Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing.
  2. Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within ten (10) days after it is received.
  3. A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable
    1. if the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement; or
    2. if the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or
    3. with respect to goods for which payment has been made and accepted or which have been received and accepted (KRS 355.2-606 ).

History. Enact. Acts 1958, ch. 77, § 2-201, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 4, Uniform Sales Act (which was based on Section 17 of the Statute of 29 Charles II).

Changes:

Completely re-phrased; restricted to sale of goods. See also Sections 1-206, 8-319 and 9-203.

Purposes of changes:

The changed phraseology of this section is intended to make it clear that:

  1. The required writing need not contain all the material terms of the contract and such material terms as are stated need not be precisely stated. All that is required is that the writing afford a basis for believing that the offered oral evidence rests on a real transaction. It may be written in lead pencil on a scratch pad. It need not indicate which party is the buyer and which the seller. The only term which must appear is the quantity term which need not be accurately stated but recovery is limited to the amount stated. The price, time and place of payment or delivery, the general quality of the goods, or any particular warranties may all be omitted.

    Special emphasis must be placed on the permissibility of omitting the price term in view of the insistence of some courts on the express inclusion of this term even where the parties have contracted on the basis of a published price list. In many valid contracts for sale the parties do not mention the price in express terms, the buyer being bound to pay and the seller to accept a reasonable price which the trier of the fact may well be trusted to determine. Again, frequently the price is not mentioned since the parties have based their agreement on a price list or catalogue known to both of them and this list serves as an efficient safeguard against perjury. Finally, “market” prices and valuations that are current in the vicinity constitute a similar check. Thus if the price is not stated in the memorandum it can normally be supplied without danger of fraud. Of course if the “price” consists of goods rather than money the quantity of goods must be stated.

    Only three definite and invariable requirements as to the memorandum are made by this subsection. First, it must evidence a contract for the sale of goods; second, it must be “signed”, a word which includes any authentication which identifies the party to be charged; and third, it must specify a quantity.

  2. “Partial performance” as a substitute for the required memorandum can validate the contract only for the goods which have been accepted or for which payment has been made and accepted.

    Receipt and acceptance either of goods or of the price constitutes an unambiguous overt admission by both parties that a contract actually exists. If the court can make a just apportionment therefor, the agreed price of any goods actually delivered can be recovered without a writing or, if the price has been paid, the seller can be forced to deliver an apportionable part of the goods. The overt actions of the parties make admissible evidence of the other terms of the contract necessary to a just apportionment. This is true even though the actions of the parties are not in themselves inconsistent with a different transaction such as a consignment for resale or a mere loan of money.

    Part performance by the buyer requires the delivery of something by him that is accepted by the seller as such performance. Thus, part payment may be made by money or check, accepted by the seller. If the agreed price consists of goods or services, then they must also have been delivered and accepted.

  3. Between merchants, failure to answer a written confirmation of a contract within ten days of receipt is tantamount to a writing under subsection (2) and is sufficient against both parties under subsection (1). The only effect, however, is to take away from the party who fails to answer the defense of the Statute of Frauds; the burden of persuading the trier of fact that a contract was in fact made orally prior to the written confirmation is unaffected. Compare the effect of a failure to reply under Section 2-207.
  4. Failure to satisfy the requirements of this section does not render the contract void for all purposes, but merely prevents it from being judicially enforced in favor of a party to the contract. For example, a buyer who takes possession of goods as provided in an oral contract which the seller has not meanwhile repudiated, is not a trespasser. Nor would the Statute of Frauds provisions of this section be a defense to a third person who wrongfully induces a party to refuse to perform an oral contract, even though the injured party cannot maintain an action for damages against the party so refusing to perform.
  5. The requirement of “signing” is discussed in the comment to Section 1-201.
  6. It is not necessary that the writing be delivered to anybody. It need not be signed or authenticated by both parties but it is, of course, not sufficient against one who has not signed it. Prior to a dispute no one can determine which party’s signing of the memorandum may be necessary but from the time of contracting each party should be aware that to him it is signing by the other which is important.
  7. If the making of a contract is admitted in court, either in a written pleading, by stipulation or by oral statement before the court, no additional writing is necessary for protection against fraud. Under this section it is no longer possible to admit the contract in court and still treat the Statute as a defense. However, the contract is not thus conclusively established. The admission so made by a party is itself evidential against him of the truth of the facts so admitted and of nothing more; as against the other party, it is not evidential at all.

Cross references:

See Sections 1-201, 2-202, 2-207, 2-209 and 2-304.

Definitional cross references:

“Action”. Section 1-201. “Between merchants”. Section 2-104. “Buyer”. Section 2-103. “Contract”. Section 1-201. “Contract for sale”. Section 2-106. “Goods”. Section 2-105. “Notice”. Section 1-201. “Party”. Section 1-201. “Reasonable time”. Section 1-204. “Sale”. Section 2-106. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Received and Accepted.

Retention of the goods for an unreasonable length of time did not necessarily constitute an acceptance under law that required contract for the sale of goods to be in writing, unless such retention was under circumstances which showed an actual assent by the buyer to become the owner of the specific goods. (decided under prior law) Marilyn Shoe Co. v. Martin's Shoe Store, Inc., 253 S.W.2d 18, 1952 Ky. LEXIS 1058 ( Ky. 1952 ).

Where shoes were shipped and received in installments and all the shoes were returned within a very few days of receipt of the last shipment and the shoes were not put on display and only a few boxes were opened for inspection purposes, there was no acceptance. (decided under prior law) Marilyn Shoe Co. v. Martin's Shoe Store, Inc., 253 S.W.2d 18, 1952 Ky. LEXIS 1058 ( Ky. 1952 ).

Motor vehicle orally sold and physically delivered but not paid for was owned by buyer at time of accident within insurance policy covering cars “owned” and “held for sale by” insured. Motors Ins. Corp. v. Safeco Ins. Co., 412 S.W.2d 584, 1967 Ky. LEXIS 434 ( Ky. 1967 ).

In a patent infringement suit, a supplier’s argument that “prebate contracts” violated the statute of frauds due to a lack of signature was misplaced because, under KRS 355.2-201 (3)(c), the contracts were enforceable as payment had been made and accepted and the goods had been received and accepted. Static Control Components, Inc. v. Lexmark Int'l, Inc., 487 F. Supp. 2d 830, 2007 U.S. Dist. LEXIS 31445 (E.D. Ky. 2007 ), aff'd, 697 F.3d 387, 2012 FED App. 0289P, 2012 U.S. App. LEXIS 18316 (6th Cir. Ky. 2012 ).

2.Contract for Services.

An agreement between the plaintiff and the defendant that the plaintiff would sell the defendant’s cameras was not a sale of goods as such but was a contract for personal services and the statute would not preclude its enforcement. Buttorff v. United Electronic Laboratories, Inc., 459 S.W.2d 581, 1970 Ky. LEXIS 133 ( Ky. 1970 ).

The Uniform Commercial Code was inapplicable to an insurer’s subrogation claim against a fire alarm company seeking damages arising from a house fire because the contract between the insureds and the fire alarm company was not for the sale of goods, but was for services; while the fire alarm company agreed to supply the alarm system, title to the control set remained with the fire alarm company. United Servs. Auto. Ass'n v. ADT Sec. Servs., 241 S.W.3d 335, 2006 Ky. App. LEXIS 284 (Ky. Ct. App. 2006).

Where plaintiffs brought an action against defendants asserting that a fatal airplane crash resulted from the negligence of defendants and that defendants breached implied warranties associated with the purchase of an airline ticket, plaintiffs had no viable breach of warranty claim against defendants because the Uniform Commercial Code (U.C.C.) was inapplicable to contracts for services, and the state had declined to create common law rights that expanded on the parameters of implied warranty established in the U.C.C. In re Air Crash, 2008 U.S. Dist. LEXIS 51062 (E.D. Ky. July 2, 2008).

3.Evidence.

In an action to recover purchase price of a sawmill where there was ample proof that a contract for sale of the sawmill existed and that vendors had received and accepted the sawmill, it was necessary for the court to determine by all the evidence just what the provisions for the sale might have been. Barnett v. Stewart Lumber Co., 547 S.W.2d 788, 1977 Ky. App. LEXIS 638 (Ky. Ct. App. 1977).

Where a putative buyer who sought to purchase coal from a putative seller was not able to satisfy the merchant’s exception to the statute of frauds, KRS 355.2-201 , by showing that a purchase agreement was a confirmation, the court entered judgment in favor of the putative seller, and the complaint was dismissed with prejudice. Appalachian Fuels, LLC v. Logan & Kanawha Coal Co., 2005 U.S. Dist. LEXIS 29211 (E.D. Ky. Nov. 22, 2005).

4.Oral Bid.

The relief provided by subsection (2) of this section cannot be effective in a case where an oral bid was used and the contract awarded before there was any time to comply with that subsection. C. G. Campbell & Son, Inc. v. Comdeq Corp., 586 S.W.2d 40, 1979 Ky. App. LEXIS 450 (Ky. Ct. App. 1979).

Plaintiff-contractor, who had accepted defendant’s telephone bid to furnish certain kitchen equipment for a contract to construct a school building, could not enforce this oral contract when defendant failed to perform, since the requirement of subsection (1) of this section is unambiguous in requiring a writing and no equitable exception, based on defendant’s knowledge that plaintiff would rely on such a bid to its detriment, would be permitted to contravene this section. C. G. Campbell & Son, Inc. v. Comdeq Corp., 586 S.W.2d 40, 1979 Ky. App. LEXIS 450 (Ky. Ct. App. 1979).

5.Written Sales Agreement.

Where the purchaser took possession of a vehicle under a so-called “car order” whereby the seller was to retain title to the vehicle until he had been paid in full, purchaser giving seller a $70.00 deposit toward a $200 purchase price with the balance of the price to be paid in $50.00 installments every two (2) weeks, and the agreement was signed by both parties, described the vehicle to be sold, and stated the terms of the sale, the exclusionary language of an insurance policy held by the seller applied to the purchaser, precluding coverage as an “insured” of one to whom possession had been transferred pursuant to an agreement of sale, as under this section all the formal requirements of a contract for the sale of goods had been satisfied. American Interinsurance Exchange v. Norton, 631 S.W.2d 851, 1982 Ky. App. LEXIS 207 (Ky. Ct. App. 1982).

6.Option.

An option, not being a contract for the purchase and sale of property but an offer to sell, was not within provision of law that provided that contract for sale of goods had to be in writing. (decided under prior law) Caskey v. Williams Bros., 227 Ky. 73 , 11 S.W.2d 991, 1928 Ky. LEXIS 459 ( Ky. 1928 ).

Law that required contracts for the sale of goods to be in writing was not applicable where the transaction was but the creation of a debtor-creditor relationship by an agreement to devise estate in consideration for board and care for needs during the rest of life and payment of burial expenses, since this was not a sale of goods or choses in action. (decided under prior law) Finn v. Finn's Adm'r, 244 S.W.2d 435, 1951 Ky. LEXIS 1209 ( Ky. 1951 ).

7.Choice of Laws.

Where a Kentucky resident executed an automobile sales installment contract in Kentucky and accepted delivery of the vehicle in Kentucky, questions concerning the formation of the contract in the first instance should have been determined by the law of Kentucky, despite a provision in the contract that required interpretation according to the law of Tennessee. In re Morristown Lincoln-Mercury, Inc., 25 B.R. 377, 1982 Bankr. LEXIS 2893 (Bankr. E.D. Tenn. 1982).

8.Written Objection.

The subcontractor entered into a contract with the contractor, even though the purchase order was not signed by a representative of the subcontractor, where the subcontractor shipped the goods, and the subcontractor did not object to the purchase order within ten days. Home Lumber Co. v. Appalachian Regional Hospitals, Inc., 722 S.W.2d 912, 1987 Ky. App. LEXIS 425 (Ky. Ct. App. 1987).

9.Sufficiency of Writing.

A promissory note and purchase order signed by representatives of stave manufacturer and distiller were sufficient under subsection (1) of this section to show that the parties had entered an oral exclusive output contract. Lonnie Hayes & Sons Staves, Inc. v. Bourbon Cooperage Co., 777 S.W.2d 940, 1989 Ky. App. LEXIS 123 (Ky. Ct. App. 1989).

10.Basis for Required Writing.

The purpose of the writing required by this section is to provide evidence of a contract. Lonnie Hayes & Sons Staves, Inc. v. Bourbon Cooperage Co., 777 S.W.2d 940, 1989 Ky. App. LEXIS 123 (Ky. Ct. App. 1989).

11.Applicable Terms.

Lower court did not commit error when it denied the corporation’s motion to compel arbitration because the representative of the restaurant deliberately obliterated the condition of the contract that required arbitration of any dispute. The representative’s act eliminated that condition from the agreement, pursuant to KRS 355.2-201 . General Steel Corp. v. Collins, 196 S.W.3d 18, 2006 Ky. App. LEXIS 182 (Ky. Ct. App. 2006).

12.Specially Manufactured for Buyer.

Architect’s plans for a dwelling house were goods “manufactured by the seller especially for the buyer and not suitable for sale to others in the ordinary course of the seller’s business,” and architect could recover for his services under an oral contract, although plans were not accepted. (decided under prior law) Minary v. Hammond, 294 Ky. 51 , 170 S.W.2d 873, 1943 Ky. LEXIS 367 ( Ky. 1943 ).

Where shoes were not manufactured by the seller especially for the buyer and were suitable for sale to others in the ordinary course of the seller’s business and were ordered from a sample shoe and the colors selected from “swatches” of leather shown by seller’s salesman and order placed according to “stock numbers” and not made according to any special design, plan, or specification, or any model furnished by the buyer such as the seller did not use in the ordinary course of its business, they were not manufactured “especially for the buyer” and the fact the shoes were of the “fad type” was not important, since the business of seller was making shoes of that type. (decided under prior law) Marilyn Shoe Co. v. Martin's Shoe Store, Inc., 253 S.W.2d 18, 1952 Ky. LEXIS 1058 ( Ky. 1952 ).

Cited:

Hicks v. Kentucky Farm Bureau Mut. Ins. Co., 455 S.W.2d 52, 1970 Ky. LEXIS 241 ( Ky. 1970 ); Renfroe v. Ladd, 701 S.W.2d 148, 1985 Ky. App. LEXIS 690 (Ky. Ct. App. 1985); Craig v. Stapp (In re Craig), 334 B.R. 572, 2005 Bankr. LEXIS 2417 (Bankr. W.D. Ky. 2005 ).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Domestic Relations, 65 Ky. L.J. 383 (1976-77).

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Northern Kentucky Law Review.

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Answer Asserting Various Defenses Based upon Writing or Signature Formalities or Lack of Definiteness, Form 210.16.

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Breach of Written Contract (General Form), Form 210.04.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Sales, § 210.00

355.2-202. Final written expression — Parol or extrinsic evidence.

Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented:

  1. By course of performance, course of dealing, or usage of trade (KRS 355.1-303 ); and
  2. By evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

History. Enact. Acts 1958, ch. 77, § 2-202, effective July 1, 1960; 2006, ch. 242, § 26, effective July 12, 2006.

Legislative Research Commission Note.

(7/12/2006). Under the authority of KRS 7.136(1), the Reviser of Statutes has changed the internal numbering system in this statute by inserting subsection numbers [(1) and (2)] in place of paragraph designations [(a) and (b)]. The words in the text were not changed.

Official Comment

Prior uniform statutory provision:

Purposes:

  1. This section definitely rejects:
    1. Any assumption that because a writing has been worked out which is final on some matters, it is to be taken as including all the matters agreed upon;
    2. The premise that the language used has the meaning attributable to such language by rules of construction existing in the law rather than the meaning which arises out of the commercial context in which it was used; and
    3. The requirement that a condition precedent to the admissibility of the type of evidence specified in paragraph (a) is an original determination by the court that the language used is ambiguous.

      2. Paragraph (a) makes admissible evidence of course of dealing, usage of trade and course of performance to explain or supplement the terms of any writing stating the agreement of the parties in order that the true understanding of the parties as to the agreement may be reached. Such writings are to be read on the assumption that the course of prior dealings between the parties and the usages of trade were taken for granted when the document was phrased. Unless carefully negated they have become an element of the meaning of the words used. Similarly, the course of actual performance by the parties is considered the best indication of what they intended the writing to mean.

      3. Under paragraph (b) consistent additional terms, not reduced to writing, may be proved unless the court finds that the writing was intended by both parties as a complete and exclusive statement of all the terms. If the additional terms are such that, if agreed upon, they would certainly have been included in the document in the view of the court, then evidence of their alleged making must be kept from the trier of fact.

Cross references:

Point 3: Sections 1-303, 2-207, 2-302 and 2-316.

Definitional cross references:

“Agreed” and “agreement”. Section 1-201. “Course of dealing”. Section 1-303. “Course of performance”. Section 1-303. “Party”. Section 1-201. “Terms”. Section 1-201. “Usage of trade”. Section 1-303. “Written” and “writing”. Section 1-201.

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NOTES TO DECISIONS

1.Admissibility of Parol Evidence.

Parol evidence is admissible to explain or supplement the meaning of a written contract if it relates to a course of dealing or a usage of trade, or if it concerns a course of performance. Savannah Sugar Refinery, Div. of Savannah Foods & Industries, Inc. v. RC Canada Dry Bottling Co., Div. of Beatrice Foods Co., 593 S.W.2d 880, 1979 Ky. App. LEXIS 509 (Ky. Ct. App. 1979).

Where oral agreement to repurchase mare did not contradict the terms of agreement to purchase shares in syndicated Arabian stallion but explained buyer’s agreement to purchase mares, and since promise to repurchase mare was obtained in writing at buyer’s request subsequent to execution of written agreement to buy shares in syndication and the representative of one of the parties testified that during negotiation of the agreement he believed that oral repurchase promise had been reduced to writing, the parties to the syndication agreement intended to include a repurchase provision and the failure to honor that provision was a breach of the agreement. J.P. Morgan Delaware v. Onyx Arabians II, Ltd., 825 F. Supp. 146, 1993 U.S. Dist. LEXIS 8694 (W.D. Ky. 1993 ).

Debtor had carried its burden of demonstrating that movant was not entitled to relief from the automatic stay in order to terminate its contract with debtor; the movant’s treatment of prior non-compliances established a course of dealing that militated against its argument that the failure to deliver coal that tested out at 12,000 British thermal units was a fatal breach and lent credence to the contention that, because of the economic conditions of the coal market, that was merely an excuse to try to terminate a contract which had become unprofitable. In re Clearwater Natural Res., 2009 Bankr. LEXIS 2461 (Bankr. E.D. Ky. July 23, 2009).

2.Oral Warranty.

Counterclaim to action on notes issued in payment of machinery which did not allege fraud or mistake was demurrable where it relied on oral warranty that machinery would crush 200 tons of stone per day when in fact it would crush only 100 to 130 tons of stone per day, and the oral warranty was made before or contemporaneously with written sales contract containing provision that machinery was purchased on conditions therein and none other, and the only warranty in the written contract was that the machinery was to be of first-class material and workmanship coupled with agreement to replace free of charge any part which might within 90 days from date of delivery prove to have been defective when furnished. (decided under prior law) Pace Const. Co. v. Brandeis Machinery & Supply Co., 239 Ky. 693 , 40 S.W.2d 268, 1931 Ky. LEXIS 829 ( Ky. 1931 ).

3.Contemporaneous Documents.

Two written documents executed contemporaneously may be considered together as evidence of the parties’ agreement. Calumet Farm, Inc. v. Northern Equine Thoroughbred Productions, Ltd., 150 B.R. 403, 1992 Bankr. LEXIS 2131 (Bankr. E.D. Ky. 1992 ).

Cited:

Wickliffe Farms, Inc. v. Owensboro Grain Co., 684 S.W.2d 17, 1984 Ky. App. LEXIS 560 (Ky. Ct. App. 1984); Potts v. Draper, 864 S.W.2d 896, 1993 Ky. LEXIS 117 ( Ky. 1993 ); A & A Mech. v. Thermal Equip. Sales, 998 S.W.2d 505, 1999 Ky. App. LEXIS 84 (Ky. Ct. App. 1999).

Research References and Practice Aids

Kentucky Bench & Bar.

Gardner, Ten Traps for the Unwary in International Transactions, Vol. 60, No. 4, Fall 1996, Ky. Bench & Bar 26.

Northern Kentucky Law Review.

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

355.2-203. Seals inoperative.

The affixing of a seal to a writing evidencing a contract for sale or an offer to buy or sell goods does not constitute the writing a sealed instrument and the law with respect to sealed instruments does not apply to such a contract or offer.

History. Enact. Acts 1958, ch. 77, § 2-203, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 3, Uniform Sales Act.

Changes:

Portion pertaining to “seals” rewritten.

Purposes of changes:

  1. This section makes it clear that every effect of the seal which relates to “sealed instruments” as such is wiped out insofar as contracts for sale are concerned. However, the substantial effects of a seal, except extension of the period of limitations, may be had by appropriate drafting as in the case of firm offers (see Section 2-205).
  2. This section leaves untouched any aspects of a seal which relate merely to signatures or to authentication of execution and the like. Thus, a statute providing that a purported signature gives prima facie evidence of its own authenticity or that a signature gives prima facie evidence of consideration is still applicable to sales transactions even though a seal may be held to be a signature within the meaning of such a statute. Similarly, the authorized affixing of a corporate seal bearing the corporate name to a contractual writing purporting to be made by the corporation may have effect as a signature without any reference to the law of sealed instruments.

Cross references:

Point 1: Section 2-205.

Definitional cross references:

“Contract for sale”. Section 2-106. “Goods”. Section 2-105. “Writing”. Section 1-201.

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355.2-204. Formation in general.

  1. A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.
  2. An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.
  3. Even though one (1) or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

History. Enact. Acts 1958, ch. 77, § 2-204, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Sections 1 and 3, Uniform Sales Act.

Changes:

Completely rewritten by this and other sections of this Article.

Purposes of changes:

Subsection (1) continues without change the basic policy of recognizing any manner of expression of agreement, oral, written or otherwise. The legal effect of such an agreement is, of course, qualified by other provisions of this Article.

Under subsection (1) appropriate conduct by the parties may be sufficient to establish an agreement. Subsection (2) is directed primarily to the situation where the interchanged correspondence does not disclose the exact point at which the deal was closed, but the actions of the parties indicate that a binding obligation has been undertaken.

Subsection (3) states the principle as to “open terms” underlying later sections of the Article. If the parties intend to enter into a binding agreement, this subsection recognizes that agreement as valid in law, despite missing terms, if there is any reasonably certain basis for granting a remedy. The test is not certainty as to what the parties were to do nor as to the exact amount of damages due the plaintiff. Nor is the fact that one or more terms are left to be agreed upon enough of itself to defeat an otherwise adequate agreement. Rather, commercial standards on the point of “indefiniteness” are intended to be applied, this Act making provision elsewhere for missing terms needed for performance, open price, remedies and the like.

The more terms the parties leave open, the less likely it is that they have intended to conclude a binding agreement, but their actions may be frequently conclusive on the matter despite the omissions.

Cross references:

Subsection (1): Sections 1-103, 2-201 and 2-302.

Subsection (2): Sections 2-205 through 2-209.

Subsection (3): See Part 3.

Definitional cross references:

“Agreement”. Section 1-201. “Contract”. Section 1-201. “Contract for sale”. Section 2-106. “Goods”. Section 2-105. “Party”. Section 1-201. “Remedy”. Section 1-201. “Term”. Section 1-201.

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NOTES TO DECISIONS

1.Terms Open.

While a degree of indefiniteness and ambiguity was created in the agreement which provided that it was an “annual contract,” that the plaintiff was to furnish only “part of the city’s requirement for parking meters,” that the number to have been furnished was “approximately 7,650 parking meters” and that delivery was to have been made only “after receipt of a purchase order” from the city, such terms did not render the agreement illusory or lacking in mutuality. Louisville v. Rockwell Mfg. Co., 482 F.2d 159, 1973 U.S. App. LEXIS 9143 (6th Cir. Ky. 1973 ).

2.Intention to Make Contract.

Where the seller agreed to sell the buyer a given number of aluminum extrusions at a given price to be delivered by a given date, the parties reached this agreement after many weeks of negotiations, and the seller prepared blueprints for the buyer’s inspection and constructed sample parts at great expense for the buyer’s approval, the parties intended to enter into a binding agreement for the sale of the extrusions. Consolidated Aluminum Corp. v. Krieger, 710 S.W.2d 869, 1986 Ky. App. LEXIS 1120 (Ky. Ct. App. 1986).

3.Buyer’s Signature.

A limitation of warranties printed on the reverse side of each of a manufacturer’s acknowledgements for parts for a heating and air conditioning system did not require the buyer’s signature in order to be effective. Middletown Eng'g Co. v. Climate Conditioning Co., 810 S.W.2d 57 (Ky. Ct. App. 1991).

4.Moment of Contract Formation.

In a patent infringement case, the fact that an executive member of the patent holder’s staff did not know when a prebate/return contract was formed was irrelevant because, pursuant to KRS 355.2-204 (2), an agreement sufficient to constitute a contract for sale could be found even though the moment of its making was undetermined. Static Control Components, Inc. v. Lexmark Int'l, Inc., 487 F. Supp. 2d 830, 2007 U.S. Dist. LEXIS 31445 (E.D. Ky. 2007 ), aff'd, 697 F.3d 387, 2012 FED App. 0289P, 2012 U.S. App. LEXIS 18316 (6th Cir. Ky. 2012 ).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Northern Kentucky Law Review.

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Sales, Form 210.00.

355.2-205. Firm offers.

An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three (3) months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.

History. Enact. Acts 1958, ch. 77, § 2-205, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Sections 1 and 3, Uniform Sales Act.

Changes:

Completely rewritten by this and other sections of this Article.

Purposes of changes:

  1. This section is intended to modify the former rule which required that “firm offers” be sustained by consideration in order to bind, and to require instead that they must merely be characterized as such and expressed in signed writings.
  2. The primary purpose of this section is to give effect to the deliberate intention of a merchant to make a current firm offer binding. The deliberation is shown in the case of an individualized document by the merchant’s signature to the offer, and in the case of an offer included on a form supplied by the other party to the transaction by the separate signing of the particular clause which contains the offer. “Signed” here also includes authentication but the reasonableness of the authentication herein allowed must be determined in the light of the purpose of the section. The circumstances surrounding the signing may justify something less than a formal signature or initialing but typically the kind of authentication involved here would consist of a minimum of initialing of the clause involved. A handwritten memorandum on the writer’s letterhead purporting in its terms to “confirm” a firm offer already made would be enough to satisfy this section, although not subscribed, since under the circumstances it could not be considered a memorandum of mere negotiation and it would adequately show its own authenticity. Similarly, an authorized telegram will suffice, and this is true even though the original draft contained only a typewritten signature. However, despite settled courses of dealing or usages of the trade whereby firm offers are made by oral communication and relied upon without more evidence, such offers remain revocable under this Article since authentication by a writing is the essence of this section.
  3. This section is intended to apply to current “firm” offers and not to long term options, and an outside time limit of three months during which such offers remain irrevocable has been set. The three month period during which firm offers remain irrevocable under this section need not be stated by days or by date. If the offer states that it is “guaranteed” or “firm” until the happening of a contingency which will occur within the three month period, it will remain irrevocable until that event. A promise made for a longer period will operate under this section to bind the offeror only for the first three months of the period but may of course be renewed. If supported by consideration it may continue for as long as the parties specify. This section deals only with the offer which is not supported by consideration.
  4. Protection is afforded against the inadvertent signing of a firm offer when contained in a form prepared by the offeree by requiring that such a clause be separately authenticated. If the offer clause is called to the offeror’s attention and he separately authenticates it, he will be bound; Section 2-302 may operate, however, to prevent an unconscionable result which otherwise would flow from other terms appearing in the form.
  5. Safeguards are provided to offer relief in the case of material mistake by virtue of the requirement of good faith and the general law of mistake.

Cross references:

Point 1: Section 1-102.

Point 2: Section 1-102.

Point 3: Section 2-201.

Point 5: Section 2-302.

Definitional cross references:

“Goods”. Section 2-105. “Merchant”. Section 2-104. “Signed”. Section 1-201. “Writing”. Section 1-201.

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NOTES TO DECISIONS

1.Evidence.

A bid sheet which was signed and indicated a firm commitment to a stated price and quantity for a particular project for a particular period was properly found to constitute an offer. A & A Mech. v. Thermal Equip. Sales, 998 S.W.2d 505, 1999 Ky. App. LEXIS 84 (Ky. Ct. App. 1999).

Research References and Practice Aids

Kentucky Law Journal.

Smith, Implied and Conditional Consent in the Sale of Horse Shares or Seasons, 74 Ky. L.J. 839 (1985-86).

355.2-206. Offer and acceptance in formation of contract.

  1. Unless otherwise unambiguously indicated by the language or circumstances
    1. an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances;
    2. an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or nonconforming goods, but such a shipment of nonconforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.
  2. Where the beginning of a requested performance is a reasonable mode of acceptance an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.

History. Enact. Acts 1958, ch. 77, § 2-206, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Sections 1 and 3, Uniform Sales Act.

Changes:

Completely rewritten in this and other sections of this Article.

Purposes of changes:

To make it clear that:

  1. Any reasonable manner of acceptance is intended to be regarded as available unless the offeror has made quite clear that it will not be acceptable. Former technical rules as to acceptance, such as requiring that telegraphic offers be accepted by telegraphed acceptance, etc., are rejected and a criterion that the acceptance be “in any manner and by any medium reasonable under the circumstances,” is substituted. This section is intended to remain flexible and its applicability to be enlarged as new media of communication develop or as the more time-saving present day media come into general use.
  2. Either shipment or a prompt promise to ship is made a proper means of acceptance of an offer looking to current shipment. In accordance with ordinary commercial understanding the section interprets an order looking to current shipment as allowing acceptance either by actual shipment or by a prompt promise to ship and rejects the artificial theory that only a single mode of acceptance is normally envisaged by an offer. This is true even though the language of the offer happens to be “ship at once” or the like. “Shipment” is here used in the same sense as in Section 2-504; it does not include the beginning of delivery by the seller’s own truck or by messenger. But loading on the seller’s own truck might be a beginning of performance under subsection (b).
  3. The beginning of performance by an offeree can be effective as acceptance so as to bind the offeror only if followed within a reasonable time by notice to the offeror. Such a beginning of performance must unambiguously express the offeree’s intention to engage himself. For the protection of both parties it is essential that notice follow in due course to constitute acceptance. Nothing in this section however bars the possibility that under the common law performance begun may have an intermediate effect of temporarily barring revocation of the offer, or at the offeror’s option, final effect in constituting acceptance.
  4. Subsection (1)(b) deals with the situation where a shipment made following an order is shown by a notification of shipment to be referable to that order but has a defect. Such a non-conforming shipment is normally to be understood as intended to close the bargain, even though it proves to have been at the same time a breach. However, the seller by stating that the shipment is non-conforming and is offered only as an accommodation to the buyer keeps the shipment or notification from operating as an acceptance.

Definitional cross references:

“Buyer”. Section 2-103. “Conforming”. Section 2-106. “Contract”. Section 1-201. “Goods”. Section 2-105. “Notifies”. Section 1-201. “Reasonable time”. Section 1-204.

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NOTES TO DECISIONS

1.Shipment of Goods.

The subcontractor entered into a contract with the contractor, even though the purchase order was not signed by a representative of the subcontractor, where the subcontractor shipped the goods, and the subcontractor did not object to the purchase order within ten days. Home Lumber Co. v. Appalachian Regional Hospitals, Inc., 722 S.W.2d 912, 1987 Ky. App. LEXIS 425 (Ky. Ct. App. 1987).

Under KRS 355.2-206 (1)(b), it was not necessary for a purchase order to be signed to constitute an acceptance of the contract; when the seller shipped the units, it accepted the contract. Thomas & Betts Corp. v. A & A Mech., Inc., 2004 Ky. App. LEXIS 339 (Ky. Ct. App. Nov. 24, 2004, sub. op., 2004 Ky. App. Unpub. LEXIS 996 (Ky. Ct. App. Nov. 24, 2004), review denied, ordered not published, 2005 Ky. LEXIS 269 (Ky. Sept. 14, 2005).

355.2-207. Additional terms in acceptance or confirmation.

  1. A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
  2. The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
    1. The offer expressly limits acceptance to the terms of the offer;
    2. They materially alter it; or
    3. Notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
  3. Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this chapter.

History. Enact. Acts 1958, ch. 77, § 2-207, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Sections 1 and 3, Uniform Sales Act.

Changes:

Completely rewritten by this and other sections of this Article.

Purposes of Changes:

  1. This section is intended to deal with two typical situations. The one is where an agreement has been reached either orally or by informal correspondence between the parties and is followed by one or both of the parties sending formal acknowledgments or memoranda embodying the terms so far as agreed upon and adding terms not discussed. The other situation is one in which a wire or letter expressed and intended as the closing or confirmation of an agreement adds further minor suggestions or proposals such as “ship by Tuesday,” “rush,” “ship draft against bill of lading inspection allowed,” or the like. A frequent example of the second situation is the exchange of printed purchase order and acceptance (sometimes called “acknowledgement”) forms. Because the forms are oriented to the thinking of the respective drafting parties, the terms contained in them often do not correspond. Often the seller’s form contains terms different from or additional to those set forth in the buyer’s form. Nevertheless, the parties proceed with the transaction.
  2. Under this Article a proposed deal which in commercial understanding has in fact been closed is recognized as a contract. Therefore any additional matter contained either in the confirmation or in the acceptance falls within subsection (2) and must be regarded as a proposal for an added term unless the acceptance is made conditional on the acceptance of the additional or different terms.
  3. Whether or not additional or different terms will become part of the agreement depends upon the provisions of subsection (2). If they are such as materially to alter the original bargain, they will not be included unless expressly agreed to by the other party. If, however, they are terms which would not so change the bargain they will be incorporated unless notice of objection to them has already been given or is given within a reasonable time.
  4. Examples of typical clauses which would normally “materially alter” the contract and so result in surprise or hardship if incorporated without express awareness by the other party are: a clause negating such standard warranties as that of merchantability or fitness for a particular purpose in circumstances in which either warranty normally attaches; a clause requiring a guaranty of 90% or 100% deliveries in a case such as a contract by cannery, where the usage of the trade allows greater quantity leeways; a clause reserving to the seller the power to cancel upon the buyer’s failure to meet any invoice when due; a clause requiring that complaints be made in a time materially shorter than customary or reasonable.
  5. Examples of clauses which involve no element of unreasonable surprise and which therefore are to be incorporated in the contract unless notice of objection is seasonably given are: a clause setting forth and perhaps enlarging slightly upon the seller’s exemption due to supervening causes beyond his control, similar to those covered by the provision of this Article on merchant’s excuse by failure of presupposed conditions or a clause fixing in advance any reasonable formula of proration under such circumstances; a clause fixing a reasonable time for complaints within customary limits, or in the case of a purchase for sub-sale, providing for inspection by the sub-purchaser; a clause providing for interest on overdue invoices or fixing the seller’s standard credit terms where they are within the range of trade practice and do not limit any credit bargained for; a clause limiting the right of rejection for defects which fall within the customary trade tolerances for acceptance “with adjustment” or otherwise limiting remedy in a reasonable manner (see Sections 2-718 and 2-719).
  6. If no answer is received within a reasonable time after additional terms are proposed, it is both fair and commercially sound to assume that their inclusion has been assented to. Where clauses on confirming forms sent by both parties conflict, each party must be assumed to object to a clause of the other conflicting with one on the confirmation sent by himself. As a result the requirement that there be notice of objection which is found in subsection (2) is satisfied and the conflicting terms do not become a part of the contract. The contract then consists of the terms originally expressly agreed to, terms on which the confirmations agree, and terms supplied by this Act, including subsection (2). The written confirmation is also subject to Section 2-201. Under that section a failure to respond permits enforcement of a prior oral agreement; under this section a failure to respond permits additional terms to become part of the agreement.
  7. In many cases, as where goods are shipped, accepted and paid for before any dispute arises, there is no question whether a contract has been made. In such cases, where the writings of the parties do not establish a contract, it is not necessary to determine which act or document constituted the offer and which the acceptance. See Section 2-204. The only question is what terms are included in the contract, and subsection (3) furnishes the governing rule.

Cross references:

See generally Section 2-302.

Point 5: Sections 2-513, 2-602, 2-607, 2-609, 2-612, 2-614, 2-615, 2-616, 2-718 and 2-719.

Point 6: Sections 1-102 and 2-104.

Definitional cross references:

“Between merchants”. Section 2-104. “Contract”. Section 1-201. “Notification”. Section 1-201. “Reasonable time”. Section 1-204. “Seasonably”. Section 1-204. “Send”. Section 1-201. “Term”. Section 1-201. “Written”. Section 1-201.

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NOTES TO DECISIONS

1.Contract Formed.

Where the terms incorporated by plaintiff in its bid to install powder dumping machines were additional to the terms contained in the specifications submitted by the defendant, in that they covered a subject on which the proposal was silent, that is, the conditions under which defendant could repair defective parts within the warranty period, defendant accepted these additional conditions imposed by the plaintiff when it executed its purchase order and specifically stated that its purchase order was in accordance with the quotations, and a contract was formed by the specifications and inquiries submitted to plaintiff by defendant, plaintiff’s quotations and defendant’s purchase order. Thaler v. I C I United States, Inc., 476 F. Supp. 67, 1979 U.S. Dist. LEXIS 11201 (W.D. Ky. 1979 ).

Under the Uniform Commercial Code, the negotiated terms in the seller’s acknowledgment form stood as the contract between the parties. Consolidated Aluminum Corp. v. Krieger, 710 S.W.2d 869, 1986 Ky. App. LEXIS 1120 (Ky. Ct. App. 1986).

Where the seller’s acknowledgment, which contained terms different from those agreed upon, did not condition the contract on the buyer’s accepting the additional proposed terms, the parties formed a contract according to the common terms in the buyer’s purchase order and the seller’s acknowledgment. Consolidated Aluminum Corp. v. Krieger, 710 S.W.2d 869, 1986 Ky. App. LEXIS 1120 (Ky. Ct. App. 1986).

Where a manufacturer expressly conditioned its acceptance of the purchase offer on the purchaser’s assent to additional terms and conditions limiting remedies and damages, and the purchaser did not notify the manufacturer of any objection to the terms and conditions until long after the goods were delivered and installed, the additional terms became a part of the contract between the parties. Middletown Eng'g Co. v. Climate Conditioning Co., 810 S.W.2d 57 (Ky. Ct. App. 1991).

2.Evidence.

Where the proof was diametrically opposed as to whether there was any oral agreement for defendant to do the repairs and to keep a running account of its expenses incurred in so doing, defendant failed to meet the burden of proving by clear and convincing evidence that the written contract was orally modified to allow defendant to make the repairs and back charge the plaintiff for them. Thaler v. I C I United States, Inc., 476 F. Supp. 67, 1979 U.S. Dist. LEXIS 11201 (W.D. Ky. 1979 ).

3.Additional or Different Terms.

Where the parties had agreed on a purchase price, but the seller’s acknowledgment contained the term “price in effect at time of shipment to apply,” that phrase constituted “terms additional to or different from those offered or agreed upon,” under subsection (1) of this section, but the buyer’s timely objection to the terms excluded them from the contract. Consolidated Aluminum Corp. v. Krieger, 710 S.W.2d 869, 1986 Ky. App. LEXIS 1120 (Ky. Ct. App. 1986).

Cited:

A & A Mech. v. Thermal Equip. Sales, 998 S.W.2d 505, 1999 Ky. App. LEXIS 84 (Ky. Ct. App. 1999); General Steel Corp. v. Collins, 196 S.W.3d 18, 2006 Ky. App. LEXIS 182 (Ky. Ct. App. 2006).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Northern Kentucky Law Review.

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

355.2-208. Course of performance or practical construction. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 2-208, effective July 1, 1960) was repealed by Acts 2006, ch. 242, § 64, effective July 12, 2006. For present comparable provisions, see KRS 355.1-303 .

355.2-209. Modification, rescission and waiver.

  1. An agreement modifying a contract within this article needs no consideration to be binding.
  2. A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party.
  3. The requirements of the statute of frauds section of this article (KRS 355.2-201 ) must be satisfied if the contract as modified is within its provisions.
  4. Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver.
  5. A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.

History. Enact. Acts 1958, ch. 77, § 2-209, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Subsection (1)—Compare Section 1, Uniform Written Obligations Act; Subsections (2) to (5)—none.

Purposes of changes and new matter:

  1. This section seeks to protect and make effective all necessary and desirable modifications of sales contracts without regard to the technicalities which at present hamper such adjustments.
  2. Subsection (1) provides that an agreement modifying a sales contract needs no consideration to be binding.

    However, modifications made thereunder must meet the test of good faith imposed by this Act. The effective use of bad faith to escape performance on the original contract terms is barred, and the extortion of a “modification” without legitimate commercial reason is ineffective as a violation of the duty of good faith. Nor can a mere technical consideration support a modification made in bad faith.

    The test of “good faith” between merchants or as against merchants includes “observance of reasonable commercial standards of fair dealing in the trade” (Section 2-103), and may in some situations require an objectively demonstrable reason for seeking a modification. But such matters as a market shift which makes a performance come to involve a loss may provide such a reason even though there is no such unforeseen difficulty as would make out a legal excuse from performance under Sections 2-615 and 2-616.

  3. Subsections (2) and (3) are intended to protect against false allegations of oral modifications. “Modification or rescission” includes abandonment or other change by mutual consent, contrary to the decision in Green v. Doniger, 300 N.Y. 238, 90 N.E.2d 56 (1949); it does not include unilateral “termination” or “cancellation” as defined in Section 2-106.

    The Statute of Frauds provisions of this Article are expressly applied to modifications by subsection (3). Under those provisions the “delivery and acceptance” test is limited to the goods which have been accepted, that is, to the past. “Modification” for the future cannot therefore be conjured up by oral testimony if the price involved is $500.00 or more since such modification must be shown at least by an authenticated memo. And since a memo is limited in its effect to the quantity of goods set forth in it there is safeguard against oral evidence.

    Subsection (2) permits the parties in effect to make their own Statute of Frauds as regards any future modification of the contract by giving effect to a clause in a signed agreement which expressly requires any modification to be by signed writing. But note that if a consumer is to be held to such a clause on a form supplied by a merchant it must be separately signed.

  4. Subsection (4) is intended, despite the provisions of subsections (2) and (3), to prevent contractual provisions excluding modification except by a signed writing from limiting in other respects the legal effect of the parties’ actual later conduct. The effect of such conduct as a waiver is further regulated in subsection (5).

Cross references:

Point 1: Section 1-203.

Point 2: Sections 1-201, 1-203, 2-615 and 2-616.

Point 3: Sections 2-106, 2-201 and 2-202.

Point 4: Sections 2-202 and 2-208.

Definitional cross references:

“Agreement”. Section 1-201. “Between merchants”. Section 2-104. “Contract”. Section 1-201. “Notification”. Section 1-201. “Signed”. Section 1-201. “Term”. Section 1-201. “Writing”. Section 1-201.

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NOTES TO DECISIONS

1.Strict Performance.

The trial court erred in not awarding utility company recovery of royalty overcharges. Coal company was obtaining more money from utility company than it paid out to the lessors on coal sold to utility company. Both the initial adjustment of payments and utility company’s later request for relief were consistent with the language of the contract between utility company and coal company that utility company’s royalty payments equal the actual royalty obligation of coal company. Kentucky Utilities Co. v. South East Coal Co., 836 S.W.2d 392, 1992 Ky. LEXIS 96 ( Ky. 1992 ), cert. dismissed, 506 U.S. 1090, 113 S. Ct. 1147, 122 L. Ed. 2d 498, 1993 U.S. LEXIS 1038 (U.S. 1993).

2.Retraction of Waiver.

In a breach of contract action, even if a supplier executed a waiver, KRS 255.2-209(5) allowed the supplier to retract the waiver because there was no detrimental reliance, and the supplier ultimately clearly reiterated that it intended to enforce the contract. Marley Cooling Tower Co. v. Caldwell Energy & Envtl., Inc., 280 F. Supp. 2d 651, 2003 U.S. Dist. LEXIS 15213 (W.D. Ky. 2003 ).

3.Modification of Agreement.

Under KRS 355.2-209 (2), a supplier and a purchaser in a breach of contract action could not modify their agreement orally, or through conduct, where their agreement plainly stated that no changes could be made without a written change order. Marley Cooling Tower Co. v. Caldwell Energy & Envtl., Inc., 280 F. Supp. 2d 651, 2003 U.S. Dist. LEXIS 15213 (W.D. Ky. 2003 ).

Two-year oral extension of a written contract for distribution of cosmetics in Japan was a contract modification rather than a new contract because no terms were changed. However, under KRS 355.2-209 (2), the modification was ineffective because it was not in writing, as required by the agreement’s express terms. The oral attempt at modification did not result in a waiver under KRS 355.2-209 (4). TWB Distrib., LLC v. BBL, Inc., 2009 U.S. Dist. LEXIS 117467 (W.D. Ky. Dec. 16, 2009).

355.2-210. Delegation of performance — Assignment of rights.

  1. A party may perform his duty through a delegate unless otherwise agreed or unless the other party has a substantial interest in having his original promisor perform or control the acts required by the contract. No delegation of performance relieves the party delegating of any duty to perform or any liability for breach.
  2. Except as otherwise provided in KRS 355.9-406 , unless otherwise agreed, all rights of either seller or buyer can be assigned except where the assignment would materially change the duty of the other party, or increase materially the burden or risk imposed on him by his contract, or impair materially his chance of obtaining return performance. A right to damages for breach of the whole contract or a right arising out of the assignor’s due performance of his entire obligation can be assigned despite agreement otherwise.
  3. The creation, attachment, perfection, or enforcement of a security interest in the seller’s interest under a contract is not a transfer that materially changes the duty of or increases materially the burden or risk imposed on the buyer or impairs materially the buyer’s chance of obtaining return performance within the purview of subsection (2) of this section unless, and then only to the extent that, enforcement actually results in a delegation of material performance of the seller. Even in that event, the creation, attachment, perfection, and enforcement of the security interest remain effective, but:
    1. The seller is liable to the buyer for damages caused by the delegation to the extent that the damages could not reasonably be prevented by the buyer; and
    2. A court having jurisdiction may grant other appropriate relief, including cancellation of the contract for sale or an injunction against enforcement of the security interest or consummation of the enforcement.
  4. Unless the circumstances indicate the contrary a prohibition of assignment of “the contract” is to be construed as barring only the delegation to the assignee of the assignor’s performance.
  5. An assignment of “the contract” or of “all my rights under the contract” or an assignment in similar general terms is an assignment of rights and unless the language or the circumstances (as in an assignment for security) indicate the contrary, it is a delegation of performance of the duties of the assignor and its acceptance by the assignee constitutes a promise by him to perform those duties. This promise is enforceable by either the assignor or the other party to the original contract.
  6. The other party may treat any assignment which delegates performance as creating reasonable grounds for insecurity and may without prejudice to his rights against the assignor demand assurances from the assignee (KRS 355.2-609 ).

History. Enact. Acts 1958, ch. 77, § 2-210, effective July 1, 1960; 2000, ch. 408, § 159, effective July 1, 2001.

Official Comment

Prior uniform statutory provision:

Purposes:

  1. Generally, this section recognizes both delegation of performance and assignability as normal and permissible incidents of a contract for the sale of goods.
  2. Delegation of performance, either in conjunction with an assignment or otherwise, is provided for by subsection (1) where no substantial reason can be shown as to why the delegated performance will not be as satisfactory as personal performance.
  3. Under subsection (2) rights which are no longer executory such as a right to damages for breach may be assigned although the agreement prohibits assignment. In such cases no question of delegation of any performance is involved. Subsection (2) is subject to Section 9-406, which makes rights to payment for goods sold (“accounts”), whether or not earned, freely alienable notwithstanding a contrary agreement or rule of law.
  4. The nature of the contract or the circumstances of the case, however, may bar assignment of the contract even where delegation of performance is not involved. This Article and this section are intended to clarify this problem, particularly in cases dealing with output requirement and exclusive dealing contracts. In the first place the section on requirements and exclusive dealing removes from the construction of the original contract most of the “personal discretion” element by substituting the reasonably objective standard of good faith operation of the plant or business to be supplied. Secondly, the section on insecurity and assurances, which is specifically referred to in subsection (5) of this section, frees the other party from the doubts and uncertainty which may afflict him under an assignment of the character in question by permitting him to demand adequate assurance of due performance without which he may suspend his own performance. Subsection (5) is not in any way intended to limit the effect of the section on insecurity and assurances and the word “performance” includes the giving of orders under a requirements contract. Of course, in any case where a material personal discretion is sought to be transferred, effective assignment is barred by subsection (2).
  5. Subsection (4) lays down a general rule of construction distinguishing between a normal commercial assignment, which substitutes the assignee for the assignor both as to rights and duties, and a financing assignment in which only the assignor’s rights are transferred.

    This Article takes no position on the possibility of extending some recognition or power to the original parties to work out normal commercial readjustments of the contract in the case of financing assignments even after the original obligor has been notified of the assignment. This question is dealt with in the Article on Secured Transactions (Article 9).

  6. Subsection (5) recognizes that the non-assigning original party has a stake in the reliability of the person with whom he has closed the original contract, and is, therefore, entitled to due assurance that any delegated performance will be properly forthcoming.
  7. This section is not intended as a complete statement of the law of delegation and assignment but is limited to clarifying a few points doubtful under the case law. Particularly, neither this section nor this Article touches directly on such questions as the need or effect of notice of the assignment, the rights of successive assignees, or any question of the form of an assignment, either as between the parties or as against any third parties. Some of these questions are dealt with in Article 9.

Cross references:

Point 3: Articles 5 and 9.

Point 4: Sections 2-306 and 2-609.

Point 5: Article 9, Sections 9-402, 9-404 to 9-406.

Point 7: Article 9.

Definitional cross references:

“Agreement”. Section 1-201. “Buyer”. Section 2-103. “Contract”. Section 1-201. “Party”. Section 1-201. “Rights”. Section 1-201. “Seller”. Section 2-103. “Term”. Section 1-201.

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Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Weinberg, Commercial Law and Consumer Credit, 65 Ky. L.J. 370 (1976-77).

Part 3. General Obligation and Construction of Contract

355.2-301. General obligations of parties.

The obligation of the seller is to transfer and deliver and that of the buyer is to accept and pay in accordance with the contract.

History. Enact. Acts 1958, ch. 77, § 2-301, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Sections 11 and 41, Uniform Sales Act.

Changes:

Rewritten.

Purposes of changes:

This section uses the term “obligation” in contrast to the term “duty” in order to provide for the “condition” aspects of delivery and payment insofar as they are not modified by other sections of this Article such as those on cure of tender. It thus replaces not only the general provisions of the Uniform Sales Act on the parties’ duties, but also the general provisions of that Act on the effect of conditions. In order to determine what is “in accordance with the contract” under this Article usage of trade, course of dealing and performance, and the general background of circumstances must be given due consideration in conjunction with the lay meaning of the words used to define the scope of the conditions and duties.

Cross references:

Section 1-106. See also Sections 1-205, 2-208, 2-209, 2-508 and 2-612.

Definitional cross references:

“Buyer”. Section 2-103. “Contract”. Section 1-201. “Party”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Delivery.

Where there was no showing of a “course of performance” between parties, who had an ongoing seller-buyer relationship, under which the seller withheld delivery of acknowledged orders when the buyer was in arrears on earlier orders, seller had no legal right to withhold delivery of orders, which it accepted without conditions and subject to future payment, for the reason that buyer had an unpaid account for earlier orders. In re H.J. Scheirich Co., 982 F.2d 945, 1993 U.S. App. LEXIS 31 (6th Cir. Ky. 1993 ).

Cited:

Permalum Window & Awning Mfg. Co. v. Permalum Window Mfg. Corp., 412 S.W.2d 863, 1967 Ky. LEXIS 440 ( Ky. 1967 ).

355.2-302. Unconscionable contract or clause.

  1. If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.
  2. When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.

History. Enact. Acts 1958, ch. 77, § 2-302, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Purposes:

  1. This section is intended to make it possible for the courts to police explicitly against the contracts or clauses which they find to be unconscionable. In the past such policing has been accomplished by adverse construction of language, by manipulation of the rules of offer and acceptance or by determinations that the clause is contrary to public policy or to the dominant purpose of the contract. This section is intended to allow the court to pass directly on the unconscionability of the contract or particular clause therein and to make a conclusion of law as to its unconscionability. The basic test is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract. Subsection (2) makes it clear that it is proper for the court to hear evidence upon these questions. The principle is one of the prevention of oppression and unfair surprise (Cf. Campbell Soup Co. v. Wentz, 172 F.2d 80, 3d Cir. 1948) and not of disturbance of allocation of risks because of superior bargaining power. The underlying basis of this section is illustrated by the results in cases such as the following:

    Kansas City Wholesale Grocery Co. v. Weber Packing Corporation, 93 Utah 414, 73 P.2d 1272 (1937), where a clause limiting time for complaints was held inapplicable to latent defects in a shipment of catsup which could be discovered only by microscopic analysis; Hardy v. General Motors Acceptance Corporation, 38 Ga. App. 463, 144 S.E. 327 (1928), holding that a disclaimer of warranty clause applied only to express warranties, thus letting in a fair implied warranty; Andrews Bros. v. Singer & Co. (1934 CA) 1 K.B. 17, holding that where a car with substantial mileage was delivered instead of a “new” car, a disclaimer of warranties, including those “implied,” left unaffected an “express obligation” on the description, even though the Sale of Goods Act called such an implied warranty; New Prague Flouring Mill Co. v. G. A. Spears, 194 Iowa 417, 189 N.W. 815 (1922), holding that a clause permitting the seller, upon the buyer’s failure to supply shipping instructions, to cancel, ship, or allow delivery date to be indefinitely postponed 30 days at a time by the inaction, does not indefinitely postpone the date of measuring damages for the buyer’s breach, to the seller’s advantage; and Kansas Flour Mills Co. v. Dirks, 100 Kan. 376, 164 P. 273 (1917), where under a similar clause in a rising market the court permitted the buyer to measure his damages for non-delivery at the end of only one 30 day postponement; Green v. Arcos, Ltd. (1931 Ca) 47 T.L.R. 336, where a blanket clause prohibiting rejection of shipments by the buyer was restricted to apply to shipments where discrepancies represented merely mercantile variations; Meyer v. Packard Cleveland Motor Co., 106 Ohio St. 328, 140 N.E. 118 (1922), in which the court held that a “waiver” of all agreements not specified did not preclude implied warranty of fitness of a rebuilt dump truck for ordinary use as a dump truck; Austin Co. v. J. H. Tillman Co., 104 Or. 541, 209 P. 131 (1922), where a clause limiting the buyer’s remedy to return was held to be applicable only if the seller had delivered a machine needed for a construction job which reasonably met the contract description; Bekkevold v. Potts, 173 Minn. 87, 216 N.W. 790, 59 A.L.R. 1164 (1927), refusing to allow warranty of fitness for purpose imposed by law to be negated by clause excluding all warranties “made” by the seller; Robert A. Munroe & Co. v. Meyer (1930) 2 K.B. 312, holding that the warranty of description overrides a clause reading “with all faults and defects” where adulterated meat not up to the contract description was delivered.

  2. Under this section the court, in its discretion, may refuse to enforce the contract as a whole if it is permeated by the unconscionability, or it may strike any single clause or group of clauses which are so tainted or which are contrary to the essential purpose of the agreement, or it may simply limit unconscionable clauses so as to avoid unconscionable results.
  3. The present section is addressed to the court, and the decision is to be made by it. The commercial evidence referred to in subsection (2) is for the court’s consideration, not the jury’s. Only the agreement which results from the court’s action on these matters is to be submitted to the general triers of the facts.

Definitional cross reference:

“Contract”. Section 1-201.

NOTES TO DECISIONS

1.Limitation of Damages.

A clause limiting consequential damages for injury resulting from the application of agricultural chemicals was not unconscionable. Gooch v. E.I. DuPont de Nemours & Co., 40 F. Supp. 2d 863, 1999 U.S. Dist. LEXIS 10211 (W.D. Ky. 1999 ).

2.Disclaimer of Warranty.

Evidence supported verdict for buyers in an action by seller to recover purchase price of new machine where there was a disclaimer of warranty which, although clear in its terms, was to be found in a long and formidable document prepared by the seller and which was doubtless unnoticed or its import uncomprehended by the buyers, and there was complete failure of the machine to accomplish the purpose for which it was designed. (decided under prior law) Myers v. Land, 314 Ky. 514 , 235 S.W.2d 988, 1950 Ky. LEXIS 1095 ( Ky. 1950 ).

Research References and Practice Aids

Kentucky Law Journal.

Brickey, Products Liability in Kentucky: The Doctrinal Dilemma, 65 Ky. L.J. 593 (1976-77).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Treatises

Petrilli, Kentucky Family Law, Dissolution Decree, § 24.23.

355.2-303. Allocation or division of risks.

Where this article allocates a risk or a burden as between the parties “unless otherwise agreed,” the agreement may not only shift the allocation but may also divide the risk or burden.

History. Enact. Acts 1958, ch. 77, § 2-303, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

  1. This section is intended to make it clear that the parties may modify or allocate “unless otherwise agreed” risks or burdens imposed by this Article as they desire, always subject, of course, to the provisions on unconscionability.

    Compare Section 1-102(4).

  2. The risk or burden may be divided by the express terms of the agreement or by the attending circumstances, since under the definition of “agreement” in this Act the circumstances surrounding the transaction as well as the express language used by the parties enter into the meaning and substance of the agreement.

Cross references:

Point 1: Sections 1-102, 2-302.

Point 2: Section 1-201.

Definitional cross references:

“Party”. Section 1-201. “Agreement”. Section 1-201.

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355.2-304. Price payable in money, goods, realty, or otherwise.

  1. The price can be made payable in money or otherwise. If it is payable in whole or in part in goods each party is a seller of the goods which he is to transfer.
  2. Even though all or part of the price is payable in an interest in realty the transfer of the goods and the seller’s obligations with reference to them are subject to this article, but not the transfer of the interest in realty or the transferor’s obligations in connection therewith.

History. Enact. Acts 1958, ch. 77, § 2-304, effective July 1, 1960.

Official Comment

Prior uniform statutory provisions:

Subsections (2) and (3) of Section 9, Uniform Sales Act.

Changes:

Rewritten.

Purposes of changes:

  1. This section corrects the phrasing of the Uniform Sales Act so as to avoid misconstruction and produce greater accuracy in commercial result. While it continues the essential intent and purpose of the Uniform Sales Act it rejects any purely verbalistic construction in disregard of the underlying reason of the provisions.
  2. Under subsection (1) the provisions of this Article are applicable to transactions where the “price” of goods is payable in something other than money. This does not mean, however, that this whole Article applies automatically and in its entirety simply because an agreed transfer of title to goods is not a gift. The basic purposes and reasons of the Article must always be considered in determining the applicability of any of its provisions.
  3. Subsection (2) lays down the general principle that when goods are to be exchanged for realty, the provisions of this Article apply only to those aspects of the transaction which concern the transfer of title to goods but do not affect the transfer of the realty since the detailed regulation of various particular contracts which fall outside the scope of this Article is left to the courts and other legislation. However, the complexities of these situations may be such that each must be analyzed in the light of the underlying reasons in order to determine the applicable principles. Local statutes dealing with realty are not to be lightly disregarded or altered by language of this Article. In contrast, this Article declares definite policies in regard to certain matters legitimately within its scope though concerned with real property situations, and in those instances the provisions of this Article control.

Cross references:

Point 1: Section 1-102.

Point 3: Sections 1-102, 1-103, 1-104 and 2-107.

Definitional cross references:

“Goods”. Section 2-105. “Money”. Section 1-201. “Party”. Section 1-201. “Seller”. Section 2-103.

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355.2-305. Open price term.

  1. The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if
    1. nothing is said as to price; or
    2. the price is left to be agreed by the parties and they fail to agree; or
    3. the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded.
  2. A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.
  3. When a price left to be fixed otherwise than by agreement of the parties fails to be fixed through fault of one party the other may at his option treat the contract as canceled or himself fix a reasonable price.
  4. Where, however, the parties intend not to be bound unless the price be fixed or agreed and it is not fixed or agreed there is no contract. In such a case the buyer must return any goods already received or if unable so to do must pay their reasonable value at the time of delivery and the seller must return any portion of the price paid on account.

History. Enact. Acts 1958, ch. 77, § 2-305, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Sections 9 and 10, Uniform Sales Act.

Changes:

Completely rewritten.

Purposes of Changes:

  1. This section applies when the price term is left open on the making of an agreement which is nevertheless intended by the parties to be a binding agreement. This Article rejects in these instances the formula that “an agreement to agree is unenforceable” if the case falls within subsection (1) of this section, and rejects also defeating such agreements on the ground of “indefiniteness”. Instead this Article recognizes the dominant intention of the parties to have the deal continue to be binding upon both. As to future performance, since this Article recognizes remedies such as cover (Section 2-712), resale (Section 2-706) and specific performance (Section 2-716) which go beyond any mere arithmetic as between contract price and market price, there is usually a “reasonably certain basis for granting an appropriate remedy for breach” so that the contract need not fail for indefiniteness.
  2. Under some circumstances the postponement of agreement on price will mean that no deal has really been concluded, and this is made express in the preamble of subsection (1) (“The parties if they so intend”) and in subsection (4). Whether or not this is so is, in most cases, a question to be determined by the trier of fact.
  3. Subsection (2), dealing with the situation where the price is to be fixed by one party rejects the uncommercial idea that an agreement that the seller may fix the price means that he may fix any price he may wish by the express qualification that the price so fixed must be fixed in good faith. Good faith includes observance of reasonable commercial standards of fair dealing in the trade if the party is a merchant. (Section 2-103). But in the normal case a “posted price” or a future seller’s or buyer’s “given price,” “price in effect,” “market price,” or the like satisfies the good faith requirement.
  4. The section recognizes that there may be cases in which a particular person’s judgment is not chosen merely as a barometer or index of a fair price but is an essential condition to the parties’ intent to make any contract at all. For example, the case where a known and trusted expert is to “value” a particular painting for which there is no market standard differs sharply from the situation where a named expert is to determine the grade of cotton, and the difference would support a finding that in the one the parties did not intend to make a binding agreement if that expert were unavailable whereas in the other they did so intend. Other circumstances would of course affect the validity of such a finding.
  5. Under subsection (3), wrongful interference by one party with any agreed machinery for price fixing in the contract may be treated by the other party as a repudiation justifying cancellation, or merely as a failure to take cooperative action thus shifting to the aggrieved party the reasonable leeway in fixing the price.
  6. Throughout the entire section, the purpose is to give effect to the agreement which has been made. That effect, however, is always conditioned by the requirement of good faith action which is made an inherent part of all contracts within this Act. (Section 1-203).

Cross references:

Point 1: Sections 2-204(3), 2-706, 2-712 and 2-716.

Point 3: Section 2-103.

Point 5: Sections 2-311 and 2-610.

Point 6: Section 1-203.

Definitional cross references:

“Agreement”. Section 1-201. “Burden of establishing”. Section 1-201. “Buyer”. Section 2-103. “Cancellation”. Section 2-106. “Contract”. Section 1-201. “Contract for sale”. Section 2-106. “Fault”. Section 1-201. “Goods”. Section 2-105. “Party”. Section 1-201. “Receipt of goods”. Section 2-103. “Seller”. Section 2-103. “Term”. Section 1-201.

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NOTES TO DECISIONS

1.Reasonable Value.

The term “reasonable value,” as used in subsection (4) of this section, is merely a codification of the doctrine of restitution as the basis of recovery in cases involving a quasi-contract, or contract implied in law; the term is not to be considered synonymous with the term “reasonable price,” although it is possible — and certainly a commercial ideal — that an item’s reasonable value and reasonable price might coincide. In re Glover Constr. Co., 49 B.R. 581, 1985 Bankr. LEXIS 6008 (Bankr. W.D. Ky. 1985 ).

Where parties to purchase order never agreed as to the meaning of the price and payment terms of the order and did not intend to be bound by the terms of the order unless the other party acquiesced to their interpretation of the price and payment terms, no contract existed between the parties, and plaintiff was entitled to the reasonable value of the goods delivered to debtor. In re Glover Constr. Co., 49 B.R. 581, 1985 Bankr. LEXIS 6008 (Bankr. W.D. Ky. 1985 ).

2.Open Price.

Where agreement in contract as to price was for original cost plus cost of handling and a “nice” profit, it could not be enforced for indefiniteness. (decided under prior law) Gaines & Sea v. R. J. Reynolds Tobacco Co., 163 Ky. 716 , 174 S.W. 482, 1915 Ky. LEXIS 293 ( Ky. 1915 ).

Research References and Practice Aids

Kentucky Law Journal.

Whiteside, Uniform Commercial Code — Major Changes in Sales Law, 49 Ky. L.J. 165 (1960).

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

355.2-306. Output, requirements and exclusive dealings.

  1. A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.
  2. A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.

History. Enact. Acts 1958, ch. 77, § 2-306, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

  1. Subsection (1) of this section, in regard to output and requirements, applies to this specific problem the general approach of this Act which requires the reading of commercial background and intent into the language of any agreement and demands good faith in the performance of that agreement. It applies to such contracts of nonproducing establishments such as dealers or distributors as well as to manufacturing concerns.
  2. Under this Article, a contract for output or requirements is not too indefinite since it is held to mean the actual good faith output or requirements of the particular party. Nor does such a contract lack mutuality of obligation since, under this section, the party who will determine quantity is required to operate his plant or conduct his business in good faith and according to commercial standards of fair dealing in the trade so that his output or requirements will approximate a reasonably foreseeable figure. Reasonable elasticity in the requirements is expressly envisaged by this section and good faith variations from prior requirements are permitted even when the variation may be such as to result in discontinuance. A shut-down by a requirements buyer for lack of orders might be permissible when a shut-down merely to curtail losses would not. The essential test is whether the party is acting in good faith. Similarly, a sudden expansion of the plant by which requirements are to be measured would not be included within the scope of the contract as made but normal expansion undertaken in good faith would be within the scope of this section. One of the factors in an expansion situation would be whether the market price had risen greatly in a case in which the requirements contract contained a fixed price. Reasonable variation of an extreme sort is exemplified in Southwest Natural Gas Co. v. Oklahoma Portland Cement Co., 102 F.2d 630 (C.C.A. 10, 1939). This Article takes no position as to whether a requirements contract is a provable claim in bankruptcy.
  3. If an estimate of output or requirements is included in the agreement, no quantity unreasonably disproportionate to it may be tendered or demanded. Any minimum or maximum set by the agreement shows a clear limit on the intended elasticity. In similar fashion, the agreed estimate is to be regarded as a center around which the parties intend the variation to occur.
  4. When an enterprise is sold, the question may arise whether the buyer is bound by an existing output or requirements contract. That question is outside the scope of this Article, and is to be determined on other principles of law. Assuming that the contract continues, the output or requirements in the hands of the new owner continue to be measured by the actual good faith output or requirements under the normal operation of the enterprise prior to sale. The sale itself is not grounds for sudden expansion or decrease.
  5. Subsection (2), on exclusive dealing, makes explicit the commercial rule embodied in this Act under which the parties to such contracts are held to have impliedly, even when not expressly, bound themselves to use reasonable diligence as well as good faith in their performance of the contract. Under such contracts the exclusive agent is required, although no express commitment has been made, to use reasonable effort and due diligence in the expansion of the market or the promotion of the product, as the case may be. The principal is expected under such a contract to refrain from supplying any other dealer or agent within the exclusive territory. An exclusive dealing agreement brings into play all of the good faith aspects of the output and requirement problems of subsection (1). It also raises questions of insecurity and right to adequate assurance under this Article.

Cross references:

Point 4: Section 2-210.

Point 5: Sections 1-203 and 2-609.

Definitional cross references:

“Agreement”. Section 1-201. “Buyer”. Section 2-103. “Contract for sale”. Section 2-106. “Good faith”. Section 1-201. “Goods”. Section 2-105. “Party”. Section 1-201. “Term”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

Analysis

1.Applicability.

A supply contract at issue was not the sort of contract ordinarily thought of as a requirements contract under the statute where there was no attempt to establish a unit price to which both parties were willing to commit themselves and, instead, the agreement contemplated a total price for a given quantity of materials, which both parties believed was a reasonable estimate of the quantity required for a project, but the parties also recognized that the quantity ultimately required was apt to exceed the estimate and addressed this contingency by a provision allowing for additional payment for “extra” materials and labor. A & A Mech. v. Thermal Equip. Sales, 998 S.W.2d 505, 1999 Ky. App. LEXIS 84 (Ky. Ct. App. 1999).

Requirements contract must be exclusive, and under Kentucky law, a term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith; a supply agreement between a seat manufacturer and three stamping companies did not constitute a requirements contract as a matter of law because: (1) the manufacturer was not obligated to order any certain amount of stamping work from the companies and, in fact, was not contractually obligated to purchase anything from them; (2) the agreement did not measure output by reference to a quantity term but by reference to the issuance of release schedules; and (3) no exclusivity was present in the agreement. Johnson Controls, Inc. v. Anson Stamping Co., 2000 U.S. Dist. LEXIS 22615 (W.D. Ky. Mar. 27, 2000).

2.Evidence.

Where the quantity actually required was at least 29 percent more than had been estimated, there was an unreasonable deviation from the stated estimate and, therefore, the statute did not apply. A & A Mech. v. Thermal Equip. Sales, 998 S.W.2d 505, 1999 Ky. App. LEXIS 84 (Ky. Ct. App. 1999).

3.Output.

A contract of new company to purchase the entire output of tobacco stems for a period of ten (10) years from an existing company was not void for indefiniteness and by implication obligated the existing company to sell its output of tobacco stems to the new company. (decided under prior law) Kentucky Tobacco Products Co. v. Lucas, 5 F.2d 723, 1925 U.S. Dist. LEXIS 1065 (W.D. Ky. 1925 ).

A contract to deliver at a designated place all the good, sound railroad ties that could be made from seller’s own land or purchased or acquired from others for a designated time did not specify the number of ties, and it could not be known exactly the number of ties that could be secured from the land or purchased, but whatever could be made or could be purchased was covered by the contract and buyer was liable for breach of contract for failure to accept the ties delivered and to be delivered. (decided under prior law) Mitchell Taylor Tie Co. v. Whitaker, 158 Ky. 651 , 166 S.W. 193, 1914 Ky. LEXIS 686 ( Ky. 1914 ). See Ayer & Lord Tie Co. v. O. T. O'Bannon & Co., 164 Ky. 34 , 174 S.W. 783, 1915 Ky. LEXIS 330 ( Ky. 1915 ).

On breach of contract to accept all railroad ties seller could deliver at a designated place prior to a designated date, the measure of damages for failure to accept was: (1) for those on hand which seller had purchased from others, the difference between the contract price and the market price; (2) for those seller could have procured from others within the designated time, the difference between the contract price and the price it would have cost seller to have procured the ties at the time and place of delivery; (3) for those on hand which he had manufactured prior to cancellation of the contract or to be made from timber cut at that time for the purpose of manufacture into ties, the difference between the contract price and the market price at the time and place of delivery; but as to those he could have thereafter manufactured and delivered, the difference between the contract price and the cost of such manufacture and delivery. (decided under prior law) Ayer & Lord Tie Co. v. O. T. O'Bannon & Co., 164 Ky. 34 , 174 S.W. 783, 1915 Ky. LEXIS 330 ( Ky. 1915 ).

Contract stating “I have this day sold to Ross-Vaughn Tobacco Co., Incorporated, my present crop of tobacco, the growth of 19 _________ , supposed to be _________ pounds, for which they agree to pay me as follows . . . . . Said tobacco to be delivered well cured and in good order and free from damage at the option of the purchasers at their factory in _________ ” was not an option contract giving the privilege of purchasing the tobacco if purchaser elected to take it but was a mutually binding contract with delivery at the option of the purchaser. (decided under prior law) Ross-Vaughan Tobacco Co. v. Johnson, 182 Ky. 325 , 206 S.W. 487, 1918 Ky. LEXIS 364 ( Ky. 1918 ).

Where a contract to mine coal was only to pay a designated price per ton for each and every ton removed on contract out of two (2) entries and no time limit was provided, the contract did not state any agreement to mine a definite quantity of coal, nor to take any specified quantity from any designated portion of the mine nor agree to exhaust the coal from any portion of the mine, and the contract could be abandoned at any time and recovery could be had only for the coal removed. (decided under prior law) Springton Coal Co. v. Bowling, 228 Ky. 317 , 14 S.W.2d 1082, 1929 Ky. LEXIS 537 ( Ky. 1929 ).

Notes to Unpublished Decisions

1.Applicability.

Unpublished decision: Under KRS 355.2-306 (1) the manufacturer had reduced its requirements in good faith because the decision to alter the specifications for certain parts was a legitimate business reason and it would be “unreasonable” to require the manufacturer to continue to manufacture with inefficient parts simply to honor a requirements contract. Wiseco, Inc. v. Johnson Controls, Inc., 155 Fed. Appx. 815, 2005 FED App. 0884N, 2005 U.S. App. LEXIS 24147 (6th Cir. Ky. 2005 ).

Research References and Practice Aids

Northern Kentucky Law Review.

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

355.2-307. Delivery in single lot or several lots.

Unless otherwise agreed all goods called for by a contract for sale must be tendered in a single delivery and payment is due only on such tender but where the circumstances give either party the right to make or demand delivery in lots the price if it can be apportioned may be demanded for each lot.

History. Enact. Acts 1958, ch. 77, § 2-307, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 45(1), Uniform Sales Act.

Changes:

Rewritten and expanded.

Purposes of Changes:

  1. This section applies where the parties have not specifically agreed whether delivery and payment are to be by lots and generally continues the essential intent of original Act, Section 45(1) by assuming that the parties intended delivery to be in a single lot.
  2. Where the actual agreement or the circumstances do not indicate otherwise, delivery in lots is not permitted under this section and the buyer is properly entitled to reject for a deficiency in the tender, subject to any privilege in the seller to cure the tender.
  3. The “but” clause of this section goes to the case in which it is not commercially feasible to deliver or to receive the goods in a single lot as for example, where a contract calls for the shipment of ten carloads of coal and only three cars are available at a given time. Similarly, in a contract involving brick necessary to build a building the buyer’s storage space may be limited so that it would be impossible to receive the entire amount of brick at once, or it may be necessary to assemble the goods as in the case of cattle on the range, or to mine them.

    In such cases, a partial delivery is not subject to rejection for the defect in quantity alone, if the circumstances do not indicate a repudiation or default by the seller as to the expected balance or do not give the buyer ground for suspending his performance because of insecurity under the provisions of Section 2-609. However, in such cases the undelivered balance of goods under the contract must be forthcoming within a reasonable time and in a reasonable manner according to the policy of Section 2-503 on manner of tender of delivery. This is reinforced by the express provisions of Section 2-608 that if a lot has been accepted on the reasonable assumption that its nonconformity will be cured, the acceptance may be revoked if the cure does not seasonably occur. The section rejects the rule of Kelly Construction Co. v. Hackensack Brick Co., 91 N.J.L. 585, 103 A. 417, 2 A.L.R. 685 (1918) and approves the result in Lynn M. Ranger, Inc. v. Gildersleeve, 106 Conn. 372, 138 A. 142 (1927) in which a contract was made for six carloads of coal then rolling from the mines and consigned to the seller but the seller agreed to divert the carloads to the buyer as soon as the car numbers became known to him. He arranged a diversion of two cars and then notified the buyer who then repudiated the contract. The seller was held to be entitled to his full remedy for the two cars diverted because simultaneous delivery of all of the cars was not contemplated by either party.

  4. Where the circumstances indicate that a party has a right to delivery in lots, the price may be demanded for each lot if it is apportionable.

Cross references:

Point 1: Section 1-201.

Point 2: Sections 2-508 and 2-601.

Point 3: Sections 2-503, 2-608 and 2-609.

Definitional cross references:

“Contract for sale”. Section 2-106. “Goods”. Section 2-105. “Lot”. Section 2-105. “Party”. Section 1-201. “Rights”. Section 1-201.

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NOTES TO DECISIONS

1.Separate Payments per Lot.

Although contract for sale of logs provided for measurement and branding in December and April and one half (1/2) of amount due would be paid on the 15th of the month following measurement and branding, where measurement and branding was made in January, February and March, the amounts due under the contract became due on the 15th of each month following measurement and branding. (decided under prior law) Collins v. Swan-Day Lumber Co., 158 Ky. 231 , 164 S.W. 813, 1914 Ky. LEXIS 597 ( Ky. 1914 ).

355.2-308. Absence of specified place for delivery.

Unless otherwise agreed

  1. the place for delivery of goods is the seller’s place of business or if he has none his residence; but
  2. in a contract for sale of identified goods which to the knowledge of the parties at the time of contracting are in some other place, that place is the place for their delivery; and
  3. documents of title may be delivered through customary banking channels.

History. Enact. Acts 1958, ch. 77, § 2-308, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Paragraphs (a) and (b)—Section 43(1), Uniform Sales Act; Paragraph (c)—none.

Changes:

Slight modification in language.

Purposes of changes and new matter:

  1. Paragraphs (a) and (b) provide for those noncommercial sales and for those occasional commercial sales where no place or means of delivery has been agreed upon by the parties. Where delivery by carrier is “required or authorized by the agreement”, the seller’s duties as to delivery of the goods are governed not by this section but by Section 2-504.
  2. Under paragraph (b) when the identified goods contracted for are known to both parties to be in some location other than the seller’s place of business or residence, the parties are presumed to have intended that place to be the place of delivery. This paragraph also applies (unless, as would be normal, the circumstances show that delivery by way of documents is intended) to a bulk of goods in the possession of a bailee. In such a case, however, the seller has the additional obligation to procure the acknowledgment by the bailee of the buyer’s right to possession.
  3. Where “customary banking channels” call only for due notification by the banker that the documents are on hand, leaving the buyer himself to see to the physical receipt of the goods, tender at the buyer’s address is not required under paragraph (c). But that paragraph merely eliminates the possibility of a default by the seller if “customary banking channels” have been properly used in giving notice to the buyer. Where the bank has purchased a draft accompanied by documents or has undertaken its collection on behalf of the seller, Part 5 of Article 4 spells out its duties and relations to its customer. Where the documents move forward under a letter of credit the Article on Letters of Credit spells out the duties and relations between the bank, the seller and the buyer.
  4. The rules of this section apply only “unless otherwise agreed.” The surrounding circumstances, usage of trade, course of dealing and course of performance, as well as the express language of the parties may constitute an “otherwise agreement”.

Cross references:

Point 1: Sections 2-504 and 2-505.

Point 2: Section 2-503.

Point 3: Section 2-512, Articles 4, Part 5, and 5.

Definitional cross references:

“Contract for sale”. Section 2-106. “Delivery”. Section 1-201. “Document of title”. Section 1-201. “Goods”. Section 2-105. “Party”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

Cited:

Cline v. Allis-Chalmers Corp., 690 S.W.2d 764, 1985 Ky. App. LEXIS 578 (Ky. Ct. App. 1985).

355.2-309. Absence of specific time provisions — Notice of termination.

  1. The time for shipment or delivery or any other action under a contract if not provided in this article or agreed upon shall be a reasonable time.
  2. Where the contract provides for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party.
  3. Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.

History. Enact. Acts 1958, ch. 77, § 2-309, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Subsection (1)—see Sections 43(2), 45(2), 47(1) and 48, Uniform Sales Act, for policy continued under this Article, Subsection (2)—none; Subsection (3)—none.

Changes:

Completely different in scope.

Purposes of changes and new matter:

  1. Subsection (1) requires that all actions taken under a sales contract must be taken within a reasonable time where no time has been agreed upon. The reasonable time under this provision turns on the criteria as to “reasonable time” and on good faith and commercial standards set forth in Sections 1-203, 1-204 and 2-103. It thus depends upon what constitutes acceptable commercial conduct in view of the nature, purpose and circumstances of the action to be taken. Agreement as to a definite time, however, may be found in a term implied from the contractual circumstances, usage of trade or course of dealing or performance as well as in an express term. Such cases fall outside of this subsection since in them the time for action is “agreed” by usage.
  2. The time for payment, where not agreed upon, is related to the time for delivery; the particular problems which arise in connection with determining the appropriate time of payment and the time for any inspection before payment which is both allowed by law and demanded by the buyer are covered in Section 2-513.
  3. The facts in regard to shipment and delivery differ so widely as to make detailed provision for them in the text of this Article impracticable. The applicable principles, however, make it clear that surprise is to be avoided, good faith judgment is to be protected, and notice or negotiation to reduce the uncertainty to certainty is to be favored.
  4. When the time for delivery is left open, unreasonably early offers of or demands for delivery are intended to be read under this Article as expressions of desire or intention, requesting the assent or acquiescence of the other party, not as final positions which may amount without more to breach or to create breach by the other side. See Sections 2-207 and 2-609.
  5. The obligation of good faith under this Act requires reasonable notification before a contract may be treated as breached because a reasonable time for delivery or demand has expired. This operates both in the case of a contract originally indefinite as to time and of one subsequently made indefinite by waiver.

    When both parties let an originally reasonable time go by in silence, the course of conduct under the contract may be viewed as enlarging the reasonable time for tender or demand of performance. The contract may be terminated by abandonment.

  6. Parties to a contract are not required in giving reasonable notification to fix, at peril of breach, a time which is in fact reasonable in the unforeseeable judgment of a later trier of fact. Effective communication of a proposed time limit calls for a response, so that failure to reply will make out acquiescence. Where objection is made, however, or if the demand is merely for information as to when goods will be delivered or will be ordered out, demand for assurances on the ground of insecurity may be made under this Article pending further negotiations. Only when a party insists on undue delay or on rejection of the other party’s reasonable proposal is there a question of flat breach under the present section.
  7. Subsection (2) applies a commercially reasonable view to resolve the conflict which has arisen in the cases as to contracts of indefinite duration. The “reasonable time” of duration appropriate to a given arrangement is limited by the circumstances. When the arrangement has been carried on by the parties over the years, the “reasonable time” can continue indefinitely and the contract will not terminate until notice.
  8. Subsection (3) recognizes that the application of principles of good faith and sound commercial practice normally call for such notification of the termination of a going contract relationship as will give the other party reasonable time to seek a substitute arrangement. An agreement dispensing with notification or limiting the time for the seeking of a substitute arrangement is, of course, valid under this subsection unless the results of putting it into operation would be the creation of an unconscionable state of affairs.
  9. Justifiable cancellation for breach is a remedy for breach and is not the kind of termination covered by the present subsection.
  10. The requirement of notification is dispensed with where the contract provides for termination on the happening of an “agreed event.” “Event” is a term chosen here to contrast with “option” or the like.

Cross references:

Point 1: Sections 1-203, 1-204 and 2-103.

Point 2: Sections 2-320, 2-321, 2-504, and 2-511 through 2-514.

Point 5: Section 1-203.

Point 6: Section 2-609.

Point 7: Section 2-204.

Point 9: Sections 2-106, 2-318, 2-610 and 2-703.

Definitional cross references:

“Agreement”. Section 1-201. “Contract”. Section 1-201. “Notification”. Section 1-201. “Party”. Section 1-201. “Reasonable time”. Section 1-204. “Termination”. Section 2-106.

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NOTES TO DECISIONS

1.Reasonable Notification.

If the provisions of Article 2 of the Uniform Commercial Code apply to the relationship, reasonable notice of the intention to terminate the agreement must be given, and, in some cases, it would be required even if a written agreement provided for dispensing with notification. Leibel v. Raynor Mfg. Co., 571 S.W.2d 640, 1978 Ky. App. LEXIS 595 (Ky. Ct. App. 1978).

Reasonable notification is required in order to terminate an on-going oral agreement for the sale of goods in a relationship of manufacturer-supplier and dealer-distributor or franchisee. Leibel v. Raynor Mfg. Co., 571 S.W.2d 640, 1978 Ky. App. LEXIS 595 (Ky. Ct. App. 1978).

Reasonable notification should be the minimum amount of protection afforded to either party upon the termination of an on-going sales agreement and when such reasonable notice is not given, a cause of action for damages may exist. Leibel v. Raynor Mfg. Co., 571 S.W.2d 640, 1978 Ky. App. LEXIS 595 (Ky. Ct. App. 1978).

The requirement of a reasonable notification does not relate to the method of giving notice, but to the circumstances under which the notice is given and the extent of advanced warning of termination that the notification gives. Leibel v. Raynor Mfg. Co., 571 S.W.2d 640, 1978 Ky. App. LEXIS 595 (Ky. Ct. App. 1978).

Under this section, an at-will contract is to continue for a reasonable period of time and may be breached by termination without reasonable notice beforehand. Pharo Distributing Co. v. Stahl, 782 S.W.2d 635, 1989 Ky. App. LEXIS 154 (Ky. Ct. App. 1989).

Reasonable notice is that period of time which, under the circumstances of the case, would allow one to make alternate arrangements upon cessation of the contract and minimize losses. Pharo Distributing Co. v. Stahl, 782 S.W.2d 635, 1989 Ky. App. LEXIS 154 (Ky. Ct. App. 1989).

Whether reasonable notice was given under the circumstances of the case is a question of fact. It is to be determined by the finder of fact unless only one legitimate inference can be drawn from the facts proven, in which case the question is one of law for the court. Pharo Distributing Co. v. Stahl, 782 S.W.2d 635, 1989 Ky. App. LEXIS 154 (Ky. Ct. App. 1989).

The obvious object of the reasonable notice requirement is to afford the party losing the contract an opportunity to make appropriate arrangement in lieu thereof by dispersing inventory, adjusting work force, exploring probable alternatives, and in general, “getting his house in order” to proceed in absence of the former relationship. It is based upon fairness and equity. Pharo Distributing Co. v. Stahl, 782 S.W.2d 635, 1989 Ky. App. LEXIS 154 (Ky. Ct. App. 1989).

2.Damages.

Where oral, open-ended sub-distributorship agreement had been in existence for many years, and was terminated almost instantaneously (in just six days), as a matter of law, the notice was clearly unreasonable; the contract was breached. However, damages would be limited to those elements directly relating to lack of notice and the lost opportunity to “put company’s house in order.” Pharo Distributing Co. v. Stahl, 782 S.W.2d 635, 1989 Ky. App. LEXIS 154 (Ky. Ct. App. 1989).

3.Performance Delays.

Court granted a furniture manufacturer’s motion for summary judgment in a wholesaler’s breach of contract action because the wholesaler provided no evidence of any specific furniture deliveries that were unreasonably delayed. The wholesaler conceded that a guaranteed delivery time of 90 to 120 days was not a term of the parties’ agreement. Peters Wholesale Furniture, Inc. v. Manchester Furniture Group, 2005 U.S. Dist. LEXIS 21583 (W.D. Ky. Sept. 26, 2005).

4.Reasonable Time.

Where written contract for sale and installation of engine on boat did not provide any time for performance, the law implied a reasonable time, and parol evidence of an agreement as to time for delivery was inadmissible in absence of fraud or mistake and, on failure to install within a reasonable time, the buyer could recover any such damages as would fairly compensate him for the loss of use of the engine for any ordinary purposes during the delay. (decided under prior law) Fairbanks, Morse & Co. v. Hooper, 147 Ky. 154 , 143 S.W. 1025, 1912 Ky. LEXIS 211 ( Ky. 1912 ).

5.Notice of Termination.

Contract giving broker exclusive sale of coal company’s output so long as the broker’s services were satisfactory was terminable at will of either party on notice and, where company claimed it gave notice but broker denied notice was given, the question of whether notice was given was for the jury. (decided under prior law) Elkhorn Consol. Coal & Coke Co. v. Eaton, Rhodes & Co., 163 Ky. 306 , 173 S.W. 798, 1915 Ky. LEXIS 227 ( Ky. 1915 ).

Unauthorized contract giving retailer exclusive privilege of selling shoes for an indefinite time could be terminated at any time by either party and no damages could be had for failure to fill orders. (decided under prior law) Peters Branch of International Shoe Co. v. Jones, 247 Ky. 193 , 56 S.W.2d 994, 1933 Ky. LEXIS 374 ( Ky. 193 3 ).

Cited:

In re Louisville Motor Exchange, Inc., 26 B.R. 490, 1983 Bankr. LEXIS 7038 (Bankr. W.D. Ky. 1983 ).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

355.2-310. Open time for payment or running of credit — Authority to ship under reservation.

Unless otherwise agreed:

  1. Payment is due at the time and place at which the buyer is to receive the goods even though the place of shipment is the place of delivery; and
  2. If the seller is authorized to send the goods he may ship them under reservation, and may tender the documents of title, but the buyer may inspect the goods after their arrival before payment is due unless such inspection is inconsistent with the terms of the contract (KRS 355.2-513 ); and
  3. If delivery is authorized and made by way of documents of title otherwise than by subsection (2) of this section, then payment is due regardless of where the goods are to be received:
    1. At the time and place at which the buyer is to receive delivery of the tangible documents; or
    2. At the time the buyer is to receive delivery of the electronic documents and at the seller’s place of business or, if none, the seller’s residence; and
  4. Where the seller is required or authorized to ship the goods on credit the credit period runs from the time of shipment but postdating the invoice or delaying its dispatch will correspondingly delay the starting of the credit period.

History. Enact. Acts 1958, ch. 77, § 2-310, effective July 1, 1960; 2012, ch. 132, § 47, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Sections 42 and 47(2), Uniform Sales Act.

Changes:

Completely rewritten in this and other sections.

Purposes of changes:

This section is drawn to reflect modern business methods of dealing at a distance rather than face to face. Thus:

  1. Paragraph (a) provides that payment is due at the time and place “the buyer is to receive the goods” rather than at the point of delivery except in documentary shipment cases (paragraph (c)). This grants an opportunity for the exercise by the buyer of his preliminary right to inspection before paying even though under the delivery term the risk of loss may have previously passed to him or the running of the credit period has already started.
  2. Paragraph (b) while providing for inspection by the buyer before he pays, protects the seller. He is not required to give up possession of the goods until he has received payment, where no credit has been contemplated by the parties. The seller may collect through a bank by a sight draft against an order bill of lading “hold until arrival; inspection allowed.” The obligations of the bank under such a provision are set forth in Part 5 of Article 4. Under subsection (c), in the absence of a credit term, the seller is permitted to ship under reservation and if he does payment is then due where and when the buyer is to receive delivery of the tangible documents of title. In the case of an electronic document of title, payment is due when the buyer is to receive delivery of the electronic document and at the seller’s place of business, or if none, the seller’s residence. Delivery as to documents of title is stated in Article 1, Section 1-201.
  3. Unless otherwise agreed, the place for the delivery of the documents and payment is the buyer’s city but the time for payment is only after arrival of the goods, since under paragraph (b), and Sections 2-512 and 2-513 the buyer is under no duty to pay prior to inspection. Tender of a document of title requires that the seller be ready, willing and able to transfer possession of a tangible document of title or control of an electronic document of title to the buyer.
  4. Where the mode of shipment is such that goods must be unloaded immediately upon arrival, too rapidly to permit adequate inspection before receipt, the seller must be guided by the provisions of this Article on inspection which provide that if the seller wishes to demand payment before inspection, he must put an appropriate term into the contract. Even requiring payment against documents will not of itself have this desired result if the documents are to be held until the arrival of the goods. But under (b) and (c) if the terms are C.I.F., C.O.D., or cash against documents payment may be due before inspection.
  5. Paragraph (d) states the common commercial understanding that an agreed credit period runs from the time of shipment or from that dating of the invoice which is commonly recognized as a representation of the time of shipment. The provision concerning any delay in sending forth the invoice is included because such conduct results in depriving the buyer of his full notice and warning as to when he must be prepared to pay.

Cross references:

Generally: Part 5.

Point 1: Section 2-509.

Point 2: Sections 2-505, 2-511, 2-512, 2-513 and Article 4.

Point 3: Sections 2-308(b), 2-512 and 2-513.

Point 4: Section 2-513(3)(b).

Definitional cross references:

“Buyer”. Section 2-103. “Delivery”. Section 1-201. “Document of title”. Section 1-201. “Goods”. Section 2-105. “Receipt of goods”. Section 2-103. “Seller”. Section 2-103. “Send”. Section 1-201. “Term”. Section 1-201.

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355.2-311. Options and cooperation respecting performance.

  1. An agreement for sale which is otherwise sufficiently definite (subsection (3) of KRS 355.2-204 ) to be a contract is not made invalid by the fact that it leaves particulars of performance to be specified by one (1) of the parties. Any such specification must be made in good faith and within limits set by commercial reasonableness.
  2. Unless otherwise agreed specifications relating to assortment of the goods are at the buyer’s option and except as otherwise provided in subsections (1)(c) and (3) of KRS 355.2-319 specifications or arrangements relating to shipment are at the seller’s option.
  3. Where such specification would materially affect the other party’s performance but is not seasonably made or where one party’s cooperation is necessary to the agreed performance of the other but is not seasonably forthcoming, the other party in addition to all other remedies
    1. is excused for any resulting delay in his own performance; and
    2. may also either proceed to perform in any reasonable manner or after the time for a material part of his own performance treat the failure to specify or to cooperate as a breach by failure to deliver or accept the goods.

History. Enact. Acts 1958, ch. 77, § 2-311, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

  1. Subsection (1) permits the parties to leave certain detailed particulars of performance to be filled in by either of them without running the risk of having the contract invalidated for indefiniteness. The party to whom the agreement gives power to specify the missing details is required to exercise good faith and to act in accordance with commercial standards so that there is no surprise and the range of permissible variation is limited by what is commercially reasonable. The “agreement” which permits one party so to specify may be found as well in a course of dealing, usage of trade, or implication from circumstances as in explicit language used by the parties.
  2. Options as to assortment of goods or shipping arrangements are specifically reserved to the buyer and seller respectively under subsection (2) where no other arrangement has been made. This section rejects the test which mechanically and without regard to usage or the purpose of the option gave the option to the party “first under a duty to move” and applies instead a standard commercial interpretation to these circumstances. The “unless otherwise agreed” provision of this subsection covers not only express terms but the background and circumstances which enter into the agreement.
  3. Subsection (3) applies when the exercise of an option or cooperation by one party is necessary to or materially affects the other party’s performance, but it is not seasonably forthcoming; the subsection relieves the other party from the necessity for performance or excuses his delay in performance as the case may be. The contract-keeping party may at his option under this subsection proceed to perform in any commercially reasonable manner rather than wait. In addition to the special remedies provided, this subsection also reserves “all other remedies”. The remedy of particular importance in this connection is that provided for insecurity. Request may also be made pursuant to the obligation of good faith for a reasonable indication of the time and manner of performance for which a party is to hold himself ready.
  4. The remedy provided in subsection (3) is one which does not operate in the situation which falls within the scope of Section 2-614 on substituted performance. Where the failure to cooperate results from circumstances set forth in that section, the other party is under a duty to proffer or demand (as the case may be) substitute performance as a condition to claiming rights against the non-cooperating party.

Cross references:

Point 1: Sections 1-201, 2-204 and 1-203.

Point 3: Sections 1-203 and 2-609.

Point 4: Section 2-614.

Definitional cross references:

“Agreement”. Section 1-201. “Buyer”. Section 2-103. “Contract for sale”. Section 2-106. “Goods”. Section 2-105. “Party”. Section 1-201. “Remedy”. Section 1-201. “Seasonably”. Section 1-204. “Seller”. Section 2-103.

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355.2-312. Warranty of title and against infringement — Buyer’s obligation against infringement.

  1. Subject to subsection (2) there is in a contract for sale a warranty by the seller that
    1. the title conveyed shall be good, and its transfer rightful; and
    2. the goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge.
  2. A warranty under subsection (1) will be excluded or modified only by specific language or by circumstances which give the buyer reason to know that the person selling does not claim title in himself or that he is purporting to sell only such right or title as he or a third person may have.
  3. Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications.

History. Enact. Acts 1958, ch. 77, § 2-312, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 13, Uniform Sales Act.

Changes:

Completely rewritten, the provisions concerning infringement being new.

Purposes of changes:

  1. Subsection (1) makes provision for a buyer’s basic needs in respect to a title which he in good faith expects to acquire by his purchase, namely, that he receive a good, clean title transferred to him also in a rightful manner so that he will not be exposed to a lawsuit in order to protect it.

    The warranty extends to a buyer whether or not the seller was in possession of the goods at the time the sale or contract to sell was made.

    The warranty of quiet possession is abolished. Disturbance of quiet possession, although not mentioned specifically, is one way, among many, in which the breach of the warranty of title may be established.

    The “knowledge” referred to in subsection (1)(b) is actual knowledge as distinct from notice.

  2. The provisions of this Article requiring notification to the seller within a reasonable time after the buyer’s discovery of a breach apply to notice of a breach of the warranty of title, where the seller’s breach was innocent. However, if the seller’s breach was in bad faith he cannot be permitted to claim that he has been misled or prejudiced by the delay in giving notice. In such case the “reasonable” time for notice should receive a very liberal interpretation. Whether the breach by the seller is in good or bad faith Section 2-725 provides that the cause of action accrues when the breach occurs. Under the provisions of that section the breach of the warranty of good title occurs when tender of delivery is made since the warranty is not one which extends to “future performance of the goods.”
  3. When the goods are part of the seller’s normal stock and are sold in his normal course of business, it is his duty to see that no claim of infringement of a patent or trademark by a third party will mar the buyer’s title. A sale by a person other than a dealer, however, raises no implication in its circumstances of such a warranty. Nor is there such an implication when the buyer orders goods to be assembled, prepared or manufactured on his own specifications. If, in such a case, the resulting product infringes a patent or trademark, the liability will run from buyer to seller. There is, under such circumstances, a tacit representation on the part of the buyer that the seller will be safe in manufacturing according to the specifications, and the buyer is under an obligation in good faith to indemnify him for any loss suffered.
  4. This section rejects the cases which recognize the principle that infringements violate the warranty of title but deny the buyer a remedy unless he has been expressly prevented from using the goods. Under this Article “eviction” is not a necessary condition to the buyer’s remedy since the buyer’s remedy arises immediately upon receipt of notice of infringement; it is merely one way of establishing the fact of breach.
  5. Subsection (2) recognizes that sales by sheriffs, executors, certain foreclosing lienors and persons similarly situated may be so out of the ordinary commercial course that their peculiar character is immediately apparent to the buyer and therefore no personal obligation is imposed upon the seller who is purporting to sell only an unknown or limited right. This subsection does not touch upon and leaves open all questions of restitution arising in such cases, when a unique article so sold is reclaimed by a third party as the rightful owner.

    Foreclosure sales under Article 9 are another matter. Section 9-610 provides that a disposition of collateral under that section includes warranties such as those imposed by this section on a voluntary disposition of property of the kind involved. Consequently, unless properly excluded under subsection (2) or under the special provisions for exclusion in Section 9-610, a disposition under Section 9-610 of collateral consisting of goods includes the warranties imposed by subsection (1) and, if applicable, subsection (3).

  6. The warranty of subsection (1) is not designated as an “implied” warranty, and hence is not subject to Section 2-316(3). Disclaimer of the warranty of title is governed instead by subsection (2), which requires either specific language or the described circumstances.

Cross references:

Point 1: Section 2-403.

Point 2: Sections 2-607 and 2-725.

Point 3: Section 1-203.

Point 4: Sections 2-609 and 2-725.

Point 6: Section 2-316.

Definitional cross references:

“Buyer”. Section 2-103. “Contract for sale”. Section 2-106. “Goods”. Section 2-105. “Person”. Section 1-201. “Right”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.No Title.

Where one innocently purchased a car which it was later proved had been stolen and the purchaser had to give it up to the true owner, there was breach of the implied warranty that the seller had the right to sell and give the purchaser peaceful enjoyment of the property. (decided under prior law) Sego v. Lynch, 233 Ky. 176 , 25 S.W.2d 353, 1929 Ky. LEXIS 462 ( Ky. 1929 ).

Where in the sale of a cleaning and pressing plant and equipment, the seller did not have title to a boiler, smokestack and tank, there was breach of warranty. (decided under prior law) Sandige v. Stephens, 252 Ky. 620 , 67 S.W.2d 967, 1934 Ky. LEXIS 826 ( Ky. 1934 ).

2.Title Subject to Undisclosed Mortgage.

Although sheriff had no right to pass title to a gas shovel which was subject to an undisclosed mortgage lien of $363.18 to a purchaser at an execution sale, where purchaser paid this amount to the mortgage lienholder to free the shovel of the mortgage lien and paid the execution debtor the surplus amount due him under purchaser’s bond less the amount paid the mortgage lienholder, the execution debtor ratified or adopted the sale by acceptance of that amount; and, although the execution debtor was entitled to the $363.18 balance from the purchaser under the bond, the execution debtor owed the purchaser the $363.18 that the purchaser had paid the mortgage lien debtor and the mutual debts and obligations were canceled. (decided under prior law) Commodari v. Hart-Commodari Const. Co., 262 Ky. 774 , 91 S.W.2d 8, 1936 Ky. LEXIS 84 ( Ky. 1936 ).

Cited:

Nick’s Auto Sales, Inc. v. Radcliff Auto Sales, Inc., 591 S.W.2d 709, 1979 Ky. App. LEXIS 496 (Ky. Ct. App. 1979).

355.2-313. Express warranties by affirmation, promise, description, sample.

  1. Express warranties by the seller are created as follows:
    1. Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.
    2. Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.
    3. Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.
  2. It is not necessary to the creation of an express warranty that the seller use formal words such as “warrant” or “guarantee” or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.

History. Enact. Acts 1958, ch. 77, § 2-313, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Sections 12, 14 and 16, Uniform Sales Act.

Changes:

Rewritten.

Purposes of changes:

To consolidate and systematize basic principles with the result that:

  1. “Express” warranties rest on “dickered” aspects of the individual bargain, and go so clearly to the essence of that bargain that words of disclaimer in a form are repugnant to the basic dickered terms. “Implied” warranties rest so clearly on a common factual situation or set of conditions that no particular language or action is necessary to evidence them and they will arise in such a situation unless unmistakably negated.

    This section reverts to the older case law insofar as the warranties of description and sample are designated “express” rather than “implied”.

  2. Although this section is limited in its scope and direct purpose to warranties made by the seller to the buyer as part of a contract for sale, the warranty sections of this Article are not designed in any way to disturb those lines of case law growth which have recognized that warranties need not be confined either to sales contracts or to the direct parties to such a contract. They may arise in other appropriate circumstances such as in the case of bailments for hire, whether such bailment is itself the main contract or is merely a supplying of containers under a contract for the sale of their contents. The provisions of Section 2-318 on third party beneficiaries expressly recognize this case law development within one particular area. Beyond that, the matter is left to the case law with the intention that the policies of this Act may offer useful guidance in dealing with further cases as they arise.
  3. The present section deals with affirmations of fact by the seller, descriptions of the goods or exhibitions of samples, exactly as any other part of a negotiation which ends in a contract is dealt with. No specific intention to make a warranty is necessary if any of these factors is made part of the basis of the bargain. In actual practice affirmations of fact made by the seller about the goods during a bargain are regarded as part of the description of those goods; hence no particular reliance on such statements need be shown in order to weave them into the fabric of the agreement. Rather, any fact which is to take such affirmations, once made, out of the agreement requires clear affirmative proof. The issue normally is one of fact.
  4. In view of the principle that the whole purpose of the law of warranty is to determine what it is that the seller has in essence agreed to sell, the policy is adopted of those cases which refuse except in unusual circumstances to recognize a material deletion of the seller’s obligation. Thus, a contract is normally a contract for a sale of something describable and described. A clause generally disclaiming “all warranties, express or implied” cannot reduce the seller’s obligation with respect to such description and therefore cannot be given literal effect under Section 2-316.

    This is not intended to mean that the parties, if they consciously desire, cannot make their own bargain as they wish. But in determining what they have agreed upon good faith is a factor and consideration should be given to the fact that the probability is small that a real price is intended to be exchanged for a pseudo-obligation.

  5. Paragraph (1)(b) makes specific some of the principles set forth above when a description of the goods is given by the seller.

    A description need not be by words. Technical specifications, blueprints and the like can afford more exact description than mere language and if made part of the basis of the bargain goods must conform with them. Past deliveries may set the description of quality, either expressly or impliedly by course of dealing. Of course, all descriptions by merchants must be read against the applicable trade usages with the general rules as to merchantability resolving any doubts.

  6. The basic situation as to statements affecting the true essence of the bargain is no different when a sample or model is involved in the transaction. This section includes both a “sample” actually drawn from the bulk of goods which is the subject matter of the sale, and a “model” which is offered for inspection when the subject matter is not at hand and which has not been drawn from the bulk of the goods.

    Although the underlying principles are unchanged, the facts are often ambiguous when something is shown as illustrative, rather than as a straight sample. In general, the presumption is that any sample or model just as any affirmation of fact is intended to become a basis of the bargain. But there is no escape from the question of fact. When the seller exhibits a sample purporting to be drawn from an existing bulk, good faith of course requires that the sample be fairly drawn. But in mercantile experience the mere exhibition of a “sample” does not of itself show whether it is merely intended to “suggest” or to “be” the character of the subject matter of the contract. The question is whether the seller has so acted with reference to the sample as to make him responsible that the whole shall have at least the values shown by it. The circumstances aid in answering this question. If the sample has been drawn from an existing bulk, it must be regarded as describing values of the goods contracted for unless it is accompanied by an unmistakable denial of such responsibility. If, on the other hand, a model of merchandise not on hand is offered, the mercantile presumption that it has become a literal description of the subject matter is not so strong, and particularly so if modification on the buyer’s initiative impairs any feature of the model.

  7. The precise time when words of description or affirmation are made or samples are shown is not material. The sole question is whether the language or samples or models are fairly to be regarded as part of the contract. If language is used after the closing of the deal (as when the buyer when taking delivery asks and receives an additional assurance), the warranty becomes a modification, and need not be supported by consideration if it is otherwise reasonable and in order (Section 2-209).
  8. Concerning affirmations of value or a seller’s opinion or commendation under subsection (b), the basic question remains the same: What statements of the seller have in the circumstances and in objective judgment become part of the basis of the bargain? As indicated above, all of the statements of the seller do so unless good reason is shown to the contrary. The provisions of subsection (2) are included, however, since common experience discloses that some statements or predictions cannot fairly be viewed as entering into the bargain. Even as to false statements of value, however, the possibility is left open that a remedy may be provided by the law relating to fraud or misrepresentation.

Cross references:

Point 1: Section 2-316.

Point 2: Sections 1-102(3) and 2-318.

Point 3: Section 2-316(2)(b).

Point 4: Section 2-316.

Point 5: Sections 1-205(4) and 2-314.

Point 6: Section 2-316.

Point 7: Section 2-209.

Point 8: Section 1-103.

Definitional cross references:

“Buyer”. Section 2-103. “Conforming”. Section 2-106. “Goods”. Section 2-105. “Seller”. Section 2-103.

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NOTES TO DECISIONS

Analysis

1.Reliance.

An agreement that the buyer of a beverage for distribution would “be taken care of on the product” was too indefinite to warrant a recovery by the buyer for its failure to sell. (decided under prior law) Morgan-Abbott Barker Co. v. Southwest Cracker Co., 225 Ky. 418 , 9 S.W.2d 119, 1928 Ky. LEXIS 799 ( Ky. 1928 ).

Where a contract for the purchase of a rock crusher stated that the machine was sold with a guarantee of “first-class material and workmanship” and no other warranties, the purchaser was not allowed to rely upon an oral warranty that the machine would crush 200 tons of stone per day. (decided under prior law) Pace Const. Co. v. Brandeis Machinery & Supply Co., 239 Ky. 693 , 40 S.W.2d 268, 1931 Ky. LEXIS 829 ( Ky. 1931 ).

Reliance is an element of a cause of action for express warranty under subdivision (1)(a) of this section. Overstreet v. Norden Laboratories, Inc., 669 F.2d 1286, 1982 U.S. App. LEXIS 22121 (6th Cir. Ky. 1982 ).

A warranty is “the basis of the bargain” if it has been relied upon as one of the inducements for purchasing the product. Overstreet v. Norden Laboratories, Inc., 669 F.2d 1286, 1982 U.S. App. LEXIS 22121 (6th Cir. Ky. 1982 ).

A buyer is not under a duty to investigate the seller’s representations and he may accept them at face value; however, a buyer may not rely blindly on a statement or affirmation that he knows is incorrect. Overstreet v. Norden Laboratories, Inc., 669 F.2d 1286, 1982 U.S. App. LEXIS 22121 (6th Cir. Ky. 1982 ).

2.Expression of Opinion.

Seller’s warranty of a furnace would not be held to include a warranty of a flue with which he had no connection or responsibility. A mere expression of opinion by seller’s agent that flue was sufficient would not be construed as a warranty of the flue. (decided under prior law) Plumbers Supply Co. v. Lanter, 280 Ky. 523 , 133 S.W.2d 739, 1939 Ky. LEXIS 159 ( Ky. 1939 ).

Every statement made by a seller does not create an express warranty; a seller may puff his wares and state his opinion on their value without creating an express warranty. Overstreet v. Norden Laboratories, Inc., 669 F.2d 1286, 1982 U.S. App. LEXIS 22121 (6th Cir. Ky. 1982 ).

3.Description of Goods.

Where seller represented that the automobile sold was a new one, whereas it had actually been driven by another party about 2,000 miles and was, without the seller’s knowledge, a “secondhand car,” purchaser was allowed to recover the value of a new car minus the value of the car purchased. Scienter need not be proven in an action for breach of warranty. (decided under prior law) Steuerle v. National Bond & Inv. Co., 272 Ky. 728 , 115 S.W.2d 283, 1938 Ky. LEXIS 188 ( Ky. 1938 ).

The existence of an express warranty depends upon the particular circumstances in which the language is used and read and a catalog description or advertisement may create an express warranty in appropriate circumstances. Overstreet v. Norden Laboratories, Inc., 669 F.2d 1286, 1982 U.S. App. LEXIS 22121 (6th Cir. Ky. 1982 ).

4.Test for Warranty.

The trier of fact must determine whether the circumstances necessary to create an express warranty are present in a given case; the test is whether the seller assumes to assert a fact of which the buyer is ignorant, or whether he merely states an opinion or expresses a judgment about a thing as to which they may each be expected to have an opinion and exercise a judgment. Overstreet v. Norden Laboratories, Inc., 669 F.2d 1286, 1982 U.S. App. LEXIS 22121 (6th Cir. Ky. 1982 ).

Retailer that sold a tree stand which allegedly broke and caused the purchaser to fall to his death was not entitled to summary judgment in a product liability case where a question remained as to whether the retailer created an express warranty under KRS 355.2-313 by advertising that it field-tested all of the products it sold before sending them to the customer; thus, a question remained as to whether the retailer was more than a mere seller for purposes of the Kentucky Middleman Statute, KRS 411.340 . Morgan v. Cabela's Inc., 788 F. Supp. 2d 552, 2011 U.S. Dist. LEXIS 22683 (E.D. Ky. 2011 ).

5.Compliance with Directions for Use.

The scope of a product warranty is limited to the product’s intended use; use of a product contrary to its directions will preclude recovery for breach of an express warranty. Overstreet v. Norden Laboratories, Inc., 669 F.2d 1286, 1982 U.S. App. LEXIS 22121 (6th Cir. Ky. 1982 ).

Substantial compliance with the directions for the use of a product is a condition precedent to the existence of an express warranty. Overstreet v. Norden Laboratories, Inc., 669 F.2d 1286, 1982 U.S. App. LEXIS 22121 (6th Cir. Ky. 1982 ).

6.Instructions.

Where the operator of a horse breeding farm brought a breach of warranty action against a manufacturer of a horse vaccine alleging that the manufacturer breached expressed and implied warranties in connection with the sale of the vaccine, the jury instructions, which allowed the jury to award a judgment against the manufacturer without stating which warranty was breached, were erroneous because in order to recover on an express warranty the plaintiff must establish that he relied on the warranty. Overstreet v. Norden Laboratories, Inc., 669 F.2d 1286, 1982 U.S. App. LEXIS 22121 (6th Cir. Ky. 1982 ).

7.Scope of Protection.

Package inserts provided by manufacturer of polio vaccine could constitute an express warranty, however, any such warranty was not extended to child vaccinated by physician who did not show such inserts to child’s mother; child lacked privity with manufacturer and was beyond the scope of the warranty protection accorded by KRS 355.2-318 . Snawder v. Cohen, 749 F. Supp. 1473, 1990 U.S. Dist. LEXIS 14410 (W.D. Ky. 1990 ).

Assuming, arguendo, that a warranty exist pursuant to Ky. Rev. Stat. Ann. § 355.2-313 , summary judgment was properly granted in favor of the manufacturer on the consumer's breach of warranty claim. Pursuant to Kentucky law, the scope of a product warranty was limited to the product's intended use, and using a ratchet strap intended to tie down items to a vehicle to instead hang a tree stand 21 feet in the air was not an intended use. Hopper v. New Buffalo Corp., 664 Fed. Appx. 530, 2016 FED App. 0634N, 2016 U.S. App. LEXIS 21527 (6th Cir. Ky. 2016 ).

8.Federal Preemption.

A breach of express warranty claim in connection with the failure of a mechanical heart valve was preempted by federal law since the federal Food and Drug Administration’s conditions of approval regarding the mechanical heart valve required its approval of any modifications or additions to the valve’s labeling. Enlow v. St. Jude Med., Inc., 171 F. Supp. 2d 684, 2001 U.S. Dist. LEXIS 16843 (W.D. Ky. 2001 ), amended, 2001 U.S. Dist. LEXIS 16843 (W.D. Ky. Oct. 18, 2001).

Defendant heart valve manufacturer, whose pre-market approval application supplement for a heart valve, a Class III device, was approved by the Food and Drug Administration under the Medical Device Amendments of 1976, 21 U.S.C.S. §§ 360c(a)(1), 360e(d)(2), was granted partial summary judgment in plaintiff’s product liability action because 21 U.S.C.S. § 360k(a), preempted plaintiff’s design defect, failure to warn, breach of express warranties under KRS 355.2-313 (1), and breach of implied warranties claims, and plaintiff’s claims of negligent design, negligent manufacturing, testing, or inspection, and manufacturing defect were preempted to the extent they alleged defendant was negligent or the valve was defective despite adherence to FDA approved design and manufacturing processes and specifications. Enlow v. St. Jude Med., Inc., 210 F. Supp. 2d 853, 2003 U.S. Dist. LEXIS 28027 (W.D. Ky. 2003 ).

9.Actionable.

Manufacturer failed to show alleged representations that dog treats were nutritious, safe and wholesome were non-actionable because use of objectively verifiable terms arguably could mislead reasonable consumer; court could reasonably infer that plaintiffs relied on representations on packaging, plaintiffs alleged that manufacturer made express warranties for their benefit, and dismissal for lack of pre-suit notice was not warranted. Bietsch v. Sergeant's Pet Care Prods., 2016 U.S. Dist. LEXIS 32928 (N.D. Ill. Mar. 15, 2016).

Where plaintiff alleged that her injuries were caused by defendants’ defective medical device, plaintiff sufficiently pled privity of contract to support a breach of express warranty claim because although plaintiff’s physician purchased the device, it was intended to be used on plaintiff as a medical device. Duff v. C.R. Bard, 2021 U.S. Dist. LEXIS 41658 (W.D. Ky. Mar. 4, 2021).

Where plaintiff alleged that her injuries were caused by defendants’ defective medical device, plaintiff sufficiently pled privity of contract to support a breach of express warranty claim because although plaintiff’s physician purchased the device, it was intended to be used on plaintiff as a medical device. Duff v. C.R. Bard, 2021 U.S. Dist. LEXIS 41658 (W.D. Ky. Mar. 4, 2021).

10.Damages.

Fact issues as to damages precluded summary judgment on a claim for breach of express warranty; there was sufficient evidence of damages because any uncertainty did not run to the existence of damages flowing from defective goods, but rather to the existence of lost profits, a question on which the parties had provided conflicting proof. Smart & Assocs., LLC v. Indep. Liquor (NZ) Ltd., 226 F. Supp. 3d 828, 2016 U.S. Dist. LEXIS 180159 (W.D. Ky. 2016 ).

Cited:

Bell v. Louisville Motors, Inc., 573 S.W.2d 351, 1978 Ky. App. LEXIS 606 (Ky. Ct. App. 1978).

Notes to Unpublished Decisions

2.Expression of Opinion.

Unpublished decision: Seller's agent's statement that he liked a racehorse a lot did not create an express warranty that the horse had no significant problem affecting her ability to train or race; the statement was more akin to sales talk or an expression of opinion. Biszantz v. Thoroughbreds, 620 Fed. Appx. 535, 2015 FED App. 0716N, 2015 U.S. App. LEXIS 18954 (6th Cir. Ky. 2015 ).

Research References and Practice Aids

Kentucky Bench & Bar.

Bertlesman, Views from the Federal Bench, Vol. 46, No. 3, July 1982, Ky. Bench & Bar 16.

An Overview of the Magnuson-Moss Warranty Act, Vol. 55, No. 3, Summer 1991, Ky. Bench & Bar 18.

Kentucky Law Journal.

Brickey, Products Liability in Kentucky: The Doctrinal Dilemma, 65 Ky. L.J. 593 (1976-77).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Northern Kentucky Law Review.

Notes, Torts — Products Liability — Should Contract or Tort Provide the Cause of Action When a Plaintiff Seeks Recovery Only for Damage to the Defective Product Itself — C & S Fuel, Inc. v. Clark Equip. Co.,10 N. Ky. L. Rev. 489 (1983).

Miller, The Kentucky Law of Products LiabilityIn A Nutshell, 12 N. Ky. L. Rev. 201 (1985).

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint on a Warranty, Form 190.07.

Caldwell’s Kentucky Form Book, 5th Ed., Complaint on by Purchaser to Recover Damages for Fraud, Without Averring a Request to Cancel the Contract, Form 190.12.

355.2-314. Implied warranty: merchantability — Usage of trade.

  1. Unless excluded or modified (KRS 355.2-316 ), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Under this section the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale.
  2. Goods to be merchantable must be at least such as
    1. pass without objection in the trade under the contract description; and
    2. in the case of fungible goods, are of fair average quality within the description; and
    3. are fit for the ordinary purposes for which such goods are used; and
    4. run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and
    5. are adequately contained, packaged, and labeled as the agreement may require; and
    6. conform to the promises or affirmations of fact made on the container or label if any.
  3. Unless excluded or modified (KRS 355.2-316 ) other implied warranties may arise from course of dealing or usage of trade.

History. Enact. Acts 1958, ch. 77, § 2-314, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 15(2), Uniform Sales Act.

Changes:

Completely rewritten.

Purposes of changes:

This section, drawn in view of the steadily developing case law on the subject, is intended to make it clear that:

  1. The seller’s obligation applies to present sales as well as to contracts to sell subject to the effects of any examination of specific goods. (Subsection (2) of Section 2-316). Also, the warranty of merchantability applies to sales for use as well as to sales for resale.
  2. The question when the warranty is imposed turns basically on the meaning of the terms of the agreement as recognized in the trade. Goods delivered under an agreement made by a merchant in a given line of trade must be of a quality comparable to that generally acceptable in that line of trade under the description or other designation of the goods used in the agreement. The responsibility imposed rests on any merchant-seller, and the absence of the words “grower or manufacturer or not” which appeared in Section 15(2) of the Uniform Sales Act does not restrict the applicability of this section.
  3. A specific designation of goods by the buyer does not exclude the seller’s obligation that they be fit for the general purposes appropriate to such goods. A contract for the sale of second-hand goods, however, involves only such obligation as is appropriate to such goods for that is their contract description. A person making an isolated sale of goods is not a “merchant” within the meaning of the full scope of this section and, thus, no warranty of merchantability would apply. His knowledge of any defects not apparent on inspection would, however, without need for express agreement and in keeping with the underlying reason of the present section and the provisions on good faith, impose an obligation that known material but hidden defects be fully disclosed.
  4. Although a seller may not be a “merchant” as to the goods in question, if he states generally that they are “guaranteed” the provisions of this section may furnish a guide to the content of the resulting express warranty. This has particular significance in the case of second-hand sales, and has further significance in limiting the effect of fine-print disclaimer clauses where their effect would be inconsistent with large-print assertions of “guarantee”.
  5. The second sentence of subsection (1) covers the warranty with respect to food and drink. Serving food or drink for value is a sale, whether to be consumed on the premises or elsewhere. Cases to the contrary are rejected. The principal warranty is that stated in subsections (1) and (2)(c) of this section.
  6. Subsection (2) does not purport to exhaust the meaning of “merchantable” nor to negate any of its attributes not specifically mentioned in the text of the statute, but arising by usage of trade or through case law. The language used is “must be at least such as …” and the intention is to leave open other possible attributes of merchantability.
  7. Paragraphs (a) and (b) of subsection (2) are to be read together. Both refer, as indicated above, to the standards of that line of the trade which fits the transaction and the seller’s business. “Fair average” is a term directly appropriate to agricultural bulk products and means goods centering around the middle belt of quality, not the least or the worst that can be understood in the particular trade by the designation, but such as can pass “without objection.” Of course a fair percentage of the least is permissible but the goods are not “fair average” if they are all of the least or worst quality possible under the description. In cases of doubt as to what quality is intended, the price at which a merchant closes a contract is an excellent index of the nature and scope of his obligation under the present section.
  8. Fitness for the ordinary purposes for which goods of the type are used is a fundamental concept of the present section and is covered in paragraph (c). As stated above, merchantability is also a part of the obligation owing to the purchaser for use. Correspondingly, protection, under this aspect of the warranty, of the person buying for resale to the ultimate consumer is equally necessary and merchantable goods must therefore be “honestly” resalable in the normal course of business because they are what they purport to be.
  9. Paragraph (d) on evenness of kind, quality and quantity follows case law. But precautionary language has been added as a reminder of the frequent usages of trade which permit substantial variations both with and without an allowance or an obligation to replace the varying units.
  10. Paragraph (e) applies only where the nature of the goods and of the transaction requires a certain type of container, package or label. Paragraph (f) applies, on the other hand, wherever there is a label or container on which representations are made, even though the original contract, either by express terms or usage of trade, may not have required either the labelling or the representation. This follows from the general obligation of good faith which requires that a buyer should not be placed in the position of reselling or using goods delivered under false representations appearing on the package or container. No problem of extra consideration arises in this connection since, under this Article, an obligation is imposed by the original contract not to deliver mislabeled articles, and the obligation is imposed where mercantile good faith so requires and without reference to the doctrine of consideration.
  11. Exclusion or modification of the warranty of merchantability, or of any part of it, is dealt with in the section to which the text of the present section makes explicit precautionary references. That section must be read with particular reference to its subsection (4) on limitation of remedies. The warranty of merchantability, wherever it is normal, is so commonly taken for granted that its exclusion from the contract is a matter threatening surprise and therefore requiring special precaution.
  12. Subsection (3) is to make explicit that usage of trade and course of dealing can create warranties and that they are implied rather than express warranties and thus subject to exclusion or modification under Section 2-316. A typical instance would be the obligation to provide pedigree papers to evidence conformity of the animal to the contract in the case of a pedigreed dog or blooded bull.
  13. In an action based on breach of warranty, it is of course necessary to show not only the existence of the warranty but the fact that the warranty was broken and that the breach of the warranty was the proximate cause of the loss sustained. In such an action an affirmative showing by the seller that the loss resulted from some action or event following his own delivery of the goods can operate as a defense. Equally, evidence indicating that the seller exercised care in the manufacture, processing or selection of the goods is relevant to the issue of whether the warranty was in fact broken. Action by the buyer following an examination of the goods which ought to have indicated the defect complained of can be shown as matter bearing on whether the breach itself was the cause of the injury.

Cross references:

Point 1: Section 2-316.

Point 3: Sections 1-203 and 2-104.

Point 5: Section 2-315.

Point 11: Section 2-316.

Point 12: Sections 1-201, 1-205 and 2-316.

Definitional cross references:

“Agreement”. Section 1-201. “Contract”. Section 1-201. “Contract for sale”. Section 2-106. “Goods”. Section 2-105. “Merchant”. Section 2-104. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Fitness for Ordinary Purposes for Which Used.

In a contract for the purchase of a home lighting system, express warranties to the effect that the machine was (a) “thoroughly durable galvanized steel acetylene generator,” (b) “automatic in action,” and (c) “of good material and workmanship” did not negative an implied warranty that the machine would “make light so that the purchaser may not dwell in darkness.” (decided under prior law) J. B. Colt Co. v. Asher, 239 Ky. 235 , 39 S.W.2d 263, 1931 Ky. LEXIS 763 ( Ky. 1931 ).

Where a letter relating to the sale of firecrackers mentioned a first grade as to which an unlimited warranty was given, a second grade without any mention of the matter of warranties, and other inferior grades as to which all warranties were expressly renounced, there was by inference a warranty of the second grade as to their reasonably adequate quality. (decided under prior law) Balfour-Guthrie & Co. v. L. S. Du Bois Son & Co., 245 Ky. 640 , 54 S.W.2d 13, 1932 Ky. LEXIS 648 ( Ky. 1932 ).

Where customer telephoned order to grocer without opportunity for inspection and chicken was picked up by her son, and she established she communicated to the grocer that she desired the chicken for eating and relied on the grocer’s selection of it, and she received it and immediately or within a reasonable time used it for that purpose and sustained injury therefrom, she could recover under the doctrine of implied warranty. (decided under prior law) Great Atlantic & Pacific Tea Co. v. Eiseman, 259 Ky. 103 , 81 S.W.2d 900, 1935 Ky. LEXIS 267 ( Ky. 1935 ).

In seller’s action to recover payment for machinery sold, nonresident buyer’s counterclaim and setoff that there was a breach of implied warranty and certain items of equipment were not fit for purpose for which sold were properly subject to jury’s determination as to whether buyer and seller had entered into an oral agreement as to the manner in which defects in the equipment were to be corrected. (decided under prior law) Cincinnati Butchers Supply Co. v. Kentucky Packers, Inc., 285 Ky. 104 , 147 S.W.2d 48, 1941 Ky. LEXIS 344 ( Ky. 1941 ).

Express warranties of construction, materials and performance did not necessarily include implied warranty that article sold was reasonably suited to the use intended. (decided under prior law) Frick Co. v. Wiley, 290 Ky. 665 , 162 S.W.2d 190, 1942 Ky. LEXIS 458 ( Ky. 1942 ).

Where the language excluding implied warranties was not conspicuous, the dealer was considered to have made an implied warranty that the tractor was fit for the ordinary purpose for which goods are used. Massey-Ferguson, Inc. v. Utley, 439 S.W.2d 57, 1969 Ky. LEXIS 353 ( Ky. 1969 ).

2.Merchant.

Where a mechanical contracting firm guaranteed its work for a period of one (1) year against defects and accepted orders to supply cooling equipment which would accomplish the standards required, the mechanical contracting firm held itself out as skilled or expert in the mechanical contracting business, thereby becoming “a merchant with respect to goods of that kind” as provided in subsection (1) of this section. Frantz, Inc. v. Blue Grass Hams, Inc., 520 S.W.2d 313, 1974 Ky. LEXIS 7 ( Ky. 1974 ).

4.Manufacturer.

In action by farmer for harm done to cattle by poisoned feed, instruction that manufacturer impliedly warranted the fitness and quality of the feed for the purpose for which it was purchased was not error, where feed was sold in original package by authorized agent of manufacturer. (decided under prior law) Moorman Mfg. Co. v. Harris, 280 Ky. 845 , 134 S.W.2d 936, 1939 Ky. LEXIS 218 ( Ky. 1939 ).

3.Evidence.

An implied warranty that peach preserves were of merchantable quality existed where express language or necessary implication did not exclude it and seller sold the goods to purchaser knowing the goods had been seized by the United States and determined to be misbranded and contraband because of shortage in net weight and knowing that purchaser was securing the goods for resale to his retail trade. (decided under prior law) Porter v. Craddock, 84 F. Supp. 704, 1949 U.S. Dist. LEXIS 2733 (D. Ky. 1949 ).

Fact goods were identified in a sale by a patent or trade name would not of itself preclude an implied warranty. (decided under prior law) Halterman v. Louisville Bridge & Iron Co., 254 S.W.2d 493, 1953 Ky. LEXIS 593 ( Ky. 1953 ).

Where there was evidence of a breach of implied warranty of merchantability defendant was not entitled to a directed verdict even if there was no evidence of negligence on his part. Belcher v. Hamilton, 475 S.W.2d 483, 1971 Ky. LEXIS 71 ( Ky. 1971 ).

The defendant motor vehicle manufacturer and dealer were not entitled to summary judgment in an action by the purchaser of a van since there was a material issue of fact as to whether the van’s stalling at highway speed was a material defect which rendered the van unmerchantable. Smith v. GMC, 979 S.W.2d 127, 1998 Ky. App. LEXIS 99 (Ky. Ct. App. 1998).

4.Services.

The warranty provisions of this section apply to services when the sale is primarily one of goods and the services are necessary to insure that those goods are merchantable. Riffe v. Black, 548 S.W.2d 175, 1977 Ky. App. LEXIS 651 (Ky. Ct. App. 1977).

Where the predominant aspect of a contract was the rendition of services, i.e., a major engine overhaul of a helicopter, the UCC warranty provisions did not apply to this transaction. T-Birds, Inc. v. Thoroughbred Helicopter Service, Inc., 540 F. Supp. 548, 1982 U.S. Dist. LEXIS 14161 (E.D. Ky. 1982 ).

5.Negligent Installation.

A hole at the bottom of a pool caused by negligent installation of the vinyl liner breached the implied warranty of merchantability. Riffe v. Black, 548 S.W.2d 175, 1977 Ky. App. LEXIS 651 (Ky. Ct. App. 1977).

6.Reliance.

The implied warranty of merchantability is a duty imposed by Kentucky law and plaintiff’s reliance thereon is not a requisite to defendant’s liability for breach. Overstreet v. Norden Laboratories, Inc., 669 F.2d 1286, 1982 U.S. App. LEXIS 22121 (6th Cir. Ky. 1982 ).

9.Pleadings.

In action by buyer to recover for alleged breach of the implied warranty referred to in law that provided if buyer made known to seller the particular purpose for which goods were required and relied on the seller’s skill and judgment that there was an implied warranty, the goods should have been reasonably fit for such purpose, it was proper to compel him to make his petition more definite and certain by alleging whether contract for purchase was oral or written and, if written, to file a copy of the contract. (decided under prior law) Citizens Ice & Fuel Co. v. Fairbanks, Morse & Co., 293 Ky. 64 , 168 S.W.2d 586, 1943 Ky. LEXIS 578 ( Ky. 1943 ).

Where there was no triable issue concerning breach of an implied warranty of merchantable quality where plaintiff alleged building developed holes and apertures and leaked badly when there was rain which rendered the building unfit for use as a commercial garage, pleading did not put defendant on notice of any claim that the building was so defective as not to be reasonably fit for general use as a building. (decided under prior law) Halterman v. Louisville Bridge & Iron Co., 280 S.W.2d 175, 1955 Ky. LEXIS 137 ( Ky. 1955 ).

7.Instructions.

Where the operator of a horse breeding farm brought a breach of warranty action against a manufacturer of a horse vaccine alleging that the manufacturer breached expressed and implied warranties in connection with the sale of the vaccine, the jury instructions, which allowed the jury to award a judgment against the manufacturer without stating which warranty was breached, were erroneous because in order to recover on an express warranty the plaintiff must establish that he relied on the warranty. Overstreet v. Norden Laboratories, Inc., 669 F.2d 1286, 1982 U.S. App. LEXIS 22121 (6th Cir. Ky. 1982 ).

8.Additional Remedies.

This section and KRS 355.2-315 , provide a contractual remedy in a case such as this where a product sold proves to be unfit for its ordinary use, and this expression of public policy does not necessarily preclude the courts from fashioning an additional remedy based upon strict liability in tort, although it may well lessen the need, if any, for such a policy. Falcon Coal Co. v. Clark Equipment Co., 802 S.W.2d 947, 1990 Ky. App. LEXIS 153 (Ky. Ct. App. 1990).

2.Adequately Contained, Packaged and Labeled.

In an action against milk company, there was no breach of implied warranty of fitness of milk bottle which broke and injured milk buyer’s hand, where it was not shown that the milk bottle was sold or that it had a specific defect and evidence established seller used reasonable care in processing and inspecting. The commodity sold by the milk company was the milk which carried with it the seller’s implied warranty that it was wholesome. (decided under prior law) Rowe v. Oscar Ewing Distributing Co., 357 S.W.2d 882, 1962 Ky. LEXIS 160 ( Ky. 1962 ).

3.Privity of Contract.

Where no contractual relation was alleged or shown between seller of boat which exploded and a guest of the son of the buyer, there was no cause of action against seller on any implied warranty. (decided under prior law) Caplinger v. Werner, 311 S.W.2d 201, 1958 Ky. LEXIS 184 ( Ky. 1958 ).

5.Exclusion of Implied Warranties.

Implied warranty could be excluded by express agreement between the parties, or by necessary implications to be drawn from the purchase agreement. (decided under prior law) Citizens Ice & Fuel Co. v. Fairbanks, Morse & Co., 293 Ky. 64 , 168 S.W.2d 586, 1943 Ky. LEXIS 578 ( Ky. 1943 ).

Where contract for sale of truck expressly agreed that there were no warranties, express or implied, except designated warranty against defective materials or workmanship and the equities of the situation did not justify a rescission of the contract on theory of failure of consideration, buyer could not recover for breach of implied warranty. (decided under prior law) L. R. Cooke Chevrolet Co. v. Culligan Soft Water Service, Inc., 282 S.W.2d 349, 1955 Ky. LEXIS 246 ( Ky. 1955 ).

Provisions in written contract excluded implied warranty and owners could not recover damages for breach of implied warranty of fitness. (decided under prior law) Amos v. Montgomery, 339 S.W.2d 471, 1960 Ky. LEXIS 466 ( Ky. 1960 ).

6.Performance of Conditions.

When express and implied warranties were coextensive, buyer would not fail to perform conditions attached to the express warranty and seek recovery on the implied warranty. (decided under prior law) Frick Co. v. Wiley, 290 Ky. 665 , 162 S.W.2d 190, 1942 Ky. LEXIS 458 ( Ky. 1942 ).

10.Acceptance.

Because a distributor accepted goods that it later claimed were defective, the distributor’s claim for breach of the implied warranty of merchantability failed both pursuant to statute and under the parties’ agreement, by which the distributor contractually assumed the risk of loss. Smart & Assocs., LLC v. Indep. Liquor (NZ) Ltd., 226 F. Supp. 3d 828, 2016 U.S. Dist. LEXIS 180159 (W.D. Ky. 2016 ).

Cited:

McMichael v. American Red Cross, 532 S.W.2d 7, 1975 Ky. LEXIS 21 ( Ky. 1975 ); Ford Motor Co. v. Mayes, 575 S.W.2d 480, 1978 Ky. App. LEXIS 649 (Ky. Ct. App. 1978); Compex Int’l Co. v. Taylor, 209 S.W.3d 462, 2006 Ky. LEXIS 253 ( Ky. 2006 ).

Research References and Practice Aids

Kentucky Bench & Bar.

An Overview of the Magnuson-Moss Warranty Act, Vol. 55, No. 3, Summer 1991, Ky. Bench & Bar 18.

Kentucky Law Journal.

Siler, Legal Liability in Tobacco Products Cases, 53 Ky. L.J. 712 (1965).

Hodge and Snyder, Can the Kentucky Consumer Ever Forget Caveat Emptor and Find True Happiness?, 58 Ky. L.J. 325 (1970).

Brickey, Products Liability in Kentucky: The Doctrinal Dilemma, 65 Ky. L.J. 593 (1976-77).

Kentucky Law Survey, Clark, Medical Malpractice, 65 Ky. L.J. 337 (1976-77).

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Northern Kentucky Law Review.

Notes, Torts — Products Liability — Should Contract or Tort Provide the Cause of Action When a Plaintiff Seeks Recovery Only for Damage to the Defective Product Itself — C & S Fuel, Inc. v. Clark Equip. Co.,10 N. Ky. L. Rev. 489 (1983).

Miller, The Kentucky Law of Products LiabilityIn A Nutshell, 12 N. Ky. L. Rev. 201 (1985).

Notes, Torts — No Defense for The Manufacturer — The Supreme Court of Kentucky Restricts The Shifting Responsibility Defense In Strict Products Liability Cases — Montgomery Elevator Co. v. McCullough, 676 S.W.2d 776, 1984 Ky. LEXIS 267 , 45 A.L.R.4th 761 ( Ky. 1984 ).

Comments, Reda Pump, a Division of TRW, Inc. v. Finck: An Update on Kentucky Product Liability Law, 14 N. Ky. L. Rev. 395 (1988).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint on a Warranty, Form 190.07.

355.2-315. Implied warranty: fitness for particular purpose.

Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under KRS 355.2-316 an implied warranty that the goods shall be fit for such purpose.

History. Enact. Acts 1958, ch. 77, § 2-315, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 15 (1), (4), (5), Uniform Sales Act.

Changes:

Rewritten.

Purposes of changes:

  1. Whether or not this warranty arises in any individual case is basically a question of fact to be determined by the circumstances of the contracting. Under this section the buyer need not bring home to the seller actual knowledge of the particular purpose for which the goods are intended or of his reliance on the seller’s skill and judgment, if the circumstances are such that the seller has reason to realize the purpose intended or that the reliance exists. The buyer, of course, must actually be relying on the seller.
  2. A “particular purpose” differs from the ordinary purpose for which the goods are used in that it envisages a specific use by the buyer which is peculiar to the nature of his business whereas the ordinary purposes for which goods are used are those envisaged in the concept of merchantability and go to uses which are customarily made of the goods in question. For example, shoes are generally used for the purpose of walking upon ordinary ground, but a seller may know that a particular pair was selected to be used for climbing mountains.

    A contract may of course include both a warranty of merchantability and one of fitness for a particular purpose.

    The provisions of this Article on the cumulation and conflict of express and implied warranties must be considered on the question of inconsistency between or among warranties. In such a case any question of fact as to which warranty was intended by the parties to apply must be resolved in favor of the warranty of fitness for particular purpose as against all other warranties except where the buyer has taken upon himself the responsibility of furnishing the technical specifications.

  3. In connection with the warranty of fitness for a particular purpose the provisions of this Article on the allocation or division of risks are particularly applicable in any transaction in which the purpose for which the goods are to be used combines requirements both as to the quality of the goods themselves and compliance with certain laws or regulations. How the risks are divided is a question of fact to be determined, where not expressly contained in the agreement, from the circumstances of contracting, usage of trade, course of performance and the like, matters which may constitute the “otherwise agreement” of the parties by which they may divide the risk or burden.
  4. The absence from this section of the language used in the Uniform Sales Act in referring to the seller, “whether he be the grower or manufacturer or not,” is not intended to impose any requirement that the seller be a grower or manufacturer. Although normally the warranty will arise only where the seller is a merchant with the appropriate “skill or judgment,” it can arise as to non-merchants where this is justified by the particular circumstances.
  5. The elimination of the “patent or other trade name” exception constitutes the major extension of the warranty of fitness which has been made by the cases and continued in this Article. Under the present section the existence of a patent or other trade name and the designation of the article by that name, or indeed in any other definite manner, is only one of the facts to be considered on the question of whether the buyer actually relied on the seller, but it is not of itself decisive of the issue. If the buyer himself is insisting on a particular brand he is not relying on the seller’s skill and judgment and so no warranty results. But the mere fact that the article purchased has a particular patent or trade name is not sufficient to indicate nonreliance if the article has been recommended by the seller as adequate for the buyer’s purposes.
  6. The specific reference forward in the present section to the following section on exclusion or modification of warranties is to call attention to the possibility of eliminating the warranty in any given case. However, it must be noted that under the following section the warranty of fitness for a particular purpose must be excluded or modified by a conspicuous writing.

Cross references:

Point 2: Sections 2-314 and 2-317.

Point 3: Section 2-303.

Point 6: Section 2-316.

Definitional cross references:

“Buyer”. Section 2-103. “Goods”. Section 2-105. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Fitness for Particular Purpose.

Where purchaser, desiring an oil that would harden a race track, told seller that he would rely on seller’s judgment as to what oil should be used as he knew nothing about the matter, the seller impliedly warranted the oil that was furnished to be reasonably suitable for the purpose in question. (decided under prior law) Louisville Grinding & Mach. Co. v. Southern Oil & Tar Co., 230 Ky. 39 , 18 S.W.2d 877, 1929 Ky. LEXIS 17 ( Ky. 1929 ).

A guarantee of “material and workmanship” did not negative an implied warranty that a machine would do the work for which it was, with the seller’s knowledge, purchased. (decided under prior law) Day Pulverizer Co. v. Rutledge, 238 Ky. 817 , 38 S.W.2d 949, 1931 Ky. LEXIS 316 ( Ky. 1931 ).

Where a purchaser stated that he wished to do a certain type of rock crushing and asked seller to recommend which type of seller’s various machines was suited to the work, and seller subsequently purchased a machine of the recommended type, there was an implied warranty that such machine would do the work for which intended. (decided under prior law) Day Pulverizer Co. v. Rutledge, 238 Ky. 817 , 38 S.W.2d 949, 1931 Ky. LEXIS 316 ( Ky. 1931 ).

Where a seller sold and installed a home lighting system, he was aware of its intended purpose, and warranted that the system was reasonably suited to the use intended. (decided under prior law) J. B. Colt Co. v. Asher, 239 Ky. 235 , 39 S.W.2d 263, 1931 Ky. LEXIS 763 ( Ky. 1931 ).

In suit on a contract for the sale of a rock crusher, an allegation that the machine would crush only 130 tons of rock per day and not the 200 tons orally warranted was insufficient to allege a breach of implied warranty of fitness for particular purpose. (decided under prior law) Pace Const. Co. v. Brandeis Machinery & Supply Co., 239 Ky. 693 , 40 S.W.2d 268, 1931 Ky. LEXIS 829 ( Ky. 1931 ).

Where, in a suit for the price on a contract for the sale of an air compressor, the contract provided that the compressor was “in perfect condition” but the complaint of the purchaser was that it would not produce a certain amount of air per minute, there was no breach of warranty of fitness for a particular purpose. (decided under prior law) Vandiver v. B. B. Wilson & Co., 244 Ky. 601 , 51 S.W.2d 899, 1932 Ky. LEXIS 473 ( Ky. 1932 ).

Where firecrackers were, with the seller’s knowledge, bought for resale on the retail market, there was a warranty that they would reasonably satisfy the purchaser’s customers. (decided under prior law) Balfour-Guthrie & Co. v. L. S. Du Bois Son & Co., 245 Ky. 640 , 54 S.W.2d 13, 1932 Ky. LEXIS 648 ( Ky. 1932 ).

Where a seller knew that certain feed purchased was to be fed to chickens, he impliedly warranted that such feed would do chickens no harm. (decided under prior law) McBride v. Farmers' Seed Ass'n, 248 Ky. 514 , 58 S.W.2d 909, 1933 Ky. LEXIS 262 ( Ky. 1933 ).

A vendor of chicken, selected, sold and delivered by the retailer in a visible condition to the purchaser for his immediate domestic use, was bound to know at his peril that the same was sound and wholesome and fit for immediate human consumption; and if it turned out to be unsound and not wholesome, and the purchaser was injured thereby, the seller was liable to him therefor, and the purchaser in so using it did not assume the risk. (decided under prior law) Great Atlantic & Pacific Tea Co. v. Eiseman, 259 Ky. 103 , 81 S.W.2d 900, 1935 Ky. LEXIS 267 ( Ky. 1935 ).

Where a woman called her grocer and asked him to pick out a chicken which her son would pick up, she was entitled to the protection of the warranty that such food was fit for human consumption. To bring her right to recovery within this principle it is indispensably essential that she establish that she had communicated to the seller the particular purpose for which she desired it (the product sold) and that she relied on its (the vendor’s) skill and judgment in selecting it; that she received and immediately or within a reasonable time used it for that purpose, and sustained an injury therefrom. (decided under prior law) Great Atlantic & Pacific Tea Co. v. Eiseman, 259 Ky. 103 , 81 S.W.2d 900, 1935 Ky. LEXIS 267 ( Ky. 1935 ).

Where a purchaser ordered and received “No. 1 hard-burned Coral Ridge common brick,” there was no implied warranty as to its fitness for any specific purpose. The spirit and intent of law that provided that where there was a sale of a specified article under its patent or trade name, there was no implied warranty as to fitness for any particular purpose is that the seller is not held to an implied warranty because the buyer gets the distinct thing selected by him, an exact article, for which he bargains. So, acting upon his own desires, he takes his own chances as to the fitness of the article, and should not be permitted to complain of the seller who has supplied him with the very thing he sought. (decided under prior law) R. B. Tyler Co. v. Hampton Cracker Co., 265 Ky. 236 , 96 S.W.2d 593, 1936 Ky. LEXIS 463 ( Ky. 1936 ).

Where seller knew that purchaser was buying the gas from his well for resale for domestic use, there was an implied warranty that it would be usable for that purpose and there was breach of such warranty when the gas later developed such a high sulphur content that it could not be used for such purpose. (decided under prior law) McNabb v. Central Kentucky Natural Gas Co., 272 Ky. 112 , 113 S.W.2d 470, 1938 Ky. LEXIS 71 ( Ky. 1938 ).

There was an implied warranty by retailer of food articles that they were suitable for the purpose intended even though they were in sealed packages and he did not have an opportunity to inspect them and, where customer alleged he purchased a sealed package of “chili con carne” to be consumed as food by himself and his family, the package was opened by customer after his arrival home and a part of the contents consumed by customer and his family who became violently ill, and the contents of the package were then emptied and a part of a dead rat leg found in the bottom, it was error to sustain demurrer to the petition. (decided under prior law) Martin v. Great Atlantic & Pacific Tea Co., 301 Ky. 429 , 192 S.W.2d 201, 1946 Ky. LEXIS 498 ( Ky. 1946 ).

Breach of implied warranty permitted recovery for personal injury where the commodity sold was the one actually manufactured or processed by the seller and, where buyer became violently ill from consuming barbecued mutton, seller had breached an implied warranty of fitness for human consumption, the particular purpose for which sold. (decided under prior law) Snead v. Waite, 306 Ky. 587 , 208 S.W.2d 749, 1948 Ky. LEXIS 615 ( Ky. 1948 ).

There was breach of an implied warranty that truck sold to farmer was free from defects and suitable for purposes for which bought. (decided under prior law) White Motor Co. v. Johnson, 254 S.W.2d 931, 1953 Ky. LEXIS 624 ( Ky. 1953 ).

The existence of an implied warranty of suitability for a particular purpose when the goods were sold under a patent or trade name depended upon the facts of the particular case, and there was no such implied warranty when buyer exercised his own judgment in the selection of the goods and did not rely upon judgment of the seller regarding its suitability for his purpose; but where buyer made known to the seller the purpose for which goods were desired and seller recommended building identified by patent or trade name “Quonset,” which buyer ordered for a garage on recommendation, relying on judgment and skill of seller, there was an implied warranty of suitability for the particular purpose. (decided under prior law) Halterman v. Louisville Bridge & Iron Co., 254 S.W.2d 493, 1953 Ky. LEXIS 593 ( Ky. 1953 ).

There was no merit in contention that because buyer made a profit in his garage business, the building necessarily must have been suitable for garage purposes and that therefore there was no breach of warranty, since it was conceivable the buyer could have operated profitably in a tent or under a makeshift shelter. “Reasonably fit” meant something more than barely usable. (decided under prior law) Halterman v. Louisville Bridge & Iron Co., 280 S.W.2d 175, 1955 Ky. LEXIS 137 ( Ky. 1955 ).

There could be no recovery against milk company for breach of implied warranty where milk bottle collapsed and injured buyer, since the milk bottle was not the subject of sale but the milk, which carried with it the seller’s implied warranty that it was wholesome. (decided under prior law) Rowe v. Oscar Ewing Distributing Co., 357 S.W.2d 882, 1962 Ky. LEXIS 160 ( Ky. 1962 ).

No implied warranty of fitness for a particular purpose existed as to beverages because they had only an ordinary purpose of consumption. Smart & Assocs., LLC v. Indep. Liquor (NZ) Ltd., 226 F. Supp. 3d 828, 2016 U.S. Dist. LEXIS 180159 (W.D. Ky. 2016 ).

2.Exclusion of Implied Warranties.

Where contract expressly provided that no warranty was made or could be relied upon, a warranty could not be implied. (decided under prior law) Sears, Roebuck & Co. v. Lea, 198 F.2d 1012, 1952 U.S. App. LEXIS 3274 (6th Cir. Ky. 1952 ).

Where, under a contract specifically stating it covered the entire agreement, seller agreed only to connect its condensing units “to the present ammonia coils in your two ice cream hardening rooms” and in the case of unsatisfactory service “to remove its equipment and refund all moneys paid to it by you,” the seller, after being notified of the buyer’s dissatisfaction, removed the units and returned all payments under the contract, he was not liable on an implied warranty that the units sold were suitable for the purpose for which they were purchased or for damages from methyl-chloride gas in the units becoming mixed with remnants of ammonia in the old coils with which seller had nothing to do under the contract. (decided under prior law) Graves Ice Cream Co. v. Rudolph W. Wurlitzer Co., 267 Ky. 1 , 100 S.W.2d 819, 1937 Ky. LEXIS 265 ( Ky. 1 937 ).

Under law that provided that where buyer informed seller of the purpose the goods are required, and relied on the seller’s skill and judgment, there was an implied warranty that the article sold was reasonably suited to the use intended when the seller was informed of same, unless expressly or by necessary implication excluded by the contract of sale. (decided under prior law) Frick Co. v. Wiley, 290 Ky. 665 , 162 S.W.2d 190, 1942 Ky. LEXIS 458 ( Ky. 1942 ).

Where seller of truck specifically limited his liability to replacement of defective parts returned to factory within 90 days, buyer could not recover on implied warranty that truck would do work for which it was purchased. (decided under prior law) James v. International Harvester Co., 294 Ky. 722 , 172 S.W.2d 670, 1943 Ky. LEXIS 548 ( Ky. 1943 ).

Where liability was predicated on an implied warranty of fitness, language in the contract that liability was restricted to replacement cost with no claim for labor or damages allowable was not sufficient to exclude the implied warranty. Water Works & Industrial Supply Co. v. Wilburn, 437 S.W.2d 951, 1968 Ky. LEXIS 172 ( Ky. 1968 ).

Where the language excluding implied warranties was not conspicuous, the dealer was considered to have made an implied warranty that the machine was fit for the purpose for which the buyer required it, there being a showing that the dealer knew of such purpose and the buyer relied on the dealer’s skill and judgment to select and furnish a suitable machine. Massey-Ferguson, Inc. v. Utley, 439 S.W.2d 57, 1969 Ky. LEXIS 353 ( Ky. 1969 ).

Where in a conditional sales contract it was stated on the back side of the contract that there were no implied warranties and reference was made to this clause on the front of the contract in larger than normal print, the buyer was bound by the contract. Childers & Venters, Inc. v. Sowards, 460 S.W.2d 343, 1970 Ky. LEXIS 582 ( Ky. 1970 ).

The General Assembly has expressly adopted the privity requirement, and warranty protections are limited to those engaged in a buyer-seller relationship. Brown Sprinkler Corp. v. Plumbers Supply Co., 265 S.W.3d 237, 2007 Ky. App. LEXIS 347 (Ky. Ct. App. 2007).

A retailer successfully disclaimed its obligations regarding implied warranties of fitness and of merchantability where the disclaimer was located on the front of the invoice in readable size print, the disclaimer language was printed in a type size that contrasted with the remaining printed information, the disclaimer was segregated from the rest of the invoice information, and the language plainly disclaimed all implied warranties including any implied warranty of merchantability or fitness for a particular use. Brown Sprinkler Corp. v. Plumbers Supply Co., 265 S.W.3d 237, 2007 Ky. App. LEXIS 347 (Ky. Ct. App. 2007).

3.Inspection by Buyers.

There was no implied warranty as to defects which should have been observed by buyers at the time of their inspection and the evidence did not establish any breach of direct warranty as to the suitability of sawmill for the purpose of buyers. (decided under prior law) Wells v. Ray, 253 S.W.2d 590, 1952 Ky. LEXIS 1102 ( Ky. 1952 ).

Where railroad requested seller to have manufacturer send cant hooks directly to the railroad’s agent, the railroad never had opportunity to inspect the cant hook and was not liable for injury to worker caused by alleged defective condition of cant hook and law that provided that if buyer relies on skill and judgment of seller, there is an implied warranty and informs seller of the purpose for which the goods are required did not apply because there was no showing that the railroad relied upon the seller’s skill or judgment in purchase, since the seller had no opportunity to inspect the cant hook. (decided under prior law) Continental Casualty Co. v. Belknap Hardware & Mfg. Co., 281 S.W.2d 914, 1955 Ky. LEXIS 213 ( Ky. 1955 ).

4.Defects in Equipment.

Former law regulating the sale of goods had no application where buyer’s claim against seller was directed in the main to defects in the equipment and not to whether the equipment was reasonably suited for the purpose for which it was sold, the processing of meat in a packing house. (decided under prior law) Cincinnati Butchers Supply Co. v. Kentucky Packers, Inc., 285 Ky. 104 , 147 S.W.2d 48, 1941 Ky. LEXIS 344 ( Ky. 1941 ).

Where there was a complete failure of a machine designed to make merchantable cement blocks, the purpose for which it was designed, there was much more than the breach of an implied warranty of suitability of fitness for a particular purpose. There was a breach of contract for failure of consideration. (decided under prior law) Myers v. Land, 314 Ky. 514 , 235 S.W.2d 988, 1950 Ky. LEXIS 1095 ( Ky. 1950 ).

5.Services.

The implied warranty of fitness for a particular purpose applies to services when the sale is primarily one of goods and the services are necessary to insure that those goods are merchantable. Riffe v. Black, 548 S.W.2d 175, 1977 Ky. App. LEXIS 651 (Ky. Ct. App. 1977).

Where the predominant aspect of a contract was the rendition of services, i.e., a major engine overhaul of a helicopter, the UCC warranty provisions did not apply to this transaction. T-Birds, Inc. v. Thoroughbred Helicopter Service, Inc., 540 F. Supp. 548, 1982 U.S. Dist. LEXIS 14161 (E.D. Ky. 1982 ).

6.Manufacturer.

A manufacturer could give an express warranty, such as a warranty of contents, or it could give an implied warranty, such as a warranty of general fitness for commonly recognized use, but there could be no breach of an implied warranty by the manufacturer that the product was an unfit fertilizer unsuited to a special use upon tobacco beds. (decided under prior law) North American Fertilizer Co. v. Combs, 307 Ky. 869 , 212 S.W.2d 526, 1948 Ky. LEXIS 844 ( Ky. 1948 ).

7.Negligent Installation.

A hole at the bottom of a pool caused by negligent installation of the vinyl liner breached the implied warranty of fitness for a particular purpose. Riffe v. Black, 548 S.W.2d 175, 1977 Ky. App. LEXIS 651 (Ky. Ct. App. 1977).

8.Privity of Contract.

Where there was no contractual relation alleged or shown between seller and a third party who had no contractual relation with the buyer, there was a failure to allege or show any cause of action on any implied warranty or representation. (decided under prior law) Caplinger v. Werner, 311 S.W.2d 201, 1958 Ky. LEXIS 184 ( Ky. 1958 ).

9.Additional Remedies.

KRS 355.2-314 and this section, provide a contractual remedy in a case such as this where a product sold proves to be unfit for its ordinary use, and this expression of public policy does not necessarily preclude the courts from fashioning an additional remedy based upon strict liability in tort, although it may well lessen the need, if any, for such a policy. Falcon Coal Co. v. Clark Equipment Co., 802 S.W.2d 947, 1990 Ky. App. LEXIS 153 (Ky. Ct. App. 1990).

10.Sufficiency of Evidence.

Evidence supported the jury’s finding that a manufacturer breached an implied warranty of fitness for a particular purpose, as it was aware of the particular use intended for the units it sold and of the specifications they had to meet, and the buyer had reason to rely on the manufacturer’s ability to produce suitable units for the job. Thomas & Betts Corp. v. A & A Mech., Inc., 2004 Ky. App. LEXIS 339 (Ky. Ct. App. Nov. 24, 2004, sub. op., 2004 Ky. App. Unpub. LEXIS 996 (Ky. Ct. App. Nov. 24, 2004), review denied, ordered not published, 2005 Ky. LEXIS 269 (Ky. Sept. 14, 2005).

11.Sale Merged with Contract.

There was a sale merged with a contract for performance with no inconsistency in the implied warranty to stop damage by termites already present under the sales law and the express warranty under the contract for performance to prevent further attacks. (decided under prior law) King v. Ohio Valley Terminix Co., 309 Ky. 35 , 214 S.W.2d 993, 1948 Ky. LEXIS 960 ( Ky. 1948 ).

12.Jury Instructions.

An instruction which authorized recovery for breach of warranty if the goods “failed to reasonably perform the function for which they were bought” was erroneous, although probably not reversible error. It would have been better to have adopted from the statutes the appropriate words or words of like import. (decided under prior law) Balfour-Guthrie & Co. v. L. S. Du Bois Son & Co., 245 Ky. 640 , 54 S.W.2d 13, 1932 Ky. LEXIS 648 ( Ky. 1932 ).

Cited:

McMichael v. American Red Cross, 532 S.W.2d 7, 1975 Ky. LEXIS 21 ( Ky. 1975 ); Compex Int’l Co. v. Taylor, 209 S.W.3d 462, 2006 Ky. LEXIS 253 ( Ky. 2006 ).

Research References and Practice Aids

Kentucky Bench & Bar.

An Overview of the Magnuson-Moss Warranty Act, Vol. 55, No. 3, Summer 1991, Ky. Bench & Bar 18.

Kentucky Law Journal.

Comments, What Chance for the New Car Purchaser of a “Lemon”?, 62 Ky. L.J. 557 (1973-1974).

Kentucky Law Survey, Clark, Medical Malpractice, 65 Ky. L.J. 337 (1976-77).

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Northern Kentucky Law Review.

Notes, Torts — Products Liability — Should Contract or Tort Provide the Cause of Action When a Plaintiff Seeks Recovery Only for Damage to the Defective Product Itself — C & S Fuel, Inc. v. Clark Equip. Co.,10 N. Ky. L. Rev. 489 (1983).

Miller, The Kentucky Law of Products LiabilityIn A Nutshell, 12 N. Ky. L. Rev. 201 (1985).

Notes, Torts — No Defense for The Manufacturer — The Supreme Court of Kentucky Restricts The Shifting Responsibility Defense In Strict Products Liability Cases — Montgomery Elevator Co. v. McCullough, 676 S.W.2d 776, 1984 Ky. LEXIS 267 , 45 A.L.R.4th 761 ( Ky. 1984 ).

Comments, Reda Pump, a Division of TRW, Inc. v. Finck: An Update on Kentucky Product Liability Law, 14 N. Ky. L. Rev. 395 (1988).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint on a Warranty, Form 190.07.

355.2-316. Exclusion or modification of warranties.

  1. Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other; but subject to the provisions of this article on parol or extrinsic evidence (KRS 355.2-202 ) negation or limitation is inoperative to the extent that such construction is unreasonable.
  2. Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for example, that “There are no warranties which extend beyond the description on the face hereof.”
  3. Notwithstanding subsection (2)
    1. unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like “as is,” “with all faults” or other language which in common understanding calls the buyer’s attention to the exclusion of warranties and makes plain that there is no implied warranty; and
    2. when the buyer before entering into the contract has examined the goods or the sample or model as fully as he desired or has refused to examine the goods there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to him; and
    3. an implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade; and
    4. with respect to the sale of bovine, porcine, ovine, and equine animals, or poultry there shall be no implied warranty that the animals are free from disease or sickness. This exemption shall not apply when the seller knowingly sells animals which are diseased or sick.
  4. Remedies for breach of warranty can be limited in accordance with the provisions of this article on liquidation or limitation of damages and on contractual modification of remedy (KRS 355.2-718 and 355.2-719 ).

History. Enact. Acts 1958, ch. 77, § 2-316, effective July 1, 1960; 1980, ch. 7, § 1, effective July 15, 1980.

Official Comment

Prior uniform statutory provision:

None. See Sections 15 and 71, Uniform Sales Act.

Purposes:

  1. This section is designed principally to deal with those frequent clauses in sales contracts which seek to exclude “all warranties, express or implied.” It seeks to protect a buyer from unexpected and unbargained language of disclaimer by denying effect to such language when inconsistent with language of express warranty and permitting the exclusion of implied warranties only by conspicuous language or other circumstances which protect the buyer from surprise.
  2. The seller is protected under this Article against false allegations of oral warranties by its provisions on parol and extrinsic evidence and against unauthorized representations by the customary “lack of authority” clauses. This Article treats the limitation or avoidance of consequential damages as a matter of limiting remedies for breach, separate from the matter of creation of liability under a warranty. If no warranty exists, there is of course no problem of limiting remedies for breach of warranty. Under subsection (4) the question of limitation of remedy is governed by the sections referred to rather than by this section.
  3. Disclaimer of the implied warranty of merchantability is permitted under subsection (2), but with the safeguard that such disclaimers must mention merchantability and in case of a writing must be conspicuous.
  4. Unlike the implied warranty of merchantability, implied warranties of fitness for a particular purpose may be excluded by general language, but only if it is in writing and conspicuous.
  5. Subsection (2) presupposes that the implied warranty in question exists unless excluded or modified. Whether or not language of disclaimer satisfies the requirements of this section, such language may be relevant under other sections to the question whether the warranty was ever in fact created. Thus, unless the provisions of this Article on parol and extrinsic evidence prevent, oral language of disclaimer may raise issues of fact as to whether reliance by the buyer occurred and whether the seller had “reason to know” under the section on implied warranty of fitness for a particular purpose.
  6. The exceptions to the general rule set forth in paragraphs (a), (b), and (c) of subsection (3) are common factual situations in which the circumstances surrounding the transaction are in themselves sufficient to call the buyer’s attention to the fact that no implied warranties are made or that a certain implied warranty is being excluded.
  7. Paragraph (a) of subsection (3) deals with general terms such as “as is,” “as they stand,” “with all faults,” and the like. Such terms in ordinary commercial usage are understood to mean that the buyer takes the entire risk as to the quality of the goods involved. The terms covered by paragraph (a) are in fact merely a particularization of paragraph (c) which provides for exclusion or modification of implied warranties by usage of trade.
  8. Under paragraph (b) of subsection (3) warranties may be excluded or modified by the circumstances where the buyer examines the goods or a sample or model of them before entering into the contract. “Examination” as used in this paragraph is not synonymous with inspection before acceptance or at any other time after the contract has been made. It goes rather to the nature of the responsibility assumed by the seller at the time of the making of the contract. Of course if the buyer discovers the defect and uses the goods anyway, or if he unreasonably fails to examine the goods before he uses them, resulting injuries may be found to result from his own action rather than proximately from a breach of warranty. See Sections 2-314 and 2-715 and comments thereto.

    In order to bring the transaction within the scope of “refused to examine” in paragraph (b), it is not sufficient that the goods are available for inspection. There must in addition be a demand by the seller that the buyer examine the goods fully. The seller by the demand puts the buyer on notice that he is assuming the risk of defects which the examination ought to reveal. The language “refused to examine” in this paragraph is intended to make clear the necessity for such demand.

    Application of the doctrine of “caveat emptor” in all cases where the buyer examines the goods regardless of statements made by the seller is, however rejected by this Article. Thus, if the offer of examination is accompanied by words as to their merchantability or specific attributes and the buyer indicates clearly that he is relying on those words rather than on his examination, they give rise to an “express” warranty. In such cases the question is one of fact as to whether a warranty of merchantability has been expressly incorporated in the agreement. Disclaimer of such an express warranty is governed by subsection (1) of the present section.

    The particular buyer’s skill and the normal method of examining goods in the circumstances determine what defects are excluded by the examination. A failure to notice defects which are obvious cannot excuse the buyer. However, an examination under circumstances which do not permit chemical or other testing of the goods would not exclude defects which could be ascertained only by such testing. Nor can latent defects be excluded by a simple examination. A professional buyer examining a product in his field will be held to have assumed the risk as to all defects which a professional in the field ought to observe, while a nonprofessional buyer will be held to have assumed the risk only for such defects as a layman might be expected to observe.

  9. The situation in which the buyer gives precise and complete specifications to the seller is not explicitly covered in this section, but this is a frequent circumstance by which the implied warranties may be excluded. The warranty of fitness for a particular purpose would not normally arise since in such a situation there is usually no reliance on the seller by the buyer. The warranty of merchantability in such a transaction, however, must be considered in connection with the next section on the cumulation and conflict of warranties. Under paragraph (c) of that section in case of such an inconsistency the implied warranty of merchantability is displaced by the express warranty that the goods will comply with the specifications. Thus, where the buyer gives detailed specifications as to the goods, neither of the implied warranties as to quality will normally apply to the transaction unless consistent with the specifications.

Cross references:

Point 2: Sections 2-202, 2-718 and 2-719.

Point 7: Sections 1-205 and 2-208.

Definitional cross references:

“Agreement”. Section 1-201. “Buyer”. Section 2-103. “Contract”. Section 1-201. “Course of dealing”. Section 1-205. “Goods”. Section 2-105. “Remedy”. Section 1-201. “Seller”. Section 2-103. “Usage of trade”. Section 1-205.

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NOTES TO DECISIONS

1.In General.

In interpreting warranty disclaimers, the court must construe, when reasonable, words which create an express warranty and words that negate or limit such warranties in a manner consistent with one another. Gooch v. E.I. DuPont de Nemours & Co., 40 F. Supp. 2d 863, 1999 U.S. Dist. LEXIS 10211 (W.D. Ky. 1999 ).

Neither the heavy equipment safety guidelines published by the federal Occupational Safety and Health Administration nor the enactment of KRS 411.340 preempt the “as is” provision of the statute. Thornton v. Deere & Co., 2001 U.S. Dist. LEXIS 15676 (W.D. Ky. Sept. 28, 2001).

2.Exclusion by Express Warranty.

Where contract expressly provided that no warranty was made or could be relied upon, a warranty could not be implied. (decided under prior law) Sears, Roebuck & Co. v. Lea, 198 F.2d 1012, 1952 U.S. App. LEXIS 3274 (6th Cir. Ky. 1952 ).

Contract containing specific warranty that the machinery was to be of first-class material and workmanship coupled with the agreement to replace free of charge any part which might within 90 days of delivery prove defective excluded all other warranties. (decided under prior law) Pace Const. Co. v. Brandeis Machinery & Supply Co., 239 Ky. 693 , 40 S.W.2d 268, 1931 Ky. LEXIS 829 ( Ky. 1931 ).

It was competent for parties by express language to exclude any and all implied warranties from a contract of sale. (decided under prior law) Graves Ice Cream Co. v. Rudolph W. Wurlitzer Co., 267 Ky. 1 , 100 S.W.2d 819, 1937 Ky. LEXIS 265 ( Ky. 1 937 ).

The seller and purchaser of an article would make a definite contract limiting the liability of each under the contract and purchaser could not refuse to pay purchase price on grounds goods were worthless where he did not comply with express warranty which excluded all other liabilities of seller. (decided under prior law) James v. International Harvester Co., 294 Ky. 722 , 172 S.W.2d 670, 1943 Ky. LEXIS 548 ( Ky. 1943 ).

A warranty would not be implied where the contract stipulated expressly against its existence or declared no other warranty was made. (decided under prior law) Dreyer-Whitehead & Goedecke, Inc. v. Land, 309 Ky. 1 13 , 216 S.W.2d 413, 1948 Ky. LEXIS 1074 ( Ky. 1 948). See Vandiver v. B. B. Wilson & Co., 244 Ky. 601 , 51 S.W.2d 899, 1932 Ky. LEXIS 473 ( Ky. 1932 ); Graves Ice Cream Co. v. Rudolph W. Wurlitzer Co., 267 Ky. 1, 100 S.W.2d 819, 1937 Ky. LEXIS 265 ( Ky. 1937 ); Citizens Ice & Fuel Co. v. Fairbanks, Morse & Co., 293 Ky. 64 , 168 S.W.2d 586, 1943 Ky. LEXIS 578 ( Ky. 1943 ); Whayne Supply Co. v. Gregory, 291 S.W.2d 835, 1956 Ky. LEXIS 406 ( Ky. 1956 ), overruled, Brown v. Noland Co., 403 S.W.2d 33, 1966 Ky. LEXIS 321 ( Ky. 1966 ).

Where contract for sale of truck contained an express warranty which specifically excluded all implied warranties and the truck was reasonably suitable for its intended use and facts did not warrant breach of a covenant or condition that would justify rescission of the contract, buyer could not recover in action for breach of implied warranty. (decided under prior law) L. R. Cooke Chevrolet Co. v. Culligan Soft Water Service, Inc., 282 S.W.2d 349, 1955 Ky. LEXIS 246 ( Ky. 1955 ).

Provisions in written contract excluded implied warranty of fitness for special purpose and owners could not recover damages for breach of implied warranty of fitness of paint. (decided under prior law) Amos v. Montgomery, 339 S.W.2d 471, 1960 Ky. LEXIS 466 ( Ky. 1960 ).

Motor vehicle warranty that it was free from defects in material and workmanship and was in lieu of all other warranties excluded implied warranties and limited remedies for breach of the warranty. Cox Motor Car Co. v. Castle, 402 S.W.2d 429, 1966 Ky. LEXIS 364 ( Ky. 1966 ).

Where liability was predicated on an implied warranty of fitness, language in the contract that liability was restricted to replacement cost with no claim for labor or damages allowable was not sufficient to exclude the implied warranty. Water Works & Industrial Supply Co. v. Wilburn, 437 S.W.2d 951, 1968 Ky. LEXIS 172 ( Ky. 1968 ).

Where a contract for the sale of a car excluded warranties in bold, large type, and in red ink, the parties had clearly entered into a binding contract regardless of defects with the automobile. Greg Coats Cars, Inc. v. Kasey, 576 S.W.2d 251, 1978 Ky. App. LEXIS 659 (Ky. Ct. App. 1978).

2.5.“As Is” Clauses.

Appellant executed a written sales contract that stated the vehicle was sold “as is,” and he acknowledged that he made the purchase knowingly without any guarantee; the effect of the as is clause shifted the assumption of risk concerning the condition and value of the vehicle to appellant, and as the injury concerned the value of the vehicle and the sole cause of the injury was appellant, he was unable to prove that the seller’s representations caused the injury, and the trial court properly dismissed his action. Roberts v. Lanigan Auto Sales, 406 S.W.3d 882, 2013 Ky. App. LEXIS 4 (Ky. Ct. App. 2013).

By agreeing to buy a vehicle as is, appellant agreed that he would make his own assessment of the vehicle’s condition in spite of appellee’s representations, and thus appellant could not later allege that he reasonably relied on those representations when he agreed to buy the vehicle. Roberts v. Lanigan Auto Sales, 406 S.W.3d 882, 2013 Ky. App. LEXIS 4 (Ky. Ct. App. 2013).

This is not to say that an “as is” clause bars any claim of fraud, and when circumstances indicate otherwise, express or implied warranties may not be disclaimed by a written contract, for purposes of KRS 355.2-316 (3)(a); different circumstances could support an action for fraud despite an “as is” clause when the injury results in consequential damages, that is, injury to a person or property as a result of a breach of warranty, rather than an injury as a result of decreased value of the goods, and the court’s holding here merely follows the rationale that an “as is” clause transfers the risk to the buyer that the condition or value of the goods is not what the seller represents. Roberts v. Lanigan Auto Sales, 406 S.W.3d 882, 2013 Ky. App. LEXIS 4 (Ky. Ct. App. 2013).

3.Conspicuousness.

Where the attempted exclusion of implied warranties was on the back of the contract and the exclusionary language was in the same size type as the general contract, the attempted exclusion was not valid or effective because it was not conspicuous within the meaning of the law. Massey-Ferguson, Inc. v. Utley, 439 S.W.2d 57, 1969 Ky. LEXIS 353 ( Ky. 1969 ).

Where the language excluding implied warranties was not conspicuous, the dealer was considered to have made an implied warranty that the machine was fit for the purpose for which the buyer required it, there being a showing that the dealer knew of such purpose and the buyer relied on the dealer’s skill and judgment to select and furnish a suitable machine. Massey-Ferguson, Inc. v. Utley, 439 S.W.2d 57, 1969 Ky. LEXIS 353 ( Ky. 1969 ).

Where the language excluding implied warranties was not conspicuous, the dealer was considered to have made an implied warranty that the tractor was fit for the ordinary purpose for which goods are used. Massey-Ferguson, Inc. v. Utley, 439 S.W.2d 57, 1969 Ky. LEXIS 353 ( Ky. 1969 ).

Where in a conditional sales contract it was stated on the back side of the contract that there were no implied warranties and reference was made to this clause on the front of the contract in larger than normal print, the buyer was bound by the contract. Childers & Venters, Inc. v. Sowards, 460 S.W.2d 343, 1970 Ky. LEXIS 582 ( Ky. 1970 ).

The fact that an exclusion of any warranty appears on the back of a contract will not per se render the exclusion ineffective. Cline v. Allis-Chalmers Corp., 690 S.W.2d 764, 1985 Ky. App. LEXIS 578 (Ky. Ct. App. 1985).

Where, on the back side of the contract, the exclusions were clearly stated in bold-face, entirely capitalized type, twice as large as the other type, the exclusions were conspicuous. Gooch v. Dowell, Inc., 743 S.W.2d 38, 1988 Ky. App. LEXIS 4 (Ky. Ct. App. 1988).

A retailer successfully disclaimed its obligations regarding implied warranties of fitness and of merchantability where the disclaimer was located on the front of the invoice in readable size print, the disclaimer language was printed in a type size that contrasted with the remaining printed information, the disclaimer was segregated from the rest of the invoice information, and the language plainly disclaimed all implied warranties including any implied warranty of merchantability or fitness for a particular use. Brown Sprinkler Corp. v. Plumbers Supply Co., 265 S.W.3d 237, 2007 Ky. App. LEXIS 347 (Ky. Ct. App. 2007).

4.Limiting Language Ineffective.

The evidence supported the trial judge’s determination that the “repair or replace” limited remedy language of a tractor shovel sales contract failed of its essential purpose within the meaning of KRS 355.2-719 (2), especially since the defective part was small, and the defect resulted in the immediate destruction of the entire tractor shovel; accordingly, regardless of how the fire damage was characterized, to the extent that express limitations in the contract precluded the owner from recovering at least the purchase price of the truck, such limitations were ineffective under KRS 355.2-719 (2). Rudd Constr. Equipment Co. v. Clark Equipment Co., 735 F.2d 974, 1984 U.S. App. LEXIS 21942 (6th Cir. Ky. 1984 ).

5.Damages Recoverable.

Where a machine simply bursts into flame, the entire machine is one big defective part, entitling the plaintiff buyer to recover the difference in value between the machine as warranted and the one actually received. Rudd Constr. Equipment Co. v. Clark Equipment Co., 735 F.2d 974, 1984 U.S. App. LEXIS 21942 (6th Cir. Ky. 1984 ).

6.Failure of Consideration.

Where purchaser agreed to purchase a yearling “as-is” the only way there could be a failure of consideration would be if purchaser had received (1) nothing, (2) a dead yearling, or (3) a live yearling different from the one on which he bid. Therefore sale would not be rescinded for failure of consideration. Cohen v. North Ridge Farms, Inc., 712 F. Supp. 1265, 1989 U.S. Dist. LEXIS 5482 (E.D. Ky. 1989 ).

Cited:

Ford Motor Co. v. Mayes, 575 S.W.2d 480, 1978 Ky. App. LEXIS 649 (Ky. Ct. App. 1978); Bartelt Aviation, Inc. v. Dry Lake Coal Co., 682 S.W.2d 796, 1985 Ky. App. LEXIS 493 (Ky. Ct. App. 1985); Skilcraft Sheetmetal, Inc. v. Kentucky Machinery, Inc., 836 S.W.2d 907, 1992 Ky. App. LEXIS 175 (Ky. Ct. App. 1992); Evans v. JNT, Inc., 2015 Ky. App. LEXIS 124 (Aug. 21, 2015).

Research References and Practice Aids

Kentucky Law Journal.

Comments, What Chance for the New Car Purchaser of a “Lemon”?, 62 Ky. L.J. 557 (1973-1974).

Brickey, Products Liability in Kentucky: The Doctrinal Dilemma, 65 Ky. L.J. 593 (1976-77).

The Sale of Horses and Horse Interests: A Transactional Approach, 78 Ky. L.J. 517 (1989-90).

Northern Kentucky Law Review.

Notes, U.C.C. — Consumer Protection Act — Limited Warranties — Automobile Manufac- turer’s Refusal to Recognize Buyers’ Rights Under the U.C.C. When a Limited Warranty Fails of its Essential Purpose Constitutes an Unfair Trade Practice Under the Consumer Protection Act,6 N. Ky. L. Rev. 403 (1979).

Notes, Torts — Products Liability — Should Contract or Tort Provide the Cause of Action When a Plaintiff Seeks Recovery Only for Damage to the Defective Product Itself — C & S Fuel, Inc. v. Clark Equip. Co.,10 N. Ky. L. Rev. 489 (1983).

Miller, The Kentucky Law of Products LiabilityIn A Nutshell, 12 N. Ky. L. Rev. 201 (1985).

Notes, Torts — No Defense for The Manufacturer — The Supreme Court of Kentucky Restricts The Shifting Responsibility Defense In Strict Products Liability Cases — Montgomery Elevator Co. v. McCullough, 676 S.W.2d 776, 1984 Ky. LEXIS 267 , 45 A.L.R.4th 761 ( Ky. 1984 ).

Comments, Reda Pump, a Division of TRW, Inc. v. Finck: An Update on Kentucky Product Liability Law, 14 N. Ky. L. Rev. 395 (1988).

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

355.2-317. Cumulation and conflict of warranties express or implied.

Warranties whether express or implied shall be construed as consistent with each other and as cumulative, but if such construction is unreasonable the intention of the parties shall determine which warranty is dominant. In ascertaining that intention the following rules apply:

  1. Exact or technical specifications displace an inconsistent sample or model or general language of description.
  2. A sample from an existing bulk displaces inconsistent general language of description.
  3. Express warranties displace inconsistent implied warranties other than an implied warranty of fitness for a particular purpose.

History. Enact. Acts 1958, ch. 77, § 2-317, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

On cumulation of warranties, see Sections 14, 15, and 16, Uniform Sales Act.

Changes:

Completely rewritten into one section.

Purposes of changes:

  1. The present section rests on the basic policy of this Article that no warranty is created except by some conduct (either affirmative action or failure to disclose) on the part of the seller. Therefore, all warranties are made cumulative unless this construction of the contract is impossible or unreasonable.

    This Article thus follows the general policy of the Uniform Sales Act except that in case of the sale of an article by its patent or trade name the elimination of the warranty of fitness depends solely on whether the buyer has relied on the seller’s skill and judgment; the use of the patent or trade name is but one factor in making this determination.

  2. The rules of this section are designed to aid in determining the intention of the parties as to which of inconsistent warranties which have arisen from the circumstances of their transaction shall prevail. These rules of intention are to be applied only where factors making for an equitable estoppel of the seller do not exist and where he has in perfect good faith made warranties which later turn out to be inconsistent. To the extent that the seller has led the buyer to believe that all of the warranties can be performed, he is estopped from setting up any essential inconsistency as a defense.
  3. The rules in subsections (a), (b) and (c) are designed to ascertain the intention of the parties by reference to the factor which probably claimed the attention of the parties in the first instance. These rules are not absolute but may be changed by evidence showing that the conditions which existed at the time of contracting make the construction called for by the section inconsistent or unreasonable.

Cross references:

Point 1: Section 2-315.

Definitional cross reference:

“Party”. Section 1-201.

NOTES TO DECISIONS

1.Consistency.

An implied warranty to stop present termite damage was not inconsistent with express warranty to “insulate” the property against further attacks where a sale of chemicals to exterminate termites was merged with a contract for performance. (decided under prior law) King v. Ohio Valley Terminix Co., 309 Ky. 35 , 214 S.W.2d 993, 1948 Ky. LEXIS 960 ( Ky. 1948 ).

2.Sale by Sample.

Where, in purchasing firecrackers for resale, samples were tested which proved satisfactory but 40 per cent of the firecrackers delivered would not explode, causing the purchaser to refund considerable money to his customers, there was a breach of warranty that firecrackers were fit for such purpose. (decided under prior law) Balfour-Guthrie & Co. v. L. S. Du Bois Son & Co., 245 Ky. 640 , 54 S.W.2d 13, 1932 Ky. LEXIS 648 ( Ky. 1932 ).

3.Express Warranties.

Where, under terms of contract containing a clause that the contract covered all the agreements and promises express or implied between the buyer and the seller, the only agreement was to sell a condensing unit, install it in plant, connect it up with the plant’s theretofore installed equipment and, if it was unsatisfactory, to remove it and refund the money paid and, when the seller was informed that it was not operating properly, he removed it and refunded the money paid, he was not liable for alleged damages for breach of an alleged implied warranty, since the language of the contract had the effect of negating any implied warranty arising from the contract. (decided under prior law) Graves Ice Cream Co. v. Rudolph W. Wurlitzer Co., 267 Ky. 1 , 100 S.W.2d 819, 1937 Ky. LEXIS 265 ( Ky. 1 937 ).

Owners could not recover damages for breach of implied warranty of fitness of paint where provisions in written contract excluded implied warranty of fitness for special purpose. (decided under prior law) Amos v. Montgomery, 339 S.W.2d 471, 1960 Ky. LEXIS 466 ( Ky. 1960 ).

355.2-318. Third party beneficiaries of warranties express or implied.

A seller’s warranty whether express or implied extends to any natural person who is in the family or household of his buyer or who is a guest in his home if it is reasonable to expect that such person may use, consume or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the operation of this section.

History. Enact. Acts 1958, ch. 77, § 2-318, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

  1. The last sentence of this section does not mean that a seller is precluded from excluding or disclaiming a warranty which might otherwise arise in connection with the sale provided such exclusion or modification is permitted by Section 2-316. Nor does that sentence preclude the seller from limiting the remedies of his own buyer and of any beneficiaries, in any manner provided in Sections 2-718 or 2-719. To the extent that the contract of sale contains provisions under which warranties are excluded or modified, or remedies for breach are limited, such provisions are equally operative against beneficiaries of warranties under this section. What this last sentence forbids is exclusion of liability by the seller to the persons to whom the warranties which he has made to his buyer would extend under this section.
  2. The purpose of this section is to give certain beneficiaries the benefit of the same warranty which the buyer received in the contract of sale, thereby freeing any such beneficiaries from any technical rules as to “privity.” It seeks to accomplish this purpose without any derogation of any right or remedy resting on negligence. It rests primarily upon the merchant-seller’s warranty under this Article that the goods sold are merchantable and fit for the ordinary purposes for which such goods are used rather than the warranty of fitness for a particular purpose. Implicit in the section is that any beneficiary of a warranty may bring a direct action for breach of warranty against the seller whose warranty extends to him.
  3. The first alternative expressly includes as beneficiaries within its provisions the family, household, and guests of the purchaser. Beyond this, the section in this form is neutral and is not intended to enlarge or restrict the developing case law on whether the seller’s warranties, given to his buyer who resells, extend to other persons in the distributive chain. The second alternative is designed for states where the case law has already developed further and for those that desire to expand the class of beneficiaries. The third alternative goes further, following the trend of modern decisions as indicated by Restatement of Torts 2d §π402A (Tentative Draft No. 10, 1965) in extending the rule beyond injuries to the person.

Cross references:

Point 1: Sections 2-316, 2-718 and 2-719.

Point 2: Section 2-314.

Definitional cross references:

“Buyer”. Section 2-103. “Goods”. Section 2-105. “Seller”. Section 2-103.

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NOTES TO DECISIONS

Analysis

1.Applicability.

The Legislature did not intend to include employees of a commercial purchaser within the parameters of this section. McLain v. Dana Corp., 16 S.W.3d 320, 1999 Ky. App. LEXIS 133 (Ky. Ct. App. 1999).

A son did not have an actionable claim for injuries against the manufacturer of a chair when the son claimed that the chair, which had been purchased by the son’s parents and kept in the parents’ home, collapsed when the son sat in it. Although the parents met the definition of buyers under KRS 355.2-103 (1)(a), they did not purchase the chair from the manufacturer, and KRS 355.2-318 did not provide grounds for the son’s claim. Compex Int'l Co. v. Taylor, 209 S.W.3d 462, 2006 Ky. LEXIS 253 ( Ky. 2006 ), modified, 2007 Ky. LEXIS 13 (Ky. Jan. 25, 2007).

Subrogor was not the buyer of the motorcycle on which the subrogor was riding as a passenger when the subrogor was injured in an accident for which the subrogee paid workers’ compensation benefits to the subrogor, and the alleged manufacturer was not the seller of that motorcycle. As a result, the subrogee could not maintain a subrogation action against the alleged manufacturer for breach of warranty, as KRS 355.2-318 , as a “buyer-seller” relationship had to be established and since there was not one between the subrogor and the alleged manufacturer, the subrogee was not in privity of contract with a party who could sue for breach of warranty. Bridgefield Cas. Ins. Co. v. Yamaha Motor Mfg. Corp. of Am., 385 S.W.3d 430, 2012 Ky. App. LEXIS 224 (Ky. Ct. App. 2012).

2.Lessee.

Warranties made by a manufacturer and dealer (seller) with regard to a piece of farm equipment applied to a farmer who leased the equipment from the corporation which purchased the combine from the dealer, where the lessor had assigned all its rights for breach of warranty to the farmer and manufacturer and dealer had previously treated the farmer as the owner. Cline v. Allis-Chalmers Corp., 690 S.W.2d 764, 1985 Ky. App. LEXIS 578 (Ky. Ct. App. 1985).

3.Privity.

Kentucky’s commercial code does not expressly extend breach of warranty standing beyond the buyer/seller setting and there was no privity of contract between patient who had a nail implanted in his femur by a physician, and manufacturers of the nail. Munn v. Pfizer Hosp. Products Group, Inc., 750 F. Supp. 244, 1990 U.S. Dist. LEXIS 15750 (W.D. Ky. 1990 ).

Package inserts provided by manufacturer of polio vaccine could constitute an express warranty, however, any such warranty was not extended to child vaccinated by physician who did not show such inserts to child’s mother; child lacked privity with manufacturer and was beyond the scope of the warranty protection accorded by KRS 355.2-318 . Snawder v. Cohen, 749 F. Supp. 1473, 1990 U.S. Dist. LEXIS 14410 (W.D. Ky. 1990 ).

Warranty actions may be brought only by purchasers or one in purchasers’ household. Halderman v. Sanderson Forklifts Co., 818 S.W.2d 270, 1991 Ky. App. LEXIS 56 (Ky. Ct. App. 1991).

Breach of warranty is not a viable theory in a personal injury claim for a product sold in a defective condition unless there is privity of contract, except in limited circumstances specified in the statute. Real Estate Mktg. v. Franz, 885 S.W.2d 921, 1994 Ky. LEXIS 127 ( Ky. 1994 ).

Where the injured person suffered an accident on a ladder borrowed at the work site, and sued the manufacturer for breach of an implied warranty of merchantability, in addition to negligence claims, the injured person was not included within the parameters of KRS 355.2-318 , as the necessary element of privity was lacking. Eversole v. Louisville Ladder Group, 2003 Ky. App. LEXIS 270 (Ky. Ct. App. Sept. 5, 2003).

Because a manufacturer was not a seller and a workers’ compensation claimant was not a buyer, a workers’ compensation insurer, as subrogee to the claimant, lacked the requisite privity of contract with the manufacturer and was not otherwise entitled to bring a claim of breach of warranty under Kentucky’s version of the Uniform Commercial Code. Bridgefield Cas. Ins. Co. v. Yamaha Motor Mfg. Corp. of Am., 2012 Ky. App. LEXIS 176 (Ky. Ct. App. Sept. 21, 2012).

Board did not purchase the school bus for personal, family or household purposes, nor were appellants in the board’s family or household or guests in its home; therefore, appellants could not be considered part of the board’s “family” pursuant to the statutes; the warranty protections were only afforded to the board, not appellants, and there was no privity of contract between the parties to support a Kentucky Consumer Protection Act or breach of warranty claim on behalf of appellants. Jones v. IC Bus, LLC, 626 S.W.3d 661, 2020 Ky. App. LEXIS 114 (Ky. Ct. App. 2020).

Cited:

Teel v. American Steel Foundries, 529 F. Supp. 337, 1981 U.S. Dist. LEXIS 16835 (E.D. Mo. 1981); Williams v. Fulmer, 695 S.W.2d 411, 1985 Ky. LEXIS 232 ( Ky. 1985 ).

Notes to Unpublished Decisions

1.Privity.

Unpublished decision: Summary judgment for a buckle manufacturer was proper in an action which arose when a deer hunter fell from a deer stand after a safety belt containing the manufacturer’s buckle broke; the hunter failed to show that buckle was defective for purposes of strict liability, failed to show any duty to warn end-users, and failed to show privity between the parties for purposes of his breach of warranty claims under KRS 355.2-318 . Waterfill v. Nat'l Molding Corp., 215 Fed. Appx. 402, 2007 FED App. 0096N, 2007 U.S. App. LEXIS 3056 (6th Cir. Ky. 2007 ).

Unpublished decision: Consumer's breach of express warranty claim failed, as it was undisputed that the consumer was not the original purchaser of the arrow that injured him, he bought the arrow second-hard. Yonts v. Easton Tech. Prods., 676 Fed. Appx. 413, 2017 FED App. 0032N, 2017 U.S. App. LEXIS 723 (6th Cir. Ky. 2017 ).

Research References and Practice Aids

Kentucky Bench & Bar.

An Overview of the Magnuson-Moss Warranty Act, Vol. 55, No. 3, Summer 1991, Ky. Bench & Bar 18.

Kentucky Law Journal.

Brickey, Products Liability in Kentucky: The Doctrinal Dilemma, 65 Ky. L.J. 593 (1976-77).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Northern Kentucky Law Review.

Notes, Torts — Products Liability — Should Contract or Tort Provide the Cause of Action When a Plaintiff Seeks Recovery Only for Damage to the Defective Product Itself — C & S Fuel, Inc. v. Clark Equip. Co.,10 N. Ky. L. Rev. 489 (1983).

Miller, The Kentucky Law of Products LiabilityIn A Nutshell, 12 N. Ky. L. Rev. 201 (1985).

Comments, Reda Pump, a Division of TRW, Inc. v. Finck: An Update on Kentucky Product Liability Law, 14 N. Ky. L. Rev. 395 (1988).

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

355.2-319. F.O.B. and F.A.S. terms.

  1. Unless otherwise agreed the term F.O.B. (which means “free on board”) at a named place, even though used only in connection with the stated price, is a delivery term under which
    1. when the term is F.O.B. the place of shipment, the seller must at that place ship the goods in the manner provided in this article (KRS 355.2-504 ) and bear the expense and risk of putting them into the possession of the carrier; or
    2. when the term is F.O.B. the place of destination, the seller must at his own expense and risk transport the goods to that place and there tender delivery of them in the manner provided in this article (KRS 355.2-503 );
    3. when under either (a) or (b) the term is also F.O.B. vessel, car or other vehicle, the seller must in addition at his own expense and risk load the goods on board. If the term is F.O.B. vessel the buyer must name the vessel and in an appropriate case the seller must comply with the provisions of this article on the form of bill of lading (KRS 355.2-323 ).
  2. Unless otherwise agreed the term F.A.S. vessel (which means “free alongside”) at a named port, even though used only in connection with the stated price, is a delivery term under which the seller must
    1. at his own expense and risk deliver the goods alongside the vessel in the manner usual in that port or on a dock designated and provided by the buyer; and
    2. obtain and tender a receipt for the goods in exchange for which the carrier is under a duty to issue a bill of lading.
  3. Unless otherwise agreed in any case falling within subsection (1)(a) or (c) or subsection (2) the buyer must seasonably give any needed instructions for making delivery, including when the term is F.A.S. or F.O.B. the loading berth of the vessel and in an appropriate case its name and sailing date. The seller may treat the failure of needed instructions as a failure of cooperation under this article (KRS 355.2-311 ). He may also at his option move the goods in any reasonable manner preparatory to delivery or shipment.
  4. Under the term F.O.B. vessel or F.A.S. unless otherwise agreed the buyer must make payment against tender of the required documents and the seller may not tender nor the buyer demand delivery of the goods in substitution for the documents.

History. Enact. Acts 1958, ch. 77, § 2-319, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

  1. This section is intended to negate the uncommercial line of decision which treats an “F.O.B.” term as “merely a price term.” The distinctions taken in subsection (1) handle most of the issues which have on occasion led to the unfortunate judicial language just referred to. Other matters which have led to sound results being based on unhappy language in regard to F.O.B. clauses are dealt with in this Act by Section 2-311(2) (seller’s option re arrangements relating to shipment) and Sections 2-614 and 615 (substituted performance and seller’s excuse).
  2. Subsection (1)(c) not only specifies the duties of a seller who engages to deliver “F.O.B. vessel,” or the like, but ought to make clear that no agreement is soundly drawn when it looks to reshipment from San Francisco or New York, but speaks merely of “F.O.B.” the place.
  3. The buyer’s obligations stated in subsection (1)(c) and subsection (3) are, as shown in the text, obligations of cooperation. The last sentence of subsection (3) expressly, though perhaps unnecessarily, authorizes the seller, pending instructions, to go ahead with such preparatory moves as shipment from the interior to the named point of delivery. The sentence presupposes the usual case in which instructions “fail”; a prior repudiation by the buyer, giving notice that breach was intended, would remove the reason for the sentence, and would normally bring into play, instead, the second sentence of Section 2-704, which duly calls for lessening damages.
  4. The treatment of “F.O.B. vessel” in conjunction with F.A.S. fits, in regard to the need for payment against documents, with standard practice and case law; but “F.O.B. vessel” is a term which by its very language makes express the need for an “on board” document. In this respect, that term is stricter than the ordinary overseas “shipment” contract (C.I.F., etc., Section 2-320).

Cross references:

Sections 2-311(3), 2-323, 2-503 and 2-504.

Definitional cross references:

“Agreed”. Section 1-201. “Bill of lading”. Section 1-201. “Buyer”. Section 2-103. “Goods”. Section 2-105. “Seasonably”. Section 1-204. “Seller”. Section 2-103. “Term”. Section 1-201.

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NOTES TO DECISIONS

1.F.O.B.

Under law that provided that where seller was to send the goods to the buyer, delivery of goods to a carrier for the purpose of transmission to the buyer was a delivery to the buyer, and law that provided that a delivery to a carrier for the purpose of transmission was an unconditional presumption that the seller had delivered the goods to the buyer, and it was expressly stated that this presumption was applicable, although by the terms of the contract, the buyer was to pay the price before receiving delivery of the goods and the goods marked with the words “collect on delivery” or their equivalent, where fuel oil was sold for delivery to barge of common carrier and F.O.B. seller’s dock, seller was not liable for loss through sinking of the barge when filled to 15 or 18 inches of the top. Troy Refining Corp. v. Slagter Oil & Grease Co., 61 F. Supp. 369, 1945 U.S. Dist. LEXIS 2188 (D. Ky. 1945 ) (decided under prior law).

Where parties had what was known as a shipment or F.O.B. contract, delivery under it was not at the destination but at the point of departure and, where shipper proved it shipped the goods and buyer did not affirmatively plead they were not received, shipper established a prima facie case of debt. Permalum Window & Awning Mfg. Co. v. Permalum Window Mfg. Corp., 412 S.W.2d 863, 1967 Ky. LEXIS 440 ( Ky. 1967 ) (decided under prior law).

In a Chapter 11 bankruptcy proceeding, a lender who had a security interest in all of debtor’s assets was entitled to the proceeds of a sale of goods delivered to debtor by a seller; because the goods were shipped “F.O.B. destination” and had arrived at property debtor leased, there had been a tender of delivery of the goods, and under KRS 355.2-401 (2), KRS 355.2-319 (1)(b), KRS 355.2-503 (1), and KRS 355.9-203 (1) and (2)(b), title to the goods had passed to debtor from the seller, and the lender’s security interest had attached to the goods. In re Ashland Steel Liquidating Co., 2004 Bankr. LEXIS 908 (Bankr. E.D. Ky. July 7, 2004).

Cited:

Department of Revenue v. Cox Machinery Co., 650 S.W.2d 261, 1982 Ky. App. LEXIS 291 (Ky. Ct. App. 1982).

Research References and Practice Aids

Kentucky Bench & Bar.

Gardner, Ten Traps for the Unwary in International Transactions, Vol. 60, No. 4, Fall 1996, Ky. Bench & Bar 26.

Kentucky Law Journal.

Brickey, Products Liability in Kentucky: The Doctrinal Dilemma, 65 Ky. L.J. 593 (1976-77).

355.2-320. C.I.F. and C. & F. terms.

  1. The term C.I.F. means that the price includes in a lump sum the cost of the goods and the insurance and freight to the named destination. The term C. & F. or C.F. means that the price so includes cost and freight to the named destination.
  2. Unless otherwise agreed and even though used only in connection with the stated price and destination, the term C.I.F. destination or its equivalent requires the seller at his own expense and risk to
    1. put the goods into the possession of a carrier at the port for shipment and obtain a negotiable bill or bills of lading covering the entire transportation to the named destination; and
    2. load the goods and obtain a receipt from the carrier (which may be contained in the bill of lading) showing that the freight has been paid or provided for; and
    3. obtain a policy or certificate of insurance, including any war risk insurance, of a kind and on terms then current at the port of shipment in the usual amount, in the currency of the contract, shown to cover the same goods covered by the bill of lading and providing for payment of loss to the order of the buyer or for the account of whom it may concern; but the seller may add to the price the amount of the premium for any such war risk insurance; and
    4. prepare an invoice of the goods and procure any other documents required to effect shipment or to comply with the contract; and
    5. forward and tender with commercial promptness all the documents in due form and with any indorsement necessary to perfect the buyer’s rights.
  3. Unless otherwise agreed the term C. & F. or its equivalent has the same effect and imposes upon the seller the same obligations and risks as a C.I.F. term except the obligation as to insurance.
  4. Under the term C.I.F. or C. & F. unless otherwise agreed the buyer must make payment against tender of the required documents and the seller may not tender nor the buyer demand delivery of the goods in substitution for the documents.

History. Enact. Acts 1958, ch. 77, § 2-320, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

To make it clear that:

  1. The C.I.F. contract is not a destination but a shipment contract with risk of subsequent loss or damage to the goods passing to the buyer upon shipment if the seller has properly performed all his obligations with respect to the goods. Delivery to the carrier is delivery to the buyer for purposes of risk and “title”. Delivery of possession of the goods is accomplished by delivery of the bill of lading, and upon tender of the required documents the buyer must pay the agreed price without awaiting the arrival of the goods and if they have been lost or damaged after proper shipment he must seek his remedy against the carrier or insurer. The buyer has no right of inspection prior to payment or acceptance of the documents.
  2. The seller’s obligations remain the same even though the C.I.F. term is “used only in connection with the stated price and destination”.
  3. The insurance stipulated by the C.I.F. term is for the buyer’s benefit to protect him against the risk of loss or damage to the goods in transit. A clause in a C.I.F. contract “insurance—for the account of sellers” should be viewed in its ordinary mercantile meaning that the sellers must pay for the insurance and not that it is intended to run to the seller’s benefit.
  4. A bill of lading covering the entire transportation from the port of shipment is explicitly required but the provision on this point must be read in the light of its reason to assure the buyer of as full protection as the conditions of shipment reasonably permit, remembering always that this type of contract is designed to move the goods in the channels commercially available. To enable the buyer to deal with the goods while they are afloat the bill of lading must be one that covers only the quantity of goods called for by the contract. The buyer is not required to accept his part of the goods without a bill of lading because the latter covers a larger quantity, nor is he required to accept a bill of lading for the whole quantity under a stipulation to hold the excess for the owner. Although the buyer is not compelled to accept either goods or documents under such circumstances he may of course claim his rights in any goods which have been identified to his contract.
  5. The seller is given the option of paying or providing for the payment of freight. He has no option to ship “freight collect” unless the agreement so provides. The rule of the common law that the buyer need not pay the freight if the goods do not arrive is preserved.

    Unless the shipment has been sent “freight collect” the buyer is entitled to receive documentary evidence that he is not obligated to pay the freight; the seller is therefore required to obtain a receipt “showing that the freight has been paid or provided for.” The usual notation in the appropriate space on the bill of lading that the freight has been prepaid is a sufficient receipt, as at common law. The phrase “provided for” is intended to cover the frequent situation in which the carrier extends credit to a shipper for the freight on successive shipments and receives periodical payments of the accrued freight charges from him.

  6. The requirement that unless otherwise agreed the seller must procure insurance “of a kind and on terms then current at the port for shipment in the usual amount, in the currency of the contract, sufficiently shown to cover the same goods covered by the bill of lading”, applies to both marine and war risk insurance. As applied to marine insurance, it means such insurance as is usual or customary at the port for shipment with reference to the particular kind of goods involved, the character and equipment of the vessel, the route of the voyage, the port of destination and any other considerations that affect the risk. It is the substantial equivalent of the ordinary insurance in the particular trade and on the particular voyage and is subject to agreed specifications of type or extent of coverage. The language does not mean that the insurance must be adequate to cover all risks to which the goods may be subject in transit. There are some types of loss or damage that are not covered by the usual marine insurance and are excepted in bills of lading or in applicable statutes from the causes of loss or damage for which the carrier or the vessel is liable. Such risks must be borne by the buyer under this Article.

    Insurance secured in compliance with a C.I.F. term must cover the entire transportation of the goods to the named destination.

  7. An additional obligation is imposed upon the seller in requiring him to procure customary war risk insurance at the buyer’s expense. This changes the common law on the point. The seller is not required to assume the risk of including in the C.I.F. price the cost of such insurance, since it often fluctuates rapidly, but is required to treat it simply as a necessary for the buyer’s account. What war risk insurance is “current” or usual turns on the standard forms of policy or rider in common use.
  8. The C.I.F. contract calls for insurance covering the value of the goods at the time and place of shipment and does not include any increase in market value during transit or any anticipated profit to the buyer on a sale by him.

    The contract contemplates that before the goods arrive at their destination they may be sold again and again on C.I.F. terms and that the original policy of insurance and bill of lading will run with the interest in the goods by being transferred to each successive buyer. A buyer who becomes the seller in such an intermediate contract for sale does not thereby, if his sub-buyer knows the circumstances, undertake to insure the goods against an increased price fixed in the new contract or to cover the increase in price by additional insurance, and his buyer may not reject the documents on the ground that the original policy does not cover such higher price. If such a sub-buyer desires additional insurance he must procure it for himself.

    Where the seller exercises an option to ship “freight collect” and to credit the buyer with the freight against the C.I.F. price, the insurance need not cover the freight since the freight is not at the buyer’s risk. On the other hand, where the seller prepays the freight upon shipping under a bill of lading requiring prepayment and providing that the freight shall be deemed earned and shall be retained by the carrier “ship and/or cargo lost or not lost,” or using words of similar import, he must procure insurance that will cover the freight, because notwithstanding that the goods are lost in transit the buyer is bound to pay the freight as part of the C.I.F. price and will be unable to recover it back from the carrier.

  9. Insurance “for the account of whom it may concern” is usual and sufficient. However, for a valid tender the policy of insurance must be one which can be disposed of together with the bill of lading and so must be “sufficiently shown to cover the same goods covered by the bill of lading.” It must cover separately the quantity of goods called for by the buyer’s contract and not merely insure his goods as part of a larger quantity in which others are interested, a case provided for in American mercantile practice by the use of negotiable certificates of insurance which are expressly authorized by this section. By usage these certificates are treated as the equivalent of separate policies and are good tender under C.I.F. contracts. The term “certificate of insurance”, however, does not of itself include certificates or “cover notes” issued by the insurance broker and stating that the goods are covered by a policy. Their sufficiency as substitutes for policies will depend upon proof of an established usage or course of dealing. The present section rejects the English rule that not only brokers’ certificates and “cover notes” but also certain forms of American insurance certificates are not the equivalent of policies and are not good tender under a C.I.F. contract.

    The seller’s failure to tender a proper insurance document is waived if the buyer refuses to make payment on other and untenable grounds at a time when proper insurance could have been obtained and tendered by the seller if timely objection had been made. Even a failure to insure on shipment may be cured by seasonable tender of a policy retroactive in effect; e. g., one insuring the goods “lost or not lost.” The provisions of this Article on cure of improper tender and on waiver of buyer’s objections by silence are applicable to insurance tenders under a C.I.F. term. Where there is no waiver by the buyer as described above, however, the fact that the goods arrive safely does not cure the seller’s breach of his obligations to insure them and tender to the buyer a proper insurance document.

  10. The seller’s invoice of the goods shipped under a C.I.F. contract is regarded as a usual and necessary document upon which reliance may properly be placed. It is the document which evidences points of description, quality and the like which do not readily appear in other documents. This Article rejects those statements to the effect that the invoice is a usual but not a necessary document under a C.I.F. term.
  11. The buyer needs all of the documents required under a C.I.F. contract, in due form and with necessary endorsements, so that before the goods arrive he may deal with them by negotiating the documents or may obtain prompt possession of the goods after their arrival. If the goods are lost or damaged in transit the documents are necessary to enable him promptly to assert his remedy against the carrier or insurer. The seller is therefore obligated to do what is mercantilely reasonable in the circumstances and should make every reasonable exertion to send forward the documents as soon as possible after the shipment. The requirement that the documents be forwarded with “commercial promptness” expresses a more urgent need for action than that suggested by the phrase “reasonable time”.
  12. Under a C.I.F. contract the buyer, as under the common law, must pay the price upon tender of the required documents without first inspecting the goods, but his payment in these circumstances does not constitute an acceptance of the goods nor does it impair his right of subsequent inspection or his options and remedies in the case of improper delivery. All remedies and rights for the seller’s breach are reserved to him. The buyer must pay before inspection and assert his remedy against the seller afterward unless the nonconformity of the goods amounts to a real failure of consideration, since the purpose of choosing this form of contract is to give the seller protection against the buyer’s unjustifiable rejection of the goods at a distant port of destination which would necessitate taking possession of the goods and suing the buyer there.
  13. A valid C.I.F. contract may be made which requires part of the transportation to be made on land and part on the sea, as where the goods are to be brought by rail from an inland point to a seaport and thence transported by vessel to the named destination under a “through” or combination bill of lading issued by the railroad company. In such a case shipment by rail from the inland point within the contract period is a timely shipment notwithstanding that the loading of the goods on the vessel is delayed by causes beyond the seller’s control.
  14. Although subsection (2) stating the legal effects of the C.I.F. term is an “unless otherwise agreed” provision, the express language used in an agreement is frequently a precautionary, fuller statement of the normal C.I.F. terms and hence not intended as a departure or variation from them. Moreover, the dominant outlines of the C.I.F. term are so well understood commercially that any variation should, whenever reasonably possible, be read as falling within those dominant outlines rather than as destroying the whole meaning of a term which essentially indicates a contract for proper shipment rather than one for delivery at destination. Particularly careful consideration is necessary before a printed form or clause is construed to mean agreement otherwise and where a C.I.F. contract is prepared on a printed form designed for some other type of contract, the C.I.F. terms must prevail over printed clauses repugnant to them.
  15. Under subsection (4) the fact that the seller knows at the time of the tender of the documents that the goods have been lost in transit does not affect his rights if he has performed his contractual obligations. Similarly, the seller cannot perform under a C.I.F. term by purchasing and tendering landed goods.
  16. Under the C. & F. term, as under the C.I.F. term, title and risk of loss are intended to pass to the buyer on shipment. A stipulation in a C. & F. contract that the seller shall effect insurance on the goods and charge the buyer with the premium (in effect that he shall act as the buyer’s agent for that purpose) is entirely in keeping with the pattern. On the other hand, it often happens that the buyer is in a more advantageous position than the seller to effect insurance on the goods or that he has in force an “open” or “floating” policy covering all shipments made by him or to him, in either of which events the C. & F. term is adequate without mention of insurance.
  17. It is to be remembered that in a French contract the term “C.A.F.” does not mean “Cost and Freight” but has exactly the same meaning as the term “C.I.F.” since it is merely the French equivalent of that term. The “A” does not stand for “and” but for “assurance” which means insurance.

Cross references:

Point 4: Section 2-323.

Point 6: Section 2-509(1)(a).

Point 9: Sections 2-508 and 2-605(1)(a).

Point 12: Sections 2-321(3), 2-512 and 2-513(3) and Article 5.

Definitional cross references:

“Bill of lading”. Section 1-201. “Buyer”. Section 2-103. “Contract”. Section 1-201. “Goods”. Section 2-105. “Rights”. Section 1-201. “Seller”. Section 2-103. “Term”. Section 1-201.

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355.2-321. C.I.F. or C. & F.: “Net landed weights” — “Payment on arrival” — Warranty of condition on arrival.

Under a contract containing a term C.I.F. or C. & F.

  1. Where the price is based on or is to be adjusted according to “net landed weights”, “delivered weights”, “out turn” quantity or quality or the like, unless otherwise agreed the seller must reasonably estimate the price. The payment due on tender of the documents called for by the contract is the amount so estimated, but after final adjustment of the price a settlement must be made with commercial promptness.
  2. An agreement described in subsection (1) or any warranty of quality or condition of the goods on arrival places upon the seller the risk of ordinary deterioration, shrinkage and the like in transportation but has no effect on the place or time of identification to the contract for sale or delivery or on the passing of the risk of loss.
  3. Unless otherwise agreed where the contract provides for payment on or after arrival of the goods the seller must before payment allow such preliminary inspection as is feasible; but if the goods are lost delivery of the documents and payment are due when the goods should have arrived.

History. Enact. Acts 1958, ch. 77, § 2-321, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

This section deals with two variations of the C.I.F. contract which have evolved in mercantile practice but are entirely consistent with the basic C.I.F. pattern. Paragraphs (a)(i) and (ii), which provide for a shift to the seller of the risk of quality and weight deterioration during shipment, are designed to conform the law to the best mercantile practice and usage without changing the legal consequences of the C.I.F. or C. & F. term as to the passing of marine risks to the buyer at the point of shipment. Paragraph (a)(iii) provides that where under the contract documents are to be presented for payment after arrival of the goods, this amounts merely to a postponement of the payment under the C.I.F. contract and is not to be confused with the “no arrival, no sale” contract. If the goods are lost, delivery of the documents and payment against them are due when the goods should have arrived. The clause for payment on or after arrival is not to be construed as such a condition precedent to payment that if the goods are lost in transit the buyer need never pay and the seller must bear the loss.

Cross reference:

Section 2-324.

Definitional cross references:

“Agreement”. Section 1-201. “Contract”. Section 1-201. “Delivery”. Section 1-201. “Goods”. Section 2-105. “Seller”. Section 2-103. “Term”. Section 1-201.

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355.2-322. Delivery “ex-ship.”

  1. Unless otherwise agreed a term for delivery of goods “ex-ship” (which means from the carrying vessel) or in equivalent language is not restricted to a particular ship and requires delivery from a ship which has reached a place at the named port of destination where goods of the kind are usually discharged.
  2. Under such a term unless otherwise agreed
    1. the seller must discharge all liens arising out of the carriage and furnish the buyer with a direction which puts the carrier under a duty to deliver the goods; and
    2. the risk of loss does not pass to the buyer until the goods leave the ship’s tackle or are otherwise properly unloaded.

History. Enact. Acts 1958, ch. 77, § 2-322, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

  1. The delivery term, “ex ship” as between seller and buyer, is the reverse of the f.a.s. term covered.
  2. Delivery need not be made from any particular vessel under a clause calling for delivery “ex ship”, even though a vessel on which shipment is to be made originally is named in the contract, unless the agreement by appropriate language, restricts the clause to delivery from a named vessel.
  3. The appropriate place and manner of unloading at the port of destination depend upon the nature of the goods and the facilities and usages of the port.
  4. A contract fixing a price “ex ship” with payment “cash against documents” calls only for such documents as are appropriate to the contract. Tender of a delivery order and of a receipt for the freight after the arrival of the carrying vessel is adequate. The seller is not required to tender a bill of lading as a document of title nor is he required to insure the goods for the buyer’s benefit, as the goods are not at the buyer’s risk during the voyage.

Cross reference:

Point 1: Section 2-319(2).

Definitional cross references:

“Buyer”. Section 2-103. “Goods”. Section 2-105. “Seller”. Section 2-103. “Term”. Section 1-201.

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355.2-323. Form of bill of lading required in overseas shipment — “Overseas.”

  1. Where the contract contemplates overseas shipment and contains a term C.I.F. or C. & F. or F.O.B. vessel, the seller unless otherwise agreed must obtain a negotiable bill of lading stating that the goods have been loaded on board or, in the case of a term C.I.F. or C. & F., received for shipment.
  2. Where in a case within subsection (1) a bill of lading has been issued in a set of parts, unless otherwise agreed if the documents are not to be sent from abroad the buyer may demand tender of the full set; otherwise only one part of the bill of lading need be tendered. Even if the agreement expressly requires a full set
    1. due tender of a single part is acceptable within the provisions of this article on cure of improper delivery (subsection (1) of KRS 355.2-508 ); and
    2. even though the full set is demanded, if the documents are sent from abroad the person tendering an incomplete set may nevertheless require payment upon furnishing an indemnity which the buyer in good faith deems adequate.
  3. A shipment by water or by air or a contract contemplating such shipment is “overseas” insofar as by usage of trade or agreement it is subject to the commercial, financing or shipping practices characteristic of international deep water commerce.

History. Enact. Acts 1958, ch. 77, § 2-323, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

  1. Subsection (1) follows the “American” rule that a regular bill of lading indicating delivery of the goods at the dock for shipment is sufficient, except under a term “F.O.B. vessel.” See Section 2-319 and comment thereto.
  2. Subsection (2) deals with the problem of bills of lading covering deep water shipments, issued not as a single bill of lading but in a set of parts, each part referring to the other parts and the entire set constituting in commercial practice and at law a single bill of lading. Commercial practice in international commerce is to accept and pay against presentation of the first part of a set if the part is sent from overseas even though the contract of the buyer requires presentation of a full set of bills of lading provided adequate indemnity for the missing parts is forthcoming.

    This subsection codifies that practice as between buyer and seller. Article 5 (Section 5-113) authorizes banks presenting drafts under letters of credit to give indemnities against the missing parts, and this subsection means that the buyer must accept and act on such indemnities if he in good faith deems them adequate. But neither this subsection nor Article 5 decides whether a bank which has issued a letter of credit is similarly bound. The issuing bank’s obligation under a letter of credit is independent and depends on its own terms. See Article 5.

Cross references:

Sections 2-508(2), 5-113.

Definitional cross references:

“Bill of lading”. Section 1-201. “Buyer”. Section 2-103. “Contract”. Section 1-201. “Delivery”. Section 1-201. “Financing agency”. Section 2-104. “Person”. Section 1-201. “Seller”. Section 2-103. “Send”. Section 1-201. “Term”. Section 1-201.

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355.2-324. “No arrival, no sale” term.

Under a term “no arrival, no sale” or terms of like meaning, unless otherwise agreed,

  1. the seller must properly ship conforming goods and if they arrive by any means he must tender them on arrival but he assumes no obligation that the goods will arrive unless he has caused the nonarrival; and
  2. where without fault of the seller the goods are in part lost or have so deteriorated as no longer to conform to the contract or arrive after the contract time, the buyer may proceed as if there had been casualty to identified goods (KRS 355.2-613 ).

History. Enact. Acts 1958, ch. 77, § 2-324, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

  1. The “no arrival, no sale” term in a “destination” overseas contract leaves risk of loss on the seller but gives him an exemption from liability for non-delivery. Both the nature of the case and the duty of good faith require that the seller must not interfere with the arrival of the goods in any way. If the circumstances impose upon him the responsibility for making or arranging the shipment, he must have a shipment made despite the exemption clause. Further, the shipment made must be a conforming one, for the exemption under a “no arrival, no sale” term applies only to the hazards of transportation and the goods must be proper in all other respects.

    The reason of this section is that where the seller is reselling goods bought by him as shipped by another and this fact is known to the buyer, so that the seller is not under any obligation to make the shipment himself, the seller is entitled under the “no arrival, no sale” clause to exemption from payment of damages for non-delivery if the goods do not arrive or if the goods which actually arrive are non-conforming. This does not extend to sellers who arrange shipment by their own agents, in which case the clause is limited to casualty due to marine hazards. But sellers who make known that they are contracting only with respect to what will be delivered to them by parties over whom they assume no control are entitled to the full quantum of the exemption.

  2. The provisions of this Article on identification must be read together with the present section in order to bring the exemption into application. Until there is some designation of the goods in a particular shipment or on a particular ship as being those to which the contract refers there can be no application of an exemption for their non-arrival.
  3. The seller’s duty to tender the agreed or declared goods if they do arrive is not impaired because of their delay in arrival or by their arrival after transshipment.
  4. The phrase “to arrive” is often employed in the same sense as “no arrival, no sale” and may then be given the same effect. But a “to arrive” term, added to a C.I.F. or C. & F. contract, does not have the full meaning given by this section to “no arrival, no sale”. Such a “to arrive” term is usually intended to operate only to the extent that the risks are not covered by the agreed insurance and the loss or casualty is due to such uncovered hazards. In some instances the “to arrive” term may be regarded as a time of payment term, or, in the case of the reselling seller discussed in point 1 above, as negating responsibility for conformity of the goods, if they arrive, to any description which was based on his good faith belief of the quality. Whether this is the intention of the parties is a question of fact based on all the circumstances surrounding the resale and in case of ambiguity the rules of Sections 2-316 and 2-317 apply to preclude dishonor.
  5. Paragraph (b) applies where goods arrive impaired by damage or partial loss during transportation and makes the policy of this Article on casualty to identified goods applicable to such a situation. For the term cannot be regarded as intending to give the seller an unforeseen profit through casualty; it is intended only to protect him from loss due to causes beyond his control.

Cross references:

Point 1: Section 1-203.

Point 2: Section 2-501(a) and (c).

Point 5: Section 2-613.

Definitional cross references:

“Buyer”. Section 2-103. “Conforming”. Section 2-106. “Contract”. Section 1-201. “Fault”. Section 1-201. “Goods”. Section 2-105. “Sale”. Section 2-106. “Seller”. Section 2-103. “Term”. Section 1-201.

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355.2-325. “Letter of credit” term — “Confirmed credit.”

  1. Failure of the buyer seasonably to furnish an agreed letter of credit is a breach of the contract for sale.
  2. The delivery to seller of a proper letter of credit suspends the buyer’s obligation to pay. If the letter of credit is dishonored, the seller may on seasonable notification to the buyer require payment directly from him.
  3. Unless otherwise agreed the term “letter of credit” or “banker’s credit” in a contract for sale means an irrevocable credit issued by a financing agency of good repute and where the shipment is overseas, of good international repute. The term “confirmed credit” means that the credit must also carry the direct obligation of such an agency which does business in the seller’s financial market.

History. Enact. Acts 1958, ch. 77, § 2-325, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

To express the established commercial and banking understanding as to the meaning and effects of terms calling for “letters of credit” or “confirmed credit”:

  1. Subsection (2) follows the general policy of this Article and Article 3 (Section 3-802) on conditional payment, under which payment by check or other short-term instrument is not ordinarily final as between the parties if the recipient duly presents the instrument and honor is refused. Thus the furnishing of a letter of credit does not substitute the financing agency’s obligation for the buyer’s, but the seller must first give the buyer reasonable notice of his intention to demand direct payment from him.
  2. Subsection (3) requires that the credit be irrevocable and be a prime credit as determined by the standing of the issuer. It is not necessary, unless otherwise agreed, that the credit be a negotiation credit; the seller can finance himself by an assignment of the proceeds under Section 5-116(2).
  3. The definition of “confirmed credit” is drawn on the supposition that the credit is issued by a bank which is not doing direct business in the seller’s financial market; there is no intention to require the obligation of two banks both local to the seller.

Cross references:

Sections 2-403, 2-511(3) and 3-802 and Article 5.

Definitional cross references:

“Buyer”. Section 2-103. “Contract for sale”. Section 2-106. “Draft”. Section 3-104. “Financing agency”. Section 2-104. “Notifies”. Section 1-201. “Overseas”. Section 2-323. “Purchaser”. Section 1-201. “Seasonably”. Section 1-204. “Seller”. Section 2-103. “Term”. Section 1-201.

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355.2-326. Sale on approval and sale or return — Rights of creditors.

  1. Unless otherwise agreed, if delivered goods may be returned by the buyer even though they conform to the contract, the transaction is:
    1. A “sale on approval” if the goods are delivered primarily for use; and
    2. A “sale or return” if the goods are delivered primarily for resale.
  2. Goods held on approval are not subject to the claims of the buyer’s creditors until acceptance; goods held on sale or return are subject to such claims while in the buyer’s possession.
  3. Any “or return” term of a contract for sale is to be treated as a separate contract for sale within the statute of frauds section of this article (KRS 355.2-201 ) and as contradicting the sale aspect of the contract within the provisions of this article on parol or extrinsic evidence (KRS 355.2-202 ).

History. Enact. Acts 1958, ch. 77, § 2-326, effective July 1, 1960; 2000, ch. 408, § 160, effective July 1, 2001.

Official Comment

Prior uniform statutory provision:

Section 19(3), Uniform Sales Act.

Changes:

Completely rewritten in this and the succeeding section.

Purposes of changes:

To make it clear that:

  1. Both a “sale on approval” and a “sale or return” should be distinguished from other types of transactions with which they frequently have been confused. A “sale on approval,” sometimes also called a sale “on trial” or “on satisfaction,” deals with a contract under which the seller undertakes a risk in order to satisfy its prospective buyer with the appearance or performance of the goods that are sold. The goods are delivered to the proposed purchaser but they remain the property of the seller until the buyer accepts them. The price has already been agreed. The buyer’s willingness to receive and test the goods is the consideration for the seller’s engagement to deliver and sell. A “sale or return,” on the other hand, typically is a sale to a merchant whose unwillingness to buy is overcome only by the seller’s engagement to take back the goods (or any commercial unit of goods) in lieu of payment if they fail to be resold. A sale or return is a present sale of goods which may be undone at the buyer’s option. Accordingly, subsection (2) provides that goods delivered on approval are not subject to the prospective buyer’s creditors until acceptance, and goods delivered in a sale or return are subject to the buyer’s creditors while in the buyer’s possession.

    These two transactions are so strongly delineated in practice and in general understanding that every presumption runs against a delivery to a consumer being a “sale or return” and against a delivery to a merchant for resale being a “sale on approval.”

  2. The right to return goods for failure to conform to the contract does not make the transaction a “sale on approval” or “sale or return” and has nothing to do with this section or Section 2-327. This section is not concerned with remedies for breach of contract. It deals instead with a power given by the contract to turn back the goods even though they are wholly as warranted. This section nevertheless pre-supposes that a contract for sale is contemplated by the parties although that contract may be of the particular character that this section addresses (i.e., a sale on approval or a sale or return).

    If a buyer’s obligation as a buyer is conditioned not on his personal approval but on the article’s passing a described objective test, the risk of loss by casualty pending the test is properly the seller’s and proper return is at his expense. On the point of “satisfaction” as meaning “reasonable satisfaction” when an industrial machine is involved, this Article takes no position.

    If a buyer’s obligation as a buyer is conditioned not on his personal approval but on the article’s passing a described objective test, the risk of loss by casualty pending the test is properly the seller’s and proper return is at his expense. On the point of “satisfaction” as meaning “reasonable satisfaction” when an industrial machine is involved, this Article takes no position.

  3. Subsection (3) resolves a conflict in the pre-UCC case law by recognizing that an “or return” provision is so definitely at odds with any ordinary contract for sale of goods that if a written agreement is involved the “or return” term must be contained in a written memorandum. The “or return” aspect of a sales contract must be treated as a separate contract under the Statute of Frauds section and as contradicting the sale insofar as questions of parole or extrinsic evidence are concerned.
  4. Certain true consignment transactions were dealt with in former Sections 2-326(3) and 9-114. These provisions have been deleted and have been replaced by new provisions in Article 9. See, e.g., Sections 9-109(a)(4); 9-103(b); 9-319.

Cross references:

Point 2: Article 9.

Point 3: Sections 2-201 and 2-202.

Definitional cross references:

“Between merchants”. Section 2-104. “Buyer”. Section 2-103. “Conform”. Section 2-106. “Contract for sale”. Section 2-106. “Creditor”. Section 1-201. “Goods”. Section 2-105. “Sale”. Section 2-106. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Consignments.

Creditor’s goods sold by debtor in debtor’s store were not held on consignment where there was no notice to third parties that any of the inventory in debtor’s store belonged to creditor and testimony describing the business practices between the parties directly contravened creditor’s characterization that the goods were sold on consignment. Brown v. Foley (In re Brown), 213 B.R. 317, 1997 Bankr. LEXIS 1548 (Bankr. W.D. Ky. 1997 ).

2.Agreements to Return.

An agreement to return in a reasonable time all unsold or unsalable goods which was made after the contract of purchase was not valid unless it was supported by a consideration. (decided under prior law) Stratton & Terstegge Co. v. Criswell, 290 Ky. 64 , 160 S.W.2d 137, 1942 Ky. LEXIS 339 ( Ky. 1942 ).

3.Delivery.

Liquor shipped subject to inspection was not subject to attachment by buyer’s creditors where sheriff appeared with the attachment and was notified prior to the levy upon the goods that they were not the property of buyer and the drayman having the packages in charge was told that they would not be received. (decided under prior law) Porter v. Rice, 128 S.W. 70 ( Ky. 1910 ).

4.Parol Evidence.

While parol evidence was inadmissible to vary or contradict the terms of a written contract, this rule did not apply where the writing only purported to express part of the contract, or was expressed in such incomplete terms as to be unintelligible, and parol evidence under such circumstances was admissible to explain the writing so long as it did not vary or contradict it. (decided under prior law) Fannin v. Williams, 231 Ky. 392 , 21 S.W.2d 482, 1929 Ky. LEXIS 283 ( Ky. 1929 ).

Cited:

In re Morristown Lincoln-Mercury, Inc., 25 B.R. 377, 1982 Bankr. LEXIS 2893 (Bankr. E.D. Tenn. 1982).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

355.2-327. Special incidents of sale on approval and sale or return.

  1. Under a sale on approval unless otherwise agreed
    1. although the goods are identified to the contract the risk of loss and the title do not pass to the buyer until acceptance; and
    2. use of the goods consistent with the purpose of trial is not acceptance but failure seasonably to notify the seller of election to return the goods is acceptance, and if the goods conform to the contract acceptance of any part is acceptance of the whole; and
    3. after due notification of election to return, the return is at the seller’s risk and expense but a merchant buyer must follow any reasonable instructions.
  2. Under a sale or return unless otherwise agreed
    1. the option to return extends to the whole or any commercial unit of the goods while in substantially their original condition, but must be exercised seasonably; and
    2. the return is at the buyer’s risk and expense.

History. Enact. Acts 1958, ch. 77, § 2-327, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 19(3), Uniform Sales Act.

Changes:

Completely rewritten in preceding and this section.

Purposes of changes:

To make it clear that:

  1. In the case of a sale on approval:

    If all of the goods involved conform to the contract, the buyer’s acceptance of part of the goods constitutes acceptance of the whole. Acceptance of part falls outside the normal intent of the parties in the “on approval” situation and the policy of this Article allowing partial acceptance of a defective delivery has no application here. A case where a buyer takes home two dresses to select one commonly involves two distinct contracts; if not, it is covered by the words “unless otherwise agreed”.

  2. In the case of a sale or return, the return of any unsold unit merely because it is unsold is the normal intent of the “sale or return” provision, and therefore the right to return for this reason alone is independent of any other action under the contract which would turn on wholly different considerations. On the other hand, where the return of goods is for breach, including return of items resold by the buyer and returned by the ultimate purchasers because of defects, the return procedure is governed not by the present section but by the provisions on the effects and revocation of acceptance.
  3. In the case of a sale on approval the risk rests on the seller until acceptance of the goods by the buyer, while in a sale or return the risk remains throughout on the buyer.
  4. Notice of election to return given by the buyer in a sale on approval is sufficient to relieve him of any further liability. Actual return by the buyer to the seller is required in the case of a sale or return contract. What constitutes due “giving” of notice, as required in “on approval” sales, is governed by the provisions on good faith and notice. “Seasonable” is used here as defined in Section 1-204. Nevertheless, the provisions of both this Article and of the contract on this point must be read with commercial reason and with full attention to good faith.

Cross references:

Point 1: Sections 2-501, 2-601 and 2-603.

Point 2: Sections 2-607 and 2-608.

Point 4: Sections 1-201 and 1-204.

Definitional cross references:

“Agreed”. Section 1-201. “Buyer”. Section 2-103. “Commercial unit”. Section 2-105. “Conform”. Section 2-106. “Contract”. Section 1-201. “Goods”. Section 2-105. “Merchant”. Section 2-104. “Notifies”. Section 1-201. “Notification”. Section 1-201. “Sale on approval”. Section 2-326. “Sale or return”. Section 2-326. “Seasonably”. Section 1-204. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Return Within Reasonable Time.

Generally it is for jury to determine whether or not the offer to return goods sold on approval is made within a reasonable time. However, when all the facts and circumstances in a case plainly show the offer was not made within a reasonable time, the question becomes one of law for the court. (decided under prior law) Stratton & Terstegge Co. v. Criswell, 290 Ky. 64 , 160 S.W.2d 137, 1942 Ky. LEXIS 339 ( Ky. 1942 ).

If sustained by the evidence, an answer in a suit for balance due on merchandise sold in February, March and April that at the time of the purchase of the goods, seller agreed that defendant partnership might return within a reasonable time all unsold and unsalable goods after a few months’ effort at selling same, and seller accepted the return of the goods from one of the partnership stores in August of the same year at a ten per cent discount, which discount was in consideration of seller releasing one of the partners from his partnership obligation for the balance due on account of goods sold, the partnership stated a valid defense. (decided under prior law) Stratton & Terstegge Co. v. Criswell, 290 Ky. 64 , 160 S.W.2d 137, 1942 Ky. LEXIS 339 ( Ky. 1942 ).

Where partners, after purchasing goods in February, March and April under alleged contract to return, had formed a corporation in April and, on its failure, dissolved the partnership in August and, when sued for balance of the purchase price, made a tender in December by answer in the suit to return the merchandise, the tender was not made within a reasonable time and was ineffective where one of the partners testified on trial that the goods could not be located. (decided under prior law) Stratton & Terstegge Co. v. Criswell, 290 Ky. 64 , 160 S.W.2d 137, 1942 Ky. LEXIS 339 ( Ky. 1942 ).

355.2-328. Sale by auction.

  1. In a sale by auction if goods are put up in lots each lot is the subject of a separate sale.
  2. A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in other customary manner. Where a bid is made while the hammer is falling in acceptance of a prior bid the auctioneer may in his discretion reopen the bidding or declare the goods sold under the bid on which the hammer was falling.
  3. Such a sale is with reserve unless the goods are in explicit terms put up without reserve. In an auction with reserve the auctioneer may withdraw the goods at any time until he announces completion of the sale. In an auction without reserve, after the auctioneer calls for bids on an article or lot, that article or lot cannot be withdrawn unless no bid is made within a reasonable time. In either case a bidder may retract his bid until the auctioneer’s announcement of completion of the sale, but a bidder’s retraction does not revive any previous bid.
  4. If the auctioneer knowingly receives a bid on the seller’s behalf or the seller makes or procures such a bid, and notice has not been given that liberty for such bidding is reserved, the buyer may at his option avoid the sale or take the goods at the price of the last good faith bid prior to the completion of the sale. This subsection shall not apply to any bid at a forced sale.

History. Enact. Acts 1958, ch. 77, § 2-328, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 21, Uniform Sales Act.

Changes:

Completely rewritten.

Purposes of changes:

To make it clear that:

  1. The auctioneer may in his discretion either reopen the bidding or close the sale on the bid on which the hammer was falling when a bid is made at that moment. The recognition of a bid of this kind by the auctioneer in his discretion does not mean closing in favor of such a bidder, but only that the bid has been accepted as a continuation of the bidding. If recognized, such a bid discharges the bid on which the hammer was falling when it was made.
  2. An auction “with reserve” is the normal procedure. The crucial point, however, for determining the nature of an auction is the “putting up” of the goods. This Article accepts the view that the goods may be withdrawn before they are actually “put up,” regardless of whether the auction is advertised as one without reserve, without liability on the part of the auction announcer to persons who are present. This is subject to any peculiar facts which might bring the case within the “firm offer” principle of this Article, but an offer to persons generally would require unmistakable language in order to fall within that section. The prior announcement of the nature of the auction either as with reserve or without reserve will, however, enter as an “explicit term” in the “putting up” of the goods and conduct thereafter must be governed accordingly. The present section continues the prior rule permitting withdrawal of bids in auctions both with and without reserve; and the rule is made explicit that the retraction of a bid does not revive a prior bid.

Cross reference:

Point 2: Section 2-205.

Definitional cross references:

“Buyer”. Section 2-103. “Good faith”. Section 1-201. “Goods”. Section 2-105. “Lot”. Section 2-105. “Notice”. Section 1-201. “Sale”. Section 2-106. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Disclaimer of Warranties.

Disclaimer of warranties in horse auctioneer’s Conditions of Sale was not unconscionable. Keeneland Ass'n v. Eamer, 830 F. Supp. 974, 1993 U.S. Dist. LEXIS 12623 (E.D. Ky. 1993 ).

2.Fall of the Hammer.

Although the hammer had fallen and the commissioner, at a decretal sale of land, announced the property was sold and asked the clerk to write the name of the purchaser down, the commissioner could offer the property for sale again where two (2) parties made the same bid but the commissioner understood only the bid of one (1) party and the hammer fell. (decided under prior law) Head v. Clark, 88 Ky. 362 , 11 S.W. 203, 10 Ky. L. Rptr. 917 , 1889 Ky. LEXIS 42 ( Ky. 1889 ).

Until the hammer fell, the seller could withdraw his property from the sale or the bidder could withdraw his bid even though the conditions of sale provided that bids could not be withdrawn. (decided under prior law) Becker v. Crabb, 223 Ky. 549 , 4 S.W.2d 370, 1928 Ky. LEXIS 382 ( Ky. 1928 ).

3.Bids on Seller’s Behalf.

Right of purchaser to refuse to comply with his bid because of by-bidder or puffer’s bid was that such a bid was made whereby he, in the excitement, was induced to bid still more so, where seller negotiated for bidding by a by-bidder or puffer but such by-bidder or puffer did not actually make a bid for the seller, the purchaser could not refuse to comply with his bid. (decided under prior law) Newman v. Woolley, 201 Ky. 139 , 255 S.W. 1050, 1923 Ky. LEXIS 238 ( Ky. 1923 ).

The purchaser at an auction sale purporting to be without reserve could repudiate the contract and decline to perform it if the vendor of the property or his agent, for whose acts he was responsible, employed by-bidders or puffers who actually bid upon the property with the understanding that they were not to take it if it should be knocked off to them. (decided under prior law) Burdon v. Seitz, 206 Ky. 336 , 267 S.W. 219, 1924 Ky. LEXIS 360 ( Ky. 1924 ).

4.Conspiracy.

Purchaser of land at auction sale could not have specific performance or recover deposits where written contracts for sale of land were fixed by auctioneer at much lower price than that knocked down to him, since it could not have been done except to deceive somebody — if nobody else, then other bidders at the sale — and was a fraudulent and unlawful transaction against public policy which courts would not enforce, leaving parties where they had enforce, leaving parties where they had placed themselves. (decided under prior law) Robenson v. Yann, 224 Ky. 56 , 5 S.W.2d 271, 1928 Ky. LEXIS 523 ( Ky. 1928 ).

Research References and Practice Aids

Kentucky Law Journal.

Waxman, Auctioning Off Integrity: The Legitimacy of Seller-Rebate Agreements in the Thoroughbred Auction Context, 96 Ky. L.J. 139 (2007).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Auctions and Auctioneers, § 334.00.

Part 4. Title, Creditors and Good Faith Purchasers

355.2-401. Passing of title — Reservation for security — Limited application of this section.

Each provision of this article with regard to the rights, obligations and remedies of the seller, the buyer, purchasers or other third parties applies irrespective of title to the goods except where the provision refers to such title. Insofar as situations are not covered by the other provisions of this article and matters concerning title become material the following rules apply:

  1. Title to goods cannot pass under a contract for sale prior to their identification to the contract (KRS 355.2-501 ), and unless otherwise explicitly agreed the buyer acquires by their identification a special property as limited by this chapter. Any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest. Subject to these provisions and to the provisions of the article on secured transactions (Article 9), title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties.
  2. Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place; and in particular and despite any reservation of a security interest by the bill of lading
    1. if the contract requires or authorizes the seller to send the goods to the buyer but does not require him to deliver them at destination, title passes to the buyer at the time and place of shipment; but
    2. if the contract requires delivery at destination, title passes on tender there.
  3. Unless otherwise explicitly agreed where delivery is to be made without moving the goods,
    1. if the seller is to deliver a document of title, title passes at the time when and the place where he delivers such documents; or
    2. if the goods are at the time of contracting already identified and no documents are to be delivered, title passes at the time and place of contracting.
  4. A rejection or other refusal by the buyer to receive or retain the goods, whether or not justified, or a justified revocation of acceptance revests title to the goods in the seller. Such revesting occurs by operation of law and is not a “sale.”

History. Enact. Acts 1958, ch. 77, § 2-401, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

See generally, Sections 17, 18, 19 and 20, Uniform Sales Act.

Purposes:

To make it clear that:

  1. This Article deals with the issues between seller and buyer in terms of step by step performance or non-performance under the contract for sale and not in terms of whether or not “title” to the goods has passed. That the rules of this section in no way alter the rights of either the buyer, seller or third parties declared elsewhere in the Article is made clear by the preamble of this section. This section, however, in no way intends to indicate which line of interpretation should be followed in cases where the applicability of “public” regulation depends upon a “sale” or upon location of “title” without further definition. The basic policy of this Article that known purpose and reason should govern interpretation cannot extend beyond the scope of its own provisions. It is therefore necessary to state what a “sale” is and when title passes under this Article in case the courts deem any public regulation to incorporate the defined term of the “private” law.
  2. “Future” goods cannot be the subject of a present sale. Before title can pass the goods must be identified in the manner set forth in Section 2-501. The parties, however, have full liberty to arrange by specific terms for the passing of title to goods which are existing.
  3. The “special property” of the buyer in goods identified to the contract is excluded from the definition of “security interest”; its incidents are defined in provisions of this Article such as those on the rights of the seller’s creditors, on good faith purchase, on the buyer’s right to goods on the seller’s insolvency, and on the buyer’s right to specific performance or replevin.
  4. The factual situations in subsections (2) and (3) upon which passage of title turn actually base the test upon the time when the seller has finally committed himself in regard to specific goods. Thus in a “shipment” contract he commits himself by the act of making the shipment. If shipment is not contemplated subsection (3) turns on the seller’s final commitment, i. e. the delivery of documents or the making of the contract.

Cross references:

Point 2: Sections 2-102, 2-501 and 2-502.

Point 3: Sections 1-201, 2-402, 2-403, 2-502 and 2-716.

Definitional cross references:

“Agreement”. Section 1-201. “Bill of lading”. Section 1-201. “Buyer”. Section 2-103. “Contract”. Section 1-201. “Contract for sale”. Section 2-106. “Delivery”. Section 1-201. “Document of title”. Section 1-201. “Good faith”. Section 2-103. “Goods”. Section 2-105. “Party”. Section 1-201. “Purchaser”. Section 1-201. “Receipt” of goods. Section 2-103. “Remedy”. Section 1-201. “Rights”. Section 1-201. “Sale”. Section 2-106. “Security interest”. Section 1-201. “Seller”. Section 2-103. “Send”. Section 1-201.

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NOTES TO DECISIONS

1.Delivery to Buyer.

Where parties agreed to exchange machinery and defendant agreed to put his machinery in good running condition, and machinery was delivered to plaintiff but was not in good running condition, presumption that property did not pass because something remained to be done to make property deliverable did not apply. (decided under prior law) Greene v. Hyden, 273 Ky. 783 , 117 S.W.2d 985, 1938 Ky. LEXIS 718 ( Ky. 1938 ).

Where bankrupt sawmill had, prior to bankruptcy, accepted orders for and received advancements upon lumber, the parties intended a bona fide purchase and sale and the marking and segregation of the lumber on the mill yard as provided by the contract constituted delivery of possession so that title was in the purchaser, although it was the practice of the sawmill to again run the lumber through the mill and thus raise it to a higher grade, even though it was deliverable at the lower grade. (decided under prior law) In re Shipley Stave & Lumber Co., 29 F. Supp. 746, 1939 U.S. Dist. LEXIS 2129 (D. Ky. 1939 ).

Where a school building to be removed from the land was sold, title passed at time of execution of the contract of sale. (decided under prior law) Arnold v. Clark County Board of Education, 288 Ky. 700 , 157 S.W.2d 306, 1941 Ky. LEXIS 193 ( Ky. 1941 ).

Unless it was expressly provided by contract that title did not pass to buyer upon delivery by seller to carrier, title passed. (decided under prior law) Troy Refining Corp. v. Slagter Oil & Grease Co., 61 F. Supp. 369, 1945 U.S. Dist. LEXIS 2188 (D. Ky. 1945 ).

There was no transfer of title and possession of automobile which would take it out of insurance policy “held for sale” provision where buyer signed conditional sale contract calling for $500 cash payment and paid $50.00 and dealer held contract pending payment of the balance of $450 but permitted buyer to drive car to obtain the balance of the money, even though buyer used the car for another purpose. (decided under prior law) Rash v. North British & Mercantile Ins. Co., 246 S.W.2d 990, 1951 Ky. LEXIS 1279 ( Ky. 1951 ).

Evidence that sustained sale of colt was completed by verbal telephone agreement at a date earlier than colt’s accidental death, where seller was to retain colt for monthly board and there was no intention to condition the sale upon execution of a written contract, although a written contract was executed at a later date. The loss of the colt was to be borne by the buyer. (decided under prior law) Courtin v. Sharp, 280 F.2d 345, 1960 U.S. App. LEXIS 3942 (5th Cir. La. 1960), cert. denied, 365 U.S. 814, 81 S. Ct. 693, 5 L. Ed. 2d 692, 1961 U.S. LEXIS 1725 (U.S. 1961).

Motor vehicle orally sold and physically delivered but not paid for was owned by buyer at time of accident within insurance policy covering cars “owned” and “held for sale by” insured. Motors Ins. Corp. v. Safeco Ins. Co., 412 S.W.2d 584, 1967 Ky. LEXIS 434 ( Ky. 1967 ).

Where a truck was delivered by the seller to the buyer and the buyer did not reject it but used it to haul coal, the sale occurred and title passed to the buyer at the time of delivery despite the fact that the buyer never received the documents of title. Lexington Mack, Inc. v. Miller, 555 S.W.2d 249, 1977 Ky. LEXIS 500 ( Ky. 1977 ).

In a Chapter 11 bankruptcy proceeding, a lender who had a security interest in all of debtor’s assets was entitled to the proceeds of a sale of goods delivered to debtor by a seller; because the goods were shipped “F.O.B. destination” and had arrived at property debtor leased, there had been a tender of delivery of the goods, and under KRS 355.2-401 (2) and (2)(b), and KRS 355.9-203 (1) and (2)(b), title to the goods had passed to debtor from the seller, and the lender’s security interest had attached to the goods. In re Ashland Steel Liquidating Co., 2004 Bankr. LEXIS 908 (Bankr. E.D. Ky. July 7, 2004).

2.Delivery to Carrier.

For the purposes of criminal prosecution for conversion, milk delivered to a milk wagon driver for delivery to a dairy became the property of the dairy upon its receipt by the driver notwithstanding that the dairy had a right to reject the milk and was not required to pay for any more milk than it actually received. Underwood v. Commonwealth, 390 S.W.2d 635, 1965 Ky. LEXIS 354 ( Ky. 1965 ).

Where the purchase price for an automobile was paid and the automobile was delivered and accepted by the buyer, and the entire transaction took place in Kentucky between residents thereof, even though a bill of sale had not been executed and title had not been transferred in the clerk’s office, the buyer was the “owner” and the coverage of the seller’s insurance would not extend to the buyer. Hicks v. Kentucky Farm Bureau Mut. Ins. Co., 455 S.W.2d 52, 1970 Ky. LEXIS 241 ( Ky. 1970 ).

3.Delivery to Construction Site.

Supplier’s reclamation of fabricated steel from debtor’s construction site was held not to constitute a preferential transfer where the debtor and its contractor never paid for the steel and the steel was never property of the debtor or contractor. Spradlin v. Jarvis (In re Tri-City Turf Club, Inc.), 323 F.3d 439, 2003 FED App. 0088P, 2003 U.S. App. LEXIS 5559 (6th Cir. Ky. 2003 ).

4.Delivery to Grain Warehouse.

Where farmer delivered grain to elevator and received “scale ticket,” but did not receive a “warehouse receipt” or “grain storage receipt” giving evidence of retained title in the grain, there was no bailment of the grain to the elevator company; although the grain was “stored grain” under KRS 251.410 (4), the farmer was not an “owner” under KRS 251.010(2) or 251.410 (6), which require a warehouse or grain storage receipt, and pursuant to subsection (2) of this section, governing passing of title in goods, and KRS 251.410(4), defining “stored grain,” the grain belonged to the elevator company because title to the grain passed to the elevator upon delivery. In re Wathen's Elevators, Inc., 37 B.R. 870, 1984 Bankr. LEXIS 6132 (Bankr. W.D. Ky. 1984 ). (Decision prior to 1982 amendment to KRS 251.410.).

5.Choice of Laws.

Where a Kentucky resident executed an automobile sales installment contract in Kentucky and accepted delivery of the vehicle in Kentucky, questions concerning the formation of the contract in the first instance should have been determined by the law of Kentucky, despite a provision in the contract that required interpretation according to the law of Tennessee. In re Morristown Lincoln-Mercury, Inc., 25 B.R. 377, 1982 Bankr. LEXIS 2893 (Bankr. E.D. Tenn. 1982).

6.Security Interest.

Where the record indicated that sellers delivered grain to a grain dealership which purchased grain for resale and received a promise of payment at a future date, and nothing more, the credit extended by the sellers was unsecured. These sellers did not obtain an enforceable security interest in the goods delivered, which was the protective avenue permissible under this section. In re Wathen's Elevators, Inc., 32 B.R. 912, 1983 Bankr. LEXIS 5427 (Bankr. W.D. Ky. 1983 ).

The seller transferred free and unfettered possession and title to the defendant at the time of delivery, pursuant to this section. By maintaining the registration certificates, the most the seller retained was a security interest in the cattle, which he admitted was never perfected. Therefore, there was no conversion on the part of the third party buyer. Bowling Green Livestock Mkt. v. Young (In re Clark), 206 B.R. 439, 1996 Bankr. LEXIS 1790 (Bankr. W.D. Ky. 1996 ).

7.Temporary Injunction.

Where the seller brought an action for temporary injunction against the buyer in order to prevent the transfer of goods to a third person, the circuit court abused its discretion in denying the seller’s motion for a temporary injunction because the seller raised a substantial question concerning the passage of title of the goods and the likelihood of irreparable injury. R.O. Hahn, Inc. v. MDG Diagnostics, Inc., 737 S.W.2d 180, 1987 Ky. App. LEXIS 537 (Ky. Ct. App. 1987).

8.Payment as Affecting Passing of Title.

Fact of payment or nonpayment of purchase price had no bearing on question of title unless payment was condition to passing title. (decided under prior law) Stimson's Ex'x v. Tharp, 284 Ky. 389 , 144 S.W.2d 1031, 1940 Ky. LEXIS 504 ( Ky. 1940 ).

Although items were not picked up for three (3) or four (4) days, for purposes of uttering a “cold check” under law that provided that making or drawing a check without sufficient funds was punishable by a fine and imprisonment, title passed on day of sale at auction simultaneously with delivery of the check and thus a thing of value was obtained simultaneously with the giving of the check. (decided under prior law) Stiles v. Commonwealth, 348 S.W.2d 843, 1961 Ky. LEXIS 37 ( Ky. 1961 ).

Where the testimony and undisputed facts at a state court trial established that a creditor had legal title to a motorcycle when a Chapter 7 debtor exercised dominion and control over it and that debtor denied creditor his right to use and enjoy the motorcycle, then conversion was established under Kentucky law, and the state court judgment was nondischargeable. Dunn v. Campbell (In re Campbell), 2014 Bankr. LEXIS 1639 (Bankr. W.D. Ky. Apr. 15, 2014).

Cited:

Spurlin v. Sloan, 368 S.W.2d 314, 1963 Ky. LEXIS 41 ( Ky. 1963 ); Jack Walker Trucking Service, Inc. v. Strong, 488 S.W.2d 689, 1972 Ky. LEXIS 50 ( Ky. 1972 ); McKenzie v. Oliver, 571 S.W.2d 102, 1978 Ky. App. LEXIS 586 (Ky. Ct. App. 1978); Revenue Cabinet v. Corum & Edwards, Inc., 673 S.W.2d 736, 1984 Ky. App. LEXIS 559 (Ky. Ct. App. 1984); Placer Coal, Inc. v. Rhondale Coal Services Co., 684 S.W.2d 25, 1984 Ky. App. LEXIS 615 (Ky. Ct. App. 1984); Brown v. Foley (In re Brown), 213 B.R. 317, 1997 Bankr. LEXIS 1548 (Bankr. W.D. Ky. 1997 ).

Opinions of Attorney General.

The personal property tax on a vehicle should be based on the date of the bill of sale since the bill of sale provides evidence of ownership under the Uniform Commercial Code. OAG 82-68 .

Research References and Practice Aids

Kentucky Law Journal.

Whiteside, Uniform Commercial Code — Major Changes in Sales Law, 49 Ky. L.J. 165 (1960).

Weber, The Extension of the Voidable Title Principle Under the Code, 49 Ky. L.J. 437 (1961).

355.2-402. Rights of seller’s creditors against sold goods.

  1. Except as provided in subsections (2) and (3), rights of unsecured creditors of the seller with respect to goods which have been identified to a contract for sale are subject to the buyer’s rights to recover the goods under this article (KRS 355.2-502 and 355.2-716 ).
  2. A creditor of the seller may treat a sale or an identification of goods to a contract for sale as void if as against him a retention of possession by the seller is fraudulent under any rule of law of the state where the goods are situated, except that retention of possession in good faith and current course of trade by a merchant-seller for a commercially reasonable time after a sale or identification is not fraudulent.
  3. Nothing in this article shall be deemed to impair the rights of creditors of the seller
    1. under the provisions of the article on secured transactions (Article 9); or
    2. where identification to the contract or delivery is made not in current course of trade but in satisfaction of or as security for a pre-existing claim for money, security or the like and is made under circumstances which under any rule of law of the state where the goods are situated would apart from this article constitute the transaction a fraudulent transfer or voidable preference.

History. Enact. Acts 1958, ch. 77, § 2-402, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Subsection (2)—Section 26, Uniform Sales Act; Subsections (1) and (3)—none.

Changes:

Rephrased.

Purposes of changes and new matter:

To avoid confusion on ordinary issues between current sellers and buyers and issues in the field of preference and hindrance by making it clear that:

  1. Local law on questions of hindrance of creditors by the seller’s retention of possession of the goods are outside the scope of this Article, but retention of possession in the current course of trade is legitimate. Transactions which fall within the law’s policy against improper preferences are reserved from the protection of this Article.
  2. The retention of possession of the goods by a merchant seller for a commercially reasonable time after a sale or identification in current course is exempted from attack as fraudulent. Similarly, the provisions of subsection (3) have no application to identification or delivery made in the current course of trade, as measured against general commercial understanding of what a “current” transaction is.

Definitional cross references:

“Contract for sale”. Section 2-106. “Creditor”. Section 1-201. “Good faith”. Section 2-103. “Goods”. Section 2-105. “Merchant”. Section 2-104. “Money”. Section 1-201. “Reasonable time”. Section 1-204. “Rights”. Section 1-201. “Sale”. Section 2-106. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Retention of Possession and Title.

Claim of mortgagee of automobile prevailed over buyer where son sold his automobile to his mother by a bill of sale but retained possession of the car and licensed it in his own name and then mortgaged it, since the mortgagee had no notice of the mother’s claim. (decided under prior law) National Fire Ins. Co. v. Collinsworth, 288 Ky. 398 , 156 S.W.2d 157, 1941 Ky. LEXIS 102 ( Ky. 1941 ).

Research References and Practice Aids

Kentucky Law Journal.

Cullen, Conflict of Laws Problems Under the Uniform Commercial Code, 48 Ky. L.J. 417 (1960).

355.2-403. Power to transfer — Good faith purchase of goods — “Entrusting.”

  1. A purchaser of goods acquires all title which his transferor had or had power to transfer except that a purchaser of a limited interest acquires rights only to the extent of the interest purchased. A person with voidable title has power to transfer a good title to a good faith purchaser for value. When goods have been delivered under a transaction of purchase the purchaser has such power even though
    1. the transferor was deceived as to the identity of the purchaser, or
    2. the delivery was in exchange for a check which is later dishonored, or
    3. it was agreed that the transaction was to be a “cash sale,” or
    4. the delivery was procured through fraud punishable as larcenous under the criminal law.
  2. Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business.
  3. “Entrusting” includes any delivery and any acquiescence in retention of possession regardless of any condition expressed between the parties to the delivery or acquiescence and regardless of whether the procurement of the entrusting or the possessor’s disposition of the goods have been such as to be larcenous under the criminal law.
  4. The rights of other purchasers of goods and of lien creditors are governed by the articles on secured transactions (Article 9) and documents of title (Article 7).

History. Enact. Acts 1958, ch. 77, § 2-403, effective July 1, 1960; 1992, ch. 116, § 63, effective July 14, 1992.

Official Comment

Prior uniform statutory provision:

Sections 20(4), 23, 24, 25, Uniform Sales Act; Section 9, especially 9(2), Uniform Trust Receipts Act; Section 9, Uniform Conditional Sales Act.

Changes:

Consolidated and rewritten.

Purposes of changes:

To gather together a series of prior uniform statutory provisions and the case law thereunder and to state a unified and simplified policy on good faith purchase of goods.

  1. The basic policy of our law allowing transfer of such title as the transferor has is generally continued and expanded under subsection (1). In this respect the provisions of the section are applicable to a person taking by any form of “purchase” as defined by this Act. Moreover the policy of this Act expressly providing for the application of supplementary general principles of law to sales transactions wherever appropriate joins with the present section to continue unimpaired all rights acquired under the law of agency or of apparent agency or ownership or other estoppel, whether based on statutory provisions or on case law principles. The section also leaves unimpaired the powers given to selling factors under the earlier Factors Acts. In addition subsection (1) provides specifically for the protection of the good faith purchaser for value in a number of specific situations which have been troublesome under prior law.

    On the other hand, the contract of purchase is of course limited by its own terms as in a case of pledge for a limited amount or of sale of a fractional interest in goods.

  2. The many particular situations in which a buyer in ordinary course of business from a dealer has been protected against reservation of property or other hidden interest are gathered by subsections (2) – (4) into a single principle protecting persons who buy in ordinary course out of inventory. Consignors have no reason to complain, nor have lenders who hold a security interest in the inventory, since the very purpose of goods in inventory is to be turned into cash by sale.

    The principle is extended in subsection (3) to fit with the abolition of the old law of “cash sale” by subsection (1)(c). It is also freed from any technicalities depending on the extended law of larceny; such extension of the concept of theft to include trick, particular types of fraud, and the like is for the purpose of helping conviction of the offender; it has no proper application to the long-standing policy of civil protection of buyers from persons guilty of such trick or fraud. Finally, the policy is extended, in the interest of simplicity and sense, to any entrusting by a bailor; this is in consonance with the explicit provisions of Section 7-205 on the powers of a warehouseman who is also in the business of buying and selling fungible goods of the kind he warehouses. As to entrusting by a secured party, subsection (2) is limited by the more specific provisions of Section 9-320, which deny protection to a person buying farm products from a person engaged in farming operations.

  3. The definition of “buyer in ordinary course of business” (Section 1-201) is effective here and preserves the essence of the healthy limitations engrafted by the case law on the older statutes. The older loose concept of good faith and wide definition of value combined to create apparent good faith purchasers in many situations in which the result outraged common sense; the court’s solution was to protect the original title especially by use of “cash sale” or of over-technical construction of the enabling clauses of the statutes. But such rulings then turned into limitations on the proper protection of buyers in the ordinary market. Section 1-201(9) cuts down the category of buyer in ordinary course in such fashion as to take care of the results of the cases, but with no price either in confusion or in injustice to proper dealings in the normal market.
  4. Except as provided in subsection (1), the rights of purchasers other than buyers in ordinary course are left to the Articles on Secured Transactions, Documents of Title, and Bulk Sales.

Cross references:

Point 1: Sections 1-103 and 1-201.

Point 2: Sections 1-201, 2-402, 7-205 and 9-320.

Points 3 and 4: Sections 1-102, 1-201, 2-104, 2-707 and Articles 6, 7 and 9.

Definitional cross references:

“Buyer in ordinary course of business”. Section 1-201. “Good faith”. Sections 1-201 and 2-103. “Goods”. Section 2-105. “Person”. Section 1-201. “Purchaser”. Section 1-201. “Signed”. Section 1-201. “Term”. Section 1-201. “Value”. Section 1-201.

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NOTES TO DECISIONS

1.Entrusting of Possession to Dealer.

Where seller made delivery of a vegetable case and later was put in possession for purpose of making repairs, such possession was not in capacity of seller and, when he resold it, the original buyer was not estopped from recovering possession, although he had left the case in possession of the seller for ten months, since he had no knowledge that the seller was handling the case so as to lead his customers to believe that he had authority to sell it. (decided under prior law) Adkins v. Damron, 324 S.W.2d 489, 1959 Ky. LEXIS 374 ( Ky. 1959 ).

Where goods are entrusted to a dealer, he can give good title, but the one to be protected must be “a buyer in ordinary course of business.” Universal C. I. T. Credit Corp. v. Middlesboro Motor Sales, Inc., 424 S.W.2d 409, 1968 Ky. LEXIS 455 ( Ky. 1968 ).

2.Transaction of Purchase.

Where parties entered into a lease-purchase agreement for truck scales such agreement was a “transaction of purchase” within the meaning of this section. United Road Machinery Co. v. Jasper, 568 S.W.2d 242, 1978 Ky. App. LEXIS 550 (Ky. Ct. App. 1978).

The buyer who was cloaked with indicia of ownership could pledge the vehicle as collateral on a loan, something that an owner of a vehicle may do. Foley v. Production Credit Asso. of Fourth Dist., 753 S.W.2d 876, 1988 Ky. App. LEXIS 87 (Ky. Ct. App. 1988).

3.Good Faith Purchaser.

A “good faith purchaser for value” can be defined as one who takes by purchase getting sufficient consideration to support a simple contract, and who is honest in the transaction of the purchase. United Road Machinery Co. v. Jasper, 568 S.W.2d 242, 1978 Ky. App. LEXIS 550 (Ky. Ct. App. 1978).

This section requires a purchaser to act in good faith to ensure an unassailable title and mandates honesty in fact in commercial conduct; in order to meet this standard, the purchaser must have displayed reasonable commercial standards of fair dealing. In re Wathen's Elevators, Inc., 32 B.R. 912, 1983 Bankr. LEXIS 5427 (Bankr. W.D. Ky. 1983 ).

A person with voidable title has power to transfer a good title to a good faith purchaser for value; further, when goods have been delivered under a transaction of purchase, the purchaser has such power even though the delivery was procured through fraud punishable as larcenous under the criminal law. Foley v. Production Credit Asso. of Fourth Dist., 753 S.W.2d 876, 1988 Ky. App. LEXIS 87 (Ky. Ct. App. 1988).

When equipment owners put the equipment on certain land, the land was foreclosed on, and the land's buyer sold the equipment to buyers, it was error to dismiss the owners' conversion suit against the buyers because the buyers' good faith in buying the equipment was irrelevant when the land's buyer lacked title to the equipment, as the equipment was never “delivered” to the land's buyer under a transaction of purchase, and the buyer was not a merchant in such goods, so the buyers could not receive good title, and nothing showed the land's buyer had voidable title to the equipment, as the buyer's commissioner's deed to the land did not include the equipment. Baciomiculo, LLC v. Nick Bohanon, LLC, 498 S.W.3d 790, 2016 Ky. App. LEXIS 147 (Ky. Ct. App. 2016).

4.Title.

Where check issued by buyer of used automobile was a forgery and was not honored by the bank, seller could rescind on the ground of fraud, but buyer could pass good title to the automobile to a bona fide purchaser for value without notice that buyer had a voidable title. (decided under prior law) Dudley v. Lovins, 310 Ky. 491 , 220 S.W.2d 978, 1949 Ky. LEXIS 939 ( Ky. 1949 ).

Incorporating the principle of voidable title, this section gives a transferor the power to pass good title to certain transferees although the transferor himself does not possess good title; this power is not limited to cash transferees, but is granted to good-faith “purchasers” for value. In re Wathen's Elevators, Inc., 32 B.R. 912, 1983 Bankr. LEXIS 5427 (Bankr. W.D. Ky. 1983 ).

If a seller cloaks a buyer with indications of ownership, then anyone who subsequently purchases from that buyer has a right to rely on those indications, even if the original seller eventually proves to have been the victim of some fraud; where the seller traded the truck to the buyer for a front-end loader, the seller cloaked the buyer with indicia of ownership, and had the buyer sold the vehicle to a subsequent purchaser, that bona fide purchaser would own the vehicle. Foley v. Production Credit Asso. of Fourth Dist., 753 S.W.2d 876, 1988 Ky. App. LEXIS 87 (Ky. Ct. App. 1988).

In an action by the seller of a truck against a creditor with a security interest in the truck who sold it in partial satisfaction of the loan balance, the principle of “voidable title” operated to protect the creditor where the buyer traded stolen property for the truck. Foley v. Production Credit Asso. of Fourth Dist., 753 S.W.2d 876, 1988 Ky. App. LEXIS 87 (Ky. Ct. App. 1988).

5.— Goods.

Where a search of county records by purchasers revealed no encumbrances upon the machinery, and purchasers had no knowledge of or reason to suspect a dispute between possessor and dealer, purchasers were bona fide purchasers in good faith and had good title as against dealer. United Road Machinery Co. v. Jasper, 568 S.W.2d 242, 1978 Ky. App. LEXIS 550 (Ky. Ct. App. 1978).

Where purchaser bought truck scales from corporation which had obtained them under lease-purchase agreement from dealer, purchasers had good title whether corporation had good title, voidable title or no title, since: in the first instance, they got good title; in the second instance, there was a transaction of purchase conferring good title, and, in the third instance, they were bona fide purchasers. United Road Machinery Co. v. Jasper, 568 S.W.2d 242, 1978 Ky. App. LEXIS 550 (Ky. Ct. App. 1978).

6.Consignment.

Where a diamond wholesaler consigned a diamond to a consignee for preliminary examination and the consignee gave it to the defendant as collateral for a loan on which he later defaulted, the defendant had no title to the diamond since, under this section, he could only take such rights as the consignee had in it, which were none; thus, the plaintiff wholesaler could properly recover the diamond in a conversion action. Kimberly & European Diamonds, Inc. v. Burbank, 518 F. Supp. 599, 1981 U.S. Dist. LEXIS 13573 (W.D. Ky. 1981 ), aff'd, 684 F.2d 363, 1982 U.S. App. LEXIS 17008 (6th Cir. Ky. 1982 ).

Cited:

In re Mel Golde Shoes, Inc., 403 F.2d 658, 1968 U.S. App. LEXIS 4652 (6th Cir. 1968); Greater Louisville Auto Auction, Inc. v. Ogle Buick, Inc., 387 S.W.2d 17, 1965 Ky. LEXIS 457 ( Ky. 1965 ).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Treatises

Petrilli, Kentucky Family Law, Minors, § 30.5.

Part 5. Performance

355.2-501. Insurable interest in goods — Manner of identification of goods.

  1. The buyer obtains a special property and an insurable interest in goods by identification of existing goods as goods to which the contract refers even though the goods so identified are nonconforming and he has an option to return or reject them. Such identification can be made at any time and in any manner explicitly agreed to by the parties. In the absence of explicit agreement identification occurs
    1. when the contract is made if it is for the sale of goods already existing and identified;
    2. if the contract is for the sale of future goods other than those described in paragraph (c), when goods are shipped, marked or otherwise designated by the seller as goods to which the contract refers;
    3. when the crops are planted or otherwise become growing crops or the young are conceived if the contract is for the sale of unborn young to be born within twelve (12) months after contracting or for the sale of crops to be harvested within twelve (12) months or the next normal harvest season after contracting whichever is longer.
  2. The seller retains an insurable interest in goods so long as title to or any security interest in the goods remains in him and where the identification is by the seller alone he may until default or insolvency or notification to the buyer that the identification is final substitute other goods for those identified.
  3. Nothing in this section impairs any insurable interest recognized under any other statute or rule of law.

History. Enact. Acts 1958, ch. 77, § 2-501, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

See Sections 17 and 19, Uniform Sales Act.

Purposes:

  1. The present section deals with the manner of identifying goods to the contract so that an insurable interest in the buyer and the rights set forth in the next section will accrue. Generally speaking, identification may be made in any manner “explicitly agreed to” by the parties. The rules of paragraphs (a), (b) and (c) apply only in the absence of such “explicit agreement”.
  2. In the ordinary case identification of particular existing goods as goods to which the contract refers is unambiguous and may occur in one of many ways. It is possible, however, for the identification to be tentative or contingent. In view of the limited effect given to identification by this Article the general policy is to resolve all doubts in favor of identification.
  3. The provision of this section as to “explicit agreement” clarifies the present confusion in the law of sales which has arisen from the fact that under prior uniform legislation all rules of presumption with reference to the passing of title or to appropriation (which in turn depended upon identification) were regarded as subject to the contrary intention of the parties or of the party appropriating. Such uncertainty is reduced to a minimum under this section by requiring “explicit agreement” of the parties before the rules of paragraphs (a), (b) and (c) are displaced—as they would be by a term giving the buyer power to select the goods. An “explicit” agreement, however, need not necessarily be found in the terms used in the particular transaction. Thus, where a usage of the trade has previously been made explicit by reduction to a standard set of “rules and regulations” currently incorporated by reference into the contracts of the parties, a relevant provision of those “rules and regulations” is “explicit” within the meaning of this section.
  4. In view of the limited function of identification there is no requirement in this section that the goods be in deliverable state or that all of the seller’s duties with respect to the processing of the goods be completed in order that identification occur. For example, despite identification the risk of loss remains on the seller under the risk of loss provisions until completion of his duties as to the goods and all of his remedies remain dependent upon his not defaulting under the contract.
  5. Undivided shares in an identified fungible bulk, such as grain in an elevator or oil in a storage tank can be sold. The mere making of the contract with reference to an undivided share in an identified fungible bulk is enough under subsection (a) to effect an identification if there is no explicit agreement otherwise. The seller’s duty, however, to segregate and deliver according to the contract is not affected by such an identification but is controlled by other provisions of this Article.
  6. Identification of crops under paragraph (c) is made upon planting only if they are to be harvested within the year or within the next normal harvest season. The phrase “next normal harvest season” fairly includes nursery stock raised for normally quick “harvest,” but plainly excludes a “timber” crop to which the concept of a harvest “season” is inapplicable.

    Paragraph (c) is also applicable to a crop of wool or the young of animals to be born within twelve months after contracting. The product of a lumbering, mining or fishing operation, though seasonal, is not within the concept of “growing”. Identification under a contract for all or part of the output of such an operation can be effected early in the operation.

Cross references:

Point 1: Section 2-502.

Point 4: Sections 2-509, 2-510 and 2-703.

Point 5: Sections 2-105, 2-308, 2-503 and 2-509.

Point 6: Sections 2-105(1), 2-107(1) and 2-402.

Definitional cross references:

“Agreement”. Section 1-201. “Contract”. Section 1-201. “Contract for sale”. Section 2-106. “Future goods”. Section 2-105. “Goods”. Section 2-105. “Notification”. Section 1-201. “Party”. Section 1-201. “Sale”. Section 2-106. “Security interest”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

Cited:

In re Wathen’s Elevators, Inc., 32 B.R. 912, 1983 Bankr. LEXIS 5427 (Bankr. W.D. Ky. 1983 ).

Research References and Practice Aids

Kentucky Law Journal.

Whiteside, Uniform Commercial Code — Major Changes in Sales Law, 49 Ky. L.J. 165 (1960).

355.2-502. Buyer’s right to goods on seller’s repudiation, failure to deliver, or insolvency.

  1. Subject to subsections (2) and (3) of this section and even though the goods have not been shipped a buyer who has paid a part or all of the price of goods in which he has a special property under the provisions of the immediately preceding section may on making and keeping good a tender of any unpaid portion of their price recover them from the seller if:
    1. In the case of goods bought for personal, family, or household purposes, the seller repudiates or fails to deliver as required by contract; or
    2. In all cases, the seller becomes insolvent within ten (10) days after receipt of the first installment on their price.
  2. The buyer’s right to recover the goods under subsection (1)(a) of this section vests upon acquisition of a special property, even if the seller had not then repudiated or failed to deliver.
  3. If the identification creating his special property has been made by the buyer he acquires the right to recover the goods only if they conform to the contract for sale.

History. Enact. Acts 1958, ch. 77, § 2-502, effective July 1, 1960; 2000, ch. 408, § 161, effective July 1, 2001.

Official Comment

Prior uniform statutory provision:

Compare Sections 17, 18 and 19, Uniform Sales Act.

Purposes:

  1. This section gives an additional right to the buyer as a result of identification of the goods to the contract in the manner provided in Section 2-501. The buyer is given a right to recover the goods, conditioned upon making and keeping good a tender of any unpaid portion of the price, in two limited circumstances. First, the buyer may recover goods bought for personal, family, or household purposes if the seller repudiates the contract or fails to deliver the goods. Second, in any case, the buyer may recover the goods if the seller becomes insolvent within 10 days after the seller receives the first installment on their price. The buyer’s right to recover the goods under this section is an exception to the usual rule, under which the disappointed buyer must resort to an action to recover damages.
  2. The question of whether the buyer also acquires a security interest in identified goods and has rights to the goods when insolvency takes place after the ten-day period provided in this section depends upon compliance with the provisions of the Article on Secured Transactions (Article 9).
  3. Under subsection (2), the buyer’s right to recover consumer goods under subsection (1)(a) vests upon acquisition of a special property, which occurs upon identification of the goods to the contract. See Section 2-501. Inasmuch as a secured party normally acquires no greater rights in its collateral that its debtor had or had power to convey, see Section 2-403(1) (first sentence), a buyer who acquires a right to recover under this section will take free of a security interest created by the seller if it attaches to the goods after the goods have been identified to the contract. The buyer will take free, even if the buyer does not buy in ordinary course and even if the security interest is perfected. Of course, to the extent that the buyer pays the price after the security interest attaches, the payments will constitute proceeds of the security interest.
  4. Subsection (3) is included to preclude the possibility of unjust enrichment, which would exist if the buyer were permitted to recover goods even though they were greatly superior in quality or quantity to that called for by the contract for sale.

Cross references:

Point 1: Sections 1-201 and 2-702.

Point 2: Article 9.

Definitional cross references:

“Buyer”. Section 2-103. “Conform”. Section 2-106. “Contract for sale”. Section 2-106. “Goods”. Section 2-105. “Insolvent”. Section 1-201. “Right”. Section 1-201. “Seller”. Section 2-103.

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Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Insolvent Debtors, § 154.00.

355.2-503. Manner of seller’s tender of delivery.

  1. Tender of delivery requires that the seller put and hold conforming goods at the buyer’s disposition and give the buyer any notification reasonably necessary to enable him to take delivery. The manner, time and place for tender are determined by the agreement and this article, and in particular:
    1. Tender must be at a reasonable hour, and if it is of goods they must be kept available for the period reasonably necessary to enable the buyer to take possession; but
    2. Unless otherwise agreed the buyer must furnish facilities reasonably suited to the receipt of the goods.
  2. Where the case is within KRS 355.2-504 respecting shipment tender requires that the seller comply with its provisions.
  3. Where the seller is required to deliver at a particular destination tender requires that he comply with subsection (1) and also in any appropriate case tender documents as described in subsections (4) and (5) of this section.
  4. Where goods are in the possession of a bailee and are to be delivered without being moved:
    1. Tender requires that the seller either tender a negotiable document of title covering such goods or procure acknowledgement by the bailee of the buyer’s right to possession of the goods; but
    2. Tender to the buyer of a nonnegotiable document of title or of a written direction to the bailee to deliver is sufficient tender unless the buyer seasonably objects, and receipt by the bailee of notification of the buyer’s rights fixes those rights as against the bailee and all third persons; but risk of loss of the goods and of any failure by the bailee to honor the nonnegotiable document of title or to obey the direction remains on the seller until the buyer has had a reasonable time to present the document or direction, and a refusal by the bailee to honor the document or to obey the direction defeats the tender.
  5. Where the contract requires the seller to deliver documents:
    1. He must tender all such documents in correct form, except as provided in this article with respect to bills of lading in a set (subsection (2) of KRS 355.2-323 ); and
    2. Tender through customary banking channels is sufficient and dishonor of a draft accompanying or associated with the documents constitutes nonacceptance or rejection.

History. Enact. Acts 1958, ch. 77, § 2-503, effective July 1, 1960; 2012, ch. 132, § 48, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

See Sections 11, 19, 20, 43 (3) and (4), 46 and 51, Uniform Sales Act.

Changes:

The general policy of the above sections is continued and supplemented but subsection (3) changes the rule of prior section 19(5) as to what constitutes a “destination” contract and subsection (4) incorporates a minor correction as to tender of delivery of goods in the possession of a bailee.

Purposes of changes:

  1. The major general rules governing the manner of proper or due tender of delivery are gathered in this section. The term “tender” is used in this Article in two different senses. In one sense it refers to “due tender” which contemplates an offer coupled with a present ability to fulfill all the conditions resting on the tendering party and must be followed by actual performance if the other party shows himself ready to proceed. Unless the context unmistakably indicates otherwise this is the meaning of “tender” in this Article and the occasional addition of the word “due” is only for clarity and emphasis. At other times it is used to refer to an offer of goods or documents under a contract as if in fulfillment of its conditions even though there is a defect when measured against the contract obligation. Used in either sense, however, “tender” connotes such performance by the tendering party as puts the other party in default if he fails to proceed in some manner. These concepts of tender would apply to tender of either tangible or electronic documents of title.
  2. The seller’s general duty to tender and deliver is laid down in Section 2-301 and more particularly in Section 2-507. The seller’s right to a receipt if he demands one and receipts are customary is governed by Section 1-205. Subsection (1) of the present section proceeds to set forth two primary requirements of tender: first, that the seller “put and hold conforming goods at the buyer’s disposition” and, second, that he “give the buyer any notice reasonably necessary to enable him to take delivery.”

    In cases in which payment is due and demanded upon delivery the “buyer’s disposition” is qualified by the seller’s right to retain control of the goods until payment by the provision of this Article on delivery on condition. However, where the seller is demanding payment on delivery he must first allow the buyer to inspect the goods in order to avoid impairing his tender unless the contract for sale is on C.I.F., C.O.D., cash against documents or similar terms negating the privilege of inspection before payment.

    In the case of contracts involving documents the seller can “put and hold conforming goods at the buyer’s disposition” under subsection (1) by tendering documents which give the buyer complete control of the goods under the provisions of Article 7 on due negotiation.

  3. Under paragraph (a) of subsection (1) usage of the trade and the circumstances of the particular case determine what is a reasonable hour for tender and what constitutes a reasonable period of holding the goods available.
  4. The buyer must furnish reasonable facilities for the receipt of the goods tendered by the seller under subsection (1), paragraph (b). This obligation of the buyer is no part of the seller’s tender.
  5. For the purposes of subsections (2) and (3) there is omitted from this Article the rule under prior uniform legislation that a term requiring the seller to pay the freight or cost of transportation to the buyer is equivalent to an agreement by the seller to deliver to the buyer or at an agreed destination. This omission is with the specific intention of negating the rule, for under this Article the “shipment” contract is regarded as the normal one and the “destination” contract as the variant type. The seller is not obligated to deliver at a named destination and bear the concurrent risk of loss until arrival, unless he has specifically agreed so to deliver or the commercial understanding of the terms used by the parties contemplates such delivery.
  6. Paragraph (a) of subsection (4) continues the rule of the prior uniform legislation as to acknowledgement by the bailee. Paragraph (b) of subsection (4) adopts the rule that between the buyer and the seller the risk of loss remains on the seller during a period reasonable for securing acknowledgment of the transfer from the bailee, while as against all other parties the buyer’s rights are fixed as of the time the bailee receives notice of the transfer.
  7. Under subsection (5) documents are never “required” except where there is an express contract term or it is plainly implicit in the peculiar circumstances of the case or in a usage of trade. Documents may, of course, be “authorized” although not required, but such cases are not within the scope of this subsection. When documents are required, there are three main requirements of this subsection: (1) “All”: each required document is essential to a proper tender; (2) “Such”: the documents must be the ones actually required by the contract in terms of source and substance; (3) “Correct form”: All documents must be in correct form. These requirements apply to both tangible and electronic documents of title. When tender is made through customary banking channels, a draft may accompany or be associated with a document of title. The language has been broadened to allow for drafts to be associated with an electronic document of title. Compare Section 2-104(2) definition of financing agency.

    When a prescribed document cannot be procured, a question of fact arises under the provision of this Article on substituted performance as to whether the agreed manner of delivery is actually commercially impracticable and whether the substitute is commercially reasonable.

Cross references:

Point 2: Sections 1-205, 2-301, 2-310, 2-507 and 2-513 and Article 7.

Point 5: Sections 2-308, 2-310 and 2-509.

Point 7: Section 2-614(1).

Specific matters involving tender are covered in many additional sections of this Article. See Sections 1-205, 2-301, 2-306 to 2-319, 2-321(3), 2-504, 2-507(2), 2-511(1), 2-513, 2-612 and 2-614.

Definitional cross references:

“Agreement”. Section 1-201. “Bill of lading”. Section 1-201. “Buyer”. Section 2-103. “Conforming”. Section 2-106. “Contract”. Section 1-201. “Delivery”. Section 1-201. “Dishonor”. Section 3-508. “Document of title”. Section 1-201. “Draft”. Section 3-104. “Goods”. Section 2-105. “Notification”. Section 1-201. “Reasonable time”. Section 1-204. “Receipt” of goods. Section 2-103. “Rights”. Section 1-201. “Seasonably”. Section 1-204. “Seller”. Section 2-103. “Written”. Section 1-201.

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NOTES TO DECISIONS

1.Delivery of Goods to Buyer’s Property.

In a Chapter 11 bankruptcy proceeding, a lender who had a security interest in all of debtor’s assets was entitled to the proceeds of a sale of goods delivered to debtor by a seller; because the goods were shipped “F.O.B. destination” and had arrived at property debtor leased, there had been a tender of delivery of the goods, and under KRS 355.2-401 (2), KRS 355.2-319 (1)(b), KRS 355.2-503 (1), and KRS 355.9-203 (1) and (2)(b), title to the goods had passed to debtor from the seller, and the lender’s security interest had attached to the goods. In re Ashland Steel Liquidating Co., 2004 Bankr. LEXIS 908 (Bankr. E.D. Ky. July 7, 2004).

Research References and Practice Aids

Kentucky Law Journal.

Brickey, Products Liability in Kentucky: The Doctrinal Dilemma, 65 Ky. L.J. 593 (1976-77).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Answer Pleading Tender of Chattels, Form 190.18.

355.2-504. Shipment by seller.

Where the seller is required or authorized to send the goods to the buyer and the contract does not require him to deliver them at a particular destination, then unless otherwise agreed he must

  1. put the goods in the possession of such a carrier and make such a contract for their transportation as may be reasonable having regard to the nature of the goods and other circumstances of the case; and
  2. obtain and promptly deliver or tender in due form any document necessary to enable the buyer to obtain possession of the goods or otherwise required by the agreement or by usage of trade; and
  3. promptly notify the buyer of the shipment.

Failure to notify the buyer under paragraph (c) or to make a proper contract under paragraph (a) is a ground for rejection only if material delay or loss ensues.

History. Enact. Acts 1958, ch. 77, § 2-504, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 46, Uniform Sales Act.

Changes:

Rewritten.

Purposes of changes:

To continue the general policy of the prior uniform statutory provision while incorporating certain modifications with respect to the requirement that the contract with the carrier be made expressly on behalf of the buyer and as to the necessity of giving notice of the shipment to the buyer, so that:

  1. The section is limited to “shipment” contracts as contrasted with “destination” contracts or contracts for delivery at the place where the goods are located. The general principles embodied in this section cover the special case of F. O. B. point of shipment contracts and C. I. F. and C. & F. contracts. Under the preceding section on manner of tender of delivery, due tender by the seller requires that he comply with the requirements of this section in appropriate cases.
  2. The contract to be made with the carrier under paragraph (a) must conform to all express terms of the agreement, subject to any substitution necessary because of failure of agreed facilities as provided in the later provision on substituted performance. However, under the policies of this Article on good faith and commercial standards and on buyer’s rights on improper delivery, the requirements of explicit provisions must be read in terms of their commercial and not their literal meaning. This policy is made express with respect to bills of lading in a set in the provision of this Article on form of bills of lading required in overseas shipment.
  3. In the absence of agreement, the provision of this Article on options and co-operation respecting performance gives the seller the choice of any reasonable carrier, routing and other arrangements. Whether or not the shipment is at the buyer’s expense the seller must see to any arrangements, reasonable in the circumstances, such as refrigeration, watering of livestock, protection against cold, the sending along of any necessary help, selection of specialized cars and the like for paragraph (a) is intended to cover all necessary arrangements whether made by contract with the carrier or otherwise. There is, however, a proper relaxation of such requirements if the buyer is himself in a position to make the appropriate arrangements and the seller gives him reasonable notice of the need to do so. It is an improper contract under paragraph (a) for the seller to agree with the carrier to a limited valuation below the true value and thus cut off the buyer’s opportunity to recover from the carrier in the event of loss, when the risk of shipment is placed on the buyer by his contract with the seller.
  4. Both the language of paragraph (b) and the nature of the situation it concerns indicate that the requirement that the seller must obtain and deliver promptly to the buyer in due form any document necessary to enable him to obtain possession of the goods is intended to cumulate with the other duties of the seller such as those covered in paragraph (a).

    In this connection, in the case of pool car shipments a delivery order furnished by the seller on the pool car consignee, or on the carrier for delivery out of a larger quantity, satisfies the requirements of paragraph (b) unless the contract requires some other form of document.

  5. This Article, unlike the prior uniform statutory provision, makes it the seller’s duty to notify the buyer of shipment in all cases. The consequences of his failure to do so, however, are limited in that the buyer may reject on this ground only where material delay or loss ensues.

    A standard and acceptable manner of notification in open credit shipments is the sending of an invoice and in the case of documentary contracts is the prompt forwarding of the documents as under paragraph (b) of this section. It is also usual to send on a straight bill of lading but this is not necessary to the required notification. However, should such a document prove necessary or convenient to the buyer, as in the case of loss and claim against the carrier, good faith would require the seller to send it on request.

    Frequently the agreement expressly requires prompt notification as by wire or cable. Such a term may be of the essence and the final clause of paragraph (c) does not prevent the parties from making this a particular ground for rejection. To have this vital and irreparable effect upon the seller’s duties, such a term should be part of the “dickered” terms written in any “form,” or should otherwise be called seasonably and sharply to the seller’s attention.

  6. Generally, under the final sentence of the section, rejection by the buyer is justified only when the seller’s dereliction as to any of the requirements of this section in fact is followed by material delay or damage. It rests on the seller, so far as concerns matters not within the peculiar knowledge of the buyer, to establish that his error has not been followed by events which justify rejection.

Cross references:

Point 1: Sections 2-319, 2-320 and 2-503(2).

Point 2: Sections 1-203, 2-323(2), 2-601 and 2-614(1).

Point 3: Section 2-311(2).

Point 5: Section 1-203.

Definitional cross references:

“Agreement”. Section 1-201. “Buyer”. Section 2-103. “Contract”. Section 1-201. “Delivery”. Section 1-201. “Goods”. Section 2-105. “Notifies”. Section 1-201. “Seller”. Section 2-103. “Send”. Section 1-201. “Usage of trade”. Section 1-205.

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NOTES TO DECISIONS

1.Action to Recover for F.O.B. Shipment.

Where parties had what was known as a shipment or F.O.B. contract, delivery under it was not at the destination but at the point of departure and, where shipper proved it shipped the goods and buyer did not affirmatively plead they were not received, shipper established a prima facie case of debt. Permalum Window & Awning Mfg. Co. v. Permalum Window Mfg. Corp., 412 S.W.2d 863, 1967 Ky. LEXIS 440 ( Ky. 1967 ).

355.2-505. Seller’s shipment under reservation.

  1. Where the seller has identified goods to the contract by or before shipment:
    1. His procurement of a negotiable bill of lading to his own order or otherwise reserves in him a security interest in the goods. His procurement of the bill to the order of a financing agency or of the buyer indicates in addition only the seller’s expectation of transferring that interest to the person named.
    2. A nonnegotiable bill of lading to himself or his nominee reserves possession of the goods as security but except in a case of conditional delivery (subsection (2) of KRS 355.2-507 ) a nonnegotiable bill of lading naming the buyer as consignee reserves no security interest even though the seller retains possession or control of the bill of lading.
  2. When shipment by the seller with reservation of a security interest is in violation of the contract for sale it constitutes an improper contract for transportation within KRS 355.2-504 but impairs neither the rights given to the buyer by shipment and identification of the goods to the contract nor the seller’s powers as a holder of a negotiable document.

History. Enact. Acts 1958, ch. 77, § 2-505, effective July 1, 1960; 2012, ch. 132, § 49, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Section 20(2), (3), (4), Uniform Sales Act.

Changes:

Completely rephrased, the “powers” of the parties in cases of reservation being emphasized primarily rather than the “rightfulness” of reservation.

Purposes of changes:

To continue in general the policy of the prior uniform statutory provision with certain modifications of emphasis and language, so that:

  1. The security interest reserved to the seller under subsection (1) is restricted to securing payment or performance by the buyer and the seller is strictly limited in his disposition and control of the goods as against the buyer and third parties. Under this Article, the provision as to the passing of interest expressly applies “despite any reservation of security title” and also provides that the “rights, obligations and remedies” of the parties are not altered by the incidence of title generally. The security interest, therefore, must be regarded as a means given to the seller to enforce his rights against the buyer which is unaffected by and in turn does not affect the location of title generally. The rules set forth in subsection (1) are not to be altered by any apparent “contrary intent” of the parties as to passing of title, since the rights and remedies of the parties to the contract of sale, as defined in this Article, rest on the contract and its performance or breach and not on stereotyped presumptions as to the location of title.

    This Article does not attempt to regulate local procedure in regard to the effective maintenance of the seller’s security interest when the action is in replevin by the buyer against the carrier.

  2. Every shipment of identified goods under a negotiable bill of lading reserves a security interest in the seller under subsection (1) paragraph (a).

    It is frequently convenient for the seller to make the bill of lading to the order of a nominee such as his agent at destination, the financing agency to which he expects to negotiate the document or the bank issuing a credit to him. In many instances, also, the buyer is made the order party. This Article does not deal directly with the question as to whether a bill of lading made out by the seller to the order of a nominee gives the carrier notice of any rights which the nominee may have so as to limit its freedom or obligation to honor the bill of lading in the hands of the seller as the original shipper if the expected negotiation fails. This is dealt with in the Article on Documents of Title (Article 7).

  3. A non-negotiable bill of lading taken to a party other than the buyer under subsection (1) paragraph (b) reserves possession of the goods as security in the seller but if he seeks to withhold the goods improperly the buyer can tender payment and recover them.
  4. In the case of a shipment by non-negotiable bill of lading taken to a buyer, the seller, under subsection (1) retains no security interest or possession as against the buyer and by the shipment he de facto loses control as against the carrier except where he rightfully and effectively stops delivery in transit. In cases in which the contract gives the seller the right to payment against delivery, the seller, by making an immediate demand for payment, can show that his delivery is conditional, but this does not prevent the buyer’s power to transfer full title to a sub-buyer in ordinary course or other purchaser under Section 2-403.
  5. Under subsection (2) an improper reservation by the seller which would constitute a breach in no way impairs such of the buyer’s rights as result from identification of the goods. The security title reserved by the seller under subsection (1) does not protect his retaining possession or control of the document or the goods for the purpose of exacting more than is due him under the contract.

Cross references:

Point 1: Section 1-201.

Point 2: Article 7.

Point 3: Sections 2-501(2) and 2-504.

Point 4: Sections 2-403, 2-507(2) and 2-705.

Point 5: Sections 2-310, 2-319(4), 2-320(4), 2-501 and 2-502 and Article 7.

Definitional cross references:

“Bill of lading”. Section 1-201. “Buyer”. Section 2-103. “Consignee”. Section 7-102. “Contract”. Section 1-201. “Contract for sale”. Section 2-106. “Delivery”. Section 1-201. “Financing agency”. Section 2-104. “Goods”. Section 2-105. “Holder”. Section 1-201. “Person”. Section 1-201. “Security interest”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Conditional Sales Contracts.

Under a conditional sales contract, title did not pass to the purchaser until performance of the condition provided in the contract which was payment of the price. (decided under prior law) White v. General Motors Acceptance Corp., 2 F. Supp. 406, 1932 U.S. Dist. LEXIS 1640 (D. Ky. 1932 ).

In a conditional seller’s action to repossess the automobile sold, an instruction to the jury that title thereto had always been in the seller and that their only question was as to whether or not there had been default in payments upon which the right of repossession arose was proper. (decided under prior law) Brown v. Woods Motor Co., 239 Ky. 312 , 39 S.W.2d 507, 1931 Ky. LEXIS 779 ( Ky. 1931 ), limited, Commonwealth v. Larson, 242 Ky. 317 , 46 S.W.2d 82, 1932 Ky. LEXIS 251 ( Ky. 1932 ).

The rule prevailing in this state before the enactment of the Uniform Sales Act, to the effect that a reservation of title by the seller of personal property did not have the effect of continuing the title in him but only gave him a lien upon the property sold, was repealed by the Uniform Sales Act. (decided under prior law) Brown v. Woods Motor Co., 239 Ky. 312 , 39 S.W.2d 507, 1931 Ky. LEXIS 779 ( Ky. 1931 ), limited, Commonwealth v. Larson, 242 Ky. 317 , 46 S.W.2d 82, 1932 Ky. LEXIS 251 ( Ky. 1932 ); Commonwealth v. Larson, 242 Ky. 317 , 46 S.W.2d 82, 1932 Ky. LEXIS 251 ( Ky. 1932 ).

2.Absolute Bill of Sale.

Where, in a transaction involving the transfer of ownership of an automobile, the seller gave an absolute bill of sale and the purchaser, in addition, executed a conditional sales contract reciting that title remained in the seller, the transaction was a sale and the conditional sales contract only created a lien on the automobile to secure the debt. (decided under prior law) Cartwright v. C. I. T. Corp., 253 Ky. 690 , 70 S.W.2d 388, 1934 Ky. LEXIS 729 ( Ky. 1934 ).

355.2-506. Rights of financing agency.

  1. A financing agency by paying or purchasing for value a draft which relates to a shipment of goods acquires to the extent of the payment or purchase and in addition to its own rights under the draft and any document of title securing it any rights of the shipper in the goods including the right to stop delivery and the shipper’s right to have the draft honored by the buyer.
  2. The right to reimbursement of a financing agency which has in good faith honored or purchased the draft under commitment to or authority from the buyer is not impaired by subsequent discovery of defects with reference to any relevant document which was apparently regular.

History. Enact. Acts 1958, ch. 77, § 2-506, effective July 1, 1960; 2012, ch. 132, § 50, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

  1. “Financing agency” is broadly defined in this Article to cover every normal instance in which a party aids or intervenes in the financing of a sales transaction. The term as used in subsection (1) is not in any sense intended as a limitation and covers any other appropriate situation which may arise outside the scope of the definition.
  2. “Paying” as used in subsection (1) is typified by the letter of credit, or “authority to pay” situation in which a banker, by arrangement with the buyer or other consignee, pays on his behalf a draft for the price of the goods. It is immaterial whether the draft is formally drawn on the party paying or his principal, whether it is a sight draft paid in cash or a time draft “paid” in the first instance by acceptance, or whether the payment is viewed as absolute or conditional. All of these cases constitute “payment” under this subsection. Similarly, “purchasing for value” is used to indicate the whole area of financing by the seller’s banker, and the principle of subsection (1) is applicable without any niceties of distinction between “purchase,” “discount,” “advance against collection” or the like. But it is important to notice that the only right to have the draft honored that is acquired is that against the buyer; if any right against any one else is claimed it will have to be under some separate obligation of that other person. A letter of credit does not necessarily protect purchasers of drafts. See Article 5. And for the relations of the parties to documentary drafts see Part 5 of Article 4.
  3. Subsection (1) is made applicable to payments or advances against a draft which “relates to” a shipment of goods and this has been chosen as a term of maximum breadth. In particular the term is intended to cover the case of a draft against an invoice or against a delivery order. Further, it is unnecessary that there be an explicit assignment of the invoice attached to the draft to bring the transaction within the reason of this subsection.
  4. After shipment, “the rights of the shipper in the goods” are merely security rights and are subject to the buyer’s right to force delivery upon tender of the price. The rights acquired by the financing agency are similarly limited and, moreover, if the agency fails to procure any outstanding negotiable document of title, it may find its exercise of these rights hampered or even defeated by the seller’s disposition of the document to a third party. This section does not attempt to create any new rights in the financing agency against the carrier which would force the latter to honor a stop order from the agency, a stranger to the shipment, or any new rights against a holder to whom a document of title has been duly negotiated under Article 7.
  5. The deletion of the language “on its face” from subsection (2) is designed to accommodate electronic documents of title without changing the requirement of regularity of the document.

Cross references:

Point 1: Section 2-104(2) and Article 4.

Point 2: Part 5 of Article 4, and Article 5.

Point 4: Sections 2-501 and 2-502(1) and Article 7.

Definitional cross references:

“Buyer”. Section 2-103. “Document of title”. Section 1-201. “Draft”. Section 3-104. “Financing agency”. Section 2-104. “Good faith”. Section 2-103. “Goods”. Section 2-105. “Honor”. Section 1-201. “Purchase”. Section 1-201. “Rights”. Section 1-201. “Value”. Section 1-201.

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355.2-507. Effect of seller’s tender — Delivery on condition.

  1. Tender of delivery is a condition to the buyer’s duty to accept the goods and, unless otherwise agreed, to his duty to pay for them. Tender entitles the seller to acceptance of the goods and to payment according to the contract.
  2. Where payment is due and demanded on the delivery to the buyer of goods or documents of title, his right as against the seller to retain or dispose of them is conditional upon his making the payment due.

History. Enact. Acts 1958, ch. 77, § 2-507, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

See Section 11, 41, 42 and 69, Uniform Sales Act.

Purposes:

  1. Subsection (1) continues the policies of the prior uniform statutory provisions with respect to tender and delivery by the seller. Under this Article the same rules in these matters are applied to present sales and to contracts for sale. But the provisions of this subsection must be read within the framework of the other sections of this Article which bear upon the question of delivery and payment.
  2. The “unless otherwise agreed” provision of subsection (1) is directed primarily to cases in which payment in advance has been promised or a letter of credit term has been included. Payment “according to the contract” contemplates immediate payment, payment at the end of an agreed credit term, payment by a time acceptance or the like. Under this Act, “contract” means the total obligation in law which results from the parties’ agreement including the effect of this Article. In this context, therefore, there must be considered the effect in law of such provisions as those on means and manner of payment and on failure of agreed means and manner of payment.
  3. Subsection (2) deals with the effect of a conditional delivery by the seller and in such a situation makes the buyer’s ‘right as against the seller’ conditional upon payment. These words are used as words of limitation to conform with the policy set forth in the bona fide purchase sections of this Article. Should the seller after making such a conditional delivery fail to follow up his rights, the condition is waived. Common law rules and precedents governing such principles are applicable (Section 1-103). If third parties are involved, Section 2-403(1) protects good faith purchasers. See PEB Commentary No. 1, dated March 10, 1990.

Cross references:

Point 1: Sections 2-310, 2-503, 2-511, 2-601 and 2-711 to 2-713.

Point 2: Sections 1-201, 2-511 and 2-614.

Point 3: Sections 2-401, 2-403 and 2-702(1)(b).

Definitional cross references:

“Buyer”. Section 2-103. “Contract”. Section 1-201. “Delivery”. Section 1-201. “Document of title”. Section 1-201. “Goods”. Section 2-105. “Rights”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Rights of Unpaid Seller.

The rights of an unpaid seller under this section are no less than in the case of sale falling within KRS 355.2-702 concerning a sale on credit to an insolvent buyer. Greater Louisville Auto Auction, Inc. v. Ogle Buick, Inc., 387 S.W.2d 17, 1965 Ky. LEXIS 457 ( Ky. 1965 ).

Sellers of used cars who were paid by checks which were later dishonored had the same right to reclamation that a seller who is unpaid has under KRS 355.2-702 . Greater Louisville Auto Auction, Inc. v. Ogle Buick, Inc., 387 S.W.2d 17, 1965 Ky. LEXIS 457 ( Ky. 1965 ).

In a cash transaction a buyer may not retain or dispose of the seller’s goods until he makes the payment due; payment by check is conditional and the buyer’s rights are defeated if his check is dishonored. Cumulatively read therefore, this section and KRS 355.2-511 implicitly permit the cash seller to reclaim his goods if the buyer refuses to pay upon demand or if his draft is not accepted by the bank. In re Wathen's Elevators, Inc., 32 B.R. 912, 1983 Bankr. LEXIS 5427 (Bankr. W.D. Ky. 1983 ).

Supplier’s reclamation of fabricated steel from debtor’s construction site was held not to constitute a preferential transfer where the debtor and its contractor never paid for the steel and the steel was never property of the debtor or contractor. Spradlin v. Jarvis (In re Tri-City Turf Club, Inc.), 323 F.3d 439, 2003 FED App. 0088P, 2003 U.S. App. LEXIS 5559 (6th Cir. Ky. 2003 ).

Corporations that terminated exclusive sales distributorships, putting the distributors out of business, did not breach distributorship contracts because the distributorships’ receipt of goods for sale, even if nonconforming, constituted acceptance under KRS 355.2-606 (1)(c), 355.2-507 (1), requiring payment in full. Powerscreen USA, LLC v. D & L Equip., Inc., 661 F. Supp. 2d 705, 2009 U.S. Dist. LEXIS 93427 (W.D. Ky. 2009 ).

Cited:

In re Wathen’s Elevators, Inc., 37 B.R. 870, 1984 Bankr. LEXIS 6132 (Bankr. W.D. Ky. 1984 ).

355.2-508. Cure by seller of improper tender or delivery — Replacement.

  1. Where any tender or delivery by the seller is rejected because nonconforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery.
  2. Where the buyer rejects a nonconforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender.

History. Enact. Acts 1958, ch. 77, § 2-508, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

  1. Subsection (1) permits a seller who has made a non-conforming tender in any case to make a conforming delivery within the contract time upon seasonable notification to the buyer. It applies even where the seller has taken back the non-conforming goods and refunded the purchase price. He may still make a good tender within the contract period. The closer, however, it is to the contract date, the greater is the necessity for extreme promptness on the seller’s part in notifying of his intention to cure, if such notification is to be “seasonable” under this subsection.

    The rule of this subsection, moreover, is qualified by its underlying reasons. Thus if, after contracting for June delivery a buyer later makes known to the seller his need for shipment early in the month and the seller ships accordingly, the “contract time” has been cut down by the supervening modification and the time for cure of tender must be referred to this modified time term.

  2. Subsection (2) seeks to avoid injustice to the seller by reason of a surprise rejection by the buyer. However, the seller is not protected unless he had “reasonable grounds to believe” that the tender would be acceptable. Such reasonable grounds can lie in prior course of dealing, course of performance or usage of trade as well as in the particular circumstances surrounding the making of the contract. The seller is charged with commercial knowledge of any factors in a particular sales situation which require him to comply strictly with his obligations under the contract as, for example, strict conformity of documents in an overseas shipment or the sale of precision parts or chemicals for use in manufacture. Further, if the buyer gives notice either implicitly, as by a prior course of dealing involving rigorous inspections, or expressly, as by the deliberate inclusion of a “no replacement” clause in the contract, the seller is to be held to rigid compliance. If the clause appears in a “form” contract evidence that it is out of line with trade usage or the prior course of dealing and was not called to the seller’s attention may be sufficient to show that the seller had reasonable grounds to believe that the tender would be acceptable.
  3. The words “a further reasonable time to substitute a conforming tender” are intended as words of limitation to protect the buyer. What is a “reasonable time” depends upon the attending circumstances. Compare Section 2-511 on the comparable case of a seller’s surprise demand for legal tender.
  4. Existing trade usages permitting variations without rejection but with price allowance enter into the agreement itself as contractual limitations of remedy and are not covered by this section.

Cross references:

Point 2: Section 2-302.

Point 3: Section 2-511.

Point 4: Sections 1-205 and 2-721.

Definitional cross references:

“Buyer”. Section 2-103. “Conforming”. Section 2-106. “Contract”. Section 1-201. “Money”. Section 1-201. “Notifies”. Section 1-201. “Reasonable time”. Section 1-204. “Seasonably”. Section 1-204. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Minor Repairs.

The buyer of a mobile home could not rescind the purchase on grounds of nonconformity without allowing the seller an opportunity to remove the defect by providing minor repairs to the damaged panel. Leitchfield Dev. Corp. v. Clark, 757 S.W.2d 207, 1988 Ky. App. LEXIS 81 (Ky. Ct. App. 1988).

2.Defect Communicated.

In situations involving the delivery of a mobile home by the seller to a buyer, a seller’s right to cure a nonconforming tendered delivery, if communicated to the buyer, prohibits the buyer from rescinding the contract on the basis of a defective condition. Leitchfield Dev. Corp. v. Clark, 757 S.W.2d 207, 1988 Ky. App. LEXIS 81 (Ky. Ct. App. 1988).

3.Perfect Tender Rule.

The right of a seller to cure an improper tender or delivery modifies or limits the perfect tender rule. Leitchfield Dev. Corp. v. Clark, 757 S.W.2d 207, 1988 Ky. App. LEXIS 81 (Ky. Ct. App. 1988).

355.2-509. Risk of loss in the absence of breach.

  1. Where the contract requires or authorizes the seller to ship the goods by carrier:
    1. If it does not require him to deliver them at a particular destination, the risk of loss passes to the buyer when the goods are duly delivered to the carrier even though the shipment is under reservation (KRS 355.2-505 ); but
    2. If it does require him to deliver them at a particular destination and the goods are there duly tendered while in the possession of the carrier, the risk of loss passes to the buyer when the goods are there duly so tendered as to enable the buyer to take delivery.
  2. Where the goods are held by a bailee to be delivered without being moved, the risk of loss passes to the buyer:
    1. On the buyer’s receipt of possession or control of a negotiable document of title covering the goods; or
    2. On acknowledgement by the bailee of the buyer’s right to possession of the goods; or
    3. After the buyer’s receipt of possession or control of a nonnegotiable document of title or other written direction to deliver, as provided in subsection (4)(b) of KRS 355.2-503 .
  3. In any case not within subsection (1) or (2) of this section, the risk of loss passes to the buyer on his receipt of the goods if the seller is a merchant; otherwise the risk passes to the buyer on tender of delivery.
  4. The provisions of this section are subject to contrary agreement of the parties and to the provisions of this article on sale on approval (KRS 355.2-327 ) and on effect of breach on risk of loss (KRS 355.2-510 ).

History. Enact. Acts 1958, ch. 77, § 2-509, effective July 1, 1960; 2012, ch. 132, § 51, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Section 22. Uniform Sales Act.

Changes:

Rewritten, subsection (3) of this section modifying prior law.

Purposes of changes:

To make it clear that:

  1. The underlying theory of these sections on risk of loss is the adoption of the contractual approach rather than an arbitrary shifting of the risk with the “property” in the goods. The scope of the present section, therefore, is limited strictly to those cases where there has been no breach by the seller. Where for any reason his delivery or tender fails to conform to the contract, the present section does not apply and the situation is governed by the provisions on effect of breach on risk of loss.
  2. The provisions of subsection (1 apply where the contract “requires or authorizes” shipment of the goods. This language is intended to be construed parallel to comparable language in the section on shipment by seller. In order that the goods be “duly delivered to the carrier” under paragraph (a) a contract must be entered into with the carrier which will satisfy the requirements of the section on shipment by the seller and the delivery must be made under circumstances which will enable the seller to take any further steps necessary to a due tender. The underlying reason of this subsection does not require that the shipment be made after contracting, but where, for example, the seller buys the goods afloat and later diverts the shipment to the buyer, he must identify the goods to the contract before the risk of loss can pass. To transfer the risk it is enough that a proper shipment and a proper identification come to apply to the same goods although, aside from special agreement, the risk will not pass retroactively to the time of shipment in such a case.
  3. Whether the contract involves delivery at the seller’s place of business or at the situs of the goods, a merchant seller cannot transfer risk of loss and it remains upon him until actual receipt by the buyer, even though full payment has been made and the buyer has been notified that the goods are at his disposal. Protection is afforded him, in the event of breach by the buyer, under the next section.

    The underlying theory of this rule is that a merchant who is to make physical delivery at his own place continues meanwhile to control the goods and can be expected to insure his interest in them. The buyer, on the other hand, has no control of the goods and it is extremely unlikely that he will carry insurance on goods not yet in his possession.

  4. Where the agreement provides for delivery of the goods as between the buyer and seller without removal from the physical possession of a bailee, the provisions on manner of tender of delivery apply on the point of transfer of risk. Due delivery of a negotiable document of title covering the goods or acknowledgment by the bailee that he holds for the buyer completes the “delivery” and passes the risk. See definition of delivery in Article 1, Section 1-201 and the definition of control in Article 7, Section 7-106.
  5. The provisions of this section are made subject by subsection (4) to the “contrary agreement” of the parties. This language is intended as the equivalent of the phrase “unless otherwise agreed” used more frequently throughout this Act. “Contrary” is in no way used as a word of limitation and the buyer and seller are left free to readjust their rights and risks as declared by this section in any manner agreeable to them. Contrary agreement can also be found in the circumstances of the case, a trade usage or practice, or a course of dealing or performance.

Cross references:

Point 1: Section 2-510(1).

Point 2: Sections 2-503 and 2-504.

Point 3: Sections 2-104, 2-503 and 2-510.

Point 4: Section 2-503(4).

Point 5: Section 1-201.

Definitional cross references:

“Agreement”. Section 1-201. “Buyer”. Section 2-103. “Contract”. Section 1-201. “Delivery”. Section 1-201. “Document of title”. Section 1-201. “Goods”. Section 2-105. “Merchant”. Section 2-104. “Party”. Section 1-201. “Receipt” of goods. Section 2-103. “Sale on approval”. Section 2-326. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Risk of Loss.

When seller delivered oil to barge owned by common carrier under a contract to deliver all seller’s oil to barges F.O.B. seller’s dock, the risk of loss was on buyer when barge sank before it was completely filled. (decided under prior law) Troy Refining Corp. v. Slagter Oil & Grease Co., 61 F. Supp. 369, 1945 U.S. Dist. LEXIS 2188 (D. Ky. 1945 ).

2.Tender of Delivery.

When seller had sawed lumber, graded it and placed it in piles with purchaser’s name on it, there was delivery to purchaser who, under terms of contracts, had made the advances required by the contract. (decided under prior law) In re Shipley Stave & Lumber Co., 29 F. Supp. 746, 1939 U.S. Dist. LEXIS 2129 (D. Ky. 1939 ).

355.2-510. Effect of breach on risk of loss.

  1. Where a tender or delivery of goods so fails to conform to the contract as to give a right of rejection the risk of their loss remains on the seller until cure or acceptance.
  2. Where the buyer rightfully revokes acceptance he may to the extent of any deficiency in his effective insurance coverage treat the risk of loss as having rested on the seller from the beginning.
  3. Where the buyer as to conforming goods already identified to the contract for sale repudiates or is otherwise in breach before risk of their loss has passed to him, the seller may to the extent of any deficiency in his effective insurance coverage treat the risk of loss as resting on the buyer for a commercially reasonable time.

History. Enact. Acts 1958, ch. 77, § 2-510, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

To make clear that:

  1. Under subsection (1) the seller by his individual action cannot shift the risk of loss to the buyer unless his action conforms with all the conditions resting on him under the contract.
  2. The “cure” of defective tenders contemplated by subsection (1) applies only to those situations in which the seller makes changes in goods already tendered, such as repair, partial substitution, sorting out from an improper mixture and the like since “cure” by repossession and new tender has no effect on the risk of loss of the goods originally tendered. The seller’s privilege of cure does not shift the risk, however, until the cure is completed.

    Where defective documents are involved a cure of the defect by the seller or a waiver of the defects by the buyer will operate to shift the risk under this section. However, if the goods have been destroyed prior to the cure or the buyer is unaware of their destruction at the time he waives the defect in the documents, the risk of the loss must still be borne by the seller, for the risk shifts only at the time of cure, waiver of documentary defects or acceptance of the goods.

  3. In cases where there has been a breach of the contract, if the one in control of the goods is the aggrieved party, whatever loss or damage may prove to be uncovered by his insurance falls upon the contract breaker under subsections (2) and (3) rather than upon him. The word “effective” as applied to insurance coverage in those subsections is used to meet the case of supervening insolvency of the insurer. The “deficiency” referred to in the text means such deficiency in the insurance coverage as exists without subrogation. This section merely distributes the risk of loss as stated and is not intended to be disturbed by any subrogation of an insurer.

Cross reference:

Section 2-509.

Definitional cross references:

“Buyer”. Section 2-103. “Conform”. Section 2-106. “Contract for sale”. Section 2-106. “Goods”. Section 2-105. “Seller”. Section 2-103.

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Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Answer Denying Fraud, Form 190.21.

355.2-511. Tender of payment by buyer — Payment by check.

  1. Unless otherwise agreed tender of payment is a condition to the seller’s duty to tender and complete any delivery.
  2. Tender of payment is sufficient when made by any means or in any manner current in the ordinary course of business unless the seller demands payment in legal tender and gives any extension of time reasonably necessary to procure it.
  3. Subject to the provisions of this chapter on the effect of an instrument on an obligation (KRS 355.3-310 ), payment by check is conditional and is defeated as between the parties by dishonor of the check on due presentment.

History. Enact. Acts 1958, ch. 77, § 2-511, effective July 1, 1960; 1996, ch. 130, § 69, effective January 1, 1997.

Official Comment

Prior uniform statutory provision:

Section 42, Uniform Sales Act.

Changes:

Rewritten by this section and Section 2-507.

Purposes of changes:

  1. The requirement of payment against delivery in subsection (1) is applicable to noncommercial sales generally and to ordinary sales at retail although it has no application to the great body of commercial contracts which carry credit terms. Subsection (1) applies also to documentary contracts in general and to contracts which look to shipment by the seller but contain no term on time and manner of payment, in which situations the payment may, in proper case, be demanded against delivery of appropriate documents.

    In the case of specific transactions such as C.O.D. sales or agreements providing for payment against documents, the provisions of this subsection must be considered in conjunction with the special sections of the Article dealing with such terms. The provision that tender of payment is a condition to the seller’s duty to tender and complete “any delivery” integrates this section with the language and policy of the section on delivery in several lots which call for separate payment. Finally, attention should be directed to the provision on right to adequate assurance of performance which recognizes, even before the time for tender, an obligation on the buyer not to impair the seller’s expectation of receiving payment in due course.

  2. Unless there is agreement otherwise the concurrence of the conditions as to tender of payment and tender of delivery requires their performance at a single place or time. This Article determines that place and time by determining in various other sections the place and time for tender of delivery under various circumstances and in particular types of transactions. The sections dealing with time and place of delivery together with the section on right to inspection of goods answer the subsidiary question as to when payment may be demanded before inspection by the buyer.
  3. The essence of the principle involved in subsection (2) is avoidance of commercial surprise at the time of performance. The section on substituted performance covers the peculiar case in which legal tender is not available to the commercial community.
  4. Subsection (3) is concerned with the rights and obligations as between the parties to a sales transaction when payment is made by check. This Article recognizes that the taking of a seemingly solvent party’s check is commercially normal and proper and, if due diligence is exercised in collection, is not to be penalized in any way. The conditional character of the payment under this section refers only to the effect of the transaction “as between the parties” thereto and does not purport to cut into the law of “absolute” and “conditional” payment as applied to such other problems as the discharge of sureties or the responsibilities of a drawee bank which is at the same time an agent for collection.

    The phrase “by check” includes not only the buyer’s own but any check which does not effect a discharge under Article 3. Similarly the reason of this subsection should apply and the same result should be reached where the buyer “pays” by sight draft on a commercial firm which is financing him.

  5. Under subsection (3) payment by check is defeated if it is not honored upon due presentment. This corresponds to the provisions of the Article on Commercial Paper. But if the seller procures certification of the check instead of cashing it, the buyer is discharged. (Section 3-411).
  6. Where the instrument offered by the buyer is not a payment but a credit instrument such as a note or a check postdated by even one day, the seller’s acceptance of the instrument insofar as third parties are concerned, amounts to a delivery on credit and his remedies are set forth in the section on buyer’s insolvency. As between the buyer and the seller, however, the matter turns on the present subsection and the section on conditional delivery and subsequent dishonor of the instrument gives the seller rights on it as well as for breach of the contract for sale.

Cross references:

Point 1: Sections 2-307, 2-310, 2-320, 2-325, 2-503, 2-513 and 2-609.

Point 2: Sections 2-307, 2-310, 2-319, 2-322, 2-503, 2-504 and 2-513.

Point 3: Section 2-614.

Point 5: Article 3, esp. Sections 3-411 and 3-802.

Point 6: Sections 2-507, 2-702, and Article 3.

Definitional cross references:

“Buyer”. Section 2-103. “Check”. Section 3-104. “Dishonor”. Section 3-508. “Party”. Section 1-201. “Reasonable time”. Section 1-204. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Rights of Unpaid Seller.

In a cash transaction a buyer may not retain or dispose of the seller’s goods until he makes the payment due; payment by check is conditional and the buyer’s rights are defeated if his check is dishonored. Cumulatively read therefore, KRS 355.2-507 and this section implicitly permit the cash seller to reclaim his goods if the buyer refuses to pay upon demand or if his draft is not accepted by the bank. In re Wathen's Elevators, Inc., 32 B.R. 912, 1983 Bankr. LEXIS 5427 (Bankr. W.D. Ky. 1983 ).

Cited:

Greater Louisville Auto Auction, Inc. v. Ogle Buick, Inc., 387 S.W.2d 17, 1965 Ky. LEXIS 457 ( Ky. 1965 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Answer Pleading Tender of Money, Form 190.19.

355.2-512. Payment by buyer before inspection.

  1. Where the contract requires payment before inspection nonconformity of the goods does not excuse the buyer from so making payment unless:
    1. The nonconformity appears without inspection; or
    2. Despite tender of the required documents the circumstances would justify injunction against honor under (KRS 355.5-109 (2)).
  2. Payment pursuant to subsection (1) of this section does not constitute an acceptance of goods or impair the buyer’s right to inspect or any of his remedies.

History. Enact. Acts 1958, ch. 77, § 2-512, effective July 1, 1960; 2000, ch. 408, § 20, effective July 1, 2001.

Official Comment

Prior uniform statutory provision:

None, but see Sections 47 and 49, Uniform Sales Act.

Purposes:

  1. Subsection (1) of the present section recognizes that the essence of a contract providing for payment before inspection is the intention of the parties to shift to the buyer the risks which would usually rest upon the seller. The basic nature of the transaction is thus preserved and the buyer is in most cases required to pay first and litigate as to any defects later.
  2. “Inspection” under this section is an inspection in a manner reasonable for detecting defects in goods whose surface appearance is satisfactory.
  3. Clause (a) of this subsection states an exception to the general rule based on common sense and normal commercial practice. The apparent non-conformity referred to is one which is evident in the mere process of taking delivery.
  4. Clause (b) is concerned with contracts for payment against documents and incorporates the general clarification and modification of the case law contained in the section on excuse of a financing agency. Section 5-114.
  5. Subsection (2) makes explicit the general policy of the Uniform Sales Act that the payment required before inspection in no way impairs the buyer’s remedies or rights in the event of a default by the seller. The remedies reserved to the buyer are all of his remedies which include as a matter of reason the remedy for total non-delivery after payment in advance.

    The provision on performance or acceptance under reservation of rights does not apply to the situations contemplated here in which payment is made in due course under the contract and the buyer need not pay “under protest” or the like in order to preserve his rights as to defects discovered upon inspection.

  6. This section applies to cases in which the contract requires payment before inspection either by the express agreement of the parties or by reason of the effect in law of that contract. The present section must therefore be considered in conjunction with the provision on right to inspection of goods which sets forth the instances in which the buyer is not entitled to inspection before payment.

Cross references:

Point 4: Article 5.

Point 5: Section 1-207.

Point 6: Section 2-513(3).

Definitional cross references:

“Buyer”. Section 2-103. “Conform”. Section 2-106. “Contract”. Section 1-201. “Financing agency”. Section 2-104. “Goods”. Section 2-105. “Remedy”. Section 1-201. “Rights”. Section 1-201.

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355.2-513. Buyer’s right to inspection of goods.

  1. Unless otherwise agreed and subject to subsection (3), where goods are tendered or delivered or identified to the contract for sale, the buyer has a right before payment or acceptance to inspect them at any reasonable place and time and in any reasonable manner. When the seller is required or authorized to send the goods to the buyer, the inspection may be after their arrival.
  2. Expenses of inspection must be borne by the buyer but may be recovered from the seller if the goods do not conform and are rejected.
  3. Unless otherwise agreed and subject to the provisions of this article on C.I.F. contracts (subsection (3) of KRS 355.2-321 ), the buyer is not entitled to inspect the goods before payment of the price when the contract provides
    1. for delivery “C.O.D.” or on other like terms; or
    2. for payment against documents of title, except where such payment is due only after the goods are to become available for inspection.
  4. A place or method of inspection fixed by the parties is presumed to be exclusive but unless otherwise expressly agreed it does not postpone identification or shift the place for delivery or for passing the risk of loss. If compliance becomes impossible, inspection shall be as provided in this section unless the place or method fixed was clearly intended as an indispensable condition failure of which avoids the contract.

History. Enact. Acts 1958, ch. 77, § 2-513, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 47(2), (3), Uniform Sales Act.

Changes:

Rewritten, subsections (2) and (3) being new.

Purposes of changes and new matter:

To correspond in substance with the prior uniform statutory provision and to incorporate in addition some of the results of the better case law so that:

  1. The buyer is entitled to inspect goods as provided in subsection (1) unless it has been otherwise agreed by the parties. The phrase “unless otherwise agreed” is intended principally to cover such situations as those outlined in subsections (3) and (4) and those in which the agreement of the parties negates inspection before tender of delivery. However, no agreement by the parties can displace the entire right of inspection except where the contract is simply for the sale of “this thing.” Even in a sale of boxed goods “as is” inspection is a right to the buyer, since if the boxes prove to contain some other merchandise altogether the price can be recovered back; nor do the limitations of the provision on effect of acceptance apply in such a case.
  2. The buyer’s right of inspection is available to him upon tender, delivery or appropriation of the goods with notice to him. Since inspection is available to him on tender, where payment is due against delivery he may, unless otherwise agreed, make his inspection before payment of the price. It is also available to him after receipt of the goods and so may be postponed after receipt for a reasonable time. Failure to inspect before payment does not impair the right to inspect after receipt of the goods unless the case falls within subsection (4) on agreed and exclusive inspection provisions. The right to inspect goods which have been appropriated with notice to the buyer holds whether or not the sale was by sample.
  3. The buyer may exercise his right of inspection at any reasonable time or place and in any reasonable manner. It is not necessary that he select the most appropriate time, place or manner to inspect or that his selection be the customary one in the trade or locality. Any reasonable time, place or manner is available to him and the reasonableness will be determined by trade usages, past practices between the parties and the other circumstances of the case.

    The last sentence of subsection (1) makes it clear that the place of arrival of shipped goods is a reasonable place for their inspection.

  4. Expenses of an inspection made to satisfy the buyer of the seller’s performance must be assumed by the buyer in the first instance. Since the rule provides merely for an allocation of expense there is no policy to prevent the parties from providing otherwise in the agreement. Where the buyer would normally bear the expenses of the inspection but the goods are rightly rejected because of what the inspection reveals, demonstrable and reasonable costs of the inspection are part of his incidental damage caused by the seller’s breach.
  5. In the case of payment against documents, subsection (3) requires payment before inspection, since shipping documents against which payment is to be made will commonly arrive and be tendered while the goods are still in transit.

    This Article recognizes no exception in any peculiar case in which the goods happen to arrive before the documents. However, where by the agreement payment is to await the arrival of the goods, inspection before payment becomes proper since the goods are then “available for inspection.”

    Where by the agreement the documents are to be held until arrival the buyer is entitled to inspect before payment since the goods are then “available for inspection”. Proof of usage is not necessary to establish this right, but if inspection before payment is disputed the contrary must be established by usage or by an explicit contract term to that effect.

    For the same reason, that the goods are available for inspection, a term calling for payment against storage documents or a delivery order does not normally bar the buyer’s right to inspection before payment under subsection (3)(b). This result is reinforced by the buyer’s right under subsection (1) to inspect goods which have been appropriated with notice to him.

  6. Under subsection (4) an agreed place or method of inspection is generally held to be intended as exclusive. However, where compliance with such an agreed inspection term becomes impossible, the question is basically one of intention. If the parties clearly intend that the method of inspection named is to be a necessary condition without which the entire deal is to fail, the contract is at an end if that method becomes impossible. On the other hand, if the parties merely seek to indicate a convenient and reliable method but do not intend to give up the deal in the event of its failure, any reasonable method of inspection may be substituted under this Article.

    Since the purpose of an agreed place of inspection is only to make sure at that point whether or not the goods will be thrown back, the “exclusive” feature of the named place is satisfied under this Article if the buyer’s failure to inspect there is held to be an acceptance with the knowledge of such defects as inspection would have revealed within the section on waiver of buyer’s objections by failure to particularize. Revocation of the acceptance is limited to the situations stated in the section pertaining to that subject. The reasonable time within which to give notice of defects within the section on notice of breach begins to run from the point of the “acceptance.”

  7. Clauses on time of inspection are commonly clauses which limit the time in which the buyer must inspect and give notice of defects. Such clauses are therefore governed by the section of this Article which requires that such a time limitation must be reasonable.
  8. Inspection under this Article is not to be regarded as a “condition precedent to the passing of title” so that risk until inspection remains on the seller. Under subsection (4) such an approach cannot be sustained. Issues between the buyer and seller are settled in this Article almost wholly by special provisions and not by the technical determination of the locus of the title. Thus “inspection as a condition to the passing of title” becomes a concept almost without meaning. However, in peculiar circumstances inspection may still have some of the consequences hitherto sought and obtained under that concept.
  9. “Inspection” under this section has to do with the buyer’s check-up on whether the seller’s performance is in accordance with a contract previously made and is not to be confused with the “examination” of the goods or of a sample or model of them at the time of contracting which may affect the warranties involved in the contract.

Cross references:

Generally: Sections 2-310(b), 2-321(3) and 2-606(1)(b).

Point 1: Section 2-607.

Point 2: Sections 2-501 and 2-502.

Point 4: Section 2-715.

Point 5: Section 2-321(3).

Point 6: Sections 2-606 to 2-608.

Point 7: Section 1-204.

Point 8: Comment to Section 2-401.

Point 9: Section 2-316(3)(b).

Definitional cross references:

“Buyer”. Section 2-103. “Conform”. Section 2-106. “Contract”. Section 1-201. “Contract for sale”. Section 2-106. “Document of title”. Section 1-201. “Goods”. Section 2-105. “Party”. Section 1-201. “Presumed”. Section 1-201. “Reasonable time”. Section 1-204. “Rights”. Section 1-201. “Seller”. Section 2-103. “Send”. Section 1-201. “Term”. Section 1-201.

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NOTES TO DECISIONS

1.Obligation to Inspect.

Buyer who bought candy on faith of sample on basis of trial order from seller who shipped almost immediately was not under duty to inspect contents of unbroken original packages to see that the goods were in accordance with sample. (decided under prior law) James Grocery Co. v. Walter O. Birk Candy Co., 228 Ky. 11 , 14 S.W.2d 214, 1928 Ky. LEXIS 5 ( Ky. 1928 ).

355.2-514. When documents deliverable on acceptance — When on payment.

Unless otherwise agreed documents against which a draft is drawn are to be delivered to the drawee on acceptance of the draft if it is payable more than three (3) days after presentment; otherwise, only on payment.

History. Enact. Acts 1958, ch. 77, § 2-514, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 41, Uniform Bills of Lading Act.

Changes:

Rewritten.

Purposes of changes:

To make the provision one of general application so that:

  1. It covers any document against which a draft may be drawn, whatever may be the form of the document, and applies to interpret the action of a seller or consignor insofar as it may affect the rights and duties of any buyer, consignee or financing agency concerned with the paper. Supplementary or corresponding provisions are found in Sections 4-503 and 5-112.
  2. An “arrival” draft is a sight draft within the purpose of this section.

Cross references:

Point 1: See Sections 2-502, 2-505(2), 2-507(2), 2-512, 2-513, 2-607 concerning protection of rights of buyer and seller, and 4-503 and 5-112 on delivery of documents.

Definitional cross references:

“Delivery”. Section 1-201. “Draft”. Section 3-104.

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355.2-515. Preserving evidence of goods in dispute.

In furtherance of the adjustment of any claim or dispute

  1. either party on reasonable notification to the other and for the purpose of ascertaining the facts and preserving evidence has the right to inspect, test and sample the goods including such of them as may be in the possession or control of the other; and
  2. the parties may agree to a third party inspection or survey to determine the conformity or condition of the goods and may agree that the findings shall be binding upon them in any subsequent litigation or adjustment.

History. Enact. Acts 1958, ch. 77, § 2-515, effective July 1, 1960.

Official Comment

Prior uniform statutory provisions:

None.

Purposes:

  1. To meet certain serious problems which arise when there is a dispute as to the quality of the goods and thereby perhaps to aid the parties in reaching a settlement, and to further the use of devices which will promote certainty as to the condition of the goods, or at least aid in preserving evidence of their condition.
  2. Under paragraph (a), to afford either party an opportunity for preserving evidence, whether or not agreement has been reached, and thereby to reduce uncertainty in any litigation and, in turn perhaps, to promote agreement.

    Paragraph (a) does not conflict with the provisions on the seller’s right to resell rejected goods or the buyer’s similar right. Apparent conflict between these provisions which will be suggested in certain circumstances is to be resolved by requiring prompt action by the parties. Nor does paragraph (a)(i) impair the effect of a term for payment before inspection. Short of such defects as amount to fraud or substantial failure of consideration, nonconformity is neither an excuse nor a defense to an action for non-acceptance of documents. Normally, therefore, until the buyer has made payment, inspected and rejected the goods, there is no occasion or use for the rights under paragraph (a).

  3. Under paragraph (b), to provide for third party inspection upon the agreement of the parties, thereby opening the door to amicable adjustments based upon the findings of such third parties.

    The use of the phrase “conformity or condition” makes it clear that the parties’ agreement may range from a complete settlement of all aspects of the dispute by a third party to the use of a third party merely to determine and record the condition of the goods so that they can be resold or used to reduce the stake in controversy. “Conformity”, at one end of the scale of possible issues, includes the whole question of interpretation of the agreement and its legal effect, the state of the goods in regard to quality and condition, whether any defects are due to factors which operate at the risk of the buyer, and the degree of non-conformity where that may be material. “Condition”, at the other end of the scale, includes nothing but the degree of damage or deterioration which the goods show. Paragraph (b) is intended to reach any point in the gamut which the parties may agree upon.

    The principle of the section on reservation of rights reinforces this paragraph in simplifying such adjustments as the parties wish to make in partial settlement while reserving their rights as to any further points. Paragraph (b) also suggests the use of arbitration, where desired, of any points left open, but nothing in this section is intended to repeal or amend any statute governing arbitration. Where any question arises as to the extent of the parties’ agreement under the paragraph, the presumption should be that it was meant to extend only to the relation between the contract description and the goods as delivered, since that is what a craftsman in the trade would normally be expected to report upon. Finally, a written and authenticated report of inspection or tests by a third party, whether or not sampling has been practicable, is entitled to be admitted as evidence under this Act, for it is a third party document.

Cross references:

Point 2: Sections 2-513(3), 2-706 and 2-711(2) and Article 5.

Point 3: Sections 1-202 and 1-207.

Definitional cross references:

“Conform”. Section 2-106. “Goods”. Section 2-105. “Notification”. Section 1-201. “Party”. Section 1-201.

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Part 6. Breach, Repudiation and Excuse

355.2-601. Buyer’s rights on improper delivery.

Subject to the provisions of this article on breach in installment contracts (KRS 355.2-612 ) and unless otherwise agreed under the sections on contractual limitations of remedy (KRS 355.2-718 and 355.2-719 ), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may

  1. reject the whole; or
  2. accept the whole; or
  3. accept any commercial unit or units and reject the rest.

History. Enact. Acts 1958, ch. 77, § 2-601, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

No one general equivalent provision but numerous provisions, dealing with situations of non-conformity where buyer may accept or reject, including Sections 11, 44 and 69(1), Uniform Sales Act.

Changes:

Partial acceptance in good faith is recognized and the buyer’s remedies on the contract for breach of warranty and the like, where the buyer has returned the goods after transfer of title, are no longer barred.

Purposes of changes:

To make it clear that:

  1. A buyer accepting a non-conforming tender is not penalized by the loss of any remedy otherwise open to him. This policy extends to cover and regulate the acceptance of a part of any lot improperly tendered in any case where the price can be reasonably be apportioned. Partial acceptance is permitted whether the part of the goods accepted conforms or not. The only limitation on partial acceptance is that good faith and commercial reasonableness must be used to avoid undue impairment of the value of the remaining portion of the goods. This is the reason for the insistence on the “commercial unit” in paragraph (c). In this respect, the test is not only what unit has been the basis of contract, but whether the partial acceptance produces so materially adverse an effect on the remainder as to constitute bad faith.
  2. Acceptance made with the knowledge of the other party is final. An original refusal to accept may be withdrawn by a later acceptance if the seller has indicated that he is holding the tender open. However, if the buyer attempts to accept, either in whole or in part, after his original rejection has caused the seller to arrange for other disposition of the goods, the buyer must answer for any ensuing damage since the next section provides that any exercise of ownership after rejection is wrongful as against the seller. Further, he is liable even though the seller may choose to treat his action as acceptance rather than conversion, since the damage flows from the misleading notice. Such arrangements for resale or other disposition of the goods by the seller must be viewed as within the normal contemplation of a buyer who has given notice of rejection. However, the buyer’s attempts in good faith to dispose of defective goods where the seller has failed to give instructions within a reasonable time are not to be regarded as an acceptance.

Cross references:

Sections 2-602(2)(a), 2-612, 2-718 and 2-719.

Definitional cross references:

“Buyer”. Section 2-103. “Commercial unit”. Section 2-105. “Conform”. Section 2-106. “Contract”. Section 1-201. “Goods”. Section 2-105. “Installment contract”. Section 2-612. “Rights”. Section 1-201.

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NOTES TO DECISIONS

1.Conformity.

Where acceptance is not effective, the burden is on the seller to show conformity with the description of the goods sold. Keck v. Wacker, 413 F. Supp. 1377, 1976 U.S. Dist. LEXIS 14786 (E.D. Ky. 1976 ).

2.Rejection.

Where there was complete failure of machine to accomplish purpose for which it was designed, which was to manufacture a merchantable product, there was much more than the breach of an implied warranty of suitability or fitness for a particular purpose. It was not a merchantable article, since it would not do what it was intended to do and there had been no delivery of that which was bought. This was a breach of a covenant or condition which by law was made part of every contract of sale unless such essential element was explicitly denied and clearly understood by buyer, and buyer could recover purchase price where it had tendered return of the machinery and seller refused to take it back. (decided under prior law) Myers v. Land, 314 Ky. 514 , 235 S.W.2d 988, 1950 Ky. LEXIS 1095 ( Ky. 1950 ).

3.— Prohibited.

In situations involving the delivery of a mobile home by the seller to a buyer, a seller’s right to cure a nonconforming tendered delivery, if communicated to the buyer, prohibits the buyer from rescinding the contract on the basis of a defective condition. Leitchfield Dev. Corp. v. Clark, 757 S.W.2d 207, 1988 Ky. App. LEXIS 81 (Ky. Ct. App. 1988).

4.Waiver of Rejection.

The continued personal use of the goods by buyer after seller had refused the buyer’s tender of them in an attempted rescission for breach of warranty constituted a waiver of the attempted rescission which defeated it. (decided under prior law) Thomas Bros. v. Puffer Mfg. Co., 211 Ky. 695 , 277 S.W. 1022, 1925 Ky. LEXIS 948 ( Ky. 1925 ); Wagner v. Guy, 252 S.W.2d 420, 1952 Ky. LEXIS 994 ( Ky. 1952 ).

5.Acceptance.

Where, in regard to a contract to furnish and lay tile for a hotel, the purchaser objected that the coloring of the tile was irregular and the seller defiantly told him to take that being laid or none and the purchaser permitted the seller to proceed rather than submit to a costly delay while other tile was procured, the purchaser was electing to accept the work and recover for the breach of warranty, but the purchaser did not by such action forfeit his right to recover for the defects. (decided under prior law) Weil v. B. E. Buffaloe & Co., 251 Ky. 673 , 65 S.W.2d 704, 1933 Ky. LEXIS 923 ( Ky. 1933 ).

Because a distributor accepted goods that it later claimed were defective, the distributor’s claim for breach of the implied warranty of merchantability failed both pursuant to statute and under the parties’ agreement, by which the distributor contractually assumed the risk of loss. Smart & Assocs., LLC v. Indep. Liquor (NZ) Ltd., 226 F. Supp. 3d 828, 2016 U.S. Dist. LEXIS 180159 (W.D. Ky. 2016 ).

6.— In Part.

Where a seller contracted to deliver a minimum of 500 tons of crushed rock per day for a certain period but delivered only an average of 352 tons per day, which the purchaser accepted, the purchaser was bound to pay for that quantity delivered at the contract rate, but this did not prevent him from having a recoupment for the damage caused by such inadequate delivery. (decided under prior law) Olive Hill Limestone Co. v. Gay-Coleman Const. Co., 244 Ky. 822 , 51 S.W.2d 465, 1932 Ky. LEXIS 459 ( Ky. 1932 ).

7.Minor Repairs.

The buyer of a mobile home could not rescind the purchase on grounds of nonconformity without allowing the seller an opportunity to remove the defect by providing minor repairs to the damaged panel. Leitchfield Dev. Corp. v. Clark, 757 S.W.2d 207, 1988 Ky. App. LEXIS 81 (Ky. Ct. App. 1988).

8.Perfect Tender Rule.

The right of a seller to cure an improper tender or delivery modifies or limits the perfect tender rule. Leitchfield Dev. Corp. v. Clark, 757 S.W.2d 207, 1988 Ky. App. LEXIS 81 (Ky. Ct. App. 1988).

355.2-602. Manner and effect of rightful rejection.

  1. Rejection of goods must be within a reasonable time after their delivery or tender. It is ineffective unless the buyer seasonably notifies the seller.
  2. Subject to the provisions of the two (2) following sections on rejected goods (KRS 355.2-603 and 355.2-604 ),
    1. after rejection any exercise of ownership by the buyer with respect to any commercial unit is wrongful as against the seller; and
    2. if the buyer has before rejection taken physical possession of goods in which he does not have a security interest under the provisions of this article (subsection (3) of KRS 355.2-711 ), he is under a duty after rejection to hold them with reasonable care at the seller’s disposition for a time sufficient to permit the seller to remove them; but
    3. the buyer has no further obligations with regard to goods rightfully rejected.
  3. The seller’s rights with respect to goods wrongfully rejected are governed by the provisions of this article on seller’s remedies in general (KRS 355.2-703 ).

History. Enact. Acts 1958, ch. 77, § 2-602, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 50. Uniform Sales Act.

Changes:

Rewritten.

Purposes of changes:

To make it clear that:

  1. A tender or delivery of goods made pursuant to a contract of sale, even though wholly non-conforming, requires affirmative action by the buyer to avoid acceptance. Under subsection (1), therefore, the buyer is given a reasonable time to notify the seller of his rejection, but without such seasonable notification his rejection is ineffective. The sections of this Article dealing with inspection of goods must be read in connection with the buyer’s reasonable time for action under this subsection. Contract provisions limiting the time for rejection fall within the rule of the section on “Time” and are effective if the time set gives the buyer a reasonable time for discovery of defects. What constitutes a due “notifying” of rejection by the buyer to the seller is defined in Section 1-201.
  2. Subsection (2) lays down the normal duties of the buyer upon rejection, which flow from the relationship of the parties. Beyond his duty to hold the goods with reasonable care for the buyer’s disposition, this section continues the policy of prior uniform legislation in generally relieving the buyer from any duties with respect to them, except when the circumstances impose the limited obligation of salvage upon him under the next section.
  3. The present section applies only to rightful rejection by the buyer. If the seller has made a tender which in all respects conforms to the contract, the buyer has a positive duty to accept and his failure to do so constitutes a “wrongful rejection” which gives the seller immediate remedies for breach. Subsection (3) is included here to emphasize the sharp distinction between the rejection of an improper tender and the non-acceptance which is a breach by the buyer.
  4. The provisions of this section are to be appropriately limited or modified when a negotiation is in process.

Cross references:

Point 1: Sections 1-201, 1-204(1) and (3), 2-512(2), 2-513(1) and 2-606(1)(b).

Point 2: Section 2-603(1).

Point 3: Section 2-703.

Definitional cross references:

“Buyer”. Section 2-103. “Commercial unit”. Section 2-105. “Goods”. Section 2-105. “Merchant”. Section 2-104. “Notifies”. Section 1-201. “Reasonable time”. Section 1-204. “Remedy”. Section 1-201. “Rights”. Section 1-201. “Seasonably”. Section 1-204. “Security interest”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Reasonable Time.

Where subject of sale was a restaurant, the ground for rescission was fraud, and the buyers discovered the alleged misrepresentations within nine (9) days after taking the business over and they continued to operate it and treat the contract as still in force for two (2) months before attempting to rescind, court held for seller and said that on discovery of fraud the buyer must act promptly and “will not be permitted to speculate as to the result of the trade and then rescind after it proves to be unprofitable.” (decided under prior law) Gargotto v. Sherman, 297 Ky. 597 , 180 S.W.2d 565, 1944 Ky. LEXIS 776 ( Ky. 1944 ).

355.2-603. Merchant buyer’s duties as to rightfully rejected goods.

  1. Subject to any security interest in the buyer (subsection (3) of KRS 355.2-711 ), when the seller has no agent or place of business at the market of rejection a merchant buyer is under a duty after rejection of goods in his possession or control to follow any reasonable instructions received from the seller with respect to the goods and in the absence of such instructions to make reasonable efforts to sell them for the seller’s account if they are perishable or threaten to decline in value speedily. Instructions are not reasonable if on demand indemnity for expenses is not forthcoming.
  2. When the buyer sells goods under subsection (1), he is entitled to reimbursement from the seller or out of the proceeds for reasonable expenses of caring for and selling them, and if the expenses include no selling commission then to such commission as is usual in the trade or if there is none to a reasonable sum not exceeding ten percent (10%) on the gross proceeds.
  3. In complying with this section the buyer is held only to good faith and good faith conduct hereunder is neither acceptance nor conversion nor the basis of an action for damages.

History. Enact. Acts 1958, ch. 77, § 2-603, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

  1. This section recognizes the duty imposed upon the merchant buyer by good faith and commercial practice to follow any reasonable instructions of the seller as to reshipping, storing, delivery to a third party, reselling or the like. Subsection (1) goes further and extends the duty to include the making of reasonable efforts to effect a salvage sale where the value of the goods is threatened and the seller’s instructions do not arrive in time to prevent serious loss.
  2. The limitations on the buyer’s duty to resell under subsection (1) are to be liberally construed. The buyer’s duty to resell under this section arises from commercial necessity and thus is present only when the seller has “no agent or place of business at the market of rejection”. A financing agency which is acting in behalf of the seller in handling the documents rejected by the buyer is sufficiently the seller’s agent to lift the burden of salvage resale from the buyer. (See provisions of Sections 4-503 and 5-112 on bank’s duties with respect to rejected documents.) The buyer’s duty to resell is extended only to goods in his “possession or control”, but these are intended as words of wide, rather than narrow, import. In effect, the measure of the buyer’s “control” is whether he can practically effect control without undue commercial burden.
  3. The explicit provisions for reimbursement and compensation to the buyer in subsection (2) are applicable and necessary only where he is not acting under instructions from the seller. As provided in subsection (1) the seller’s instructions to be “reasonable” must on demand of the buyer include indemnity for expenses.
  4. Since this section makes the resale of perishable goods an affirmative duty in contrast to a mere right to sell as under the case law, subsection (3) makes it clear that the buyer is liable only for the exercise of good faith in determining whether the value of the goods is sufficiently threatened to justify a quick resale or whether he has waited a sufficient length of time for instructions, or what a reasonable means and place of resale is.
  5. A buyer who fails to make a salvage sale when his duty to do so under this section has arisen is subject to damages pursuant to the section on liberal administration of remedies.

Cross references:

Point 2: Sections 4-503 and 5-112.

Point 5: Section 1-106. Compare generally Section 2-706.

Definitional cross references:

“Buyer”. Section 2-103. “Good faith”. Section 1-201. “Goods”. Section 2-105. “Merchant”. Section 2-104. “Security interest”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Offer to Return.

A buyer entitled to rescind became bailee for the seller after an offer to return and, where affirmative relief was sought by buyer and he sought recovery on ground he had made tender, his tender had to be kept good for he could not, upon rescission, keep the goods but had to return goods or account for their nonreturn before he could recover his purchase price. (decided under prior law) Automatic Equipment Co. v. Mohney, 295 Ky. 451 , 174 S.W.2d 716, 1943 Ky. LEXIS 263 ( Ky. 1943 ).

355.2-604. Buyer’s options as to salvage of rightfully rejected goods.

Subject to the provisions of KRS 355.2-603 on perishables if the seller gives no instructions within a reasonable time after notification of rejection the buyer may store the rejected goods for the seller’s account or reship them to him or resell them for the seller’s account with reimbursement as provided in KRS 355.2-603 . Such action is not acceptance or conversion.

History. Enact. Acts 1958, ch. 77, § 2-604, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

The basic purpose of this section is twofold: on the one hand it aims at reducing the stake in dispute and on the other at avoiding the pinning of a technical “acceptance” on a buyer who has taken steps towards realization on or preservation of the goods in good faith. This section is essentially a salvage section and the buyer’s right to act under it is conditioned upon (1) non-conformity of the goods, (2) due notification of rejection to the seller under the section on manner of rejection, and (3) the absence of any instructions from the seller which the merchant-buyer has a duty to follow under the preceding section.

This section is designed to accord all reasonable leeway to a rightfully rejecting buyer acting in good faith. The listing of what the buyer may do in the absence of instructions from the seller is intended to be not exhaustive but merely illustrative. This is not a “merchant’s” section and the options are pure options given to merchant and nonmerchant buyers alike. The merchant-buyer, however, may in some instances be under a duty rather than an option to resell under the provisions of the preceding section.

Cross references:

Sections 2-602(1), 2-603(1) and 2-706.

Definitional cross references:

“Buyer”. Section 2-103. “Notification”. Section 1-201. “Reasonable time”. Section 1-204. “Seller”. Section 2-103.

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355.2-605. Waiver of buyer’s objections by failure to particularize.

  1. The buyer’s failure to state in connection with rejection a particular defect which is ascertainable by reasonable inspection precludes him from relying on the unstated defect to justify rejection or to establish breach:
    1. Where the seller could have cured it if stated seasonably; or
    2. Between merchants when the seller has after rejection made a request in writing for a full and final written statement of all defects on which the buyer proposes to rely.
  2. A buyer’s payment against documents tendered to the buyer made without reservation of rights precludes recovery of the payment for defects apparent in the documents.

History. Enact. Acts 1958, ch. 77, § 2-605, effective July 1, 1960; 2012, ch. 132, § 52, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

  1. The present section rests upon a policy of permitting the buyer to give a quick and informal notice of defects in a tender without penalizing him for omissions in his statement, while at the same time protecting a seller who is reasonably misled by the buyer’s failure to state curable defects.
  2. Where the defect in a tender is one which could have been cured by the seller, a buyer who merely rejects the delivery without stating his objections to it is probably acting in commercial bad faith and seeking to get out of a deal which has become unprofitable. Subsection (1)(a), following the general policy of this Article which looks to preserving the deal wherever possible, therefore insists that the seller’s right to correct his tender in such circumstances be protected.
  3. When the time for cure is past, subsection (1)(b) makes it plain that a seller is entitled upon request to a final statement of objections upon which he can rely. What is needed is that he make clear to the buyer exactly what is being sought. A formal demand under paragraph (1)(b) will be sufficient in the case of a merchant-buyer.
  4. Subsection (2) applies to the particular case of documents the same principle which the section on effects of acceptance applies to the case of goods. The matter is dealt with in this section in terms of “waiver” of objections rather than of right to revoke acceptance, partly to avoid any confusion with the problems of acceptance of goods and partly because defects in documents which are not taken as grounds for rejection are generally minor ones. The only defects concerned in the present subsection are defects in the documents which are apparent. This rule applies to both tangible and electronic documents of title. Where payment is required against the documents they must be inspected before payment, and the payment then constitutes acceptance of the documents. Under the section dealing with this problem, such acceptance of the documents does not constitute an acceptance of the goods or impair any options or remedies of the buyer for their improper delivery. Where the documents are delivered without requiring such contemporary action as payment from the buyer, the reason of the next section on what constitutes acceptance of goods, applies. Their acceptance by non-objection is therefore postponed until after a reasonable time for their inspection. In either situation, however, the buyer “waives” only the defects apparent in the documents.

Cross references:

Point 2: Section 2-508.

Point 4: Sections 2-512(2), 2-606(1)(b) and 2-607(2).

Definitional cross references:

“Between merchants”. Section 2-104. “Buyer”. Section 2-103. “Seasonably”. Section 1-204. “Seller”. Section 2-103. “Writing” and “written”. Section 1-201.

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NOTES TO DECISIONS

1.Reservation of Rights.

Where a seller had erroneously put a harmful substance into chicken feed, the buyer’s testimony that seller promised to make good any loss from feeding the mixture to buyer’s chickens was admissible to show that buyer had not waived recovery for the loss by giving a note for the price after feeding a part of such mixture. (decided under prior law) McBride v. Farmers' Seed Ass'n, 248 Ky. 514 , 58 S.W.2d 909, 1933 Ky. LEXIS 262 ( Ky. 1933 ).

Cited:

Leitchfield Dev. Corp. v. Clark, 757 S.W.2d 207, 1988 Ky. App. LEXIS 81 (Ky. Ct. App. 1988).

355.2-606. What constitutes acceptance of goods.

  1. Acceptance of goods occurs when the buyer
    1. after a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that he will take or retain them in spite of their nonconformity; or
    2. fails to make an effective rejection (subsection (1) of KRS 355.2-602 ), but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect them; or
    3. does any act inconsistent with the seller’s ownership; but if such act is wrongful as against the seller it is an acceptance only if ratified by him.
  2. Acceptance of a part of any commercial unit is acceptance of that entire unit.

History. Enact. Acts 1958, ch. 77, § 2-606, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 48, Uniform Sales Act.

Changes:

Rewritten, the qualification in paragraph (c) and subsection (2) being new; otherwise the general policy of the prior legislation is continued.

Purposes of changes and new matter:

To make it clear that:

  1. Under this Article “acceptance” as applied to goods means that the buyer, pursuant to the contract, takes particular goods which have been appropriated to the contract as his own, whether or not he is obligated to do so, and whether he does so by words, action, or silence when it is time to speak. If the goods conform to the contract, acceptance amounts only to the performance by the buyer of one part of his legal obligation.
  2. Under this Article acceptance of goods is always acceptance of identified goods which have been appropriated to the contract or are appropriated by the contract. There is no provision for “acceptance of title” apart from acceptance in general, since acceptance of title is not material under this Article to the detailed rights and duties of the parties. (See Section 2-401). The refinements of the older law between acceptance of goods and of title become unnecessary in view of the provisions of the sections on effect and revocation of acceptance, on effects of identification and on risk of loss, and those sections which free the seller’s and buyer’s remedies from the complications and confusions caused by the question of whether title has or has not passed to the buyer before breach.
  3. Under paragraph (a), payment made after tender is always one circumstance tending to signify acceptance of the goods but in itself it can never be more than one circumstance and is not conclusive. Also, a conditional communication of acceptance always remains subject to its expressed conditions.
  4. Under paragraph (c), any action taken by the buyer, which is inconsistent with his claim that he has rejected the goods, constitutes an acceptance. However, the provisions of paragraph (a)(iii) are subject to the sections dealing with rejection by the buyer which permit the buyer to take certain actions with respect to the goods pursuant to his options and duties imposed by those sections, without effecting an acceptance of the goods. The second clause of paragraph (c) modifies some of the prior case law and makes it clear that “acceptance” in law based on the wrongful act of the acceptor is acceptance only as against the wrongdoer and then only at the option of the party wronged.

    In the same manner in which a buyer can bind himself, despite his insistence that he is rejecting or has rejected the goods, by an act inconsistent with the seller’s ownership under paragraph (c), he can obligate himself by a communication of acceptance despite a prior rejection under paragraph (a). However the sections on buyer’s rights on improper delivery and on the effect of rightful rejection, make it clear that after he once rejects a tender, paragraph (a) does not operate in favor of the buyer unless the seller has re-tendered the goods or has taken affirmative action indicating that he is holding the tender open. See also Comment 2 to Section 2-601.

  5. Subsection (2) supplements the policy of the section on buyer’s rights on improper delivery, recognizing the validity of a partial acceptance but insisting that the buyer exercise this right only as to whole commercial units.

Cross references:

Point 2: Section 2-401, 2-509, 2-510, 2-607, 2-608 and Part 7.

Point 4: Sections 2-601 through 2-604.

Point 5: Section 2-601.

Definitional cross references:

“Buyer”. Section 2-103. “Commercial unit”. Section 2-105. “Goods”. Section 2-105. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Acceptance by Conduct.

Where a buyer did not reject a truck, but accepted delivery and used the truck to haul coal over a period of several months, his conduct constituted an acceptance of the goods. Lexington Mack, Inc. v. Miller, 555 S.W.2d 249, 1977 Ky. LEXIS 500 ( Ky. 1977 ).

2.Promise to Purchase Exclusively from One Supplier.

Corporations that terminated exclusive sales distributorships, putting the distributors out of business, did not breach distributorship contracts because the distributorships’ receipt of farm goods for sale constituted acceptance under KRS 355.2-606 (1)(c), 355.2-507 (1), requiring payment in full. Powerscreen USA, LLC v. D & L Equip., Inc., 661 F. Supp. 2d 705, 2009 U.S. Dist. LEXIS 93427 (W.D. Ky. 2009 ).

Cited:

Keck v. Wacker, 413 F. Supp. 1377, 1976 U.S. Dist. LEXIS 14786 (E.D. Ky. 1976 ); Greene v. Waddell, 657 S.W.2d 589, 1983 Ky. App. LEXIS 321 (Ky. Ct. App. 1983).

355.2-607. Effect of acceptance — Notice of breach — Burden of establishing breach after acceptance — Notice of claim or litigation to person answerable over.

  1. The buyer must pay at the contract rate for any goods accepted.
  2. Acceptance of goods by the buyer precludes rejection of the goods accepted and if made with knowledge of a nonconformity cannot be revoked because of it unless the acceptance was on the reasonable assumption that the nonconformity would be seasonably cured but acceptance does not of itself impair any other remedy provided by this article for nonconformity.
  3. Where a tender has been accepted
    1. the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy; and
    2. if the claim is one for infringement or the like (subsection (3) of KRS 355.2-312 ) and the buyer is sued as a result of such a breach he must so notify the seller within a reasonable time after he receives notice of the litigation or be barred from any remedy over for liability established by the litigation.
  4. The burden is on the buyer to establish any breach with respect to the goods accepted.
  5. Where the buyer is sued for breach of a warranty or other obligation for which his seller is answerable over:
    1. He may give his seller written notice of the litigation. If the notice states that the seller may come in and defend and that if the seller does not do so he will be bound in any action against him by his buyer by any determination of fact common to the two (2) litigations, then unless the seller after seasonable receipt of the notice does come in and defend he is so bound.
    2. If the claim is one for infringement or the like (subsection (3) of KRS 355.2-312 ) the original seller may demand in writing that his buyer turn over to him control of the litigation including settlement or else be barred from any remedy over and if he also agrees to bear all expense and to satisfy any adverse judgment, then unless the buyer after seasonable receipt of the demand does turn over control the buyer is so barred.
  6. The provisions of subsections (3), (4) and (5) apply to any obligation of a buyer to hold the seller harmless against infringement or the like (subsection (3) of KRS 355.2-312 ).

History. Enact. Acts 1958, ch. 77, § 2-607, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Subsection (1)—Section 41, Uniform Sales Act; Subsections (2) and (3)—Sections 49 and 69, Uniform Sales Act.

Changes:

Rewritten.

Purposes of changes:

To continue the prior basic policies with respect to acceptance of goods while making a number of minor though material changes in the interest of simplicity and commercial convenience so that:

  1. Under subsection (1), once the buyer accepts a tender the seller acquires a right to its price on the contract terms. In cases of partial acceptance, the price of any part accepted is, if possible, to be reasonably apportioned, using the type of apportionment familiar to the courts in quantum valebat cases, to be determined in terms of “the contract rate,” which is the rate determined from the bargain in fact (the agreement) after the rules and policies of this Article have been brought to bear.
  2. Under subsection (2) acceptance of goods precludes their subsequent rejection. Any return of the goods thereafter must be by way of revocation of acceptance under the next section. Revocation is unavailable for a non-conformity known to the buyer at the time of acceptance, except where the buyer has accepted on the reasonable assumption that the non-conformity would be seasonably cured.
  3. All other remedies of the buyer remain unimpaired under subsection (2). This is intended to include the buyer’s full rights with respect to future installments despite his acceptance of any earlier non-conforming installment.
  4. The time of notification is to be determined by applying commercial standards to a merchant buyer. “A reasonable time” for notification from a retail consumer is to be judged by different standards so that in his case it will be extended, for the rule of requiring notification is designed to defeat commercial bad faith, not to deprive a good faith consumer of his remedy.

    The content of the notification need merely be sufficient to let the seller know that the transaction is still troublesome and must be watched. There is no reason to require that the notification which saves the buyer’s rights under this section must include a clear statement of all the objections that will be relied on by the buyer, as under the section covering statements of defects upon rejection (Section 2-605). Nor is there reason for requiring the notification to be a claim for damages or of any threatened litigation or other resort to a remedy. The notification which saves the buyer’s rights under this Article need only be such as informs the seller that the transaction is claimed to involve a breach, and thus opens the way for normal settlement through negotiation.

  5. Under this Article various beneficiaries are given rights for injuries sustained by them because of the seller’s breach of warranty. Such a beneficiary does not fall within the reason of the present section in regard to discovery of defects and the giving of notice within a reasonable time after acceptance, since he has nothing to do with acceptance. However, the reason of this section does extend to requiring the beneficiary to notify the seller that an injury has occurred. What is said above, with regard to the extended time for reasonable notification from the lay consumer after the injury is also applicable here; but even a beneficiary can be properly held to the use of good faith in notifying, once he has had time to become aware of the legal situation.
  6. Subsection (4) unambiguously places the burden of proof to establish breach on the buyer after acceptance. However, this rule becomes one purely of procedure when the tender accepted was non-conforming and the buyer has given the seller notice of breach under subsection (3). For subsection (2) makes it clear that acceptance leaves unimpaired the buyer’s right to be made whole, and that right can be exercised by the buyer not only by way of cross-claim for damages, but also by way of recoupment in diminution or extinction of the price.
  7. Subsections (3)(b) and (5)(b) give a warrantor against infringement an opportunity to defend or compromise third-party claims or be relieved of his liability. Subsection (5)(a) codifies for all warranties the practice of voucher to defend. Compare Section 3-803. Subsection (6) makes these provisions applicable to the buyer’s liability for infringement under Section 2-312.
  8. All of the provisions of the present section are subject to any explicit reservation of rights.

Cross references:

Point 1: Section 1-201.

Point 2: Section 2-608.

Point 4: Sections 1-204 and 2-605.

Point 5: Section 2-318.

Point 6: Section 2-717.

Point 7: Sections 2-312 and 3-803.

Point 8: Section 1-207.

Definitional cross references:

“Burden of establishing”. Section 1-201. “Buyer”. Section 2-103. “Conform”. Section 2-106. “Contract”. Section 1-201. “Goods”. Section 2-105. “Notifies”. Section 1-201. “Reasonable time”. Section 1-204. “Remedy”. Section 1-201. “Seasonably”. Section 1-204.

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NOTES TO DECISIONS

1.Notice.

Under law that provided that acceptance of the goods by buyer did not discharge seller from liability for damages, if the buyer, after acceptance of the goods, failed to give notice to the seller of the breach of any warranty within a reasonable time after the buyer knew of such breach, the seller was not liable therefor. (decided under prior law) Sears, Roebuck & Co. v. Lea, 198 F.2d 1012, 1952 U.S. App. LEXIS 3274 (6th Cir. Ky. 1952 ).

Where the purchaser of a packaged item from a retail grocer gave no notice to the grocer of her claim for breach of warranty, but did notify the manufacturer, such notice did not satisfy the requirement of this section insofar as an action against the retailer was concerned. Leeper v. Banks, 487 S.W.2d 58, 1972 Ky. LEXIS 58 ( Ky. 1972 ).

Failure to provide pre-litigation notice is not fatal to a civil action for breach of warranty, particularly in circumstances where pre-litigation notice to vendor might be to purchaser’s detriment or where seller would not welcome notice of breach and would resist recovery by purchaser. Mullins v. Wyatt, 887 S.W.2d 356, 1994 Ky. LEXIS 133 ( Ky. 1994 ).

Manufacturer failed to show alleged representations that dog treats were nutritious, safe and wholesome were non-actionable because use of objectively verifiable terms arguably could mislead reasonable consumer; court could reasonably infer that plaintiffs relied on representations on packaging, plaintiffs alleged that manufacturer made express warranties for their benefit, and dismissal for lack of pre-suit notice was not warranted. Bietsch v. Sergeant's Pet Care Prods., 2016 U.S. Dist. LEXIS 32928 (N.D. Ill. Mar. 15, 2016).

2.Obligation to Pay Contract Price.

Where a buyer accepted a truck and used it to haul coal over a period of several months, he became obligated to pay the contract price. Lexington Mack, Inc. v. Miller, 555 S.W.2d 249, 1977 Ky. LEXIS 500 ( Ky. 1977 ).

Where defendant did not comply with either the written provisions contained in the warranty made by the plaintiff or with the provisions of this section, and where the proof was not clear and convincing that plaintiff waived its rights under the contract or under the statute by orally agreeing to defendant’s keeping a running tab on the back charges for repairs, judgment would be entered for plaintiff in the amount of the balance due, together with interest at the rate of 6 percent from August 1, 1974, until June 19, 1976, at which time KRS 360.040 was amended to provide for interest upon liquidated judgments at the rate of 8 percent, and plaintiff would be entitled to the full 8 percent rate accruing after June 19, 1976. Thaler v. I C I United States, Inc., 476 F. Supp. 67, 1979 U.S. Dist. LEXIS 11201 (W.D. Ky. 1979 ).

Jury’s verdict awarding a buyer damages for breach of warranty but denying the seller’s claim for the purchase price of the goods was inconsistent, as a buyer who accepts non-conforming goods, although entitled to breach of warranty damages, is responsible for payment of the contract price under KRS 355.2-607 . Thomas & Betts Corp. v. A & A Mech., Inc., 2004 Ky. App. LEXIS 339 (Ky. Ct. App. Nov. 24, 2004, sub. op., 2004 Ky. App. Unpub. LEXIS 996 (Ky. Ct. App. Nov. 24, 2004), review denied, ordered not published, 2005 Ky. LEXIS 269 (Ky. Sept. 14, 2005).

3.Reasonable Time.

Whether litigation notice given is “within a reasonable time” is an issue of fact and should be determined upon equitable principles with the party seeking application of the rule being required to show that the delay in giving notice was unreasonable and prejudicial. Mullins v. Wyatt, 887 S.W.2d 356, 1994 Ky. LEXIS 133 ( Ky. 1994 ).

4. Performance Delays.

Court granted a furniture manufacturer’s motion for summary judgment in a wholesaler’s breach of contract action because the wholesaler provided no evidence of any specific furniture deliveries that were unreasonably delayed. Even if certain deliveries were made in an unreasonable time, the wholesaler accepted the deliveries without complaint. Peters Wholesale Furniture, Inc. v. Manchester Furniture Group, 2005 U.S. Dist. LEXIS 21583 (W.D. Ky. Sept. 26, 2005).

5.Effect of Acceptance.

Because a distributor accepted goods that it later claimed were defective, the distributor’s claim for breach of the implied warranty of merchantability failed both pursuant to statute and under the parties’ agreement, by which the distributor contractually assumed the risk of loss. Smart & Assocs., LLC v. Indep. Liquor (NZ) Ltd., 226 F. Supp. 3d 828, 2016 U.S. Dist. LEXIS 180159 (W.D. Ky. 2016 ).

Cited:

Keck v. Wacker, 413 F. Supp. 1377, 1976 U.S. Dist. LEXIS 14786 (E.D. Ky. 1976 ); Bell v. Louisville Motors, Inc., 573 S.W.2d 351, 1978 Ky. App. LEXIS 606 (Ky. Ct. App. 1978); Snawder v. Cohen, 749 F. Supp. 1473, 1990 U.S. Dist. LEXIS 14410 (W.D. Ky. 1990 ).

Research References and Practice Aids

Kentucky Law Journal.

Brickey, Products Liability in Kentucky: The Doctrinal Dilemma, 65 Ky. L.J. 593 (1976-77).

Kentucky Law Survey, Weinberg, Commercial Law and Consumer Credit, 65 Ky. L.J. 370 (1976-77).

Northern Kentucky Law Review.

Notes, Torts — Products Liability — Should Contract or Tort Provide the Cause of Action When a Plaintiff Seeks Recovery Only for Damage to the Defective Product Itself — C & S Fuel, Inc. v. Clark Equip. Co.,10 N. Ky. L. Rev. 489 (1983).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Breach of Express Warranty — General Form, Form 137.05.

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Breach of Implied Warranty of Fitness — General Form, Form 137.07.

Caldwell’s Kentucky Form Book, 5th Ed., Notice of Breach of Warranty Required under the UCC, Form 137.03.

Caldwell’s Kentucky Form Book, 5th Ed., Notice to Seller of Litigation, Form 137.04.

355.2-608. Revocation of acceptance in whole or in part.

  1. The buyer may revoke his acceptance of a lot or commercial unit whose nonconformity substantially impairs its value to him if he has accepted it
    1. on the reasonable assumption that its nonconformity would be cured and it has not been seasonably cured; or
    2. without discovery of such nonconformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller’s assurances.
  2. Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it.
  3. A buyer who so revokes has the same rights and duties with regard to the goods involved as if he had rejected them.

History. Enact. Acts 1958, ch. 77, § 2-608, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 69(1)(d), (3), (4) and (5), Uniform Sales Act.

Changes:

Rewritten.

Purposes of changes:

To make it clear that:

  1. Although the prior basic policy is continued, the buyer is no longer required to elect between revocation of acceptance and recovery of damages for breach. Both are now available to him. The non-alternative character of the two remedies is stressed by the terms used in the present section. The section no longer speaks of “rescission,” a term capable of ambiguous application either to transfer of title to the goods or to the contract of sale and susceptible also of confusion with cancellation for cause of an executed or executory portion of the contract. The remedy under this section is instead referred to simply as “revocation of acceptance” of goods tendered under a contract for sale and involves no suggestion of “election” of any sort.
  2. Revocation of acceptance is possible only where the non-conformity substantially impairs the value of the goods to the buyer. For this purpose the test is not what the seller had reason to know at the time of contracting; the question is whether the non-conformity is such as will in fact cause a substantial impairment of value to the buyer though the seller had no advance knowledge as to the buyer’s particular circumstances.
  3. “Assurances” by the seller under paragraph (b) of subsection (1) can rest as well in the circumstances or in the contract as in explicit language used at the time of delivery. The reason for recognizing such assurances is that they induce the buyer to delay discovery. These are the only assurances involved in paragraph (b). Explicit assurances may be made either in good faith or bad faith. In either case any remedy accorded by this Article is available to the buyer under the section on remedies for fraud.
  4. Subsection (2) requires notification of revocation of acceptance within a reasonable time after discovery of the grounds for such revocation. Since this remedy will be generally resorted to only after attempts at adjustment have failed, the reasonable time period should extend in most cases beyond the time in which notification of breach must be given, beyond the time for discovery of non-conformity after acceptance and beyond the time for rejection after tender. The parties may by their agreement limit the time for notification under this section, but the same sanctions and considerations apply to such agreements as are discussed in the comment on manner and effect of rightful rejection.
  5. The content of the notice under subsection (2) is to be determined in this case as in others by considerations of good faith, prevention of surprise, and reasonable adjustment. More will generally be necessary than the mere notification of breach required under the preceding section. On the other hand the requirements of the section on waiver of buyer’s objections do not apply here. The fact that quick notification of trouble is desirable affords good ground for being slow to bind a buyer by his first statement. Following the general policy of this Article, the requirements of the content of notification are less stringent in the case of a non-merchant buyer.
  6. Under subsection (2) the prior policy is continued of seeking substantial justice in regard to the condition of goods restored to the seller. Thus the buyer may not revoke his acceptance if the goods have materially deteriorated except by reason of their own defects. Worthless goods, however, need not be offered back and minor defects in the articles reoffered are to be disregarded.
  7. The policy of the section allowing partial acceptance is carried over into the present section and the buyer may revoke his acceptance, in appropriate cases, as to the entire lot or any commercial unit thereof.

Cross references:

Point 3: Section 2-721.

Point 4: Sections 1-204, 2-602 and 2-607.

Point 5: Sections 2-605 and 2-607.

Point 7: Section 2-601.

Definitional cross references:

“Buyer”. Section 2-103. “Commercial unit”. Section 2-105. “Conform”. Section 2-106. “Goods”. Section 2-105. “Lot”. Section 2-105. “Notifies”. Section 1-201. “Reasonable time”. Section 1-204. “Rights”. Section 1-201. “Seasonably”. Section 1-204. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Use of Goods by Buyer.

Where, although the seller had not had the right to sell and thus had breached his warranty, the purchaser, since entering into possession, had by his own act caused serious deterioration in the value of the property sold, the purchaser could not rescind the contract and recover the price but could recover only damages for that part of the property as to which title failed. (decided under prior law) Sandige v. Stephens, 252 Ky. 620 , 67 S.W.2d 967, 1934 Ky. LEXIS 826 ( Ky. 1934 ).

Automobile buyer who used automobile for two years and drove it over 14,000 miles with result that it was practically worn out and was greatly depreciated in value was not entitled to rescind contract for breach of warranty, since return of car would not put seller in status quo, notwithstanding that delay in rescinding was caused by seller’s efforts and promises to perform, but buyer should be permitted to amend pleadings to present claim for damages. (decided under prior law) Ross v. Riedley Motor Co., 275 Ky. 302 , 121 S.W.2d 689, 1938 Ky. LEXIS 416 ( Ky. 1938 ).

The continued personal use of the goods by the buyer after the seller had refused the buyer’s tender of them in an attempted rescission would defeat the attempted rescission. (decided under prior law) Thomas Bros. v. Puffer Mfg. Co., 211 Ky. 695 , 277 S.W. 1022, 1925 Ky. LEXIS 948 ( Ky. 1925 ); Wagner v. Guy, 252 S.W.2d 420, 1952 Ky. LEXIS 994 ( Ky. 1952 ).

The buyer could lose his right of rescission if he used the property as if it were his own. (decided under prior law) Gargotto v. Sherman, 297 Ky. 597 , 180 S.W.2d 565, 1944 Ky. LEXIS 776 ( Ky. 1944 ); Wagner v. Guy, 252 S.W.2d 420, 1952 Ky. LEXIS 994 ( Ky. 1952 ).

Buyer waived his right to rescind contract where he used the television set after an offer to return. (decided under prior law) Wagner v. Guy, 252 S.W.2d 420, 1952 Ky. LEXIS 994 ( Ky. 1952 ).

Where a buyer accepted and used a truck and refused to return it to the seller short of a court order forcing him to do so, there was no revocation of acceptance. Lexington Mack, Inc. v. Miller, 555 S.W.2d 249, 1977 Ky. LEXIS 500 ( Ky. 1977 ).

Evidence did not support the jury’s finding that a buyer had not accepted units sold to it by the manufacturer, as it had them for four (4) years and never affirmatively attempted to reject them, but instead repaired, used, and accepted payment for them from a third party. Thomas & Betts Corp. v. A & A Mech., Inc., 2004 Ky. App. LEXIS 339 (Ky. Ct. App. Nov. 24, 2004, sub. op., 2004 Ky. App. Unpub. LEXIS 996 (Ky. Ct. App. Nov. 24, 2004), review denied, ordered not published, 2005 Ky. LEXIS 269 (Ky. Sept. 14, 2005).

2.Unfair Trade Practice.

Where a defective truck could not be repaired within a reasonable time, manufacturer acted “unconscionably” when it insisted that buyers had no remedy other than to allow manufacturer and its dealer to continue indefinitely in their efforts to correct the problem and where such manufacturer followed a warranty policy which refused to recognize the rights of buyers under the Uniform Commercial Code when the only remedy afforded by its limited warranty failed of its purpose, such policy was an “unfair” trade practice which was unlawful under the Consumer Protection Act. Ford Motor Co. v. Mayes, 575 S.W.2d 480, 1978 Ky. App. LEXIS 649 (Ky. Ct. App. 1978).

3.Revocation of Acceptance.

When the selling dealer fails within a reasonable time to correct a defect which substantially impairs the value of a new motor vehicle, the buyer is entitled to revoke his acceptance of the vehicle. Ford Motor Co. v. Mayes, 575 S.W.2d 480, 1978 Ky. App. LEXIS 649 (Ky. Ct. App. 1978).

Where the truck purchased by buyers contained a serious defect and buyers returned the truck to the selling dealer seven (7) or eight (8) times in a five (5) month period for major repairs, but the problems were never corrected and where, when the trouble was finally diagnosed as a twisted and diamonded frame, manufacturer would not extend the duration of the warranty even though the defective frame would cause excessive wear to all moving parts, the value of the truck was substantially impaired within the meaning of this section and buyers were entitled to revoke acceptance since purpose of limited remedy of repair and replacement of defective parts had failed. Ford Motor Co. v. Mayes, 575 S.W.2d 480, 1978 Ky. App. LEXIS 649 (Ky. Ct. App. 1978).

4.Intention.

A buyer’s actions do not necessarily have to be detrimental to the seller’s interest to preclude revocation, only inconsistent with any intention to revoke. Chernick v. Casares, 759 S.W.2d 832, 1988 Ky. App. LEXIS 179 (Ky. Ct. App. 1988).

5.Act of Dominion.

The buyer’s attempt to breed the mare three (3) years after he was put on notice of the possibility of a breeding defect, was an act of dominion which precluded revocation. Chernick v. Casares, 759 S.W.2d 832, 1988 Ky. App. LEXIS 179 (Ky. Ct. App. 1988).

6.Timeliness.

Where milking machine was delivered on November 10th and shortly thereafter buyer became ill and took a trip to Florida for his health and made no complaint for six (6) months, and a purchase-money note was renewed for an additional six (6) months on May 10th before the buyer elected to rescind, court reversed judgment upholding rescission on ground that buyer delayed unreasonably and inoperable condition of machine was readily discoverable, since buyer admittedly had time after his recovery of health and return from Florida to try out the machine before he renewed the note but no effort in that direction was made until a month or more after the note was renewed. (decided under prior law) A. C. Morris & Co. v. Heaton, 235 Ky. 66 , 29 S.W.2d 617, 1930 Ky. LEXIS 304 ( Ky. 1930 ).

When buyers treated property as their own after discovering alleged fraudulent representations, changed the victrola and amusement machines and even made a payment of $40.00 on the note, it was clear that by so doing and by their delay in acting to rescind the contract, they had waived their right to a rescission, although there might be a breach of warranty resulting in damages. (decided under prior law) Gargotto v. Sherman, 297 Ky. 597 , 180 S.W.2d 565, 1944 Ky. LEXIS 776 ( Ky. 1944 ).

The buyer could, upon a breach of warranty, rescind the sales contract either by a return or an offer to return the goods, but the notice of rescission had to be explicit and had to be within a reasonable time. (decided under prior law) Wagner v. Guy, 252 S.W.2d 420, 1952 Ky. LEXIS 994 ( Ky. 1952 ).

If the buyer promptly called upon the seller to make his warranty good, the time should not have commenced to run against the buyer until it was no longer reasonable for him to expect that the seller could and would do so. (decided under prior law) Chaplin v. Bessire & Co., 361 S.W.2d 293, 1962 Ky. LEXIS 241 ( Ky. 1962 ).

It was fundamental that the purchaser who desired to rescind had to act “within a reasonable time, taking all of the circumstances into consideration.” (decided under prior law) Chaplin v. Bessire & Co., 361 S.W.2d 293, 1962 Ky. LEXIS 241 ( Ky. 1962 ).

One of the important considerations in determining whether a rescission was reasonably prompt was the possibility of prejudice to the seller. (decided under prior law) Chaplin v. Bessire & Co., 361 S.W.2d 293, 1962 Ky. LEXIS 241 ( Ky. 1962 ).

Since the question as to what was a reasonable time depended on the facts of the particular case, and was frequently a matter as to which different conclusions could reasonably be drawn, it was well settled that ordinarily the question was one of fact for the jury. (decided under prior law) Chaplin v. Bessire & Co., 361 S.W.2d 293, 1962 Ky. LEXIS 241 ( Ky. 1962 ).

The reasonable time in which a purchaser of chattels had to rescind the contract ran only from the time the purchaser had knowledge of or was reasonably chargeable with knowledge of the breach of warranty and, according to the nature of the case, disillusionment and discovery could, of course, come by degree. (decided under prior law) Chaplin v. Bessire & Co., 361 S.W.2d 293, 1962 Ky. LEXIS 241 ( Ky. 1962 ).

Where buyer did not delay either in putting refrigeration box to test of use or in notifying the seller of its shortcomings as they developed and were observed, question of “reasonable time” was for jury. (decided under prior law) Chaplin v. Bessire & Co., 361 S.W.2d 293, 1962 Ky. LEXIS 241 ( Ky. 1962 ).

While the seller was engaged in an effort to remedy the defects, the “reasonable time” within which the buyer had to rescind did not run. (decided under prior law) Chaplin v. Bessire & Co., 361 S.W.2d 293, 1962 Ky. LEXIS 241 ( Ky. 1962 ).

Where the buyer was put on notice of the possibility of a defect in the mare three (3) months after he purchased her and while she was still in his possession, three (3) years between the purchase of the mare and the attempted revocation of her was clearly unreasonable as a matter of law, and the attempted revocation was properly determined to be untimely because a thoroughbred horse, particularly a broodmare, has a limited useful life. Chernick v. Casares, 759 S.W.2d 832, 1988 Ky. App. LEXIS 179 (Ky. Ct. App. 1988).

Although a buyer is entitled to rely on a seller’s assurances, once put on notice he or she should not be allowed to wait indefinitely for a defect to materialize before revoking acceptance. Chernick v. Casares, 759 S.W.2d 832, 1988 Ky. App. LEXIS 179 (Ky. Ct. App. 1988).

While ordinarily “reasonable time” for taking action is a question of fact to be submitted to the jury, there are situations in which a buyer has delayed so excessively that his or her actions become untimely as a matter of law. Chernick v. Casares, 759 S.W.2d 832, 1988 Ky. App. LEXIS 179 (Ky. Ct. App. 1988).

7.— Type of Goods.

The type of goods involved may be dispositive of what constitutes a reasonable time in which to revoke acceptance; perishable or seasonable goods demand prompter action than, for instance, a long-term fixture. Chernick v. Casares, 759 S.W.2d 832, 1988 Ky. App. LEXIS 179 (Ky. Ct. App. 1988).

Cited:

Keck v. Wacker, 413 F. Supp. 1377, 1976 U.S. Dist. LEXIS 14786 (E.D. Ky. 1976 ); Bell v. Louisville Motors, Inc., 573 S.W.2d 351, 1978 Ky. App. LEXIS 606 (Ky. Ct. App. 1978); Capitol Cadillac Olds, Inc. v. Roberts, 813 S.W.2d 287, 1991 Ky. LEXIS 133 ( Ky. 1991 ).

Research References and Practice Aids

Northern Kentucky Law Review.

Notes, U.C.C. — Consumer Protection Act — Limited Warranties — Automobile Manufacturer’s Refusal to Recognize Buyers’ Rights Under the U.C.C. When a Limited Warranty Fails of Its Essential Purpose Constitutes an Unfair Trade Practice Under the Consumer Protection Act, 6 N. Ky. L. Rev. 403 (1979).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Failing to Deliver Hogs to be Paid for on Delivery, Neither Time Nor Place for Delivery Being Specified in the Contract, Form 190.09.

355.2-609. Right to adequate assurance of performance.

  1. A contract for sale imposes an obligation on each party that the other’s expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.
  2. Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards.
  3. Acceptance of any improper delivery or payment does not prejudice the aggrieved party’s right to demand adequate assurance of future performance.
  4. After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty (30) days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.

History. Enact. Acts 1958, ch. 77, § 2-609, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

See Sections 53, 54(1)(b), 55 and 63(2), Uniform Sales Act.

Purposes:

  1. The section rests on the recognition of the fact that the essential purpose of a contract between commercial men is actual performance and they do not bargain merely for a promise, or for a promise plus the right to win a lawsuit and that a continuing sense of reliance and security that the promised performance will be forthcoming when due, is an important feature of the bargain. If either the willingness or the ability of a party to perform declines materially between the time of contracting and the time for performance, the other party is threatened with the loss of a substantial part of what he has bargained for. A seller needs protection not merely against having to deliver on credit to a shaky buyer, but also against having to procure and manufacture the goods, perhaps turning down other customers. Once he has been given reason to believe that the buyer’s performance has become uncertain, it is an undue hardship to force him to continue his own performance. Similarly, a buyer who believes that the seller’s deliveries have become uncertain cannot safely wait for the due date of performance when he has been buying to assure himself of materials for his current manufacturing or to replenish his stock of merchandise.
  2. Three measures have been adopted to meet the needs of commercial men in such situations. First, the aggrieved party is permitted to suspend his own performance and any preparation therefor, with excuse for any resulting necessary delay, until the situation has been clarified. “Suspend performance” under this section means to hold up performance pending the outcome of the demand, and includes also the holding up of any preparatory action. This is the same principle which governs the ancient law of stoppage and seller’s lien, and also of excuse of a buyer from prepayment if the seller’s actions manifest that he cannot or will not perform. (Original Act, Section 63(2).)

    Secondly, the aggrieved party is given the right to require adequate assurance that the other party’s performance will be duly forthcoming. This principle is reflected in the familiar clauses permitting the seller to curtail deliveries if the buyer’s credit becomes impaired, which when held within the limits of reasonableness and good faith actually express no more than the fair business meaning of any commercial contract.

    Third, and finally, this section provides the means by which the aggrieved party may treat the contract as broken if his reasonable grounds for insecurity are not cleared up within a reasonable time. This is the principle underlying the law of anticipatory breach, whether by way of defective part performance or by repudiation. The present section merges these three principles of law and commercial practice into a single theory of general application to all sales agreements looking to future performance.

  3. Subsection (2) of the present section requires that “reasonable” grounds and “adequate” assurance as used in subsection (1) be defined by commercial rather than legal standards. The express reference to commercial standards carries no connotation that the obligation of good faith is not equally applicable here.

    Under commercial standards and in accord with commercial practice, a ground for insecurity need not arise from or be directly related to the contract in question. The law as to “dependence” or “independence” of promises within a single contract does not control the application of the present section.

    Thus a buyer who falls behind in “his account” with the seller, even though the items involved have to do with separate and legally distinct contracts, impairs the seller’s expectation of due performance. Again, under the same test, a buyer who requires precision parts which he intends to use immediately upon delivery, may have reasonable grounds for insecurity if he discovers that his seller is making defective deliveries of such parts to other buyers with similar needs. Thus, too, in a situation such as arose in Jay Dreher Corporation v. Delco Appliance Corporation, 93, F.2d 275 (C.C.A.2, 1937), where a manufacturer gave a dealer an exclusive franchise for the sale of his product but on two or three occasions breached the exclusive dealing clause, although there was no default in orders, deliveries or payments under the separate sales contract between the parties, the aggrieved dealer would be entitled to suspend his performance of the contract for sale under the present section and to demand assurance that the exclusive dealing contract would be lived up to. There is no need for an explicit clause tying the exclusive franchise into the contract for the sale of goods since the situation itself ties the agreements together.

    The nature of the sales contract enters also into the question of reasonableness. For example, a report from an apparently trustworthy source that the seller had shipped defective goods or was planning to ship them would normally give the buyer reasonable grounds for insecurity. But when the buyer has assumed the risk of payment before inspection of the goods, as in a sales contract on C.I.F. or similar cash against documents terms, that risk is not to be evaded by a demand for assurance. Therefore no ground for insecurity would exist under this section unless the report went to a ground which would excuse payment by the buyer.

  4. What constitutes “adequate” assurance of due performance is subject to the same test of factual conditions. For example, where the buyer can make use of a defective delivery, a mere promise by a seller of good repute that he is giving the matter his attention and that the defect will not be repeated, is normally sufficient. Under the same circumstances, however, a similar statement by a known corner-cutter might well be considered insufficient without the posting of a guaranty or, if so demanded by the buyer, a speedy replacement of the delivery involved. By the same token where a delivery has defects, even though easily curable, which interfere with easy use by the buyer, no verbal assurance can be deemed adequate which is not accompanied by replacement, repair, money-allowance, or other commercially reasonable cure.

    A fact situation such as arose in Corn Products Refining Co. v. Fasola, 94 N.J.L. 181, 109 A. 505 (1920) offers illustration both of reasonable grounds for insecurity and “adequate” assurance. In that case a contract for the sale of oils on 30 days’ credit, 2% off for payment within 10 days, provided that credit was to be extended to the buyer only if his financial responsibility was satisfactory to the seller. The buyer had been in the habit of taking advantage of the discount but at the same time that he failed to make his customary 10 day payment, the seller heard rumors, in fact false, that the buyer’s financial condition was shaky. Thereupon, the seller demanded cash before shipment or security satisfactory to him. The buyer sent a good credit report from his banker, expressed willingness to make payments when due on the 30 day terms and insisted on further deliveries under the contract. Under this Article the rumors, although false, were enough to make the buyer’s financial condition “unsatisfactory” to the seller under the contract clause. Moreover, the buyer’s practice of taking the cash discounts is enough, apart from the contract clause, to lay a commercial foundation for suspicion when the practice is suddenly stopped. These matters, however, go only to the justification of the seller’s demand for security, or his “reasonable grounds for insecurity”.

    The adequacy of the assurance given is not measured as in the type of “satisfaction” situation affected with intangibles, such as in personal service cases, cases involving a third party’s judgment as final, or cases in which the whole contract is dependent on one party’s satisfaction, as in a sale on approval. Here, the seller must exercise good faith and observe commercial standards. This Article thus approves the statement of the court in James B. Berry’s Sons Co. of Illinois v. Monark Gasoline & Oil Co., Inc. 32 F.2d 74 (C.C.A.8, 1929), that the seller’s satisfaction under such a clause must be based upon reason and must not be arbitrary or capricious; and rejects the purely personal “good faith” test of the Corn Products Refining Co. case, which held that in the seller’s sole judgment, if for any reason he was dissatisfied, he was entitled to revoke the credit. In the absence of the buyer’s failure to take the 2% discount as was his custom, the banker’s report given in that case would have been “adequate” assurance under this Act, regardless of the language of the “satisfaction” clause. However, the seller is reasonably entitled to feel insecure at a sudden expansion of the buyer’s use of a credit term, and should be entitled either to security or to a satisfactory explanation.

    The entire foregoing discussion as to adequacy of assurance by way of explanation is subject to qualification when repeated occasions for the application of this section arise. This Act recognizes that repeated delinquencies must be viewed as cumulative. On the other hand, commercial sense also requires that if repeated claims for assurance are made under this section, the basis for these claims must be increasingly obvious.

  5. A failure to provide adequate assurance of performance and thereby to reestablish the security of expectation, results in a breach only “by repudiation” under subsection (4). Therefore, the possibility is continued of retraction of the repudiation under the section dealing with that problem, unless the aggrieved party has acted on the breach in some manner.

    The thirty day limit on the time to provide assurance is laid down to free the question of reasonable time from uncertainty in later litigation.

  6. Clauses seeking to give the protected party exceedingly wide powers to cancel or readjust the contract when ground for insecurity arises must be read against the fact that good faith is a part of the obligation of the contract and not subject to modification by agreement and includes, in the case of a merchant, the reasonable observance of commercial standards of fair dealing in the trade. Such clauses can thus be effective to enlarge the protection given by the present section to a certain extent, to fix the reasonable time within which requested assurance must be given, or to define adequacy of the assurance in any commercially reasonable fashion. But any clause seeking to set up arbitrary standards for action is ineffective under this Article. Acceleration clauses are treated similarly in the Articles on Commercial Paper and Secured Transactions.

Cross references:

Point 3: Section 1-203.

Point 5: Section 2-611.

Point 6: Sections 1-203 and 2-208 and Articles 3 and 9.

Definitional cross references:

“Aggrieved party”. Section 1-201. “Between merchants”. Section 2-104. “Contract”. Section 1-201. “Contract for sale”. Section 2-106. “Party”. Section 1-201. “Reasonable time”. Section 1-204. “Rights”. Section 1-201. “Writing”. Section 1-201.

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NOTES TO DECISIONS

1.Withholding Delivery.

Where there was no showing of a “course of performance” between parties, who had an ongoing seller-buyer relationship, under which the seller withheld delivery of acknowledged orders when the buyer was in arrears on earlier orders, seller had no legal right to withhold delivery of orders, which it accepted without conditions and subject to future payment, for the reason that buyer had an unpaid account for earlier orders. In re H.J. Scheirich Co., 982 F.2d 945, 1993 U.S. App. LEXIS 31 (6th Cir. Ky. 1993 ).

Notes to Unpublished Decisions

1.Withholding Delivery.

Unpublished decision: Under KRS § 355.2-609 , a seller with reasonable grounds for insecurity with respect to a buyer’s performance has a right to suspend its own performance until receiving adequate assurance from the buyer. Golden Brands, LLC v. Castle Cheese, Inc., 110 Fed. Appx. 666, 2004 U.S. App. LEXIS 20441 (6th Cir. 2004).

Research References and Practice Aids

Northern Kentucky Law Review.

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Answer Stating Demand for Adequate Assurance of Performance, Form 190.16.

355.2-610. Anticipatory repudiation.

When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may

  1. for a commercially reasonable time await performance by the repudiating party; or
  2. resort to any remedy for breach (KRS 355.2-703 or 355.2-711 ), even though he has notified the repudiating party that he would await the latter’s performance and has urged retraction; and
  3. in either case suspend his own performance or proceed in accordance with the provisions of this article on the seller’s right to identify goods to the contract notwithstanding breach or to salvage unfinished goods (KRS 355.2-704 ).

History. Enact. Acts 1958, ch. 77, § 2-610, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

See Sections 63(2) and 65, Uniform Sales Act.

Purposes:

To make it clear that:

  1. With the problem of insecurity taken care of by the preceding section and with provision being made in this Article as to the effect of a defective delivery under an installment contract, anticipatory repudiation centers upon an overt communication of intention or an action which renders performance impossible or demonstrates a clear determination not to continue with performance.

    Under the present section when such a repudiation substantially impairs the value of the contract, the aggrieved party may at any time resort to his remedies for breach, or he may suspend his own performance while he negotiates with, or awaits performance by, the other party. But if he awaits performance beyond a commercially reasonable time he cannot recover resulting damages which he should have avoided.

  2. It is not necessary for repudiation that performance be made literally and utterly impossible. Repudiation can result from action which reasonably indicates a rejection of the continuing obligation. And, a repudiation automatically results under the preceding section on insecurity when a party fails to provide adequate assurance of due future performance within thirty days after a justifiable demand therefor has been made. Under the language of this section, a demand by one or both parties for more than the contract calls for in the way of counter-performance is not in itself a repudiation nor does it invalidate a plain expression of desire for future performance. However, when under a fair reading it amounts to a statement of intention not to perform except on conditions which go beyond the contract, it becomes a repudiation.
  3. The test chosen to justify an aggrieved party’s action under this section is the same as that in the section on breach in installment contracts—namely the substantial value of the contract. The most useful test of substantial value is to determine whether material inconvenience or injustice will result if the aggrieved party is forced to wait and receive an ultimate tender minus the part or aspect repudiated.
  4. After repudiation, the aggrieved party may immediately resort to any remedy he chooses provided he moves in good faith (see Section 1-203). Inaction and silence by the aggrieved party may leave the matter open but it cannot be regarded as misleading the repudiating party. Therefore the aggrieved party is left free to proceed at any time with his options under this section, unless he has taken some positive action which in good faith requires notification to the other party before the remedy is pursued.

Cross references:

Point 1: Sections 2-609 and 2-612.

Point 2: Section 2-609.

Point 3: Section 2-612.

Point 4: Section 1-203.

Definitional cross references:

“Aggrieved party”. Section 1-201. “Contract”. Section 1-201. “Party”. Section 1-201. “Remedy”. Section 1-201.

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NOTES TO DECISIONS

1.Payment of Money in Future.

Anticipatory breach of contract rule had no application to a contract to pay money in the future at time specified where the other party had completely executed the contract on his part. (decided under prior law) Fidelity & Deposit Co. v. Brown, 230 Ky. 534 , 20 S.W.2d 284, 1929 Ky. LEXIS 120 ( Ky. 1929 ).

2.Action for Breach.

The unequivocal repudiation or renunciation of an executory contract in advance of the time of performance could be regarded as an anticipatory breach and supported an immediate action for breach without waiting for the time of performance to arrive, if the injured party so elected. (decided under prior law) Globe Fertilizer Co. v. Tennessee Phosphate Co., 85 S.W. 1177, 27 Ky. L. Rptr. 636 (1905). See Wallingford v. Aitkins, 72 S.W. 794, 24 Ky. L. Rptr. 1995 , 1903 Ky. LEXIS 517 (Ky. Ct. App. 1903).

When seller, at any time subsequent to the making of the contract, notified buyer that he did not intend to comply with the contract, it was a breach of the contract and buyer’s cause of action for damages for refusal to deliver accrued immediately. (decided under prior law) Royster v. A. Weller & Co., 186 Ky. 476 , 217 S.W. 684, 1920 Ky. LEXIS 61 ( Ky. 1920 ).

Trial court’s finding that tobacco dealer did not repudiate the contract for sale of tobacco it contracted to buy at the insurer’s auction was not clearly erroneous in light of the evidence in the record; no showing was made that the tobacco dealer unequivocally intended to repudiate the sale, but, instead, that the tobacco dealer could not remove all of the tobacco at once because of a previously-scheduled machinery show that the dealer was obligated to sponsor. Upton v. Ginn, 231 S.W.3d 788, 2007 Ky. App. LEXIS 255 (Ky. Ct. App. 2007).

With respect to an agreement between the debtor and a buyer of coal produced by the debtor, the buyer’s letter expressing its conclusion that an agreement between the parties was terminated constituted anticipatory breach under KRS 355.2-610 and permitted the debtor to suspend all performance under the parties’ agreement. Black Diamond Mining Co., LLC v. Hazard Coal Sales, LLC (In re Black Diamond Mining Co., LLC), 2009 Bankr. LEXIS 4639 (Bankr. E.D. Ky. June 11, 2009).

355.2-611. Retraction of anticipatory repudiation.

  1. Until the repudiating party’s next performance is due he can retract his repudiation unless the aggrieved party has since the repudiation canceled or materially changed his position or otherwise indicated that he considers the repudiation final.
  2. Retraction may be by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform, but must include any assurance justifiably demanded under the provisions of this article (KRS 355.2-609 ).
  3. Retraction reinstates the repudiating party’s rights under the contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation.

History. Enact. Acts 1958, ch. 77, § 2-611, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

To make it clear that:

  1. The repudiating party’s right to reinstate the contract is entirely dependent upon the action taken by the aggrieved party. If the latter has cancelled the contract or materially changed his position at any time after the repudiation, there can be no retraction under this section.
  2. Under subsection (2) an effective retraction must be accompanied by any assurances demanded under the section dealing with right to adequate assurance. A repudiation is of course sufficient to give reasonable ground for insecurity and to warrant a request for assurance as an essential condition of the retraction. However, after a timely and unambiguous expression of retraction, a reasonable time for the assurance to be worked out should be allowed by the aggrieved party before cancellation.

Cross reference:

Point 2: Section 2-609.

Definitional cross references:

“Aggrieved party”. Section 1-201. “Cancellation”. Section 2-106. “Contract”. Section 1-201. “Party”. Section 1-201. “Rights”. Section 1-201.

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NOTES TO DECISIONS

1.Repudiation.

Although buyer’s letter indicated it had nothing further to say on its failure to inspect and receive staves and that an inspector could not be sent and that it would be satisfactory to sell the staves to someone else, it was not a repudiation of the contract and seller had a right to wait a reasonable time for buyer to perform before selling staves to another at a loss. (decided under prior law) Paducan Cooperage Co. v. Arkansas Stove Co., 193 Ky. 774 , 237 S.W. 412, 1922 Ky. LEXIS 72 ( Ky. 1922 ).

355.2-612. “Installment contract” — Breach.

  1. An “installment contract” is one which requires or authorizes the delivery of goods in separate lots to be separately accepted, even though the contract contains a clause “each delivery is a separate contract” or its equivalent.
  2. The buyer may reject any installment which is nonconforming if the nonconformity substantially impairs the value of that installment and cannot be cured or if the nonconformity is a defect in the required documents; but if the nonconformity does not fall within subsection (3) and the seller gives adequate assurance of its cure the buyer must accept that installment.
  3. Whenever nonconformity or default with respect to one (1) or more installments substantially impairs the value of the whole contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a nonconforming installment without seasonably notifying of cancellation or if he brings an action with respect only to past installments or demands performance as to future installments.

History. Enact. Acts 1958, ch. 77, § 2-612, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 45(2), Uniform Sales Act.

Changes:

Rewritten.

Purposes of changes:

To continue prior law but to make explicit the more mercantile interpretation of many of the rules involved, so that:

  1. The definition of an installment contract is phrased more broadly in this Article so as to cover installment deliveries tacitly authorized by the circumstances or by the option of either party.
  2. In regard to the apportionment of the price for separate payment this Article applies the more liberal test of what can be apportioned rather than the test of what is clearly apportioned by the agreement. This Article also recognizes approximate calculation or apportionment of price subject to subsequent adjustment. A provision for separate payment for each lot delivered ordinarily means that the price is at least roughly calculable by units of quantity, but such a provision is not essential to an “installment contract.” If separate acceptance of separate deliveries is contemplated, no generalized contrast between wholly “entire” and wholly “divisible” contracts has any standing under this Article.
  3. This Article rejects any approach which gives clauses such as “each delivery is a separate contract” their legalistically literal effect. Such contracts nonetheless call for installment deliveries. Even where a clause speaks of “a separate contract for all purposes”, a commercial reading of the language under the section on good faith and commercial standards requires that the singleness of the document and the negotiation, together with the sense of the situation, prevail over any uncommercial and legalistic interpretation.
  4. One of the requirements for rejection under subsection (2) is non-conformity substantially impairing the value of the installment in question. However, an installment agreement may require accurate conformity in quality as a condition to the right to acceptance if the need for such conformity is made clear either by express provision or by the circumstances. In such a case the effect of the agreement is to define explicitly what amounts to substantial impairment of value impossible to cure. A clause requiring accurate compliance as a condition to the right to acceptance must, however, have some basis in reason, must avoid imposing hardship by surprise and is subject to waiver or to displacement by practical construction.

    Substantial impairment of the value of an installment can turn not only on the quality of the goods but also on such factors as time, quantity, assortment, and the like. It must be judged in terms of the normal or specifically known purposes of the contract. The defect in required documents refers to such matters as the absence of insurance documents under a C.I.F. contract, falsity of a bill of lading, or one failing to show shipment within the contract period or to the contract destination. Even in such cases, however, the provisions on cure of tender apply if appropriate documents are readily procurable.

  5. Under subsection (2) an installment delivery must be accepted if the non-conformity is curable and the seller gives adequate assurance of cure. Cure of non-conformity of an installment in the first instance can usually be afforded by an allowance against the price, or in the case of reasonable discrepancies in quantity either by a further delivery or a partial rejection. This Article requires reasonable action by a buyer in regard to discrepant delivery and good faith requires that the buyer make any reasonable minor outlay of time or money necessary to cure an overshipment by severing out an acceptable percentage thereof. The seller must take over a cure which involves any material burden; the buyer’s obligation reaches only to cooperation. Adequate assurance for purposes of subsection (2) is measured by the same standards as under the section on right to adequate assurance of performance.
  6. Subsection (3) is designed to further the continuance of the contract in the absence of an overt cancellation. The question arising when an action is brought as to a single installment only is resolved by making such action waive the right of cancellation. This involves merely a defect in one or more installments, as contrasted with the situation where there is a true repudiation within the section on anticipatory repudiation. Whether the non-conformity in any given installment justifies cancellation as to the future depends, not on whether such non-conformity indicates an intent or likelihood that the future deliveries will also be defective, but whether the non-conformity substantially impairs the value of the whole contract. If only the seller’s security in regard to future installments is impaired, he has the right to demand adequate assurances of proper future performance but has not an immediate right to cancel the entire contract. It is clear under this Article, however, that defects in prior installments are cumulative in effect, so that acceptance does not wash out the defect “waived.” Prior policy is continued, putting the rule as to buyer’s default on the same footing as that in regard to seller’s default.
  7. Under the requirement of seasonable notification of cancellation under subsection (3), a buyer who accepts a non-conforming installment which substantially impairs the value of the entire contract should properly be permitted to withhold his decision as to whether or not to cancel pending a response from the seller as to his claim for cure or adjustment. Similarly, a seller may withhold a delivery pending payment for prior ones, at the same time delaying his decision as to cancellation. A reasonable time for notifying of cancellation, judged by commercial standards under the section on good faith, extends of course to include the time covered by any reasonable negotiation in good faith. However, during this period the defaulting party is entitled, on request, to know whether the contract is still in effect, before he can be required to perform further.

Cross references:

Point 2: Sections 2-307 and 2-607.

Point 3: Section 1-203.

Point 5: Sections 2-208 and 2-609.

Point 6: Section 2-610.

Definitional cross references:

“Action”. Section 1-201. “Aggrieved party”. Section 1-201. “Buyer”. Section 2-103. “Cancellation”. Section 2-106. “Conform”. Section 2-106. “Contract”. Section 1-201. “Lot”. Section 2-105. “Notifies”. Section 1-201. “Seasonably”. Section 1-204. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Installment Contracts.

Where two distinct installment contracts were involved, each contract was entire and indivisible and the breach of one contract did not justify failure to perform another one. (decided under prior law) Ten Broeck Tyre Co. v. Rubber Trading Co., 186 Ky. 526 , 217 S.W. 345, 1919 Ky. LEXIS 201 ( Ky. 1919 ).

Contract to buy 150,000 bricks each shipment, to be paid for within a reasonable time after delivery, was a divisible contract and seller could recover contract price for each shipment as made instead of recovering on quantum meruit and, on buyer’s failure to pay, could refuse to make further shipments and recover for deliveries made. (decided under prior law) Evans v. Barbourville Brick Co., 205 Ky. 561 , 266 S.W. 46, 1924 Ky. LEXIS 168 ( Ky. 1924 ).

A single contract to deliver boxes to be used in bottling business for a definite period of time for the successive deliveries of the boxes, to be paid for as delivered, was an entire contract, and the fact the articles were to be delivered in installments as needed did not change its character so as to make it divisible into a number of contracts consisting of the separate orders for boxes as required. (decided under prior law) O'Bryan v. Mengel Co., 224 Ky. 284 , 6 S.W.2d 249, 1928 Ky. LEXIS 586 ( Ky. 1928 ).

The test applied in determining whether a contract was to be treated as an entirety, or as severable, was the intention of the parties, to be gathered from the object and terms of the contract. (decided under prior law) O'Bryan v. Mengel Co., 224 Ky. 284 , 6 S.W.2d 249, 1928 Ky. LEXIS 586 ( Ky. 1928 ).

2.Nonconformity.

If buyer acted promptly, he was entitled to refuse further deliveries and terminate the contract for five (5) carloads of oranges so far as it remained unexecuted, and such termination would not prevent recovery of damages for other breaches of the contract which occurred prior to its termination where the first two carloads delivered were green or otherwise unmerchantable. (decided under prior law) Newton v. Bayless Fruit Co., 155 Ky. 440 , 159 S.W. 968, 1913 Ky. LEXIS 276 ( Ky. 1913 ).

When defective goods were delivered in any instalment, the buyer was at liberty to refuse them and insist upon proper performance then and in the future and, if upon notice or demand, the defective goods were not replaced, or the defect made good, then buyer would have an action for damages for the breach. (decided under prior law) O'Bryan v. Mengel Co., 224 Ky. 284 , 6 S.W.2d 249, 1928 Ky. LEXIS 586 ( Ky. 1928 ).

3.Rights of Buyer on Breach.

Where objection was failure to deliver, which required no inspection or invoice to learn of the failure, each monthly shipment stood on its own footing and the buyer who desired cancellation of future shipments for breach of contract by failure to deliver had to act promptly upon learning of the failure. (decided under prior law) T. L. Malone & Co. v. Stone, 214 Ky. 443 , 283 S.W. 407, 1926 Ky. LEXIS 353 ( Ky. 1926 ).

Where the defect was in quantity which could not be learned until after receipt of invoice, the buyer could act upon either the first or a subsequent shipment if the continuing instalments were deficient in quantity. (decided under prior law) T. L. Malone & Co. v. Stone, 214 Ky. 443 , 283 S.W. 407, 1926 Ky. LEXIS 353 ( Ky. 1926 ).

Where the objection to a particular shipment was a defect in quality ascertainable only after an inspection, the buyer could return the articles and cancel the remaining instalments of the contract if he acted promptly and without delay. (decided under prior law) T. L. Malone & Co. v. Stone, 214 Ky. 443 , 283 S.W. 407, 1926 Ky. LEXIS 353 ( Ky. 1926 ).

4.Failure to Deliver on Time.

A buyer could terminate contract for failure of seller to deliver on time and recover damages up to the time of termination or insist on future performance and recover damages for the delay only. (decided under prior law) T. L. Malone & Co. v. Stone, 214 Ky. 443 , 283 S.W. 407, 1926 Ky. LEXIS 353 ( Ky. 1926 ).

5.Acceptance of Late Delivery.

Where buyer insisted upon delivery of late shipment of installment up to the time it was actually received and all deliveries to that time were accepted and paid for, he waived the right to cancel future deliveries. (decided under prior law) T. L. Malone & Co. v. Stone, 214 Ky. 443 , 283 S.W. 407, 1926 Ky. LEXIS 353 ( Ky. 1926 ).

355.2-613. Casualty to identified goods.

Where the contract requires for its performance goods identified when the contract is made, and the goods suffer casualty without fault of either party before the risk of loss passes to the buyer, or in a proper case under a “no arrival, no sale” term (KRS 355.2-324 ) then

  1. if the loss is total the contract is avoided; and
  2. if the loss is partial or the goods have so deteriorated as no longer to conform to the contract the buyer may nevertheless demand inspection and at his option either treat the contract as avoided or accept the goods with due allowance from the contract price for the deterioration or the deficiency in quantity but without further right against the seller.

History. Enact. Acts 1958, ch. 77, § 2-613, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Sections 7 and 8, Uniform Sales Act.

Changes:

Rewritten, the basic policy being continued but the test of a “divisible” or “indivisible” sale or contract being abandoned in favor of adjustment in business terms.

Purposes of changes:

  1. Where goods whose continued existence is presupposed by the agreement are destroyed without fault of either party, the buyer is relieved from his obligation but may at his option take the surviving goods at a fair adjustment. “Fault” is intended to include negligence and not merely wilful wrong. The buyer is expressly given the right to inspect the goods in order to determine whether he wishes to avoid the contract entirely or to take the goods with a price adjustment.
  2. The section applies whether the goods were already destroyed at the time of contracting without the knowledge of either party or whether they are destroyed subsequently but before the risk of loss passes to the buyer. Where under the agreement, including of course usage of trade, the risk has passed to the buyer before the casualty, the section has no application. Beyond this, the essential question in determining whether the rules of this section are to be applied is whether the seller has or has not undertaken the responsibility for the continued existence of the goods in proper condition through the time of agreed or expected delivery.
  3. The section on the term “no arrival, no sale” makes clear that delay in arrival, quite as much as physical change in the goods, gives the buyer the options set forth in this section.

Cross reference:

Point 3: Section 2-324.

Definitional cross references:

“Buyer”. Section 2-103. “Conform”. Section 2-106. “Contract”. Section 1-201. “Fault”. Section 1-201. “Goods”. Section 2-105. “Party”. Section 1-201. “Rights”. Section 1-201. “Seller”. Section 2-103.

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355.2-614. Substituted performance.

  1. Where without fault of either party the agreed berthing, loading, or unloading facilities fail or an agreed type of carrier becomes unavailable or the agreed manner of delivery otherwise becomes commercially impracticable but a commercially reasonable substitute is available, such substitute performance must be tendered and accepted.
  2. If the agreed means or manner of payment fails because of domestic or foreign governmental regulation, the seller may withhold or stop delivery unless the buyer provides a means or manner of payment which is commercially a substantial equivalent. If delivery has already been taken, payment by the means or in the manner provided by the regulation discharges the buyer’s obligation unless the regulation is discriminatory, oppressive or predatory.

History. Enact. Acts 1958, ch. 77, § 2-614, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

  1. Subsection (1) requires the tender of a commercially reasonable substituted performance where agreed to facilities have failed or become commercially impracticable. Under this Article, in the absence of specific agreement, the normal or usual facilities enter into the agreement either through the circumstances, usage of trade or prior course of dealing.

    This section appears between Section 2-613 on casualty to identified goods and the next section on excuse by failure of presupposed conditions, both of which deal with excuse and complete avoidance of the contract where the occurrence or non-occurrence of a contingency which was a basic assumption of the contract makes the expected performance impossible. The distinction between the present section and those sections lies in whether the failure or impossibility of performance arises in connection with an incidental matter or goes to the very heart of the agreement. The differing lines of solution are contrasted in a comparison of International Paper Co. v. Rockefeller, 161 App. Div. 180, 146 N.Y.S. 371 (1914) and Meyer v. Sullivan, 40 Cal. App. 723, 181 P. 847 (1919). In the former case a contract for the sale of spruce to be cut from a particular tract of land was involved. When a fire destroyed the trees growing on that tract the seller was held excused since performance was impossible. In the latter case the contract called for delivery of wheat “f.o.b. Kosmos Steamer at Seattle.” The war led to cancellation of that line’s sailing schedule after space had been duly engaged and the buyer was held entitled to demand substituted delivery at the warehouse on the line’s loading dock. Under this Article, of course, the seller would also be entitled, had the market gone the other way, to make a substituted tender in that manner.

    There must, however, be a true commercial impracticability to excuse the agreed to performance and justify a substituted performance. When this is the case a reasonable substituted performance tendered by either party should excuse him from strict compliance with contract terms which do not go to the essence of the agreement.

  2. The substitution provided in this section as between buyer and seller does not carry over into the obligation of a financing agency under a letter of credit, since such an agency is entitled to performance which is plainly adequate on its face and without need to look into commercial evidence outside of the documents. See Article 5, especially Sections 5-102, 5-103, 5-109, 5-110 and 5-114.
  3. Under subsection (2) where the contract is still executory on both sides, the seller is permitted to withdraw unless the buyer can provide him with a commercially equivalent return despite the governmental regulation. Where, however, only the debt for the price remains, a larger leeway is permitted. The buyer may pay in the manner provided by the regulation even though this may not be commercially equivalent provided that the regulation is not “discriminatory, oppressive or predatory.”

Cross reference:

Point 2: Article 5.

Definitional cross references:

“Buyer”. Section 2-103. “Fault”. Section 1-201. “Party”. Section 1-201. “Seller”. Section 2-103.

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355.2-615. Excuse by failure of presupposed conditions.

Except so far as a seller may have assumed a greater obligation and subject to KRS 355.2-614 on substituted performance:

  1. Delay in delivery or nondelivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.
  2. Where the clauses mentioned in paragraph (a) affect only a part of the seller’s capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.
  3. The seller must notify the buyer seasonably that there will be delay or nondelivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.

History. Enact. Acts 1958, ch. 77, § 2-615, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

  1. This section excuses a seller from timely delivery of goods contracted for, where his performance has become commercially impracticable because of unforeseen supervening circumstances not within the contemplation of the parties at the time of contracting. The destruction of specific goods and the problem of the use of substituted performance on points other than delay or quantity, treated elsewhere in this Article, must be distinguished from the matter covered by this section.
  2. The present section deliberately refrains from any effort at an exhaustive expression of contingencies and is to be interpreted in all cases sought to be brought within its scope in terms of its underlying reason and purpose.
  3. The first test for excuse under this Article in terms of basic assumption is a familiar one. The additional test of commercial impracticability (as contrasted with “impossibility,” “frustration of performance” or “frustration of the venture”) has been adopted in order to call attention to the commercial character of the criterion chosen by this Article.
  4. Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance. Neither is a rise or a collapse in the market in itself a justification, for that is exactly the type of business risk which business contracts made at fixed prices are intended to cover. But a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in cost or altogether prevents the seller from securing supplies necessary to his performance, is within the contemplation of this section. (See Ford & Sons, Ltd. v. Henry Leetham & Sons, Ltd., 21 Com. Cas. 55 (1915, K.B.D.).)
  5. Where a particular source of supply is exclusive under the agreement and fails through casualty, the present section applies rather than the provision on destruction or deterioration of specific goods. The same holds true where a particular source of supply is shown by the circumstances to have been contemplated or assumed by the parties at the time of contracting. (See Davis Co. v. Hoffmann-LaRoche Chemical Works, 178 App. Div. 855, 166 N.Y.S. 179 (1917) and International Paper Co. v. Rockefeller, 161 App. Div. 180, 146 N.Y.S. 371 (1914).) There is no excuse under this section, however, unless the seller has employed all due measures to assure himself that his source will not fail. (See Canadian Industrial Alcohol Co., Ltd. v. Dunbar Molasses Co., 258 N.Y. 194, 179 N.E. 383, 80 A.L.R. 1173 (1932) and Washington Mfg. Co. v. Midland Lumber Co., 113 Wash. 593, 194 P. 777 (1921).)

    In the case of failure of production by an agreed source for causes beyond the seller’s control, the seller should, if possible, be excused since production by an agreed source is without more a basic assumption of the contract. Such excuse should not result in relieving the defaulting supplier from liability nor in dropping into the seller’s lap an unearned bonus of damages over. The flexible adjustment machinery of this Article provides the solution under the provision on the obligation of good faith. A condition to his making good the claim of excuse is the turning over to the buyer of his rights against the defaulting source of supply to the extent of the buyer’s contract in relation to which excuse is being claimed.

  6. In situations in which neither sense nor justice is served by either answer when the issue is posed in flat terms of “excuse” or “no excuse,” adjustment under the various provisions of this Article is necessary, especially the sections on good faith, on insecurity and assurance and on the reading of all provisions in the light of their purposes, and the general policy of this Act to use equitable principles in furtherance of commercial standards and good faith.
  7. The failure of conditions which go to convenience or collateral values rather than to the commercial practicability of the main performance does not amount to a complete excuse. However, good faith and the reason of the present section and of the preceding one may properly be held to justify and even to require any needed delay involved in a good faith inquiry seeking a readjustment of the contract terms to meet the new conditions.
  8. The provisions of this section are made subject to assumption of greater liability by agreement and such agreement is to be found not only in the expressed terms of the contract but in the circumstances surrounding the contracting, in trade usage and the like. Thus the exemptions of this section do not apply when the contingency in question is sufficiently foreshadowed at the time of contracting to be included among the business risks which are fairly to be regarded as part of the dickered terms, either consciously or as a matter of reasonable, commercial interpretation from the circumstances. (See Madeirense Do Brasil, S. A. v. Stulman-Emrick Lumber Co., 147 F.2d 399 (C.C.A., 2 Cir., 1945).) The exemption otherwise present through usage of trade under the present section may also be expressly negated by the language of the agreement. Generally, express agreements as to exemptions designed to enlarge upon or supplant the provisions of this section are to be read in the light of mercantile sense and reason, for this section itself sets up the commercial standard for normal and reasonable interpretation and provides a minimum beyond which agreement may not go.

    Agreement can also be made in regard to the consequences of exemption as laid down in paragraphs (b) and (c) and the next section on procedure on notice claiming excuse.

  9. The case of a farmer who has contracted to sell crops to be grown on designated land may be regarded as falling either within the section on casualty to identified goods or this section, and he may be excused, when there is a failure of the specific crop, either on the basis of the destruction of identified goods or because of the failure of a basic assumption of the contract.

    Exemption of the buyer in the case of a “requirements” contract is covered by the “Output and Requirements” section both as to assumption and allocation of the relevant risks. But when a contract by a manufacturer to buy fuel or raw material makes no specific reference to a particular venture and no such reference may be drawn from the circumstances, commercial understanding views it as a general deal in the general market and not conditioned on any assumption of the continuing operation of the buyer’s plant. Even when notice is given by the buyer that the supplies are needed to fill a specific contract of a normal commercial kind, commercial understanding does not see such a supply contract as conditioned on the continuance of the buyer’s further contract for outlet. On the other hand, where the buyer’s contract is in reasonable commercial understanding conditioned on a definite and specific venture or assumption as, for instance, a war procurement sub-contract known to be based on a prime contract which is subject to termination, or a supply contract for a particular construction venture, the reason of the present section may well apply and entitle the buyer to the exemption.

  10. Following its basic policy of using commercial practicability as a test for excuse, this section recognizes as of equal significance either a foreign or domestic regulation and disregards any technical distinctions between “law,” “regulation,” “order” and the like. Nor does it make the present action of the seller depend upon the eventual judicial determination of the legality of the particular governmental action. The seller’s good faith belief in the validity of the regulation is the test under this Article and the best evidence of his good faith is the general commercial acceptance of the regulation. However, governmental interference cannot excuse unless it truly “supervenes” in such a manner as to be beyond the seller’s assumption of risk. And any action by the party claiming excuse which causes or colludes in inducing the governmental action preventing his performance would be in breach of good faith and would destroy his exemption.
  11. An excused seller must fulfill his contract to the extent which the supervening contingency permits, and if the situation is such that his customers are generally affected he must take account of all in supplying one. Subsections (a)(i) and (a)(ii), therefore, explicitly permit in any proration a fair and reasonable attention to the needs of regular customers who are probably relying on spot orders for supplies. Customers at different stages of the manufacturing process may be fairly treated by including the seller’s manufacturing requirements. A fortiori, the seller may also take account of contracts later in date than the one in question. The fact that such spot orders may be closed at an advanced price causes no difficulty, since any allocation which exceeds normal past requirements will not be reasonable. However, good faith requires, when prices have advanced, that the seller exercise real care in making his allocations, and in case of doubt his contract customers should be favored and supplies prorated evenly among them regardless of price. Save for the extra care thus required by changes in the market, this section seeks to leave every reasonable business leeway to the seller.

Cross references:

Point 1: Sections 2-613 and 2-614.

Point 2: Section 1-102.

Point 5: Sections 1-203 and 2-613.

Point 6: Sections 1-102, 1-203 and 2-609.

Point 7: Section 2-614.

Point 8: Sections 1-201, 2-302 and 2-616.

Point 9: Sections 1-102, 2-306 and 2-613.

Definitional cross references:

“Between merchants”. Section 2-104. “Buyer”. Section 2-103. “Contract”. Section 1-201. “Contract for sale”. Section 2-106. “Good faith”. Section 1-201. “Merchant”. Section 2-104. “Notifies”. Section 1-201. “Seasonably”. Section 1-204. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Contractual Standard.

A coal supply agreement, as an instrument for the sale of goods, does trigger the UCC. However, in this case two (2) sophisticated parties with able and learned legal counsel, contracted away from the UCC, its definitions and interpretations which the parties were legally entitled to do. The coal supply agreement provided for the risk allocation agreed to by the parties and the contractual standard was not based on whether the events or conditions could or should have been foreseen, but required only a factual determination that the events or conditions were not foreseen. The contractual standard was a negotiated provision for period price review, not an excuse from performance clause. Kentucky Utilities Co. v. South East Coal Co., 836 S.W.2d 392, 1992 Ky. LEXIS 96 ( Ky. 1992 ), cert. dismissed, 506 U.S. 1090, 113 S. Ct. 1147, 122 L. Ed. 2d 498, 1993 U.S. LEXIS 1038 (U.S. 1993).

While it was strongly believed this section applies only to sellers, as its language states, the Supreme Court found it unnecessary to so conclude as the language of this section under any circumstances was not pertinent due to explicit language of the coal supply agreement; in no other way can sense be given to the parties’ stated intent that the phrase “material unforeseen events or changed conditions” was to have included matters such as the increase or decrease in the costs of producing coal, the effects of inflation or deflation and the then current market price of like quality of coal. The difference in price was the result of material unforeseen events or changed conditions and because of such events and conditions, the billing price charged in dispute between utility company and coal company was inequitable. Kentucky Utilities Co. v. South East Coal Co., 836 S.W.2d 392, 1992 Ky. LEXIS 96 ( Ky. 1992 ), cert. dismissed, 506 U.S. 1090, 113 S. Ct. 1147, 122 L. Ed. 2d 498, 1993 U.S. LEXIS 1038 (U.S. 1993).

Cited:

Wickliffe Farms, Inc. v. Owensboro Grain Co., 684 S.W.2d 17, 1984 Ky. App. LEXIS 560 (Ky. Ct. App. 1984); Kentucky Utils. Co. v. South E. Coal Co., 836 S.W.2d 388, 1991 Ky. LEXIS 203 ( Ky. 1991 ).

355.2-616. Procedure on notice claiming excuse.

  1. Where the buyer receives notification of a material or indefinite delay or an allocation justified under the preceding section he may by written notification to the seller as to any delivery concerned, and where the prospective deficiency substantially impairs the value of the whole contract under the provisions of this article relating to breach of installment contracts (KRS 355.2-612 ), then also as to the whole,
    1. terminate and thereby discharge any unexecuted portion of the contract; or
    2. modify the contract by agreeing to take his available quota in substitution.
  2. If after receipt of such notification from the seller the buyer fails so to modify the contract within a reasonable time not exceeding thirty (30) days the contract lapses with respect to any deliveries affected.
  3. The provisions of this section may not be negated by agreement except in so far as the seller has assumed a greater obligation under KRS 355.2-615 .

History. Enact. Acts 1958, ch. 77, § 2-616, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

This section seeks to establish simple and workable machinery for providing certainty as to when a supervening and excusing contingency “excuses” the delay, “discharges” the contract, or may result in a waiver of the delay by the buyer. When the seller notifies, in accordance with the preceding section, claiming excuse, the buyer may acquiesce, in which case the contract is so modified. No consideration is necessary in a case of this kind to support such a modification. If the buyer does not elect so to modify the contract, he may terminate it and under subsection (2) his silence after receiving the seller’s claim of excuse operates as such a termination. Subsection (3) denies effect to any contract clause made in advance of trouble which would require the buyer to stand ready to take delivery whenever the seller is excused from delivery by unforeseen circumstances.

Cross references:

Point 1: Sections 2-209 and 2-615.

Definitional cross references:

“Buyer”. Section 2-103. “Contract”. Section 1-201. “Installment contract”. Section 2-612. “Notification”. Section 1-201. “Reasonable time”. Section 1-204. “Seller”. Section 2-103. “Termination”. Section 2-106. “Written”. Section 1-201.

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Part 7. Remedies

355.2-701. Remedies for breach of collateral contracts not impaired.

Remedies for breach of any obligation or promise collateral or ancillary to a contract for sale are not impaired by the provisions of this article.

History. Enact. Acts 1958, ch. 77, § 2-701, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

Whether a claim for breach of an obligation collateral to the contract for sale requires separate trial to avoid confusion of issues is beyond the scope of this Article; but contractual arrangements which as a business matter enter vitally into the contract should be considered a part thereof insofar as cross-claims or defenses are concerned.

Definitional cross references:

“Contract for sale”. Section 2-106. “Remedy”. Section 1-201.

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Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint by Seller to Recover Price, Form 190.03.

355.2-702. Seller’s remedies on discovery of buyer’s insolvency.

  1. Where the seller discovers the buyer to be insolvent he may refuse delivery except for cash including payment for all goods theretofore delivered under the contract, and stop delivery under this article (KRS 355.2-705 ).
  2. Where the seller discovers that the buyer has received goods on credit while insolvent he may reclaim the goods upon demand made within ten (10) days after the receipt, but if misrepresentation of solvency has been made to the particular seller in writing within three (3) months before delivery the ten (10) day limitation does not apply. Except as provided in this subsection the seller may not base a right to reclaim goods on the buyer’s fraudulent or innocent misrepresentation of solvency or of intent to pay.
  3. The seller’s right to reclaim under subsection (2) is subject to the rights of a buyer in ordinary course or other good faith purchaser under this article (KRS 355.2-403 ). Successful reclamation of goods excludes all other remedies with respect to them.

History. Enact. Acts 1958, ch. 77, § 2-702, effective July 1, 1960; 1986, ch. 118, § 5, effective July 1, 1987.

Official Comment

Prior uniform statutory provision:

Subsection (1)—Sections 53(1)(b), 54(1)(c) and 57, Uniform Sales Act; Subsection (2)—none; Subsection (3)—Section 76(3), Uniform Sales Act.

Changes:

Rewritten, the protection given to a seller who has sold on credit and has delivered goods to the buyer immediately preceding his insolvency being extended.

Purposes of changes and new matter:

To make it clear that:

  1. The seller’s right to withhold the goods or to stop delivery except for cash when he discovers the buyer’s insolvency is made explicit in subsection (1) regardless of the passage of title, and the concept of stoppage has been extended to include goods in the possession of any bailee who has not yet attorned to the buyer.
  2. Subsection (2) takes as its base line the proposition that any receipt of goods on credit by an insolvent buyer amounts to a tacit business misrepresentation of solvency and therefore is fraudulent as against the particular seller. This Article makes discovery of the buyer’s insolvency and demand within a ten day period a condition of the right to reclaim goods on this ground. The ten day limitation period operates from the time of receipt of the goods.

    An exception to this time limitation is made when a written misrepresentation of solvency has been made to the particular seller within three months prior to the delivery. To fall within the exception the statement of solvency must be in writing, addressed to the particular seller and dated within three months of the delivery.

  3. Because the right of the seller to reclaim goods under this section constitutes preferential treatment as against the buyer’s other creditors, subsection (3) provides that such reclamation bars all his other remedies as to the goods involved.

Cross references:

Point 1: Sections 2-401 and 2-705.

Compare Section 2-502.

Definitional cross references:

“Buyer”. Section 2-103. “Buyer in ordinary course of business”. Section 1-201. “Contract”. Section 1-201. “Good faith”. Section 1-201. “Goods”. Section 2-105. “Insolvent”. Section 1-201. “Person”. Section 1-201. “Purchaser”. Section 1-201. “Receipt” of goods. Section 2-103. “Remedy”. Section 1-201. “Rights”. Section 1-201. “Seller”. Section 2-103. “Writing”. Section 1-201.

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NOTES TO DECISIONS

1.Defrauded Seller.

The rights of an unpaid seller to reclaim are tantamount to the rights of a defrauded seller. In re Mel Golde Shoes, Inc., 403 F.2d 658, 1968 U.S. App. LEXIS 4652 (6th Cir. Ky. 1968 ).

Under the common law of Kentucky, a defrauded seller’s right to reclaim his goods is superior to any right of attaching creditors. In re Mel Golde Shoes, Inc., 403 F.2d 658, 1968 U.S. App. LEXIS 4652 (6th Cir. Ky. 1968 ).

2.Unpaid Seller.

Rights of unpaid seller who had delivered on condition and had demanded payment were no less than those provided in this section relating to sale on credit to an insolvent buyer and unpaid seller had right of reclamation until cars were resold within ten (10) days of buyer’s receipt. Greater Louisville Auto Auction, Inc. v. Ogle Buick, Inc., 387 S.W.2d 17, 1965 Ky. LEXIS 457 ( Ky. 1965 ).

3.Dishonored Check.

When payment of goods is due and demanded on delivery, as between the parties, the buyer’s right to retain or dispose of the property is conditional upon his making the payment due and payment by check is conditional and defeated as between the parties by dishonor of the check on due presentment, so seller’s rights are no less than in the case of a sale falling within the express terms of this section. Greater Louisville Auto Auction, Inc. v. Ogle Buick, Inc., 387 S.W.2d 17, 1965 Ky. LEXIS 457 ( Ky. 1965 ).

4.Priorities of Creditors.

Kentucky’s commercial code does not contain any provision defining the relative priorities of a creditor as against a reclaiming seller, and in that situation KRS 355.1-103 provides that the common law will apply. In re Mel Golde Shoes, Inc., 403 F.2d 658, 1968 U.S. App. LEXIS 4652 (6th Cir. Ky. 1968 ).

The right of reclamation contained in this section is not a “security interest” within the meaning of KRS 355.9-301 and that section has no application in determining the priority of claims between the reclaiming seller and attaching creditors. In re Mel Golde Shoes, Inc., 403 F.2d 658, 1968 U.S. App. LEXIS 4652 (6th Cir. Ky. 1968 ).

5.Right of Reclamation.

Although, because of the sellers’ status as unsecured creditors, they generally would be limited to an action for the price of the goods and could not successfully demand their return, the sellers did have the additional legal right of reclamation because they dealt with an insolvent buyer. In re Wathen's Elevators, Inc., 32 B.R. 912, 1983 Bankr. LEXIS 5427 (Bankr. W.D. Ky. 1983 ).

The right of grain sellers to reclaim their grain from an insolvent buyer was subordinate to the rights of a bona fide purchaser who held a purchase money security interest in the buyer’s property. In re Wathen's Elevators, Inc., 32 B.R. 912, 1983 Bankr. LEXIS 5427 (Bankr. W.D. Ky. 1983 ).

The right of reclamation could not be asserted under the UCC or the bankruptcy code by grain sellers who failed to demand the return of their grain from the buyer within ten (10) days of its receipt by the buyer. In re Wathen's Elevators, Inc., 32 B.R. 912, 1983 Bankr. LEXIS 5427 (Bankr. W.D. Ky. 1983 ).

The delivery of merchandise to a carrier pursuant to an F.O.B. shipment contract does not terminate the seller’s right to stop that shipment, nor would such delivery start the running of the ten (10) day period by the end of which such seller must make a demand for reclamation. In re Maloney Enterprises, Inc., 37 B.R. 290, 1983 Bankr. LEXIS 4989 (Bankr. E.D. Ky. 1983 ).

6.Receipt of Goods.

For the purposes of subsection (2) of this section, the “receipt” of the goods by the debtor occurred on the day the goods arrived at the debtor’s warehouse and the debtor took actual, physical possession of the goods, not on the day that the goods were delivered by the creditor to be shipped to the debtor. In re Maloney Enterprises, Inc., 37 B.R. 290, 1983 Bankr. LEXIS 4989 (Bankr. E.D. Ky. 1983 ).

Cited:

In re Federal’s, Inc., 553 F.2d 509, 1977 U.S. App. LEXIS 13768 (6th Cir. 1977); A.J. Cunningham Packing Corp. v. Restaurant Servs., Inc., 26 B.R. 215, 1982 Bankr. LEXIS 3523 (Bankr. W.D. Ky. 1982 ); In re Kentucky Flush Door Corp., 28 B.R. 808, 1983 Bankr. LEXIS 6570 (Bankr. W.D. Ky. 1983 ); In re Jeanes Mechanical Contractors, Inc., 32 B.R. 657, 1983 Bankr. LEXIS 5493 (Bankr. W.D. Ky. 1983 ); Placer Coal, Inc. v. Rhondale Coal Services Co., 684 S.W.2d 25, 1984 Ky. App. LEXIS 615 (Ky. Ct. App. 1984).

Research References and Practice Aids

Kentucky Law Journal.

Whiteside, Uniform Commercial Code — Major Changes in Sales Law, 49 Ky. L.J. 165 (1960).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Answer That Buyer Was Insolvent at Time Fixed for Delivery of Goods, Form 190.15.

355.2-703. Seller’s remedies in general.

Where the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due on or before delivery or repudiates with respect to a part or the whole, then with respect to any goods directly affected and, if the breach is of the whole contract (KRS 355.2-612 ), then also with respect to the whole undelivered balance, the aggrieved seller may

  1. withhold delivery of such goods;
  2. stop delivery by any bailee as hereafter provided (KRS 355.2-705 );
  3. proceed under KRS 355.2-704 respecting goods still unidentified to the contract;
  4. resell and recover damages as hereafter provided (KRS 355.2-706 );
  5. recover damages for nonacceptance (KRS 355.2-708 ) or in a proper case the price (KRS 355.2-709 );
  6. cancel.

History. Enact. Acts 1958, ch. 77, § 2-703, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

No comparable index section. See Section 53, Uniform Sales Act.

Purposes:

  1. This section is an index section which gathers together in one convenient place all of the various remedies open to a seller for any breach by the buyer. This Article rejects any doctrine of election of remedy as a fundamental policy and thus the remedies are essentially cumulative in nature and include all of the available remedies for breach. Whether the pursuit of one remedy bars another depends entirely on the facts of the individual case.
  2. The buyer’s breach which occasions the use of the remedies under this section may involve only one lot or delivery of goods, or may involve all of the goods which are the subject matter of the particular contract. The right of the seller to pursue a remedy as to all the goods when the breach is as to only one or more lots is covered by the section on breach in installment contracts. The present section deals only with the remedies available after the goods involved in the breach have been determined by that section.
  3. In addition to the typical case of refusal to pay or default in payment, the language in the preamble, “fails to make a payment due,” is intended to cover the dishonor of a check on due presentment, or the non-acceptance of a draft, and the failure to furnish an agreed letter of credit.
  4. It should also be noted that this Act requires its remedies to be liberally administered and provides that any right or obligation which it declares is enforceable by action unless a different effect is specifically prescribed (Section 1-106).

Cross references:

Point 2: Section 2-612.

Point 3: Section 2-325.

Point 4: Section 1-106.

Definitional cross references:

“Aggrieved party”. Section 1-201. “Buyer”. Section 2-103. “Cancellation”. Section 2-106. “Contract”. Section 1-201. “Goods”. Section 2-105. “Remedy”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Inapplicability.

This section was not applicable where orders were accepted by seller as follows: “Terms 2% 15 Days Net 30.” In re H.J. Scheirich Co., 982 F.2d 945, 1993 U.S. App. LEXIS 31 (6th Cir. Ky. 1993 ).

2.Withholding Delivery.

Where there was no showing of a “course of performance” between parties, who had an ongoing seller-buyer relationship, under which the seller withheld delivery of acknowledged orders when the buyer was in arrears on earlier orders, seller had no legal right to withhold delivery of orders, which it accepted without conditions and subject to future payment, for the reason that buyer had an unpaid account for earlier orders. In re H.J. Scheirich Co., 982 F.2d 945, 1993 U.S. App. LEXIS 31 (6th Cir. Ky. 1993 ).

Cited:

Greater Louisville Auto Auction, Inc. v. Ogle Buick, Inc., 387 S.W.2d 17, 1965 Ky. LEXIS 457 ( Ky. 1965 ); In re Louisville Motor Exchange, Inc., 26 B.R. 490, 1983 Bankr. LEXIS 7038 (Bankr. W.D. Ky. 1983 ); In re Wathen’s Elevators, Inc., 32 B.R. 912, 1983 Bankr. LEXIS 5427 (Bankr. W.D. Ky. 1983 ).

Research References and Practice Aids

Northern Kentucky Law Review.

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint by Seller Against Purchaser for Refusal to Receive and Pay for Goods Under an Agreement Specifying the Time and Place of Delivery, Form 190.04.

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Failing, at Time and Place Agreed on, to Accept and Pay for Hogs, to be Paid for on Delivery, Form 190.10.

355.2-704. Seller’s right to identify goods to the contract notwithstanding breach or to salvage unfinished goods.

  1. An aggrieved seller under KRS 355.2-703 may
    1. identify to the contract conforming goods not already identified if at the time he learned of the breach they are in his possession or control;
    2. treat as the subject of resale goods which have demonstrably been intended for the particular contract even though those goods are unfinished.
  2. Where the goods are unfinished an aggrieved seller may in the exercise of reasonable commercial judgment for the purposes of avoiding loss and of effective realization either complete the manufacture and wholly identify the goods to the contract or cease manufacture and resell for scrap or salvage value or proceed in any other reasonable manner.

History. Enact. Acts 1958, ch. 77, § 2-704, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Sections 63(3) and 64(4). Uniform Sales Act.

Changes:

Rewritten, the seller’s rights being broadened.

Purpose of changes:

  1. This section gives an aggrieved seller the right at the time of breach to identify to the contract any conforming finished goods, regardless of their resalability, and to use reasonable judgment as to completing unfinished goods. It thus makes the goods available for resale under the resale section, the seller’s primary remedy, and in the special case in which resale is not practicable, allows the action for the price which would then be necessary to give the seller the value of his contract.
  2. Under this Article the seller is given express power to complete manufacture or procurement of goods for the contract unless the exercise of reasonable commercial judgment as to the facts as they appear at the time he learns of the breach makes it clear that such action will result in a material increase in damages. The burden is on the buyer to show the commercially unreasonable nature of the seller’s action in completing manufacture.

Cross references:

Sections 2-703 and 2-706.

Definitional cross references:

“Aggrieved party”. Section 1-201. “Conforming”. Section 2-106. “Contract”. Section 1-201. “Goods”. Section 2-105. “Rights”. Section 1-201. “Seller”. Section 2-103.

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355.2-705. Seller’s stoppage of delivery in transit or otherwise.

  1. The seller may stop delivery of goods in the possession of a carrier or other bailee when he discovers the buyer to be insolvent (KRS 355.2-702 ) and may stop delivery of carload, truckload, planeload or larger shipments of express or freight when the buyer repudiates or fails to make a payment due before delivery or if for any other reason the seller has a right to withhold or reclaim the goods.
  2. As against such buyer the seller may stop delivery until:
    1. Receipt of the goods by the buyer; or
    2. Acknowledgement to the buyer by any bailee of the goods except a carrier that the bailee holds the goods for the buyer; or
    3. Such acknowledgement to the buyer by a carrier by reshipment or as a warehouse; or
    4. Negotiation to the buyer of any negotiable document of title covering the goods.
    1. To stop delivery the seller must so notify as to enable the bailee by reasonable diligence to prevent delivery of the goods. (3) (a) To stop delivery the seller must so notify as to enable the bailee by reasonable diligence to prevent delivery of the goods.
    2. After such notification the bailee must hold and deliver the goods according to the directions of the seller but the seller is liable to the bailee for any ensuing charges or damages.
    3. If a negotiable document of title has been issued for goods the bailee is not obliged to obey a notification to stop until surrender of possession or control of the document.
    4. A carrier who has issued a nonnegotiable bill of lading is not obliged to obey a notification to stop received from a person other than the consignor.

History. Enact. Acts 1958, ch. 77, § 2-705, effective July 1, 1960; 2012, ch. 132, § 53, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Sections 57-59, Uniform Sales Act; see also Sections 12, 14 and 42, Uniform Bills of Lading Act and Sections 9, 11 and 49, Uniform Warehouse Receipts Act.

Changes:

This section continues and develops the above sections of the Uniform Sales Act in the light of the other uniform statutory provisions noted.

Purposes:

To make it clear that:

  1. Subsection (1) applies the stoppage principle to other bailees as well as carriers.

    It also expands the remedy to cover the situations, in addition to buyer’s insolvency, specified in the subsection. But since stoppage is a burden in any case to carriers, and might be a very heavy burden to them if it covered all small shipments in all these situations, the right to stop for reasons other than insolvency is limited to carload, truckload, planeload or larger shipments. The seller shipping to a buyer of doubtful credit can protect himself by shipping C.O.D.

    Where stoppage occurs for insecurity it is merely a suspension of performance, and if assurances are duly forthcoming from the buyer the seller is not entitled to resell or divert.

    Improper stoppage is a breach by the seller if it effectively interferes with the buyer’s right to due tender under the section on manner of tender of delivery. However, if the bailee obeys an unjustified order to stop he may also be liable to the buyer. The measure of his obligation is dependent on the provisions of the Documents of Title Article (Section 7-303). Subsection (3)(b) therefore gives him a right of indemnity as against the seller in such a case.

  2. “Receipt by the buyer” includes receipt by the buyer’s designated representative, the sub-purchaser, when shipment is made direct to him and the buyer himself never receives the goods. It is entirely proper under this Article that the seller, by making such direct shipment to the sub-purchaser, be regarded as acquiescing in the latter’s purchase and as thus barred from stoppage of the goods as against him.

    As between the buyer and the seller, the latter’s right to stop the goods at any time until they reach the place of final delivery is recognized by this section.

    Under subsection (3)(c) and (d), the carrier is under no duty to recognize the stop order of a person who is a stranger to the carrier’s contract. But the seller’s right as against the buyer to stop delivery remains, whether or not the carrier is obligated to recognize the stop order. If the carrier does obey it, the buyer cannot complain merely because of that circumstance; and the seller becomes obligated under subsection (c)(ii) to pay the carrier any ensuing damages or charges.

  3. A diversion of a shipment is not a “reshipment” under subsection (2)(c) when it is merely an incident to the original contract of transportation. Nor is the procurement of “exchange bills” of lading which change only the name of the consignee to that of the buyer’s local agent but do not alter the destination of a reshipment.

    Acknowledgment by the carrier as a “warehouse” within the meaning of this Article requires a contract of a truly different character from the original shipment, a contract not in extension of transit but as a warehouse.

  4. Subsection (3)(c) makes the bailee’s obedience of a notification to stop conditional upon the surrender of possession or control of any outstanding negotiable document.
  5. Any charges or losses incurred by the carrier in following the seller’s orders, whether or not he was obligated to do so, fall to the seller’s charge.
  6. After an effective stoppage under this section the seller’s rights in the goods are the same as if he had never made a delivery.

Cross references:

Sections 2-702 and 2-703.

Point 1: Sections 2-503 and 2-609, and Article 7.

Point 2: Section 2-103 and Article 7.

Definitional cross references:

“Buyer”. Section 2-103. “Contract for sale”. Section 2-106. “Document of title”. Section 1-201. “Goods”. Section 2-105. “Insolvent”. Section 1-201. “Notification”. Section 1-201. “Receipt” of goods. Section 2-103. “Rights”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Right to Stop Delivery.

The delivery of merchandise to a carrier pursuant to an F.O.B. shipment contract does not terminate the seller’s right to stop that shipment, nor would such delivery start the running of the ten (10) day period by the end of which such seller must make a demand for reclamation. In re Maloney Enterprises, Inc., 37 B.R. 290, 1983 Bankr. LEXIS 4989 (Bankr. E.D. Ky. 1983 ).

2.Receipt of Goods by Buyer.

The “receipt” of goods by the purchaser is not effectuated until the purchaser actually takes physical possession of the goods. In re Maloney Enterprises, Inc., 37 B.R. 290, 1983 Bankr. LEXIS 4989 (Bankr. E.D. Ky. 1983 ).

355.2-706. Seller’s resale including contract for resale.

  1. Under the conditions stated in KRS 355.2-703 on seller’s remedies, the seller may resell the goods concerned or the undelivered balance thereof. Where the resale is made in good faith and in a commercially reasonable manner the seller may recover the difference between the resale price and the contract price together with any incidental damages allowed under the provisions of this article (KRS 355.2-710 ), but less expenses saved in consequence of the buyer’s breach.
  2. Except as otherwise provided in subsection (3) or unless otherwise agreed resale may be at public or private sale including sale by way of one (1) or more contracts to sell or of identification to an existing contract of the seller. Sale may be as a unit or in parcels and at any time and place and on any terms but every aspect of the sale including the method, manner, time, place and terms must be commercially reasonable. The resale must be reasonably identified as referring to the broken contract, but it is not necessary that the goods be in existence or that any or all of them have been identified to the contract before the breach.
  3. Where the resale is at private sale the seller must give the buyer reasonable notification of his intention to resell.
  4. Where the resale is at public sale
    1. only identified goods can be sold except where there is a recognized market for a public sale of futures in goods of the kind; and
    2. it must be made at a usual place or market for public sale if one is reasonably available and except in the case of goods which are perishable or threaten to decline in value speedily the seller must give the buyer reasonable notice of the time and place of the resale; and
    3. if the goods are not to be within the view of those attending the sale the notification of sale must state the place where the goods are located and provide for their reasonable inspection by prospective bidders; and
    4. the seller may buy.
  5. A purchaser who buys in good faith at a resale takes the goods free of any rights of the original buyer even though the seller fails to comply with one (1) or more of the requirements of this section.
  6. The seller is not accountable to the buyer for any profit made on any resale. A person in the position of a seller (KRS 355.2-707 ) or a buyer who has rightfully rejected or justifiably revoked acceptance must account for any excess over the amount of his security interest, as hereinafter defined (subsection (3) of KRS 355.2-711 ).

History. Enact. Acts 1958, ch. 77, § 2-706, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 60, Uniform Sales Act.

Changes:

Rewritten.

Purposes of changes:

To simplify the prior statutory provision and to make it clear that:

  1. The only condition precedent to the seller’s right of resale under subsection (1) is a breach by the buyer within the section on the seller’s remedies in general or insolvency. Other meticulous conditions and restrictions of the prior uniform statutory provision are disapproved by this Article and are replaced by standards of commercial reasonableness. Under this section the seller may resell the goods after any breach by the buyer. Thus, an anticipatory repudiation by the buyer gives rise to any of the seller’s remedies for breach, and to the right of resale. This principle is supplemented by subsection (2) which authorizes a resale of goods which are not in existence or were not identified to the contract before the breach.
  2. In order to recover the damages prescribed in subsection (1) the seller must act “in good faith and in a commercially reasonable manner” in making the resale. This standard is intended to be more comprehensive than that of “reasonable care and judgment” established by the prior uniform statutory provision. Failure to act properly under this section deprives the seller of the measure of damages here provided and relegates him to that provided in Section 2-708.

    Under this Article the seller resells by authority of law, in his own behalf, for his own benefit and for the purpose of fixing his damages. The theory of a seller’s agency is thus rejected.

  3. If the seller complies with the prescribed standard of duty in making the resale, he may recover from the buyer the damages provided for in subsection (1). Evidence of market or current prices at any particular time or place is relevant only on the question of whether the seller acted in a commercially reasonable manner in making the resale.

    The distinction drawn by some courts between cases where the title had not passed to the buyer and the seller had resold as owner, and cases where the title had passed and the seller had resold by virtue of his lien on the goods is rejected.

  4. Subsection (2) frees the remedy of resale from legalistic restrictions and enables the seller to resell in accordance with reasonable commercial practices so as to realize as high a price as possible in the circumstances. By “public” sale is meant a sale by auction. A “private” sale may be effected by solicitation and negotiation conducted either directly or through a broker. In choosing between a public and private sale the character of the goods must be considered and relevant trade practices and usages must be observed.
  5. Subsection (2) merely clarifies the common law rule that the time for resale is a reasonable time after the buyer’s breach, by using the language “commercially reasonable.” What is such a reasonable time depends upon the nature of the goods, the condition of the market and the other circumstances of the case; its length cannot be measured by any legal yardstick or divided into degrees. Where a seller contemplating resale receives a demand from the buyer for inspection under the section of preserving evidence of goods in dispute, the time for resale may be appropriately lengthened.

    On the question of the place for resale, subsection (2) goes to the ultimate test, the commercial reasonableness of the seller’s choice as to the place for an advantageous resale. This Article rejects the theory that the seller is required to resell at the agreed place for delivery and that a resale elsewhere can be permitted only in exceptional cases.

  6. The purpose of subsection (2) being to enable the seller to dispose of the goods to the best advantage, he is permitted in making the resale to depart from the terms and conditions of the original contract for sale to any extent “commercially reasonable” in the circumstances.
  7. The provision of subsection (2) that the goods need not be in existence to be resold applies when the buyer is guilty of anticipatory repudiation of a contract for future goods, before the goods or some of them have come into existence. In such a case the seller may exercise the right of resale and fix his damages by “one or more contracts to sell” the quantity of conforming future goods affected by the repudiation. The companion provision of subsection (2) that resale may be made although the goods were not identified to the contract prior to the buyer’s breach, likewise contemplates an anticipatory repudiation by the buyer but occurring after the goods are in existence. If the goods so identified conform to the contract, their resale will fix the seller’s damages quite as satisfactorily as if they had been identified before the breach.
  8. Where the resale is to be by private sale, subsection (3) requires that reasonable notification of the seller’s intention to resell must be given to the buyer. The length of notification or a private sale depends upon the urgency of the matter. Notification of the time and place of this type of sale is not required.

    Subsection (4)(b) requires that the seller give the buyer reasonable notice of the time and place of a public resale so that he may have an opportunity to bid or to secure the attendance of other bidders. An exception is made in the case of goods “which are perishable or threaten to decline speedily in value.”

  9. Since there would be no reasonable prospect of competitive bidding elsewhere, subsection (4) requires that a public resale “must be made at a usual place or market for public sale if one is reasonably available;” i.e., a place or market which prospective bidders may reasonably be expected to attend. Such a market may still be “reasonably available” under this subsection, though at a considerable distance from the place where the goods are located. In such a case the expense of transporting the goods for resale is recoverable from the buyer as part of the seller’s incidental damages under subsection (1). However, the question of availability is one of commercial reasonableness in the circumstances and if such “usual” place or market is not reasonably available, a duly advertised public resale may be held at another place if it is one which prospective bidders may reasonably be expected to attend, as distinguished from a place where there is no demand whatsoever for goods of the kind.

    Paragraph (a) of subsection (4) qualifies the last sentence of subsection (b) with respect to resales of unidentified and future goods at public sale. If conforming goods are in existence the seller may identify them to the contract after the buyer’s breach and then resell them at public sale. If the goods have not been identified, however, he may resell them at public sale only as “future” goods and only where there is a recognized market for public sale of futures in goods of the kind.

    The provisions of paragraph (c) of subsection (4) are intended to permit intelligent bidding.

    The provision of paragraph (d) of subsection (4) permitting the seller to bid and, of course, to become the purchaser, benefits the original buyer by tending to increase the resale price and thus decreasing the damages he will have to pay.

  10. This Article departs in subsection (5) from the prior uniform statutory provision in permitting a good faith purchaser at resale to take a good title as against the buyer even though the seller fails to comply with the requirements of this section.
  11. Under subsection (6), the seller retains profit, if any, without distinction based on whether or not he had a lien since this Article divorces the question of passage of title to the buyer from the seller’s right of resale or the consequences of its exercise. On the other hand, where “a person in the position of a seller” or a buyer acting under the section on buyer’s remedies, exercises his right of resale under the present section he does so only for the limited purpose of obtaining cash for his “security interest” in the goods. Once that purpose has been accomplished any excess in the resale price belongs to the seller to whom an accounting must be made as provided in the last sentence of subsection (6).

Cross references:

Point 1: Sections 2-610, 2-702 and 2-703.

Point 2: Section 1-201.

Point 3: Sections 2-708 and 2-710.

Point 4: Section 2-328.

Point 8: Section 2-104.

Point 9: Section 2-710.

Point 11: Sections 2-401, 2-707 and 2-711(3).

Definitional cross references:

“Buyer”. Section 2-103. “Contract”. Section 1-201. “Contract for sale”. Section 2-106. “Good faith”. Section 2-103. “Goods”. Section 2-105. “Merchant”. Section 2-104. “Notification”. Section 1-201. “Person in position of seller”. Section 2-707. “Purchase”. Section 1-201. “Rights”. Section 1-201. “Sale”. Section 2-106. “Security interest”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Notice.

Trial court did not err in finding that the tobacco dealer did not repudiate the contract to purchase tobacco from the insurer in a case where the tobacco dealer contracted to by the tobacco and could not remove it all at once, which led the insurer to resell the tobacco to a third-party; not only was there not unequivocal evidence of an intent to repudiate, but the resale was not accompanied by the required commercially reasonable notice to the tobacco dealer of an intent to resell. Upton v. Ginn, 231 S.W.3d 788, 2007 Ky. App. LEXIS 255 (Ky. Ct. App. 2007).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Failing, at Time and Place Agreed on, to Accept and Pay for Hogs, to be Paid for on Delivery, Form 190.10.

355.2-707. “Person in the position of a seller.”

  1. A “person in the position of a seller” includes as against a principal an agent who has paid or become responsible for the price of goods on behalf of his principal or anyone who otherwise holds a security interest or other right in goods similar to that of a seller.
  2. A person in the position of a seller may as provided in this article withhold or stop delivery (KRS 355.2-705 ) and resell (KRS 355.2-706 ) and recover incidental damages (KRS 355.2-710 ).

History. Enact. Acts 1958, ch. 77, § 2-707, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 52(2), Uniform Sales Act.

Changes:

Rewritten.

Purposes of changes:

To make it clear that:

In addition to following in general the prior uniform statutory provision, the case of a financing agency which has acquired documents by honoring a letter of credit for the buyer or by discounting a draft for the seller has been included in the term “a person in the position of a seller.”

Cross reference:

Article 5, Section 2-506.

Definitional cross references:

“Consignee”. Section 7-102. “Consignor”. Section 7-102. “Goods”. Section 2-105. “Security interest”. Section 1-201. “Seller”. Section 2-103.

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355.2-708. Seller’s damages for nonacceptance or repudiation.

  1. Subject to subsection (2) and to the provisions of this article with respect to proof of market price (KRS 355.2-723 ), the measure of damages for nonacceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this article (KRS 355.2-710 ), but less expenses saved in consequence of the buyer’s breach.
  2. If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this article (KRS 355.2-710 ), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.

History. Enact. Acts 1958, ch. 77, § 2-708, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 64, Uniform Sales Act.

Changes:

Rewritten.

Purposes of changes:

To make it clear that:

  1. The prior uniform statutory provision is followed generally in setting the current market price at the time and place for tender as the standard by which damages for non-acceptance are to be determined. The time and place of tender is determined by reference to the section on manner of tender of delivery, and to the sections on the effect of such terms as FOB, FAS, CIF, C & F, Ex Ship and No Arrival, No Sale.

    In the event that there is no evidence available of the current market price at the time and place of tender, proof of a substitute market may be made under the section on determination and proof of market price. Furthermore, the section on the admissibility of market quotations is intended to ease materially the problem of providing competent evidence.

  2. The provision of this section permitting recovery of expected profit including reasonable overhead where the standard measure of damages is inadequate, together with the new requirement that price actions may be sustained only where resale is impractical, are designed to eliminate the unfair and economically wasteful results arising under the older law when fixed price articles were involved. This section permits the recovery of lost profits in all appropriate cases, which would include all standard priced goods. The normal measure there would be list price less cost to the dealer or list price less manufacturing cost to the manufacturer. It is not necessary to a recovery of “profit” to show a history of earnings, especially if a new venture is involved.
  3. In all cases the seller may recover incidental damages.

Cross references:

Point 1: Sections 2-319 through 2-324, 2-503, 2-723 and 2-724.

Point 2: Section 2-709.

Point 3: Section 2-710.

Definitional cross references:

“Buyer”. Section 2-103. “Contract”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Acceptance.

Laws that provided for action for price and for action for damages for nonacceptance of goods had no application where contract never came into existence because offer was not accepted, although seller sent order to factory without his signature and without notifying offeror. (decided under prior law) Venters v. Stewart, 261 S.W.2d 444, 1953 Ky. LEXIS 1023 ( Ky. 1953 ).

2.Measure of Damages.

Where contract required ice company to supply ice as an express company directed and purchaser suddenly called upon seller to furnish immediately an unanticipated and extraordinary quantity, then failed to take it, the loss recoverable by the seller was to be measured by what the purchaser had agreed to pay for the ice and not by what the ice cost the seller. (decided under prior law) Fruit Growers Express Co. v. Citizens Ice & Fuel Co., 271 Ky. 330 , 112 S.W.2d 54, 1937 Ky. LEXIS 246 ( Ky. 1937 ).

Where a contract of sale provided that a seller was to deliver malt in equal monthly instalments and the buyer went into bankruptcy when only a part of the malt had been delivered, the seller was able to recover for the decline in price of the malt after stoppage when such stoppage was due to buyer’s failure to give shipping instruction. (decided under prior law) In re Independent Distillers of Kentucky, 34 F. Supp. 708, 1940 U.S. Dist. LEXIS 2634 (D. Ky. 1940 ).

The measure of damages in case of nonacceptance by the buyer was usually the difference between the contract price and the market price at the place of delivery. The seller was not entitled to recovery in an action for damages unless he alleged facts showing that the contract price was higher than the market price. (decided under prior law) Amber Milling Co. v. Kentucky Macaroni Co., 292 Ky. 831 , 168 S.W.2d 34, 1942 Ky. LEXIS 155 ( Ky. 1942 ).

3.Liquidated Damages.

Where contract of sale required seller to give 14 days’ notice of intention to terminate contract in case of default of buyer, whereupon liquidated damages specified in the contract would become payable, seller could not recover where he failed to give such notice, even though buyer had notified seller that he would not perform the contract. (decided under prior law) Amber Milling Co. v. Kentucky Macaroni Co., 292 Ky. 831 , 168 S.W.2d 34, 1942 Ky. LEXIS 155 ( Ky. 1942 ).

Cited:

Louisville v. Rockwell Mfg. Co., 482 F.2d 159, 1973 U.S. App. LEXIS 9143 (6th Cir. 1973).

355.2-709. Action for the price.

  1. When the buyer fails to pay the price as it becomes due the seller may recover, together with any incidental damages under KRS 355.2-710 , the price
    1. of goods accepted or of conforming goods lost or damaged within a commercially reasonable time after risk of their loss has passed to the buyer; and
    2. of goods identified to the contract if the seller is unable after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing.
  2. Where the seller sues for the price he must hold for the buyer any goods which have been identified to the contract and are still in his control except that if resale becomes possible he may resell them at any time prior to the collection of the judgment. The net proceeds of any such resale must be credited to the buyer and payment of the judgment entitles him to any goods not resold.
  3. After the buyer has wrongfully rejected or revoked acceptance of the goods or has failed to make a payment due or has repudiated (KRS 355.2-610 ), a seller who is held not entitled to the price under this section shall nevertheless be awarded damages for nonacceptance under the preceding section.

History. Enact. Acts 1958, ch. 77, § 2-709, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 63, Uniform Sales Act.

Changes:

Rewritten, important commercially needed changes being incorporated.

Purposes of changes:

To make it clear that:

  1. Neither the passing of title to the goods nor the appointment of a day certain for payment is now material to a price action.
  2. The action for the price is now generally limited to those cases where resale of the goods is impracticable except where the buyer has accepted the goods or where they have been destroyed after risk of loss has passed to the buyer.
  3. This section substitutes an objective test by action for the former “not readily resalable” standard. An action for the price under subsection (1)(b) can be sustained only after a “reasonable effort to resell” the goods “at reasonable price” has actually been made or where the circumstances “reasonably indicate” that such an effort will be unavailing.
  4. If a buyer is in default not with respect to the price, but on an obligation to make an advance, the seller should recover not under this section for the price as such, but for the default in the collateral (though coincident) obligation to finance the seller. If the agreement between the parties contemplates that the buyer will acquire, on making the advance, a security interest in the goods, the buyer on making the advance has such an interest as soon as the seller has rights in the agreed collateral. See Section 9-204.
  5. “Goods accepted” by the buyer under subsection (1)(a) include only goods as to which there has been no justified revocation of acceptance, for such a revocation means that there has been a default by the seller which bars his rights under this section. “Goods lost or damaged” are covered by the section on risk of loss. “Goods identified to the contract” under subsection (1)(b) are covered by the section on identification and the section on identification notwithstanding breach.
  6. This section is intended to be exhaustive in its enumeration of cases where an action for the price lies.
  7. If the action for the price fails, the seller may nonetheless have proved a case entitling him to damages for non-acceptance. In such a situation, subsection (3) permits a recovery of those damages in the same action.

Cross references:

Point 4: Section 1-106.

Point 5: Section 2-501, 2-509, 2-510 and 2-704.

Point 7: Section 2-708.

Definitional cross references:

“Action”. Section 1-201. “Buyer”. Section 2-103. “Conforming”. Section 2-106. “Contract”. Section 1-201. “Goods”. Section 2-105. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Compliance with Contract.

Action by seller to recover purchase price was decided in his favor on basis of buyer’s failure to comply with provision of the written sales contract requiring him, in the event of a breach of warranty, to return the threshing machine immediately to the place where received where buyer had neither returned nor tendered a return of the machine until after he had been sued for the unpaid balance of the purchase price. (decided under prior law) Frick Co. v. Wiley, 290 Ky. 665 , 162 S.W.2d 190, 1942 Ky. LEXIS 458 ( Ky. 1942 ).

2.Acceptance.

Where X, through error, shipped merchandise to Y without any previous agreement, and Y retained and assumed control over it, including the resale of a large portion, X was able to maintain an action for the price of such merchandise. (decided under prior law) Louisville Tin & Stove Co. v. Lay, 251 Ky. 584 , 65 S.W.2d 1002, 1933 Ky. LEXIS 948 ( Ky. 1933 ).

Cited:

Louisville v. Rockwell Mfg. Co., 482 F.2d 159, 1973 U.S. App. LEXIS 9143 (6th Cir. 1973); In re Wathen’s Elevators, Inc., 32 B.R. 912, 1983 Bankr. LEXIS 5427 (Bankr. W.D. Ky. 1983 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint by Seller to Recover Value of Goods Sold and Delivered at a Fixed Price, Form 190.06.

Caldwell’s Kentucky Form Book, 5th Ed., Kentucky Rules of Civil Procedure — Official Form 4 — Complaint for Goods Sold and Delivered, Form 210.05.

355.2-710. Seller’s incidental damages.

Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer’s breach, in connection with return or resale of the goods or otherwise resulting from the breach.

History. Enact. Acts 1958, ch. 77, § 2-710, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

See Sections 64 and 70, Uniform Sales Act.

Purposes:

To authorize reimbursement of the seller for expenses reasonably incurred by him as a result of the buyer’s breach. The section sets forth the principal normal and necessary additional elements of damage flowing from the breach but intends to allow all commercially reasonable expenditures made by the seller.

Definitional cross references:

“Aggrieved party”. Section 1-201. “Buyer”. Section 2-103. “Goods”. Section 2-105. “Seller”. Section 2-103.

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Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint by Seller to Recover Price, Form 190.03.

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Failing, at Time and Place Agreed on, to Accept and Pay for Hogs, to be Paid for on Delivery, Form 190.10.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Sales, § 190.00.

355.2-711. Buyer’s remedies in general — Buyer’s security interest in rejected goods.

  1. Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract (KRS 355.2-612 ), the buyer may cancel and whether or not he has done so may in addition to recovering so much of the price as has been paid
    1. “cover” and have damages under KRS 355.2-712 as to all the goods affected whether or not they have been identified to the contract; or
    2. recover damages for nondelivery as provided in this article (KRS 355.2-713 ).
  2. Where the seller fails to deliver or repudiates the buyer may also
    1. if the goods have been identified recover them as provided in this article (KRS 355.2-502 ); or
    2. in a proper case obtain specific performance or replevy the goods as provided in this article (KRS 355.2-716 ).
  3. On rightful rejection or justifiable revocation of acceptance a buyer has a security interest in goods in his possession or control for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, transportation, care and custody and may hold such goods and resell them in like manner as an aggrieved seller (KRS 355.2-706 ).

History. Enact. Acts 1958, ch. 77, § 2-711, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

No comparable index section; Subsection (3)—Section 69(5), Uniform Sales Act.

Changes:

The prior uniform statutory provision is generally continued and expanded in Subsection (3).

Purposes of changes and new matter:

  1. To index in this section the buyer’s remedies, subsection (1) covering those remedies permitting the recovery of money damages, and subsection (2) covering those which permit reaching the goods themselves. The remedies listed here are those available to a buyer who has not accepted the goods or who has justifiably revoked his acceptance. The remedies available to a buyer with regard to goods finally accepted appear in the section dealing with breach in regard to accepted goods. The buyer’s right to proceed as to all goods when the breach is as to only some of the goods is determined by the section on breach in installment contracts and by the section on partial acceptance.

    Despite the seller’s breach, proper retender of delivery under the section on cure of improper tender or replacement can effectively preclude the buyer’s remedies under this section, except for any delay involved.

  2. To make it clear in subsection (3) that the buyer may hold and resell rejected goods if he has paid a part of the price or incurred expenses of the type specified. “Paid” as used here includes acceptance of a draft or other time negotiable instrument or the signing of a negotiable note. His freedom of resale is coextensive with that of a seller under this Article except that the buyer may not keep any profit resulting from the resale and is limited to retaining only the amount of the price paid and the costs involved in the inspection and handling of the goods. The buyer’s security interest in the goods is intended to be limited to the items listed in subsection (c), and the buyer is not permitted to retain such funds as he might believe adequate for his damages. The buyer’s right to cover or to have damages for non-delivery, is not impaired by his exercise of his right of resale.
  3. It should also be noted that this Act requires its remedies to be liberally administered and provides that any right or obligation which it declares is enforceable by action unless a different effect is specifically prescribed (Section 1-106).

Cross references:

Point 1: Sections 2-508, 2-601(c), 2-608, 2-612 and 2-714.

Point 2: Section 2-706.

Point 3: Section 1-106.

Definitional cross references:

“Aggrieved party”. Section 1-201. “Buyer”. Section 2-103. “Cancellation”. Section 2-106. “Contract”. Section 1-201. “Cover”. Section 2-712. “Goods”. Section 2-105. “Notifies”. Section 1-201. “Receipt” of goods. Section 2-103. “Remedy”. Section 1-201. “Security interest”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Failure to Deliver.

Where there was no showing of a “course of performance” between parties, who had an ongoing seller-buyer relationship, under which the seller withheld delivery of acknowledged orders when the buyer was in arrears on earlier orders, seller had no legal right to withhold delivery of orders, which it accepted without conditions and subject to future payment, for the reason that buyer had an unpaid account for earlier orders. In re H.J. Scheirich Co., 982 F.2d 945, 1993 U.S. App. LEXIS 31 (6th Cir. Ky. 1993 ).

2.Rescission.

Buyer must on rescission make tender of goods and keep the tender current. (decided under prior law) Automatic Equipment Co. v. Mohney, 295 Ky. 451 , 174 S.W.2d 716, 1943 Ky. LEXIS 263 ( Ky. 1943 ).

Where buyer had tendered return of refrigeration box and seller had refused it, its continued presence in buyer’s possession obliged him to care for it, thus tending to generate damages that at the same time he was under duty to mitigate, and buyer’s attempt to sell the box during pending litigation did not waive buyer’s right of rescission. (decided under prior law) Chaplin v. Bessire & Co., 361 S.W.2d 293, 1962 Ky. LEXIS 241 ( Ky. 1962 ).

3.Measure of Damages on Rescission.

Where contract provided that seller was to install product and remove it if unsatisfactory and that contract covered entire agreement, the seller, by removing the product at buyer’s request, had complied with all his obligations under the contract and was not liable under implied warranty for damage to installations to which the product was temporarily connected. (decided under prior law) Graves Ice Cream Co. v. Rudolph W. Wurlitzer Co., 267 Ky. 1 , 100 S.W.2d 819, 1937 Ky. LEXIS 265 ( Ky. 1 937 ).

Where walk-in refrigeration box was an addition to the capacity of plant and not a replacement for facilities theretofore in existence, when it was shut down, buyer was left in same position he occupied before its acquisition, and the continued occupancy of space was not a measure of damage, since justification for allowance of special damages in a rescission case is to restore aggrieved party to status quo. (decided under prior law) Chaplin v. Bessire & Co., 361 S.W.2d 293, 1962 Ky. LEXIS 241 ( Ky. 1962 ).

Cited:

Ford Motor Co. v. Mayes, 575 S.W.2d 480, 1978 Ky. App. LEXIS 649 (Ky. Ct. App. 1978).

Research References and Practice Aids

Northern Kentucky Law Review.

Notes, U.C.C. — Consumer Protection Act — Limited Warranties — Automobile Manufac- turer’s Refusal to Recognize Buyers’ Rights Under the U.C.C. When a Limited Warranty Fails of Its Essential Purpose Constitutes an Unfair Trade Practice Under the Consumer Protection Act,6 N. Ky. L. Rev. 403 (1979).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint by Purchaser to Recover Purchase Money Paid, and Damages for Fraud, With Averment of Request to Cancel the Contract, Form 190.13.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Sales, § 190.00.

355.2-712. “Cover” — Buyer’s procurement of substitute goods.

  1. After a breach within KRS 355.2-711 the buyer may “cover” by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.
  2. The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages as hereinafter defined (KRS 355.2-715 ), but less expenses saved in consequence of the seller’s breach.
  3. Failure of the buyer to effect cover within this section does not bar him from any other remedy.

History. Enact. Acts 1958, ch. 77, § 2-712, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

  1. This section provides the buyer with a remedy aimed at enabling him to obtain the goods he needs thus meeting his essential need. This remedy is the buyer’s equivalent of the seller’s right to resell.
  2. The definition of “cover” under subsection (1) envisages a series of contracts or sales, as well as a single contract or sale; goods not identical with those involved but commercially usable as reasonable substitutes under the circumstances of the particular case; and contracts on credit or delivery terms differing from the contract in breach, but again reasonable under the circumstances. The test of proper cover is whether at the time and place the buyer acted in good faith and in a reasonable manner, and it is immaterial that hindsight may later prove that the method of cover used was not the cheapest or most effective.

    The requirement that the buyer must cover “without unreasonable delay” is not intended to limit the time necessary for him to look around and decide as to how he may best effect cover. The test here is similar to that generally used in this Article as to reasonable time and seasonable action.

  3. Subsection (3) expresses the policy that cover is not a mandatory remedy for the buyer. The buyer is always free to choose between cover and damages for non-delivery under the next section.

    However, this subsection must be read in conjunction with the section which limits the recovery of consequential damages to such as could not have been obviated by cover. Moreover, the operation of the section on specific performance of contracts for “unique” goods must be considered in this connection for availability of the goods to the particular buyer for his particular needs is the test for that remedy and inability to cover is made an express condition to the right of the buyer to replevy the goods.

  4. This section does not limit cover to merchants, in the first instance. It is the vital and important remedy for the consumer buyer as well. Both are free to use cover: the domestic or non-merchant consumer is required only to act in normal good faith while the merchant buyer must also observe all reasonable commercial standards of fair dealing in the trade, since this falls within the definition of good faith on his part.

Cross references:

Point 1: Section 2-706.

Point 2: Section 1-204.

Point 3: Sections 2-713, 2-715 and 2-716.

Point 4: Section 1-203.

Definitional cross references:

“Buyer”. Section 2-103. “Contract”. Section 1-201. “Good faith”. Section 2-103. “Goods”. Section 2-105. “Purchase”. Section 1-201. “Remedy”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Right to Cover.

Nothing in this section or any other part of the Uniform Commercial Code requires the innocent nonbreaching buyer and its customers to absorb the cost of the seller’s breach of contract; the only restriction on the buyer’s right to invoke the cover remedy requires it to make a reasonable purchase of substitute goods “in good faith and without unreasonable delay.” Consolidated Aluminum Corp. v. Krieger, 710 S.W.2d 869, 1986 Ky. App. LEXIS 1120 (Ky. Ct. App. 1986).

Where a subcontractor did not perform as agreed in the specifications of the contract, the contractor was entitled to the costs of “cover,” which included the reasonable cost difference of having the work performed by a substitute when the contractor acted reasonably and in a timely manner in obtaining the substitute; costs incurred by the substitute for items or services that were not a part of the original contract were excluded. Siemens Bldg. Techs., Inc. v. BTS, Inc., 2002 U.S. Dist. LEXIS 26314 (W.D. Ky. Sept. 11, 2002).

2.Consequential Damages.

Where the terms and conditions of sale, which contained an express exclusion of consequential damages, appeared on the reverse side of the seller’s acknowledgment form below the signature line, and the language on the face of the contract incorporating those terms and conditions by reference also appeared below the signature line, those terms, conditions, and the incorporating language were not part of the contract between the buyer and the seller; therefore, the lower court did not err in awarding the buyer consequential damages under subsection (2) of this section and KRS 355.2-715 . Consolidated Aluminum Corp. v. Krieger, 710 S.W.2d 869, 1986 Ky. App. LEXIS 1120 (Ky. Ct. App. 1986).

Cited:

Wahba v. Don Corlett Motors, Inc., 573 S.W.2d 357, 1978 Ky. App. LEXIS 608 (Ky. Ct. App. 1978); Ford Motor Co. v. Mayes, 575 S.W.2d 480, 1978 Ky. App. LEXIS 649 (Ky. Ct. App. 1978).

355.2-713. Buyer’s damages for nondelivery or repudiation.

  1. Subject to the provisions of this article with respect to proof of market price (KRS 355.2-723 ), the measure of damages for nondelivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this article (KRS 355.2-715 ), but less expenses saved in consequence of the seller’s breach.
  2. Market price is to be determined as of the place for tender or, in cases of rejection after arrival or revocation of acceptance, as of the place of arrival.

History. Enact. Acts 1958, ch. 77, § 2-713, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 67(3), Uniform Sales Act.

Changes:

Rewritten.

Purposes of changes:

To clarify the former rule so that:

  1. The general baseline adopted in this section uses as a yardstick the market in which the buyer would have obtained cover had he sought that relief. So the place for measuring damages is the place of tender (or the place of arrival if the goods are rejected or their acceptance is revoked after reaching their destination) and the crucial time is the time at which the buyer learns of the breach.
  2. The market or current price to be used in comparison with the contract price under this section is the price for goods of the same kind and in the same branch of trade.
  3. When the current market price under this section is difficult to prove the section on determination and proof of market price is available to permit a showing of a comparable market price or, where no market price is available, evidence of spot sale prices is proper. Where the unavailability of a market price is caused by a scarcity of goods of the type involved, a good case is normally made for specific performance under this Article. Such scarcity conditions, moreover, indicate that the price has risen and under the section providing for liberal administration of remedies, opinion evidence as to the value of the goods would be admissible in the absence of a market price and a liberal construction of allowable consequential damages should also result.
  4. This section carries forward the standard rule that the buyer must deduct from his damages any expenses saved as a result of the breach.
  5. The present section provides a remedy which is completely alternative to cover under the preceding section and applies only when and to the extent that the buyer has not covered.

Cross references:

Point 3: Sections 1-106, 2-716 and 2-723.

Point 5: Section 2-712.

Definitional cross references:

“Buyer”. Section 2-103. “Contract”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

Cited:

Ford Motor Co. v. Mayes, 575 S.W.2d 480, 1978 Ky. App. LEXIS 649 (Ky. Ct. App. 1978).

Research References and Practice Aids

Northern Kentucky Law Review.

Notes, U.C.C. — Consumer Protection Act — Limited Warranties — Automobile Manufac- turer’s Refusal to Recognize Buyers’ Rights Under the U.C.C. When a Limited Warranty Fails of Its Essential Purpose Constitutes an Unfair Trade Practice Under the Consumer Protection Act,6 N. Ky. L. Rev. 403 (1979).

355.2-714. Buyer’s damages for breach in regard to accepted goods.

  1. Where the buyer has accepted goods and given notification (subsection (3) of KRS 355.2-607 ) he may recover as damages for any nonconformity of tender the loss resulting in the ordinary course of events from the seller’s breach as determined in any manner which is reasonable.
  2. The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.
  3. In a proper case any incidental and consequential damages under KRS 355.2-715 may also be recovered.

History. Enact. Acts 1958, ch. 77, § 2-714, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

Section 69(6) and (7), Uniform Sales Act.

Changes:

Rewritten.

Purposes of changes:

  1. This section deals with the remedies available to the buyer after the goods have been accepted and the time for revocation of acceptance has gone by. In general this section adopts the rule of the prior uniform statutory provision for measuring damages where there has been a breach of warranty as to goods accepted but goes further to lay down an explicit provision as to the time and place for determining the loss.

    The section on deduction of damages from price provides an additional remedy for a buyer who still owes part of the purchase price, and frequently the two remedies will be available concurrently. The buyer’s failure to notify of his claim under the section on effects of acceptance, however, operates to bar his remedies under either that section or the present section.

  2. The “non-conformity” referred to in subsection (1) includes not only breaches of warranties but also any failure of the seller to perform according to his obligations under the contract. In the case of such non-conformity, the buyer is permitted to recover for his loss “in any manner which is reasonable.”
  3. Subsection (2) describes the usual, standard and reasonable method of ascertaining damages in the case of breach of warranty but it is not intended as an exclusive measure. It departs from the measure of damages for non-delivery in utilizing the place of acceptance rather than the place of tender. In some cases the two may coincide as where the buyer signifies his acceptance upon the tender. If, however, the non-conformity is such as would justify revocation of acceptance, the time and place of acceptance under this section is determined as of the buyer’s decision not to revoke.
  4. The incidental and consequential damages referred to in subsection (3), which will usually accompany an action brought under this section, are discussed in detail in the comment on the next section.

Cross references:

Point 1: Compare Section 2-711; Sections 2-607 and 2-717.

Point 2: Section 2-106.

Point 3: Sections 2-608 and 2-713.

Point 4: Section 2-715.

Definitional cross references:

“Buyer”. Section 2-103. “Conform”. Section 2-106. “Goods”. Section 1-201. “Notification”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Measure of Damages.

Where one innocently purchased a stolen car which the purchaser was required to deliver up to the true owner, the purchaser was allowed to recover purchase value of the car from the seller or the cash payment plus a redelivery of the “trade-in” car, if the seller was able to redeliver the latter. (decided under prior law) Sego v. Lynch, 233 Ky. 176 , 25 S.W.2d 353, 1929 Ky. LEXIS 462 ( Ky. 1929 ).

The measure of damages for breach of warranty as to the quality of an automobile was the difference between the reasonable market value of the car received and the market value of the car as warranted, and not the difference between the market value of the car received and the price which the buyer paid. (decided under prior law) Ferguson v. James D. Waddle Motor Co., 236 Ky. 235 , 32 S.W.2d 1001, 1930 Ky. LEXIS 723 ( Ky. 1930 ).

The measure of damages for buyer’s breach of sale contract was difference between contract price and market price at place of delivery. (decided under prior law) Hawkins v. Midland Flour Milling Co., 236 Ky. 803 , 34 S.W.2d 439, 1930 Ky. LEXIS 843 ( Ky. 1930 ).

Where a seller contracted to deliver a minimum of 500 tons of crushed rock per day for a certain period to be used by purchaser in laying a roadbed but actually delivered an average of only 352 tons per day, thus delaying purchaser in building the road, and there was suit for the damage caused by such inadequate delivery, the court properly instructed the jury that the recovery would be a sum as would represent the difference between what it would cost if the rock company had delivered not less than the contract amount of rock per day. (decided under prior law) Olive Hill Limestone Co. v. Gay-Coleman Const. Co., 244 Ky. 822 , 51 S.W.2d 465, 1932 Ky. LEXIS 459 ( Ky. 1932 ).

Where breach of warranty in a contract for the sale of a refrigerating meat counter was based on the fact that gases escaped from the system, damages could not be recovered for loss of customers and ruination of business due to the sale of tainted, odoriferous meat, such being a too remote consequence. (decided under prior law) Henry Porter & Co. v. Lacy, 268 Ky. 666 , 105 S.W.2d 818, 1937 Ky. LEXIS 514 ( Ky. 1937 ).

Where seller represented that the automobile sold was a new one whereas it had, without the seller’s knowledge, been driven by another about 2,000 miles and was a “secondhand” car, purchaser was allowed to recover the value of a new car minus the value of the car purchased. Scienter need not be proven in an action for breach of warranty. (decided under prior law) Steuerle v. National Bond & Inv. Co., 272 Ky. 728 , 115 S.W.2d 283, 1938 Ky. LEXIS 188 ( Ky. 1938 ).

In action by purchaser of refrigerating equipment for damages for breach of warranty, the measure of damages was the difference between value of equipment at time of delivery to purchaser and value it would have had if it had answered to the warranty, and purchaser was entitled to recover for lost business by reason of improper refrigeration due to breach. (decided under prior law) Rudolph Wurlitzer Co. v. Kaufman-Straus Co., 273 Ky. 149 , 116 S.W.2d 305, 1938 Ky. LEXIS 613 ( Ky. 1938 ).

In action for breach of warranty of furnace, buyer could not recover for smoke damage caused by defective flue in house nor for cost of engineer’s plans showing necessary furnace capacity and radiation requirements, but could recover for trips made in effort to effect repair of furnace. (decided under prior law) Plumbers Supply Co. v. Lanter, 280 Ky. 523 , 133 S.W.2d 739, 1939 Ky. LEXIS 159 ( Ky. 1939 ).

The correct measure of damages for breach of warranty of a furnace was the difference between the fair value thereof as it was at the time of installation and as it would have been if it had come up to the warranty, together with any special damage sustained in its proper installation and in efforts to repair and restore it. (decided under prior law) Plumbers Supply Co. v. Lanter, 280 Ky. 523 , 133 S.W.2d 739, 1939 Ky. LEXIS 159 ( Ky. 1939 ).

The measure of damages to innocent buyer for breach of warranty of title of stolen automobile was loss of purchase price, financing charges, usage tax and reasonable amount spent by him for repairs and accessories which he could not recover from true owner when automobile was repossessed. (decided under prior law) Riggs Motor Co. v. Archer, 240 S.W.2d 75, 1951 Ky. LEXIS 948 ( Ky. 1951 ).

The measure of damage for breach of warranty was the loss directly and naturally resulting in the ordinary course of events from the breach and, in the case of breach of warranty of quality, the loss in absence of special circumstances showing proximate damage of greater amount was the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered the warranty. (decided under prior law) Sears, Roebuck & Co. v. Lea, 198 F.2d 1012, 1952 U.S. App. LEXIS 3274 (6th Cir. Ky. 1952 ).

Instruction setting measure of damages as the difference in the value of refrigerator as installed and the value it would have had had it been sound in construction plus value of food lost incident to the malfunctions of refrigerator was proper in breach of warranty of merchantability case. Belcher v. Hamilton, 475 S.W.2d 483, 1971 Ky. LEXIS 71 ( Ky. 1971 ).

Where purchaser of two (2) defective coal trucks did not revoke acceptance or reject the trucks because of their nonconformity, but merely parked the trucks, ceased payment and waited for them to be repaired, his measure of damages was the difference at the time and place of acceptance between the value of the trucks as accepted and the value they would have had if they had been as warranted. Galigher Trucks, Inc. v. McKenzie, 553 S.W.2d 294, 1977 Ky. App. LEXIS 741 (Ky. Ct. App. 1977).

Federal district court erred in its determination of damages under KRS 355.2-714 because the court used the current value of the engine the purchaser received instead of the value at the time and place of acceptance. Dillon v. Cobra Power Corp., 560 F.3d 591, 2009 FED App. 0121P, 2009 U.S. App. LEXIS 6961 (6th Cir. Ky. 2009 ).

2.Substantial Evidence.

In action by quadriplegic against Department of Education and foreign corporation for breach of express and implied warranties contained in contract for modification of quadriplegic’s van, an award of $10,200 damages was supported by the evidence where measure of damages was the difference in value of the van to the quadriplegic after it was modified as compared to its value before modification ($10,200), where quadriplegic introduced testimony that van had no value after modification and there was no direct testimony of Department as to the value of the van after modification. Commonwealth Dep't of Education v. Gravitt, 673 S.W.2d 428, 1984 Ky. App. LEXIS 476 (Ky. Ct. App. 1984).

3.Requirement that Goods Be Accepted and Paid for.

Jury’s verdict awarding a buyer damages for breach of warranty but denying the seller’s claim for the purchase price of the goods was inconsistent, as a buyer who accepts nonconforming goods, although entitled to breach of warranty damages, is responsible for payment of the contract price under KRS 355.2-607 . Thomas & Betts Corp. v. A & A Mech., Inc., 2004 Ky. App. LEXIS 339 (Ky. Ct. App. Nov. 24, 2004, sub. op., 2004 Ky. App. Unpub. LEXIS 996 (Ky. Ct. App. Nov. 24, 2004), review denied, ordered not published, 2005 Ky. LEXIS 269 (Ky. Sept. 14, 2005).

4.Notice.

After breach of contract, buyer was required to give reasonable notice. (decided under prior law) Sears, Roebuck & Co. v. Lea, 198 F.2d 1012, 1952 U.S. App. LEXIS 3274 (6th Cir. Ky. 1952 ).

5.Damages on Counterclaim.

Where, in suit for balance of purchase price due, the purchaser counterclaimed for breach of warranty, the instructions of the court as to the measure of recovery on such counterclaim should have contained the words, or at least the import, of breach of warranty. (decided under prior law) Black Motor Co. v. Foure, 266 Ky. 431 , 99 S.W.2d 177, 1936 Ky. LEXIS 671 ( Ky. 1936 ).

Where, as a counterclaim to a suit for the purchase price, a purchaser alleged breach of warranty either as to improper installation or materials, it was essential that the purchaser show that the equipment was properly maintained and operated by him. (decided under prior law) Henry Porter & Co. v. Lacy, 268 Ky. 666 , 105 S.W.2d 818, 1937 Ky. LEXIS 514 ( Ky. 1937 ).

6.Special Damages.

Where there was breach of warranty, the purchaser was able to defeat recovery on notes given as partial payment of the purchase price, secure the cancellation of such notes, recover the cash that had been given as partial payment of the price, and recover damages for special injury suffered from the breach. (decided under prior law) Day Pulverizer Co. v. Rutledge, 238 Ky. 817 , 38 S.W.2d 949, 1931 Ky. LEXIS 316 ( Ky. 1931 ).

Failure to instruct as to special damages was not error when there was no allegation asking for such special damages. (decided under prior law) Balfour-Guthrie & Co. v. L. S. Du Bois Son & Co., 245 Ky. 640 , 54 S.W.2d 13, 1932 Ky. LEXIS 648 ( Ky. 1932 ).

Special damages which were pleaded and proven could be recovered in breach of warranty action. (decided under prior law) Coyle v. Hall, 309 Ky. 829 , 219 S.W.2d 48, 1949 Ky. LEXIS 823 ( Ky. 1949 ).

7.Jury Instructions.

Jury instructions as to the measure of damages should have followed the law. (decided under prior law) Greene v. Hyden, 273 Ky. 783 , 117 S.W.2d 985, 1938 Ky. LEXIS 718 ( Ky. 1938 ).

Where plaintiff and defendant agreed to exchange boilers and engines and defendant agreed to pay a difference in the sum of $150 and put a new boiler extension on the boiler he was exchanging to put it in good running condition and, after the exchange, plaintiff brought action claiming the boiler had not been put in good condition but was dangerous and worthless and sought to recover between the fair market value of the engine she exchanged and the sum defendant had paid her in exchange, instruction that authorized jury to find for plaintiff in such sum as they believed was the difference in the price of the boiler and engine she exchanged and the one she received, not to exceed $350, if the jury believed defendant properly failed to repair the engine and put it in good running condition, was erroneous in that it did not fix the measure of damages substantially. (decided under prior law) Greene v. Hyden, 273 Ky. 783 , 117 S.W.2d 985, 1938 Ky. LEXIS 718 ( Ky. 1938 ).

8.Implied Warranty.

Buyer of truck who kept and used it for six months, during which time various defects were discovered and numerous repairs were required, could not recover damages for breach of implied warranty that truck would perform work for which it was purchased, where he had made no offer to rescind contract and no request that seller make good its express warranty to replace defective parts. (decided under prior law) James v. International Harvester Co., 294 Ky. 722 , 172 S.W.2d 670, 1943 Ky. LEXIS 548 ( Ky. 1943 ).

9.Express Warranty.

Fact issues as to damages precluded summary judgment on a claim for breach of express warranty; there was sufficient evidence of damages because any uncertainty did not run to the existence of damages flowing from defective goods, but rather to the existence of lost profits, a question on which the parties had provided conflicting proof. Smart & Assocs., LLC v. Indep. Liquor (NZ) Ltd., 226 F. Supp. 3d 828, 2016 U.S. Dist. LEXIS 180159 (W.D. Ky. 2016 ).

Cited:

Overstreet v. Norden Laboratories, Inc., 669 F.2d 1286, 1982 U.S. App. LEXIS 22121 (6th Cir. 1982); Ford Motor Co. v. Mayes, 575 S.W.2d 480, 1978 Ky. App. LEXIS 649 (Ky. Ct. App. 1978).

Research References and Practice Aids

Kentucky Bench & Bar.

An Overview of the Magnuson-Moss Warranty Act, Vol. 55, No. 3, Summer 1991, Ky. Bench & Bar 18.

Kentucky Law Journal.

Brickey, Products Liability in Kentucky: The Doctrinal Dilemma, 65 Ky. L.J. 593 (1976-77).

Kentucky Law Survey, Weinberg, Commercial Law and Consumer Credit, 65 Ky. L.J. 370 (1976-77).

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Northern Kentucky Law Review.

Notes, Torts — Products Liability — Should Contract or Tort Provide the Cause of Action When a Plaintiff Seeks Recovery Only for Damage to the Defective Product Itself — C & S Fuel, Inc. v. Clark Equip. Co.,10 N. Ky. L. Rev. 489 (1983).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Products Liability, § 137.00.

355.2-715. Buyer’s incidental and consequential damages.

  1. Incidental damages resulting from the seller’s breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.
  2. Consequential damages resulting from the seller’s breach include
    1. any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and
    2. injury to person or property proximately resulting from any breach of warranty.

History. Enact. Acts 1958, ch. 77, § 2-715, effective July 1, 1960.

Official Comment

Prior uniform statutory provisions:

Subsection (2)(b)—Sections 69(7) and 70, Uniform Sales Act.

Changes:

Rewritten.

Purposes of changes and new matter:

  1. Subsection (1) is intended to provide reimbursement for the buyer who incurs reasonable expenses in connection with the handling of rightfully rejected goods or goods whose acceptance may be justifiably revoked, or in connection with effecting cover where the breach of the contract lies in non-conformity or non-delivery of the goods. The incidental damages listed are not intended to be exhaustive but are merely illustrative of the typical kinds of incidental damage.
  2. Subsection (2) operates to allow the buyer, in an appropriate case, any consequential damages which are the result of the seller’s breach. The “tacit agreement” test for the recovery of consequential damages is rejected. Although the older rule at common law which made the seller liable for all consequential damages of which he had “reason to know” in advance is followed, the liberality of that rule is modified by refusing to permit recovery unless the buyer could not reasonably have prevented the loss by cover or otherwise. Subparagraph (2) carries forward the provisions of the prior uniform statutory provision as to consequential damages resulting from breach of warranty, but modifies the rule by requiring first that the buyer attempt to minimize his damages in good faith, either by cover or otherwise.
  3. In the absence of excuse under the section on merchant’s excuse by failure of presupposed conditions, the seller is liable for consequential damages in all cases where he had reason to know of the buyer’s general or particular requirements at the time of contracting. It is not necessary that there be a conscious acceptance of an insurer’s liability on the seller’s part, nor is his obligation for consequential damages limited to cases in which he fails to use due effort in good faith.

    Particular needs of the buyer must generally be made known to the seller while general needs must rarely be made known to charge the seller with knowledge.

    Any seller who does not wish to take the risk of consequential damages has available the section on contractual limitation of remedy.

  4. The burden of proving the extent of loss incurred by way of consequential damage is on the buyer, but the section on liberal administration of remedies rejects any doctrine of certainty which requires almost mathematical precision in the proof of loss. Loss may be determined in any manner which is reasonable under the circumstances.
  5. Subsection (2)(b) states the usual rule as to breach of warranty, allowing recovery for injuries “proximately” resulting from the breach. Where the injury involved follows the use of goods without discovery of the defect causing the damage, the question of “proximate” cause turns on whether it was reasonable for the buyer to use the goods without such inspection as would have revealed the defects. If it was not reasonable for him to do so, or if he did in fact discover the defect prior to his use, the injury would not proximately result from the breach of warranty.
  6. In the case of sales of wares to one in the business of reselling them, resale is one of the requirements of which the seller has reason to know within the meaning of subsection (2)(a).

Cross references:

Point 1: Section 2-608.

Point 3: Sections 1-203, 2-615 and 2-719.

Point 4: Section 1-106.

Definitional cross references:

“Cover”. Section 2-712. “Goods”. Section 1-201. “Person”. Section 1-201. “Receipt” of goods. Section 2-103. “Seller”. Section 2-103.

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NOTES TO DECISIONS

1.Implied Warranty of Fitness.

Consequential damages are recoverable for a breach of implied warranty of fitness. Water Works & Industrial Supply Co. v. Wilburn, 437 S.W.2d 951, 1968 Ky. LEXIS 172 ( Ky. 1968 ).

2.Legislative Intent.

This section was not intended to displace the common law of Kentucky regarding the awarding of attorney’s fees. Nick's Auto Sales, Inc. v. Radcliff Auto Sales, Inc., 591 S.W.2d 709, 1979 Ky. App. LEXIS 496 (Ky. Ct. App. 1979).

3.Incidental or Consequential Damages.

Attorney’s fees do not constitute a buyer’s incidental or consequential damage recoverable under this section. Nick's Auto Sales, Inc. v. Radcliff Auto Sales, Inc., 591 S.W.2d 709, 1979 Ky. App. LEXIS 496 (Ky. Ct. App. 1979).

4.Seller.

It is clear that a “seller” under this section may include a manufacturer of defective goods as well as a retail seller. Teel v. American Steel Foundries, 529 F. Supp. 337, 1981 U.S. Dist. LEXIS 16835 (E.D. Mo. 1981).

5.Award of Damages.

In action by quadriplegic against Department of Education and foreign corporation for breach of warranties of contract between Department and corporation for modification of quadriplegic’s van, an award of damages for use of rental vehicle during van’s immobility and for assistance in transportation and remodification costs were proper, but award for depreciation on personal property of quadriplegic and for payments on van were unrelated to the action and were improper. Commonwealth Dep't of Education v. Gravitt, 673 S.W.2d 428, 1984 Ky. App. LEXIS 476 (Ky. Ct. App. 1984).

Where the terms and conditions of sale, which contained an express exclusion of consequential damages, appeared on the reverse side of the seller’s acknowledgment form below the signature line, and the language on the face of the contract incorporating those terms and conditions by reference also appeared below the signature line, those terms, conditions, and the incorporating language were not part of the contract between the buyer and the seller; therefore, the lower court did not err in awarding the buyer consequential damages under subsection (2) of KRS 355.2-712 and this section. Consolidated Aluminum Corp. v. Krieger, 710 S.W.2d 869, 1986 Ky. App. LEXIS 1120 (Ky. Ct. App. 1986).

6.Economic Loss Doctrine.

Kentucky would follow the “economic loss doctrine” and would not allow recovery of commercial buyer in tort under either theories of negligence or strict liability where the subject damage is limited to the product itself, but would permit recovery in tort for damage to buyer’s other property; motion of defendant who manufactured defective utility poles to dismiss claims of utility company to recover in tort for the cost of identifying, repairing, or replacing defective poles was granted. Bowling Green Mun. Utils. v. Thomasson Lumber Co., 902 F. Supp. 134, 1995 U.S. Dist. LEXIS 15341 (W.D. Ky. 1995 ).

7.Notice by Seller of Error.

Where a seller erroneously mixed into a chicken feed a substance harmful to chickens, the purchaser could not recover for injury to the chickens if the seller promptly notified the purchaser of such error, so that the purchaser knew of such error when he fed the feed. (decided under prior law) McBride v. Farmers' Seed Ass'n, 248 Ky. 514 , 58 S.W.2d 909, 1933 Ky. LEXIS 262 ( Ky. 1933 ).

8.Finance Charges and Usage Tax.

Finance charges and usage tax which seller knew purchaser of stolen automobile had to pay were proper damages in action for breach of warranty of title. (decided under prior law) Riggs Motor Co. v. Archer, 240 S.W.2d 75, 1951 Ky. LEXIS 948 ( Ky. 1951 ).

Cited:

Overstreet v. Norden Laboratories, Inc., 669 F.2d 1286, 1982 U.S. App. LEXIS 22121 (6th Cir. 1982); Keck v. Wacker, 413 F. Supp. 1377, 1976 U.S. Dist. LEXIS 14786 (E.D. Ky. 1976 ); Wahba v. Don Corlett Motors, Inc., 573 S.W.2d 357, 1978 Ky. App. LEXIS 608 (Ky. Ct. App. 1978).

Research References and Practice Aids

Kentucky Bench & Bar.

Bertlesman, Views from the Federal Bench, Vol. 46, No. 3, July 1982, Ky. Bench & Bar 16.

An Overview of the Magnuson-Moss Warranty Act, Vol. 55, No. 3, Summer 1991, Ky. Bench & Bar 18.

Kentucky Law Journal.

Brickey, Products Liability in Kentucky: The Doctrinal Dilemma, 65 Ky. L.J. 593 (1976-77).

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Northern Kentucky Law Review.

Notes, Torts — Products Liability — Should Contract or Tort Provide the Cause of Action When a Plaintiff Seeks Recovery Only for Damage to the Defective Product Itself — C & S Fuel, Inc. v. Clark Equip. Co.,10 N. Ky. L. Rev. 489 (1983).

Miller, The Kentucky Law of Products LiabilityIn A Nutshell, 12 N. Ky. L. Rev. 201 (1985).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Mitigation of Damages, § 215.00.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Products Liability, § 137.00.

355.2-716. Buyer’s right to specific performance or replevin.

  1. Specific performance may be decreed where the goods are unique or in other proper circumstances.
  2. The decree for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just.
  3. The buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered. In the case of goods bought for personal, family, or household purposes, the buyer’s right of replevin vests upon acquisition of a special property, even if the seller had not then repudiated or failed to deliver.

History. Enact. Acts 1958, ch. 77, § 2-716, effective July 1, 1960; 2000, ch. 408, § 162, effective July 1, 2001.

Official Comment

Prior uniform statutory provision:

Section 68, Uniform Sales Act.

Changes:

Rephrased.

Purposes of changes:

To make it clear that:

  1. The present section continues in general prior policy as to specific performance and injunction against breach. However, without intending to impair in any way the exercise of the court’s sound discretion in the matter, this Article seeks to further a more liberal attitude than some courts have shown in connection with the specific performance of contracts of sale.
  2. In view of this Article’s emphasis on the commercial feasibility of replacement, a new concept of what are “unique” goods is introduced under this section. Specific performance is no longer limited to goods which are already specific or ascertained at the time of contracting. The test of uniqueness under this section must be made in terms of the total situation which characterizes the contract. Output and requirements contracts involving a particular or peculiarly available source or market present today the typical commercial specific performance situation, as contrasted with contracts for the sale of heirlooms or priceless works of art which were usually involved in the older cases. However, uniqueness is not the sole basis of the remedy under this section for the relief may also be granted “in other proper circumstances” and inability to cover is strong evidence of “other proper circumstances”.
  3. The legal remedy of replevin is given to the buyer in cases in which cover is reasonably unavailable and goods have been identified to the contract. This is in addition to the buyer’s right to recover identified goods under Section 2-502. For consumer goods, the buyer’s right to replevin vests upon the buyer’s acquisition of a special property, which occurs upon identification of the goods to the contract. See Section 2-501.

    Inasmuch as a secured party normally acquires no greater rights in its collateral that its debtor had or had power to convey, see Section 2-403(1) (first sentence), a buyer who acquires a right of replevin under subsection (c) will take free of a security interest created by the seller if it attaches to the goods after the goods have been identified to the contract. The buyer will take free, even if the buyer does not buy in ordinary course and even if the security interest is perfected. Of course, to the extent that the buyer pays the price after the security interest attaches, the payments will constitute proceeds of the security interest.

  4. This section is intended to give the buyer rights to the goods comparable to the seller’s rights to the price.
  5. If a negotiable document of title is outstanding, the buyer’s right of replevin relates of course to the document not directly to the goods. See Article 7, especially Section 7-602.

Cross references:

Point 3: Section 2-502.

Point 4: Section 2-709.

Point 5: Article 7.

Definitional cross references:

“Buyer”. Section 2-103. “Goods”. Section 1-201. “Rights”. Section 1-201.

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NOTES TO DECISIONS

1.Specific Performance.

A contract for the purchase or sale of corporate stock will be specifically enforced where there is some special reason for the purchaser obtaining the same, or where the shares are limited or not easily ascertainable, or where the value cannot be readily ascertained, or where, because of other special or peculiar circumstances, a remedy at law would not be adequate. (decided under prior law) Talamini v. Rosa, 257 Ky. 228 , 77 S.W.2d 627, 1934 Ky. LEXIS 541 ( Ky. 1934 ).

Contract for the sale and delivery of articles indispensable in specie to the party asking relief, unobtainable elsewhere except at considerable expense, trouble or loss, which cannot be estimated in advance, would be specifically enforced. (decided under prior law) Talamini v. Rosa, 257 Ky. 228 , 77 S.W.2d 627, 1934 Ky. LEXIS 541 ( Ky. 1934 ).

Enjoining the breach of a contract operated as a negative enforcement of its terms, and the court whose jurisdiction was invoked was guided by same rules as applied in cases of specific performance. As a general rule, equity would not decree specific performance of a contract for sale of personal property because ordinarily there was an adequate remedy at law by an action for damages for breach of contract. (decided under prior law) Lexington Loose Leaf Tobacco Warehouse Co. v. Coleman, 289 Ky. 277 , 158 S.W.2d 633, 1942 Ky. LEXIS 543 ( Ky. 1942 ).

Injunction to compel brewery to deliver ale in accordance with contract would lie where buyer could not obtain ale elsewhere and damages for failure to meet demands of customers were not measurable. (decided under prior law) Heidelberg Brewing Co. v. E. F. Prichard Co., 297 Ky. 788 , 180 S.W.2d 849, 1944 Ky. LEXIS 779 ( Ky. 1944 ).

355.2-717. Deduction of damages from the price.

The buyer on notifying the seller of his intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract.

History. Enact. Acts 1958, ch. 77, § 2-717, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

See Section 69(1)(a), Uniform Sales Act.

Purposes:

  1. This section permits the buyer to deduct from the price damages resulting from any breach by the seller and does not limit the relief to cases of breach of warranty as did the prior uniform statutory provision. To bring this provision into application the breach involved must be of the same contract under which the price in question is claimed to have been earned.
  2. The buyer, however, must give notice of his intention to withhold all or part of the price if he wishes to avoid a default within the meaning of the section on insecurity and right to assurances. In conformity with the general policies of this Article, no formality of notice is required and any language which reasonably indicates the buyer’s reason for holding up his payment is sufficient.

Cross reference:

Point 2: Section 2-609.

Definitional cross references:

“Buyer”. Section 2-103. “Notifies”. Section 1-201.

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355.2-718. Liquidation or limitation of damages — Deposits.

  1. Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.
  2. Where the seller justifiably withholds delivery of goods because of the buyer’s breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds
    1. the amount to which the seller is entitled by virtue of terms liquidating the seller’s damages in accordance with subsection (1), or
    2. in the absence of such terms, twenty percent (20%) of the value of the total performance for which the buyer is obligated under the contract or five hundred dollars ($500), whichever is smaller.
  3. The buyer’s right to restitution under subsection (2) is subject to offset to the extent that the seller establishes
    1. a right to recover damages under the provisions of this article other than subsection (1), and
    2. the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.
  4. Where a seller has received payment in goods their reasonable value or the proceeds of their resale shall be treated as payments for the purposes of subsection (2); but if the seller has notice of the buyer’s breach before reselling goods received in part performance, his resale is subject to the conditions laid down in this article on resale by an aggrieved seller (KRS 355.2-706 ).

History. Enact. Acts 1958, ch. 77, § 2-718, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

  1. Under subsection (1) liquidated damage clauses are allowed where the amount involved is reasonable in the light of the circumstances of the case. The subsection sets forth explicitly the elements to be considered in determining the reasonableness of a liquidated damage clause. A term fixing unreasonably large liquidated damages is expressly made void as a penalty. An unreasonably small amount would be subject to similar criticism and might be stricken under the section on unconscionable contracts or clauses.
  2. Subsection (2) refuses to recognize a forfeiture unless the amount of the payment so forfeited represents a reasonable liquidation of damages as determined under subsection (1). A special exception is made in the case of small amounts (20% of the price or $500, whichever is smaller) deposited as security. No distinction is made between cases in which the payment is to be applied on the price and those in which it is intended as security for performance. Subsection (2) is applicable to any deposit or down or part payment. In the case of a deposit or turn in of goods resold before the breach, the amount actually received on the resale is to be viewed as the deposit rather than the amount allowed the buyer for the trade in. However, if the seller knows of the breach prior to the resale of the goods turned in, he must make reasonable efforts to realize their true value, and this is assured by requiring him to comply with the conditions laid down in the section on resale by an aggrieved seller.

Cross references:

Point 1: Section 2-302.

Point 2: Section 2-706.

Definitional cross references:

“Aggrieved party”. Section 1-201. “Agreement”. Section 1-201. “Buyer”. Section 2-103. “Goods”. Section 2-105. “Notice”. Section 1-201. “Party”. Section 1-201. “Remedy”. Section 1-201. “Seller”. Section 2-103. “Term”. Section 1-201.

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NOTES TO DECISIONS

1.Liquidation of Damages.

Where $5,000 was placed in escrow as a deposit to be used as damages in case of the breach of the $162,000 sale contract, such liquidated damage provision was enforceable. Coca-Cola Bottling Works v. Hazard Coca-Cola Bottling, 450 S.W.2d 515, 1970 Ky. LEXIS 450 ( Ky. 1970 ).

Supplier was entitled to full payment under the terms of a contract, even though it breached the contract first by delivering late, because the purchaser accepted the late delivery, and the contract specifically excluded liability for liquidated damages. Marley Cooling Tower Co. v. Caldwell Energy & Envtl., Inc., 280 F. Supp. 2d 651, 2003 U.S. Dist. LEXIS 15213 (W.D. Ky. 2003 ).

2.— Unenforceable Penalty.

While under the law of Kentucky liquidated damage provisions are clearly allowed, Kentucky courts will not enforce liquidated damage provisions which constitute a penalty. In order for a court to find that a liquidated damage provision is an unenforceable penalty, the party arguing against the provision must clearly show that under the circumstances at the time of the execution of the agreement containing the provision in question the amount of stipulated or liquidated damages was far in excess of the actual damages that would actually flow from a breach. In re Robinson, 49 B.R. 575, 1985 Bankr. LEXIS 6015 (Bankr. W.D. Ky. 1985 ).

Contract provision that provided for liquidated damages equaling 12 months’ rent for the failure to meet one month’s rent or to comply with any material contract provision was on its face a penalty, and where debtor had met his burden of proof and had clearly shown the punitive nature of this clause, and debtor’s landlords had not made any showing, other than their own assertions, that the economics of restaurant business made this facially invalid penalty provision a reasonable liquidated damage clause with some relation to the actual damages which would result from a breach of the lease agreement, such provision was an unenforceable penalty. In re Robinson, 49 B.R. 575, 1985 Bankr. LEXIS 6015 (Bankr. W.D. Ky. 1985 ).

3.— Standby Fee.

A commitment or standby fee, paid by borrowers for a loan commitment and retained by the lender when the borrowers cancelled, constituted liquidated damages and no other remedies were permitted. Capital Holding Corp. v. Octagon Dev. Co., 757 S.W.2d 202, 1988 Ky. App. LEXIS 98 (Ky. Ct. App. 1988).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

355.2-719. Contractual modification or limitation of remedy.

  1. Subject to the provisions of subsections (2) and (3) of this section and of KRS 355.2-718 on liquidation and limitation of damages,
    1. the agreement may provide for remedies in addition to or in substitution for those provided in this article and may limit or alter the measure of damages recoverable under this article, as by limiting the buyer’s remedies to return of the goods and repayment of the price or to repair and replacement of nonconforming goods or parts; and
    2. resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.
  2. Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this chapter.
  3. Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

History. Enact. Acts 1958, ch. 77, § 2-719, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

  1. Under this section parties are left free to shape their remedies to their particular requirements and reasonable agreements limiting or modifying remedies are to be given effect.

    However, it is of the very essence of a sales contract that at least minimum adequate remedies be available. If the parties intend to conclude a contract for sale within this Article they must accept the legal consequence that there be at least a fair quantum of remedy for breach of the obligations or duties outlined in the contract. Thus any clause purporting to modify or limit the remedial provisions of this Article in an unconscionable manner is subject to deletion and in that event the remedies made available by this Article are applicable as if the stricken clause had never existed. Similarly, under subsection (b), where an apparently fair and reasonable clause because of circumstances fails in its purpose or operates to deprive either party of the substantial value of the bargain, it must give way to the general remedy provisions of this Article.

  2. Subsection (1)(b) creates a presumption that clauses prescribing remedies are cumulative rather than exclusive. If the parties intend the term to describe the sole remedy under the contract, this must be clearly expressed.
  3. Subsection (3) recognizes the validity of clauses limiting or excluding consequential damages but makes it clear that they may not operate in an unconscionable manner. Actually such terms are merely an allocation of unknown or undeterminable risks. The seller in all cases is free to disclaim warranties in the manner provided in Section 2-316.

Cross references:

Point 1: Section 2-302.

Point 3: Section 2-316.

Definitional cross references:

“Agreement”. Section 1-201. “Buyer”. Section 2-103. “Conforming”. Section 2-106. “Contract”. Section 1-201. “Goods”. Section 2-105. “Remedy”. Section 1-201. “Seller”. Section 2-103.

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NOTES TO DECISIONS

Analysis

1.Limitation of Remedies.

Where sales contract contained warranty and provision for remedy for breach, such remedy was exclusive, that is, where the purchaser had failed to advise the vendor that the car was defective before operating it for 5,000 miles and had overloaded it, both of which were in breach of the conditions for recovery for breach of warranty, he was not allowed to recover. (decided under prior law) Black Motor Co. v. Foure, 266 Ky. 431 , 99 S.W.2d 177, 1936 Ky. LEXIS 671 ( Ky. 1936 ).

Where contract provided that seller was to install product and remove it if unsatisfactory and that contract covered entire agreement, the seller, by removing the product at buyer’s request, had complied with all his obligations under the contract and was not liable under implied warranty for damage to installations to which the product was temporarily connected. (decided under prior law) Graves Ice Cream Co. v. Rudolph W. Wurlitzer Co., 267 Ky. 1 , 100 S.W.2d 819, 1937 Ky. LEXIS 265 ( Ky. 1 937 ).

Motor vehicle warranty that it was free from defects in material and workmanship and was in lieu of all other warranties excluded implied warranties and limited remedies for breach of the warranty. Cox Motor Car Co. v. Castle, 402 S.W.2d 429, 1966 Ky. LEXIS 364 ( Ky. 1966 ).

In a breach of contract action, the $135,000 in damages a purchaser sustained as a result of the supplier’s breach were “consequential damages” and therefore not recoverable under the contract’s express terms, because KRS 355.2-719 (3) allowed the parties to agree to exclude liability for consequential damages so long as the exclusion was not unconscionable. Marley Cooling Tower Co. v. Caldwell Energy & Envtl., Inc., 280 F. Supp. 2d 651, 2003 U.S. Dist. LEXIS 15213 (W.D. Ky. 2003 ).

Court dismissed a buyer’s claim for consequential damages where the complaint failed to allege bad faith by a seller in its performance under a contract, pursuant to KRS 355.2-719 (3) and KRS 355.1-203 ; the buyer’s only allegation of bad faith related to the negotiations surrounding the contract, rather than to the performance of the contract. Strathmore Web Graphics v. Sanden Mach., Ltd., 2000 U.S. Dist. LEXIS 22618 (W.D. Ky. May 16, 2000).

Because a distributor accepted goods that it later claimed were defective, the distributor’s claim for breach of the implied warranty of merchantability failed both pursuant to statute and under the parties’ agreement, by which the distributor contractually assumed the risk of loss. Smart & Assocs., LLC v. Indep. Liquor (NZ) Ltd., 226 F. Supp. 3d 828, 2016 U.S. Dist. LEXIS 180159 (W.D. Ky. 2016 ).

2.Revocation of Acceptance.

Where the truck purchased by buyers contained a serious defect and buyers returned the truck to the selling dealer seven (7) or eight (8) times in a five (5) month period for major repairs, but the problems were never corrected and where, when the trouble was finally diagnosed as a twisted and diamonded frame, manufacturer would not extend the duration of the warranty even though the defective frame would cause excessive wear to all moving parts, the value of the truck was substantially impaired within the meaning of this section and buyers were entitled to revoke acceptance since purpose of limited remedy of repair and replacement of defective parts had failed. Ford Motor Co. v. Mayes, 575 S.W.2d 480, 1978 Ky. App. LEXIS 649 (Ky. Ct. App. 1978).

3.Limiting Language Ineffective.

The evidence supported the trial judge’s determination that the “repair or replace” limited remedy language of a tractor shovel sales contract failed of its essential purpose within the meaning of subsection (2) of this section, especially since the defective part was small, and the defect resulted in the immediate destruction of the entire tractor shovel; accordingly, regardless of how the fire damage was characterized, to the extent that express limitations in the contract precluded the owner from recovering at least the purchase price of the truck, such limitations were ineffective under subsection (2) of this section. Rudd Constr. Equipment Co. v. Clark Equipment Co., 735 F.2d 974, 1984 U.S. App. LEXIS 21942 (6th Cir. Ky. 1984 ).

4.Award of Damages.

Where a machine simply bursts into flame, the entire machine is one big defective part, entitling the plaintiff buyer to recover the difference in value between the machine as warranted and the one actually received. Rudd Constr. Equipment Co. v. Clark Equipment Co., 735 F.2d 974, 1984 U.S. App. LEXIS 21942 (6th Cir. Ky. 1984 ).

5.Remedy of Repair or Replacement.

An exclusive remedy of repair or replacement, which limited damages, does not fail of its purpose merely because the buyer suffered consequential damages while repairs were being made. The length of time that it takes to make repairs does not, in and of itself, raise an inference one way or another as to whether the seller failed to correct the defect within a reasonable period. Middletown Eng'g Co. v. Climate Conditioning Co., 810 S.W.2d 57 (Ky. Ct. App. 1991).

Cited:

T-Birds, Inc. v. Thoroughbred Helicopter Service, Inc., 540 F. Supp. 548, 1982 U.S. Dist. LEXIS 14161 (E.D. Ky. 1982 ); Gooch v. E.I. DuPont de Nemours & Co., 40 F. Supp. 2d 863, 1999 U.S. Dist. LEXIS 10211 (W.D. Ky. 1999 ).

Notes to Unpublished Decisions

1.Limitation of Remedies.

Unpublished decision: Time limits for inspection imposed under a contract for sale of a racehorse did not fail of their essential purpose; the buyer, a sophisticated horseman, could have made additional inquiries, reviewed veterinary records, or undertaken more intrusive inspections during the agreed-upon time frames but failed to do so. Biszantz v. Thoroughbreds, 620 Fed. Appx. 535, 2015 FED App. 0716N, 2015 U.S. App. LEXIS 18954 (6th Cir. Ky. 2015 ).

Research References and Practice Aids

Kentucky Law Journal.

Comments, What Chance for the New Car Purchaser of a “Lemon”?, 62 Ky. L.J. 557 (1973-1974).

Brickey, Products Liability in Kentucky: The Doctrinal Dilemma, 65 Ky. L.J. 593 (1976-77).

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Northern Kentucky Law Review.

Notes, U.C.C. — Consumer Protection Act — Limited Warranties — Automobile Manufacturer’s Refusal to Recognize Buyers’ Rights Under the U.C.C. When a Limited Warranty Fails of Its Essential Purpose Constitutes an Unfair Trade Practice Under the Consumer Protection Act, 6 N. Ky. L. Rev. 403 (1979).

Notes, Torts — Products Liability — Should Contract or Tort Provide the Cause of Action When a Plaintiff Seeks Recovery Only for Damage to the Defective Product Itself — C & S Fuel, Inc. v. Clark Equip. Co.,10 N. Ky. L. Rev. 489 (1983).

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

355.2-720. Effect of “cancellation” or “rescission” on claims for antecedent breach.

Unless the contrary intention clearly appears, expressions of “cancellation” or “rescission” of the contract or the like shall not be construed as a renunciation or discharge of any claim in damages for an antecedent breach.

History. Enact. Acts 1958, ch. 77, § 2-720, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purpose:

This section is designed to safeguard a person holding a right of action from any unintentional loss of rights by the ill-advised use of such terms as “cancellation”, “rescission”, or the like. Once a party’s rights have accrued they are not to be lightly impaired by concessions made in business decency and without intention to forego them. Therefore, unless the cancellation of a contract expressly declares that it is “without reservation of rights”, or the like, it cannot be considered to be a renunciation under this section.

Cross reference:

Section 1-107.

Definitional cross references:

“Cancellation”. Section 2-106. “Contract”. Section 1-201.

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355.2-721. Remedies for fraud.

Remedies for material misrepresentation or fraud include all remedies available under this article for nonfraudulent breach. Neither rescission or a claim for rescission of the contract for sale nor rejection or return of the goods shall bar or be deemed inconsistent with a claim for damages or other remedy.

History. Enact. Acts 1958, ch. 77, § 2-721, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

To correct the situation by which remedies for fraud have been more circumscribed than the more modern and mercantile remedies for breach of warranty. Thus the remedies for fraud are extended by this section to coincide in scope with those for non-fraudulent breach. This section thus makes it clear that neither rescission of the contract for fraud nor rejection of the goods bars other remedies unless the circumstances of the case make the remedies incompatible.

Definitional cross references:

“Contract for sale”. Section 2-106. “Goods”. Section 1-201. “Remedy”. Section 1-201.

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NOTES TO DECISIONS

1.Damages.

Damages for fraud may be recovered by a buyer who rescinds a contract which is clearly and convincingly shown to have been induced, at the buyer’s detriment and injury, by a false material representation made knowingly or recklessly by a seller. Keck v. Wacker, 413 F. Supp. 1377, 1976 U.S. Dist. LEXIS 14786 (E.D. Ky. 1976 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Sales, § 190.00.

Caldwell’s Kentucky Form Book, 5th Ed., Answer and Counterclaim Alleging Fraud in Selling Personal Property, Without an Offer to Return it, Form 190.17.

355.2-722. Who can sue third parties for injury to goods.

Where a third party so deals with goods which have been identified to a contract for sale as to cause actionable injury to a party to that contract

  1. a right of action against the third party is in either party to the contract for sale who has title to or a security interest or a special property or an insurable interest in the goods; and if the goods have been destroyed or converted a right of action is also in the party who either bore the risk of loss under the contract for sale or has since the injury assumed that risk as against the other;
  2. if at the time of the injury the party plaintiff did not bear the risk of loss as against the other party to the contract for sale and there is no arrangement between them for disposition of the recovery, his suit or settlement is, subject to his own interest, as a fiduciary for the other party to the contract;
  3. either party may with the consent of the other sue for the benefit of whom it may concern.

History. Enact. Acts 1958, ch. 77, § 2-722, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

To adopt and extend somewhat the principle of the statutes which provide for suit by the real party in interest. The provisions of this section apply only after identification of the goods. Prior to that time only the seller has a right of action. During the period between identification and final acceptance (except in the case of revocation of acceptance) it is possible for both parties to have the right of action. Even after final acceptance both parties may have the right of action if the seller retains possession or otherwise retains an interest.

Definitional cross references:

“Action”. Section 1-201. “Buyer”. Section 2-103. “Contract for sale”. Section 2-106. “Goods”. Section 2-105. “Party”. Section 1-201. “Rights”. Section 1-201. “Security interest”. Section 1-201.

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NOTES TO DECISIONS

Cited:

Jack Walker Trucking Service, Inc. v. Strong, 488 S.W.2d 689, 1972 Ky. LEXIS 50 ( Ky. 1972 ).

355.2-723. Proof of market price: time and place.

  1. If an action based on anticipatory repudiation comes to trial before the time for performance with respect to some or all of the goods, any damages based on market price (KRS 355.2-708 or 355.2-713 ) shall be determined according to the price of such goods prevailing at the time when the aggrieved party learned of the repudiation.
  2. If evidence of a price prevailing at the times or places described in this article is not readily available the price prevailing within any reasonable time before or after the time described or at any other place which in commercial judgment or under usage of trade would serve as a reasonable substitute for the one described may be used, making any proper allowance for the cost of transporting the goods to or from such other place.
  3. Evidence of a relevant price prevailing at a time or place other than the one described in this article offered by one party is not admissible unless and until he has given the other party such notice as the court finds sufficient to prevent unfair surprise.

History. Enact. Acts 1958, ch. 77, § 2-723, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

To eliminate the most obvious difficulties arising in connection with the determination of market price, when that is stipulated as a measure of damages by some provision of this Article. Where the appropriate market price is not readily available the court is here granted reasonable leeway in receiving evidence of prices current in other comparable markets or at other times comparable to the one in question. In accordance with the general principle of this Article against surprise, however, a party intending to offer evidence of such a substitute price must give suitable notice to the other party.

This section is not intended to exclude the use of any other reasonable method of determining market price or of measuring damages if the circumstances of the case make this necessary.

Definitional cross references:

“Action”. Section 1-201. “Aggrieved party”. Section 1-201. “Goods”. Section 2-105. “Notifies”. Section 1-201. “Party”. Section 1-201. “Reasonable time”. Section 1-204. “Usage of trade”. Section 1-205.

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Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Failing to Accept and Pay for Hogs, to be Paid for on Delivery, Neither Time Nor Place for Delivery Being Specified in Contract, Form 190.11.

355.2-724. Admissibility of market quotations.

Whenever the prevailing price or value of any goods regularly bought and sold in any established commodity market is in issue, reports in official publications or trade journals or in newspapers or periodicals of general circulation published as the reports of such market shall be admissible in evidence. The circumstances of the preparation of such a report may be shown to affect its weight but not its admissibility.

History. Enact. Acts 1958, ch. 77, § 2-724, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

To make market quotations admissible in evidence while providing for a challenge of the material by showing the circumstances of its preparation.

No explicit provision as to the weight to be given to market quotations is contained in this section, but such quotations, in the absence of compelling challenge, offer an adequate basis for a verdict.

Market quotations are made admissible when the price or value of goods traded “in any established market” is in issue. The reason of the section does not require that the market be closely organized in the manner of a produce exchange. It is sufficient if transactions in the commodity are frequent and open enough to make a market established by usage in which one price can be expected to affect another and in which an informed report of the range and trend of prices can be assumed to be reasonably accurate.

This section does not in any way intend to limit or negate the application of similar rules of admissibility to other material, whether by action of the courts or by statute. The purpose of the present section is to assure a minimum of mercantile administration in this important situation and not to limit any liberalizing trend in modern law.

Definitional cross reference:

“Goods”. Section 2-105.

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Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Sales, § 190.00.

355.2-725. Statute of limitations in contracts for sale.

  1. An action for breach of any contract for sale must be commenced within four (4) years after the cause of action has accrued. By the original agreement the parties may reduce the period of limitation to not less than one (1) year but may not extend it.
  2. A cause of action accrues when the breach occurs, regardless of the aggrieved party’s lack of knowledge of the breach. A breach of warranty occurs when tender of delivery is made, except that where a warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance the cause of action accrues when the breach is or should have been discovered.
  3. Where an action commenced within the time limited by subsection (1) is so terminated as to leave available a remedy by another action for the same breach such other action may be commenced after the expiration of the time limited and within six (6) months after the termination of the first action unless the termination resulted from voluntary discontinuance or from dismissal for failure or neglect to prosecute.
  4. This section does not alter the law on tolling of the statute of limitations nor does it apply to causes of action which have accrued before this chapter becomes effective.

History. Enact. Acts 1958, ch. 77, § 2-725, effective July 1, 1960.

Official Comment

Prior uniform statutory provision:

None.

Purposes:

To introduce a uniform statute of limitations for sales contracts, thus eliminating the jurisdictional variations and providing needed relief for concerns doing business on a nationwide scale whose contracts have heretofore been governed by several different periods of limitation depending upon the state in which the transaction occurred. This Article takes sales contracts out of the general laws limiting the time for commencing contractual actions and selects a four year period as the most appropriate to modern business practice. This is within the normal commercial record keeping period.

Subsection (1) permits the parties to reduce the period of limitation. The minimum period is set at one year. The parties may not, however, extend the statutory period.

Subsection (2), providing that the cause of action accrues when the breach occurs, states an exception where the warranty extends to future performance.

Subsection (3) states the saving provision included in many state statutes and permits an additional short period for bringing new actions, where suits begun within the four year period have been terminated so as to leave a remedy still available for the same breach.

Subsection (4) makes it clear that this Article does not purport to alter or modify in any respect the law on tolling of the Statute of Limitations as it now prevails in the various jurisdictions.

Definitional cross references:

“Action”. Section 1-201. “Aggrieved party”. Section 1-201. “Agreement”. Section 1-201. “Contract for sale”. Section 2-106. “Goods”. Section 2-105. “Party”. Section 1-201. “Remedy”. Section 1-201. “Term”. Section 1-201. “Termination”. Section 2-106.

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NOTES TO DECISIONS

Analysis

1.Construction.

The intention of this section is to enable a litigant to obtain a trial on the merits and not to penalize it for filing its original action in a court of the wrong venue. D. & J. Leasing, Inc. v. Hercules Galion Products, Inc., 429 S.W.2d 854, 1968 Ky. LEXIS 761 ( Ky. 1968 ).

2.Applicability.

The phraseology of the Uniform Commercial Code denying the benefit of its savings period when the termination of the first action “resulted from voluntary discontinuance or from failure or neglect to prosecute” the action is intended to cover situations where the litigant signifies that it does not intend to go on with its case — where it “drops” its case in the sense that it fails “or neglects to prosecute it,” and not a situation where the plaintiff moved to dismiss its action so that it could file it in a court with jurisdiction of the subject matter or parties. D. & J. Leasing, Inc. v. Hercules Galion Products, Inc., 429 S.W.2d 854, 1968 Ky. LEXIS 761 ( Ky. 1968 ).

Since the Kentucky courts have never resolved the apparent conflict between this section and KRS 413.140(1)(a) over which limitation statute applies in a breach of warranty action for personal injuries, a federal court applied the four (4) year limitations period of this section, because when substantial doubt exists as to which of two (2) limitations statutes is applicable, the longer period will be applied. Teel v. American Steel Foundries, 529 F. Supp. 337, 1981 U.S. Dist. LEXIS 16835 (E.D. Mo. 1981).

Even if claim for breach of common law implied warranty against manufacturer of fireproofing containing asbestos was viable in suit by owner of building, the Uniform Commercial Code (UCC) had been adopted by the time the building was constructed, making it dispositive, as the enactment of the UCC by Kentucky was a clear expression of legislative intent to occupy the field of commercial transactions; therefore, this section provided the proper statute of limitations for a breach of warranty claim. Farm Credit Bank v. United States Mineral Prods. Co., 864 F. Supp. 643, 1994 U.S. Dist. LEXIS 14642 (W.D. Ky.) sub. nom.Agribank, FCB v. United States Mineral Prods. Co., 864 F. Supp. 643, 1994 U.S. Dist. LEXIS 14755 (W.D. Ky. 1994 ).

Where a seller filed suit to recover payment for coal that was previously delivered to a buyer, a District Court erred in dismissing the seller’s breach of contract claim because the five-year statute of limitations in KRS 413.120(10) prevailed over the four-year statute of limitations in KRS 355.2-725 (1). Rebecca Son v. Coal Equity, Inc., 122 Fed. Appx. 797, 2004 U.S. App. LEXIS 24106 (6th Cir. Ky. 2004 ).

To the extent that an insurer, as a subrogee for an insured, was seeking contractual relief against the supplier, the claims were governed by the statute of limitations period set forth in KRS 355.2-725 because the agreement was a contract for the sale of goods. The 15-year statute of limitations period for contractual claims set forth in KRS 413.090 did not apply. Elec. Ins. Co. v. Freudenberg-NOK, Gen. P'ship., 487 F. Supp. 2d 894, 2007 U.S. Dist. LEXIS 17292 (W.D. Ky. 2007 ).

Insurance subrogee’s common law indemnity claims against a subcontractor for indemnification of the subrogee’s claims paid out on behalf of the insurer were not subject to the four-year limitation periods that applied to a contractual sale of goods under KRS 355.2-725 . Although the underlying relationship involved a sale of goods common law claims for indemnity could be recognized and governed by the limitations provisions set forth in KRS 413.020(7). Elec. Ins. Co. v. Freudenberg-NOK, Gen. P'ship., 487 F. Supp. 2d 894, 2007 U.S. Dist. LEXIS 17292 (W.D. Ky. 2007 ).

3.Commencement of Limitations Period.

Under subsection (2) of this section, the plain meaning of the words is that the limitations period on a breach of warranty begins to run when the delivery of the product is tendered to the purchaser and not on the date of the injury to the plaintiff, despite injured plaintiff’s lack of knowledge of the breach. Teel v. American Steel Foundries, 529 F. Supp. 337, 1981 U.S. Dist. LEXIS 16835 (E.D. Mo. 1981).

Action by building owner of building fireproofed with material that contained asbestos against manufacturer of fireproofing for breach of implied warranty was controlled by four (4) year statute of limitations of this section and thus such action brought in 1991 was barred since building owner’s claim began to accrue in 1969 or 1970 when the fireproofing was delivered. Farm Credit Bank v. United States Mineral Prods. Co., 864 F. Supp. 643, 1994 U.S. Dist. LEXIS 14642 (W.D. Ky.) sub. nom.Agribank, FCB v. United States Mineral Prods. Co., 864 F. Supp. 643, 1994 U.S. Dist. LEXIS 14755 (W.D. Ky. 1994 ).

Kentucky’s four (4) year statute of limitations period applied to a supply contract, and the supplier’s breach of contract suit was time-barred because the contract was one for goods and was governed by the Kentucky UCC. Son v. Coal Equity, Inc., 293 B.R. 392, 2003 U.S. Dist. LEXIS 6941 (W.D. Ky. 2003 ).

Defendant’s promise to protect, defend, hold harmless, and indemnify the subrogee’s insured against any losses caused by its allegedly defective products provided only a remedy, and it was not a guarantee of the performance of the products for any specific time period. Subrogee suffered no prejudice by being held to general rule that action for breach of a sales contract accrued when tender of delivery was made. Elec. Ins. Co. v. Freudenberg-Nok, Gen. P'ship., 487 F. Supp. 2d 894, 2007 U.S. Dist. LEXIS 39217 (W.D. Ky. 2007 ).

4.Proof.

Where the proof necessary to establish the breach of contract had already been presented in support of the breach of warranty claim, all without objection, CR 15.02 was appropriately used to amend the pleadings to include a breach of contract claim. Nucor Corp. v. General Electric Co., 812 S.W.2d 136, 1991 Ky. LEXIS 54 ( Ky. 1991 ).

Cited:

Williams v. Fulmer, 695 S.W.2d 411, 1985 Ky. LEXIS 232 ( Ky. 1985 ); Imes v. Touma, 784 F.2d 756, 1986 U.S. App. LEXIS 22582 (6th Cir. 1986); Munn v. Pfizer Hosp. Products Group, Inc., 750 F. Supp. 244, 1990 U.S. Dist. LEXIS 15750 (W.D. Ky. 1990 ).

Notes to Unpublished Decisions

1.Proof.

Unpublished decision: Trail court erred in granting summary judgment for bank in deficiency action on repossessed truck five and one half years later where the bank argued the truck was not “goods” and did not fit under Article 2 of the UCC; the appellate court concluded that this case dealt essentially with a contract for the sale of a good and as such, it fell squarely within Article 2 of the Uniform Commercial Code and should be governed by the limitations period contained in that article. Four years was a more than an ample period of time to allow a seller or assignee of a seller to determine any deficiency remaining following the breach of a contract for the sale of a good and institute suit thereon. Barnes v. Cmty. Trust Bank, 121 S.W.3d 520, 2003 Ky. App. LEXIS 280 (Ky. Ct. App. 2003).

Research References and Practice Aids

Kentucky Law Journal.

Brickey, Products Liability in Kentucky: The Doctrinal Dilemma, 65 Ky. L.J. 593 (1976-77).

Northern Kentucky Law Review.

Notes, Torts — Products Liability — Should Contract or Tort Provide the Cause of Action When a Plaintiff Seeks Recovery Only for Damage to the Defective Product Itself — C & S Fuel, Inc. v. Clark Equip. Co., 10 N. Ky. L. Rev. 489 (1983).

Miller, The Kentucky Law of Products LiabilityIn A Nutshell, 12 N. Ky. L. Rev. 201 (1985).

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint by Purchaser to Recover Purchase Money Paid, and Damages for Fraud, With Averment of Request to Cancel the Contract, Form 190.13.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Products Liability, § 137.00.

Article 2A. Leases

Compiler’s Notes.

The official comments in this article are copyrighted by the National Conference of Commissioners of Uniform State Laws and the American Law Institute, and are reproduced by permission.

Part 1. General Provisions

355.2A-101. Short title.

This article shall be known and may be cited as the Uniform Commercial Code — Leases.

History. Enact. Acts 1990, ch. 363, § 1, effective January 1, 1991.

Official Comment

Rationale for Codification:

There are several reasons for codifying the law with respect to leases of goods. An analysis of the case law as it applies to leases of goods suggests at least three significant issues to be resolved by codification. First, what is a lease? It is necessary to define lease to determine whether a transaction creates a lease or a security interest disguised as a lease. If the transaction creates a security interest disguised as a lease, the lessor will be required to file a financing statement or take other action to perfect its interest in the goods against third parties. There is no such requirement with respect to leases. Yet the distinction between a lease and a security interest disguised as a lease is not clear. Second, will the lessor be deemed to have made warranties to the lessee? If the transaction is a sale the express and implied warranties of Article 2 of the Uniform Commercial Code apply. However, the warranty law with respect to leases is uncertain. Third, what remedies are available to the lessor upon the lessee’s default? If the transaction is a security interest disguised as a lease, the answer is stated in Part 5 of the Article on Secured Transactions (Article 9). There is no clear answer with respect to leases.

There are reasons to codify the law with respect to leases of goods in addition to those suggested by a review of the reported cases. The answer to this important question should not be limited to the issues raised in these cases. Is it not also proper to determine the remedies available to the lessee upon the lessor’s default? It is, but that issue is not reached through a review of the reported cases. This is only one of the many issues presented in structuring, negotiating and documenting a lease of goods.

Statutory Analogue:

After it was decided to proceed with the codification project, the drafting committee of the National Conference of Commissioners on Uniform State Laws looked for a statutory analogue, gradually narrowing the focus to the Article on Sales (Article 2) and the Article on Secured Transactions (Article 9). A review of the literature with respect to the sale of goods reveals that Article 2 is predicated upon certain assumptions: Parties to the sales transaction frequently are without counsel; the agreement of the parties often is oral or evidenced by scant writings; obligations between the parties are bilateral; applicable law is influenced by the need to preserve freedom of contract. A review of the literature with respect to personal property security law reveals that Article 9 is predicated upon very different assumptions: Parties to a secured transaction regularly are represented by counsel; the agreement of the parties frequently is reduced to a writing, extensive in scope; the obligations between the parties are essentially unilateral; and applicable law seriously limits freedom of contract.

The lease is closer in spirit and form to the sale of goods than to the creation of a security interest. While parties to a lease are sometimes represented by counsel and their agreement is often reduced to a writing, the obligations of the parties are bilateral and the common law of leasing is dominated by the need to preserve freedom of contract. Thus the drafting committee concluded that Article 2 was the appropriate statutory analogue.

Issues:

The drafting committee then identified and resolved several issues critical to codification:

Scope:

The scope of the Article was limited to leases (Section 2A-102). There was no need to include leases intended as security, i.e., security interests disguised as leases, as they are adequately treated in Article 9. Further, even if leases intended as security were included, the need to preserve the distinction would remain, as policy suggests treatment significantly different from that accorded leases.

Definition of Lease:

Lease was defined to exclude leases intended as security (Section 2A-103(1)(j)). Given the litigation to date a revised definition of security interest was suggested for inclusion in the Act. (Section 1-201(37)). This revision sharpens the distinction between leases and security interests disguised as leases.

Filing:

The lessor was not required to file a financing statement against the lessee or take any other action to protect the lessor’s interest in the goods (Section 2A-301). The refined definition of security interest will more clearly signal the need to file to potential lessors of goods. Those lessors who are concerned will file a protective financing statement (Section 9-408).

Warranties:

All of the express and implied warranties of the Article on Sales (Article 2) were included (Sections 2A-210 through 2A-216), revised to reflect differences in lease transactions. The lease of goods is sufficiently similar to the sale of goods to justify this decision. Further, many courts have reached the same decision.

Certificate of Title Laws:

Many leasing transactions involve goods subject to certificate of title statutes. To avoid conflict with those statutes, this Article is subject to them (Section 2A-104(1)(a)).

Consumer Leases:

Many leasing transactions involve parties subject to consumer protection statutes or decisions. To avoid conflict with those laws this Article is subject to them to the extent provided in (Section 2A-104(1)(c) and (2)). Further, certain consumer protections have been incorporated in the Article.

Finance Leases:

Certain leasing transactions substitute the supplier of the goods for the lessor as the party responsible to the lessee with respect to warranties and the like. The definition of finance lease (Section 2A-103(1)(g)) was developed to describe these transactions. Various sections of the Article implement the substitution of the supplier for the lessor, including Sections 2A-209 and 2A-407. No attempt was made to fashion a special rule where the finance lessor is an affiliate of the supplier of goods; this is to be developed by the courts, case by case.

Sale and Leaseback:

Sale and leaseback transactions are becoming increasingly common. A number of state statutes treat transactions where possession is retained by the seller as fraudulent per se or prima facie fraudulent. That position is not in accord with modern practice and thus is changed by the Article “if the buyer bought for value and in good faith” (Section 2A-308(3)).

Remedies:

The Article has not only provided for lessor’s remedies upon default by the lessee (Sections 2A-523 through 2A-531), but also for lessee’s remedies upon default by the lessor (Sections 2A-508 through 2A-522). This is a significant departure from Article 9, which provides remedies only for the secured party upon default by the debtor. This difference is compelled by the bilateral nature of the obligations between the parties to a lease.

Damages:

Many leasing transactions are predicated on the parties’ ability to stipulate an appropriate measure of damages in the event of default. The rule with respect to sale of goods (Section 2-718) is not sufficiently flexible to accommodate this practice. Consistent with the common law emphasis upon freedom to contract, the Article has created a revised rule that allows greater flexibility with respect to leases of goods (Section 2A-504(1)).

History:

This Article is a revision of the Uniform Personal Property Leasing Act, which was approved by the National Conference of Commissioners on Uniform State Laws in August, 1985. However, it was believed that the subject matter of the Uniform Personal Property Leasing Act would be better treated as an article of this Act. Thus, although the Conference promulgated the Uniform Personal Property Leasing Act as a Uniform Law, activity was held in abeyance to allow time to restate the Uniform Personal Property Leasing Act as Article 2A.

In August, 1986 the Conference approved and recommended this Article (including conforming amendments to Article 1 and Article 9) for promulgation as an amendment to this Act. In December, 1986 the Council of the American Law Institute approved and recommended this Article (including conforming amendments to Article 1 and Article 9), with official comments, for promulgation as an amendment to this Act. In March, 1987 the Permanent Editorial Board for the Uniform Commercial Code approved and recommended this Article (including conforming amendments to Article 1 and Article 9), with official comments, for promulgation as an amendment to this Act. In May, 1987 the American Law Institute approved and recommended this Article (including conforming amendments to Article 1 and Article 9), with official comments, for promulgation as an amendment to this Act. In August, 1987 the Conference confirmed its approval of the final text of this Article.

Upon its initial promulgation, Article 2A was rapidly enacted in several states, was introduced in a number of other states, and underwent bar association, law revision commission and legislative study in still further states. In that process debate emerged, principally sparked by the study of Article 2A by the California Bar Association, California’s non-uniform amendments to Article 2A, and articles appearing in a symposium on Article 2A published after its promulgation in the Alabama Law Review. The debate chiefly centered on whether Article 2A had struck the proper balance or was clear enough concerning the ability of a lessor to grant a security interest in its leasehold interest and in the residual, priority between a secured party and the lessee, and the lessor’s remedy structure under Article 2A.

This debate over issues on which reasonable minds could and did differ began to affect the enactment effort for Article 2A in a deleterious manner. Consequently, the Standby Committee for Article 2A, composed predominantly of the former members of the drafting committee, reviewed the legislative actions and studies in the various states, and opened a dialogue with the principal proponents of the non-uniform amendments. Negotiations were conducted in conjunction with, and were facilitated by, a study of the uniform Article and the non-uniform Amendments by the New York Law Revision Commission. Ultimately, a consensus was reached, which has been approved by the membership of the Conference, the Permanent Editorial Board, and the Council of the Institute. Rapid and uniform enactment of Article 2A is expected as a result of the completed amendments. The Article 2A experience reaffirms the essential viability of the procedures of the Conference and the Institute for creating and updating uniform state law in the commercial law area.

Relationship of Article 2A to Other Articles:

The Article on Sales provided a useful point of reference for codifying the law of leases. Many of the provisions of that Article were carried over, changed to reflect differences in style, leasing terminology or leasing practices. Thus, the official comments to those sections of Article 2 whose provisions were carried over are incorporated by reference in Article 2A, as well; further, any case law interpreting those provisions should be viewed as persuasive but not binding on a court when deciding a similar issue with respect to leases. Any change in the sequence that has been made when carrying over a provision from Article 2 should be viewed as a matter of style, not substance. This is not to suggest that in other instances Article 2A did not also incorporate substantially revised provisions of Article 2, Article 9 or otherwise where the revision was driven by a concern over the substance; but for the lack of a mandate, the drafting committee might well have made the same or a similar change in the statutory analogue. Those sections in Article 2A include Sections 2A-104, 2A-105, 2A-106, 2A-108(2) and (4), 2A-109(2), 2A-208, 2A-214(2) and (3)(a), 2A-216, 2A-303, 2A-306, 2A-503, 2A-504(3)(b), 2A-506(2), and 2A-515. For lack of relevance or significance not all of the provisions of Article 2 were incorporated in Article 2A.

This codification was greatly influenced by the fundamental tenet of the common law as it has developed with respect to leases of goods: freedom of the parties to contract. Note that, like all other Articles of this Act, the principles of construction and interpretation contained in Article 1 are applicable throughout Article 2A (Section 2A-103(4)). These principles include the ability of the parties to vary the effect of the provisions of Article 2A, subject to certain limitations including those that relate to the obligations of good faith, diligence, reasonableness and care (Section 1-102(3)). Consistent with those principles no negative inference is to be drawn by the episodic use of the phrase “unless otherwise agreed” in certain provisions of Article 2A. Section 1-102(4). Indeed, the contrary is true, as the general rule in the Act, including this Article, is that the effect of the Act’s provisions may be varied by agreement. Section 1-102(3). This conclusion follows even where the statutory analogue contains the phrase and the correlative provision in Article 2A does not.

355.2A-102. Scope.

This article applies to any transaction, regardless of form, that creates a lease.

History. Enact. Acts 1990, ch. 363, § 2, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 9-102(1). Throughout this Article, unless otherwise stated, references to “Section” are to other sections of this Act.

Changes:

Substantially revised.

Purposes:

This Article governs transactions as diverse as the lease of a hand tool to an individual for a few hours and the leveraged lease of a complex line of industrial equipment to a multi-national organization for a number of years.

To achieve that end it was necessary to provide that this Article applies to any transaction, regardless of form, that creates a lease. Since lease is defined as a transfer of an interest in goods (Section 2A-103(1)(j)) and goods is defined to include fixtures (Section 2A-103(1)(h)), application is limited to the extent the transaction relates to goods, including fixtures. Further, since the definition of lease does not include a sale (Section 2-106(1)) or retention or creation of a security interest (Section 1-201(37)), application is further limited; sales and security interests are governed by other Articles of this Act.

Finally, in recognition of the diversity of the transactions to be governed, the sophistication of many of the parties to these transactions, and the common law tradition as it applies to the bailment for hire or lease, freedom of contract has been preserved. DeKoven, Proceedings After Default by the Lessee Under a True Lease of Equipment, in 1C P. Coogan, W. Hogan, D. Vagts, Secured Transactions Under the Uniform Commercial Code, § 29B.02[2] (1986). Thus, despite the extensive regulatory scheme established by this Article, the parties to a lease will be able to create private rules to govern their transaction. Sections 2A-103(4) and 1-102(3). However, there are special rules in this Article governing consumer leases, as well as other state and federal statutes, that may further limit freedom of contract with respect to consumer leases.

A court may apply this Article by analogy to any transaction, regardless of form, that creates a lease of personal property other than goods, taking into account the expressed intentions of the parties to the transaction and any differences between a lease of goods and a lease of other property. Such application has precedent as the provisions of the Article on Sales (Article 2) have been applied by analogy to leases of goods. E.g., Hawkland, The Impact of the Uniform Commercial Code on Equipment Leasing , 1972 Ill. L.F. 446; Murray, Under the Spreading Analogy of Article 2 of the Uniform Commercial Code , 39 Fordham L. Rev. 447 (1971). Whether such application would be appropriate for other bailments of personal property, gratuitous or for hire, should be determined by the facts of each case. See Mieske v. Bartell Drug Co. , 92 Wash.2d 40, 46-48, 593 P.2d 1308, 1312 (1979).

Further, parties to a transaction creating a lease of personal property other than goods, or a bailment of personal property may provide by agreement that this Article applies. Upholding the parties’ choice is consistent with the spirit of this Article.

Cross References:

Sections 1-102(3), 1-201(37), Article 2, esp. Section 2-106(4), and Sections 2A-103(1)(h), 2A-103(1)(j) and 2A-103(1).

Definitional Cross References:

“Lease”. Section 2A-103(1)(j).

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355.2A-103. Definitions and index of definitions.

  1. In this article unless the context otherwise requires:
    1. “Buyer in ordinary course of business” means a person who in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest or leasehold interest of a third party in the goods, buys in ordinary course from a person in the business of selling goods of that kind but does not include a pawnbroker. “Buying” may be for cash or by exchange of other property or on secured or unsecured credit and includes receiving goods or documents of title under a pre-existing contract for sale but does not include a transfer in bulk or as security for or in total or partial satisfaction of a money debt;
    2. “Cancellation” occurs when either party puts an end to the lease contract for default by the other party;
    3. “Commercial unit” means such a unit of goods as by commercial usage is a single whole for purposes of lease and division of which materially impairs its character or value on the market or in use. A commercial unit may be a single article, as a machine, or a set of articles, as a suite of furniture or a line of machinery, or a quantity, as a gross or carload, or any other unit treated in use or in the relevant market as a single whole;
    4. “Conforming” goods or performance under a lease contract means goods or performance that are in accordance with the obligations under the lease contract;
    5. “Consumer lease” means a lease that a lessor regularly engaged in the business of leasing or selling makes to a lessee who is an individual and who takes under the lease primarily for a personal, family, or household purpose;
    6. “Fault” means wrongful act, omission, breach, or default;
    7. “Finance lease” means a lease with respect to which:
      1. The lessor does not select, manufacture, or supply the goods;
      2. The lessor acquires the goods or the right to possession and use of the goods in connection with the lease; and
      3. One (1) of the following occurs:
        1. The lessee receives a copy of the contract by which the lessor acquired the goods or the right to possession and use of the goods before signing the lease contract;
        2. The lessee’s approval of the contract by which the lessor acquired the goods or the right to possession and use of the goods is a condition to effectiveness of the lease contract;
        3. The lessee, before signing the lease contract, receives an accurate and complete statement designating the promises and warranties, and any disclaimers of warranties, limitations or modifications of remedies, or liquidated damages, including those of a third party, such as the manufacturer of the goods, provided to the lessor by the person supplying the goods in connection with or as part of the contract by which the lessor acquired the goods or the right to possession and use of the goods; or
        4. If the lease is not a consumer lease, the lessor, before the lessee signs the lease contract, informs the lessee in writing (a) of the identity of the person supplying the goods to the lessor, unless the lessee has selected that person and directed the lessor to acquire the goods or the right to possession and use of the goods from that person, (b) that the lessee is entitled under this article to the promises and warranties, including those of any third party, provided to the lessor by the person supplying the goods in connection with or as part of the contract by which the lessor acquired the goods or the right to possession and use of the goods, and (c) that the lessee may communicate with the person supplying the goods to the lessor and receive an accurate and complete statement of those promises and warranties, including any disclaimers and limitations of them or of remedies;
    8. “Goods” means all things that are movable at the time of identification to the lease contract, or are fixtures (KRS 355.2A-309 ), but the term does not include money, documents, instruments, accounts, chattel paper, general intangibles, or minerals or the like, including oil and gas, before extraction. The term also includes the unborn young of animals;
    9. “Installment lease contract” means a lease contract that authorizes or requires the delivery of goods in separate lots to be separately accepted, even though the lease contract contains a clause “each delivery is a separate lease” or its equivalent;
    10. “Lease” means a transfer of the right to possession and use of goods for a term in return for consideration, but a sale, including a sale on approval or a sale or return, or retention or creation of a security interest is not a lease. Unless the context clearly indicates otherwise, the term includes a sublease;
    11. “Lease agreement” means the bargain, with respect to the lease, of the lessor and the lessee in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance as provided in this article. Unless the context clearly indicates otherwise, the term includes a sublease agreement;
    12. “Lease contract” means the total legal obligation that results from the lease agreement as affected by this article and any other applicable rules of law. Unless the context clearly indicates otherwise, the term includes a sublease contract;
    13. “Leasehold interest” means the interest of the lessor or the lessee under a lease contract;
    14. “Lessee” means a person who acquires the right to possession and use of goods under a lease. Unless the context clearly indicates otherwise, the term includes a sublessee;
    15. “Lessee in ordinary course of business” means a person who in good faith and without knowledge that the lease to him is in violation of the ownership rights or security interest or leasehold interest of a third party in the goods leases in ordinary course from a person in the business of selling or leasing goods of that kind but does not include a pawnbroker. “Leasing” may be for cash or by exchange of other property or on secured or unsecured credit and includes receiving goods or documents of title under a pre-existing lease contract but does not include a transfer in bulk or as security for or in total or partial satisfaction of a money debt;
    16. “Lessor” means a person who transfers the right to possession and use of goods under a lease. Unless the context clearly indicates otherwise, the term includes a sublessor;
    17. “Lessor’s residual interest” means the lessor’s interest in the goods after expiration, termination, or cancellation of the lease contract;
    18. “Lien” means a charge against or interest in goods to secure payment of a debt or performance of an obligation, but the term does not include a security interest;
    19. “Lot” means a parcel or a single article that is the subject matter of a separate lease or delivery, whether or not it is sufficient to perform the lease contract.
    20. “Merchant lessee” means a lessee that is a merchant with respect to goods of the kind subject to the lease;
    21. “Present value” means the amount as of a date certain of one (1) or more sums payable in the future, discounted to the date certain. The discount is determined by the interest rate specified by the parties if the rate was not manifestly unreasonable at the time the transaction was entered into; otherwise, the discount is determined by a commercially reasonable rate that takes into account the facts and circumstances of each case at the time the transaction was entered into;
    22. “Purchase” includes taking by sale, lease, mortgage, security interest, pledge, gift, or any other voluntary transaction creating an interest in goods;
    23. “Sublease” means a lease of goods the right to possession and use of which was acquired by the lessor as a lessee under an existing lease;
    24. “Supplier” means a person from whom a lessor buys or leases goods to be leased under a finance lease;
    25. “Supply contract” means a contract under which a lessor buys or leases goods to be leased; and
    26. “Termination” occurs when either party pursuant to a power created by agreement or law puts an end to the lease contract otherwise than for default.
  2. Other definitions applying to this article and the sections in which they appear are:
    1. “Accessions.” KRS 355.2A-310 (1);
    2. “Construction mortgage.” KRS 355.2A-309 (1)(d);
    3. “Encumbrance.” KRS 355.2A-309 (1)(e);
    4. “Fixtures.” KRS 355.2A-309(1)(a);
    5. “Fixture filing.” KRS 355.2A-309(1)(b); and
    6. “Purchase money lease.” KRS 355.2A-309(1)(c).
  3. The following definitions in other articles apply to this article:
    1. “Account.” KRS 355.9-102 (1)(b);
    2. “Between merchants.” KRS 355.2-104 (3);
    3. “Buyer.” KRS 355.2-103 (1)(a);
    4. “Chattel paper.” KRS 355.9-102 (1)(k);
    5. “Consumer goods.” KRS 355.9-102(1)(w);
    6. “Document.” KRS 355.9-102(1)(ad);
    7. “Entrusting.” KRS 355.2-403 (3);
    8. “General intangible.” KRS 355.9-102(1)(ap);
    9. “Instrument.” KRS 355.9-102(1)(au);
    10. “Merchant.” KRS 355.2-104 (1);
    11. “Mortgage.” KRS 355.9-102(1)(bc);
    12. “Pursuant to commitment.” KRS 355.9-102(1)(bq);
    13. “Receipt.” KRS 355.2-103 (1)(c);
    14. “Sale.” KRS 355.2-106 (1);
    15. “Sale on approval.” KRS 355.2-326 ;
    16. “Sale or return.” KRS 355.2-326 ; and
    17. “Seller.” KRS 355.2-103(1)(d).
  4. In addition Article 1 contains general definitions and principles of construction and interpretation applicable throughout this article.

History. Enact. Acts 1990, ch. 363, § 3, effective January 1, 1991; 1992, ch. 116, § 1, effective January 1, 1993; 1998, ch. 542, § 9, effective July 15, 1998; 2000, ch. 408, § 163, effective July 1, 2001; 2006, ch. 242, § 27, effective July 12, 2006; 2012, ch. 132, § 54, effective July 12, 2012.

Legislative Research Commission Notes.

(7/12/2006). Under the authority of KRS 7.136(1), the Reviser of Statutes has added paragraph headings [(a), (b), etc.] before terms referenced in subsection (2) of this statute that are defined in other statutes. The words in the text were not changed.

Official Comment

  1. “Buyer in ordinary course of business”. Section 1-201(b)(9).
  2. “Cancellation”. Section 2-106(4). The effect of a cancellation is provided in Section 2A-505(1).
  3. “Commercial unit”. Section 2-105(6).
  4. “Conforming”. Section 2-106(2).
  5. “Consumer lease”. New. This Article includes a subset of rules that applies only to consumer leases. Sections 2A-106, 2A-108(2), 2A-108(4), 2A-109(2), 2A-221, 2A-309, 2A-406, 2A-407, 2A-504(3)(b), and 2A-516(3)(b).

    For a transaction to qualify as a consumer lease it must first qualify as a lease. Section 2A-103(1)(j). Note that this Article regulates the transactional elements of a lease, including a consumer lease; consumer protection statutes, present and future, and existing consumer protection decisions are unaffected by this Article. Section 2A-104(1)(c) and (2). Of course, Article 2A as state law also is subject to federal consumer protection law.

    This definition is modeled after the definition of consumer lease in the Consumer Leasing Act, 15 U.S.C. § 1667 (1982), and in the Unif. Consumer Credit Code § 1.301(14), 7A U.L.A. 43 (1974). However, this definition of consumer lease differs from its models in several respects: the lessor can be a person regularly engaged either in the business of leasing or of selling goods, the lease need not be for a term exceeding four months, a lease primarily for an agricultural purpose is not covered, and whether there should be a limitation by dollar amount and its amount is left up to the individual states.

    This definition focuses on the parties as well as the transaction. If a lease is within this definition, the lessor must be regularly engaged in the business of leasing or selling, and the lessee must be an individual not an organization; note that a lease to two or more individuals having a common interest through marriage or the like is not excluded as a lease to an organization under Section 1-201(28). The lessee must take the interest primarily for a personal, family or household purpose. If required by the enacting state, total payments under the lease contract, excluding payments for options to renew or buy, cannot exceed the figure designated.

  6. “Fault”. Section 1-201(16).
  7. “Finance Lease”. New. This Article includes a subset of rules that applies only to finance leases. Sections 2A-209, 2A-211(2), 2A-212(1), 2A-213, 2A-219(1), 2A-220(1)(a), 2A-221, 2A-405(1)(c), 2A-407, 2A-516(2) and 2A-517(1)(a) and (2).

    For a transaction to qualify as a finance lease it must first qualify as a lease. Section 2A-103(1)(j). Unless the lessor is comfortable that the transaction will qualify as a finance lease, the lease agreement should include provisions giving the lessor the benefits created by the subset of rules applicable to the transaction that qualifies as a finance lease under this Article.

    A finance lease is the product of a three-party transaction. The supplier manufactures or supplies the goods pursuant to the lessee’s specification, perhaps even pursuant to a purchase order, sales agreement or lease agreement between the supplier and the lessee. After the prospective finance lease is negotiated, a purchase order, sales agreement, or lease agreement is entered into by the lessor (as buyer or prime lessee) or an existing order, agreement or lease is assigned by the lessee to the lessor, and the lessor and the lessee then enter into a lease or sublease of the goods. Due to the limited function usually performed by the lessor, the lessee looks almost entirely to the supplier for representations, covenants and warranties. If a manufacturer’s warranty carries through, the lessee may also look to that. Yet, this definition does not restrict the lessor’s function solely to the supply of funds; if the lessor undertakes or performs other functions, express warranties, covenants and the common law will protect the lessee.

    This definition focuses on the transaction, not the status of the parties; to avoid confusion it is important to note that in other contexts, e.g., tax and accounting, the term finance lease has been used to connote different types of lease transactions, including leases that are disguised secured transactions. M. Rice, Equipment Financing , 62-71 (1981). A lessor who is a merchant with respect to goods of the kind subject to the lease may be a lessor under a finance lease. Many leases that are leases back to the seller of goods (Section 2A-308(3)) will be finance leases. This conclusion is easily demonstrated by a hypothetical. Assume that B had bought goods from C pursuant to a sales contract. After delivery to and acceptance of the goods by B, B negotiates to sell the goods to A and simultaneously to lease the goods back from A, on terms and conditions that, we assume, will qualify the transaction as a lease. Section 2A-103(1)(j). In documenting the sale and lease back, B assigns the original sales contract between B, as buyer, and C, as seller, to A. A review of these facts leads to the conclusion that the lease from A to B qualifies as a finance lease, as all three conditions of the definition are satisfied. Subparagraph (i) is satisfied as A, the lessor, had nothing to do with the selection, manufacture, or supply of the equipment. Subparagraph (ii) is satisfied as A, the lessor, bought the equipment at the same time that A leased the equipment to B, which certainly is in connection with the lease. Finally, subparagraph (iii)(A) is satisfied as A entered into the sales contract with B at the same time that A leased the equipment back to B. B, the lessee, will have received a copy of the sales contract in a timely fashion.

    Subsection (i) requires the lessor to remain outside the selection, manufacture and supply of the goods; that is the rationale for releasing the lessor from most of its traditional liability. The lessor is not prohibited from possession, maintenance or operation of the goods, as policy does not require such prohibition. To insure the lessee’s reliance on the supplier, and not on the lessor, subsection (ii) requires that the goods (where the lessor is the buyer of the goods) or that the right to possession and use of the goods (where the lessor is the prime lessee and the sublessor of the goods) be acquired in connection with the lease (or sublease) to qualify as a finance lease. The scope of the phrase “in connection with” is to be developed by the courts, case by case. Finally, as the lessee generally relies almost entirely upon the supplier for representations and covenants, and upon the supplier or a manufacturer, or both, for warranties with respect to the goods, subsection (iii) requires that one of the following occur: (A) the lessee receive a copy of the supply contract before signing the lease contract; (B) the lessee’s approval of the supply contract is a condition to the effectiveness of the lease contract; (C) the lessee receive a statement describing the promises and warranties and any limitations relevant to the lessee before signing the lease contract; or (D) before signing the lease contract and except in a consumer lease, the lessee receive a writing identifying the supplier (unless the supplier was selected and required by the lessee) and the rights of the lessee under Section 2A-209, and advising the lessee a statement of promises and warranties is available from the supplier. Thus, even where oral supply orders or computer placed supply orders are compelled by custom and usage the transaction may still qualify as a finance lease if the lessee approves the supply contract before the lease contract is effective and such approval was a condition to the effectiveness of the lease contract. Moreover, where the lessor does not want the lessee to see the entire supply contract, including price information, the lessee may be provided with a separate statement of the terms of the supply contract relevant to the lessee; promises between the supplier and the lessor that do not affect the lessee need not be included. The statement can be a restatement of those terms or a copy of portions of the supply contract with the relevant terms clearly designated. Any implied warranties need not be designated, but a disclaimer or modification of remedy must be designated. A copy of any manufacturer’s warranty is sufficient if that is the warranty provided. However, a copy of any Regulation M disclosure given pursuant to 12 C.F.R. § 213.4(g) concerning warranties in itself is not sufficient since those disclosures need only briefly identify express warranties and need not include any disclaimer of warranty.

    If a transaction does not qualify as a finance lease, the parties may achieve the same result by agreement; no negative implications are to be drawn if the transaction does not qualify. Further, absent the application of special rules (fraud, duress, and the like), a lease that qualifies as a finance lease and is assigned by the lessor or the lessee to a third party does not lose its status as a finance lease under this Article. Finally, this Article creates no special rule where the lessor is an affiliate of the supplier; whether the transaction qualifies as a finance lease will be determined by the facts of each case.

  8. “Goods”. Section 9-102(a)(44). See Section 2A-103(3) for reference to the definition of “Account”, “Chattel paper”, “Document”, “General intangibles” and “Instrument”. See Section 2A-217 for determination of the time and manner of identification.
  9. “Installment lease contract”. Section 2-612(1).
  10. “Lease”. New. There are several reasons to codify the law with respect to leases of goods. An analysis of the case law as it applies to leases of goods suggests at least several significant issues to be resolved by codification. First and foremost is the definition of a lease. It is necessary to define lease to determine whether a transaction creates a lease or a security interest disguised as a lease. If the transaction creates a security interest disguised as a lease, the transaction will be governed by the Article on Secured Transactions (Article 9) and the lessor will be required to file a financing statement or take other action to perfect its interest in the goods against third parties. There is no such requirement with respect to leases under the common law and, except with respect to leases of fixtures (Section 2A-309), this Article imposes no such requirement. Yet the distinction between a lease and a security interest disguised as a lease is not clear from the case law at the time of the promulgation of this Article. DeKoven,  Leases of Equipment: Puritan Leasing Company v. August, A Dangerous Decision,  12 U.S.F. L.Rev. 257 (1978).

    At common law a lease of personal property is a bailment for hire. While there are several definitions of bailment for hire, all require a thing to be let and a price for the letting. Thus, in modern terms and as provided in this definition, a lease is created when the lessee agrees to furnish consideration for the right to the possession and use of goods over a specified period of time. Mooney, Personal Property Leasing: A Challenge , 36 Bus.Law. 1605, 1607 (1981). Further, a lease is neither a sale (Section 2-106(1)) nor a retention or creation of a security interest (Section 1-201(b)(35) and 1-203). Due to extensive litigation to distinguish true leases from security interests, an amendment to former Section 1-201(37) (now codified as Section 1-203) was promulgated with this Article to create a sharper distinction.

    This section as well as Section 1-203 must be examined to determine whether the transaction in question creates a lease or a security interest. The following hypotheticals indicate the perimeters of the issue. Assume that A has purchased a number of copying machines, new, for $1,000 each; the machines have an estimated useful economic life of three years. A advertises that the machines are available to rent for a minimum of one month and that the monthly rental is $100.00. A intends to enter into leases where A provides all maintenance, without charge to the lessee. Further, the lessee will rent the machine, month to month, with no obligation to renew. At the end of the lease term the lessee will be obligated to return the machine to A’s place of business. This transaction qualifies as a lease under the first half of the definition, for the transaction includes a transfer by A to a prospective lessee of possession and use of the machine for a stated term, month to month. The machines are goods (Section 2A-103(1)(h)). The lessee is obligated to pay consideration in return, $100.00 for each month of the term.

    However, the second half of the definition provides that a sale or a security interest is not a lease. Since there is no passing of title, there is no sale. Sections 2A-103(3) and 2-106(1). Under pre-Act security law this transaction would have created a bailment for hire or a true lease and not a conditional sale. Da Rocha v. Macomber , 330 Mass. 611, 614-15, 116 N.E.2d 139, 142 (1953). Under Section 1-203, the same result would follow. While the lessee is obligated to pay rent for the one-month term of the lease, one of the other four conditions of Section 1-203(b) must be met and none is. The term of the lease is one month and the economic life of the machine is 36 months; thus, Section 1-203(b)(1) is not now satisfied. Considering the amount of the monthly rent, absent economic duress or coercion, the lessee is not bound either to renew the lease for the remaining economic life of the goods or to become the owner. If the lessee did lease the machine for 36 months, the lessee would have paid the lessor $3,600 for a machine that could have been purchased for $1,000; thus, Section 1-203(b)(2) is not satisfied. Finally, there are no options; thus, subparagraphs (3) and (4) of Section 1-203(b) are not satisfied. This transaction creates a lease, not a security interest. However, with each renewal of the lease the facts and circumstances at the time of each renewal must be examined to determine if that conclusion remains accurate, as it is possible that a transaction that first creates a lease, later creates a security interest.

    Assume that the facts are changed and that A requires each lessee to lease the goods for 36 months, with no right to terminate. Under pre-Act security law this transaction would have created a conditional sale, and not a bailment for hire or true lease. Hervey v. Rhode Island Locomotive Works , 93 U.S. 664, 672-73 (1876). Under this subsection, and Section 1-203, the same result would follow. The lessee’s obligation for the term is not subject to termination by the lessee and the term is equal to the economic life of the machine.

    Between these extremes there are many transactions that can be created. Some of the transactions were not properly categorized by the courts in applying the 1978 and earlier Official Texts of former Section 1-201(37). This subsection, together with Section 1-203, draws a brighter line, which should create a clearer signal to the professional lessor and lessee.

  11. “Lease agreement”. This definition is derived from Section 1-201(b)(3). Because the definition of lease is broad enough to cover future transfers, lease agreement includes an agreement contemplating a current or subsequent transfer. Thus it was not necessary to make an express reference to an agreement for the future lease of goods (Section 2-106(1)). This concept is also incorporated in the definition of lease contract. Note that the definition of lease does not include transactions in ordinary building materials that are incorporated into an improvement on land. Section 2A-309(2).

    The provisions of this Article, if applicable, determine whether a lease agreement has legal consequences; otherwise the law of bailments and other applicable law determine the same. Sections 2A-103(4) and 1-103.

  12. “Lease contract”. This definition is derived from the definition of contract in Section 1-201(b)(12). Note that a lease contract may be for the future lease of goods, since this notion is included in the definition of lease.
  13. “Leasehold interest”. New.
  14. “Lessee”. New.
  15. “Lessee in ordinary course of business”. Section 1-201(b)(9).
  16. “Lessor”. New.
  17. “Lessor’s residual interest”. New.
  18. “Lien”. New. This term is used in Section 2A-307 (Priority of Liens Arising by Attachment or Levy on, Security Interests in, and Other Claims to Goods).
  19. “Lot”. Section 2-105(5).
  20. “Merchant lessee”. New. This term is used in Section 2A-511 (Merchant Lessee’s Duties as to Rightfully Rejected Goods). A person may satisfy the requirement of dealing in goods of the kind subject to the lease as lessor, lessee, seller, or buyer.
  21. [Deleted as part of conforming amendments to revised Article 1].
  22. “Purchase”. Section 1-201(b)(29). This definition omits the reference to lien contained in the definition of purchase in Article 1 (Section 1-201(b)(29)). This should not be construed to exclude consensual liens from the definition of purchase in this Article; the exclusion was mandated by the scope of the definition of lien in Section 2A-103(1)(r). Further, the definition of purchaser in this Article adds a reference to lease; as purchase is defined in Section 1-201(b)(29) to include any other voluntary transaction creating an interest in property, this addition is not substantive.
  23. “Sublease”. New.
  24. “Supplier”. New.
  25. “Supply contract”. New.
  26. “Termination”. Section 2-106(3). The effect of a termination is provided in Section 2A-505(2).

Research References and Practice Aids

Kentucky Bench & Bar.

Treatment of Leases in Bankruptcy, Vol. 69, No. 3, May 2005, Ky. Bench & Bar 15.

355.2A-104. Lease subject to other law.

  1. A lease, although subject to this article, is also subject to any applicable:
    1. Certificate of title statute of this state;
    2. Certificate of title statute of another jurisdiction (KRS 355.2A-105 ); or
    3. Consumer protection statute of this state, or final consumer protection decision of a court of this state existing on the effective date of this article.
  2. In case of conflict between this article, other than KRS 355.2A-105 , subsection (3) of KRS 355.2A-304 , and subsection (3) of KRS 355.2A-305 , and a statute or decision referred to in subsection (1), the statute or decision controls.
  3. Failure to comply with an applicable law has only the effect specified therein.

History. Enact. Acts 1990, ch. 363, § 4, effective January 1, 1991; 1992, ch. 116, § 2, effective January 1, 1993.

Official Comment

Uniform Statutory Source:

Sections 9-203(4) and 9-302(3)(b) and (c) (now codified as Sections 9-201 and 9-311(a)(2) and (3)).

Changes:

Substantially revised.

Purposes:

  1. This Article creates a comprehensive scheme for the regulation of transactions that create leases. Section 2A-102. Thus, the Article supersedes all prior legislation dealing with leases, except to the extent set forth in this Section.
  2. Subsection (1) states the general rule that a lease, although governed by the scheme of this Article, also may be governed by certain other applicable laws. This may occur in the case of a consumer lease. Section 2A-103(1)(e). Those laws may be state statutes existing prior to enactment of Article 2A or passed afterward. In this case, it is desirable for this Article to specify which statute controls. Or the law may be a pre-existing consumer protection decision. This Article preserves such decisions. Or the law may be a statute of the United States. Such a law controls without any statement in this Article under applicable principles of preemption. An illustration of a statute of the United States that governs consumer leases is the Consumer Leasing Act, 15 U.S.C. §§ 1667-1667(e) (1982) and its implementing regulation, Regulation M, 12 C.F.R. § 213 (1986); the statute mandates disclosures of certain lease terms, delimits the liability of a lessee in leasing personal property, and regulates the advertising of lease terms. An illustration of a state statute that governs consumer leases and which if adopted in the enacting state prevails over this Article is the Unif. Consumer Credit Code, which includes many provisions similar to those of the Consumer Leasing Act, e.g. Unif. Consumer Credit Code §§ 3.202, 3.209, 3.401, 7A U.L.A. 108-09, 115, 125 (1974), as well as provisions in addition to those of the Consumer Leasing Act, e.g., Unif. Consumer Credit Code §§ 5.109 -.111, 7A U.L.A. 171-76 (1974) (the right to cure a default). Such statutes may define consumer lease so as to govern transactions within and without the definition of consumer lease under this Article.
  3. Under subsection (2), subject to certain limited exclusions, in case of conflict a statute or a decision described in subsection (1) prevails over this Article. For example, a provision like Unif. Consumer Credit Code § 5.112 , 7A U.L.A. 176 (1974), limiting self-help repossession, prevails over Section 2A-525(c). A consumer protection decision rendered after the effective date of this Article may supplement its provisions. For example, in relation to Article 9 a court might conclude that an acceleration clause may not be enforced against an individual debtor after late payments have been accepted unless a prior notice of default is given. To the extent the decision establishes a general principle applicable to transactions other than secured transactions, it may supplement Section 2A-502.
  4. Consumer protection in lease transactions is primarily left to other law. However, several provisions of this Article do contain special rules that may not be varied by agreement in the case of a consumer lease. E.g., Sections 2A-106, 2A-108, and 2A-109(2). Were that not so, the ability of the parties to govern their relationship by agreement together with the position of the lessor in a consumer lease too often could result in a one-sided lease agreement.
  5. In construing this provision the reference to statute should be deemed to include applicable regulations. A consumer protection decision is “final” on the effective date of this Article if it is not subject to appeal on that date or, if subject to appeal, is not later reversed on appeal. Of course, such a decision can be overruled by a later decision or superseded by a later statute.

Cross References:

Sections 2A-103(1)(e), 2A-106, 2A-108, 2A-109(2) and 2A-525(3).

Definitional Cross Reference:

“Lease”. Section 2A-103(1)(j).

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355.2A-105. Territorial application of article to goods covered by certificate of title.

Subject to the provisions of subsection (3) of KRS 355.2A-304 and subsection (3) of KRS 355.2A-305 , with respect to goods covered by a certificate of title issued under a statute of this state or of another jurisdiction, compliance and the effect of compliance or noncompliance with a certificate of title statute are governed by the law (including the conflict of laws rules) of the jurisdiction issuing the certificate until the earlier of (a) surrender of the certificate, or (b) four (4) months after the goods are removed from that jurisdiction and thereafter until a new certificate of title is issued by another jurisdiction.

History. Enact. Acts 1990, ch. 363, § 5, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 9-103(2)(a) and (b) (now codified as Sections 9-303 and 9-316).

Changes:

Substantially revised. The provisions of the last sentence of Section 9-103(2)(b) have not been incorporated as it is superfluous in this context. The provisions of Section 9-103(2)(d) have not been incorporated because the problems dealt with are adequately addressed by this section and Sections 2A-304(3) and 305(3).

Purposes:

The new certificate referred to in (b) must be permanent, not temporary. Generally, the lessor or creditor whose interest is indicated on the most recently issued certificate of title will prevail over interests indicated on certificates issued previously by other jurisdictions. This provision reflects a policy that it is reasonable to require holders of interests in goods covered by a certificate of title to police the goods or risk losing their interests when a new certificate of title is issued by another jurisdiction.

Cross References:

Sections 2A-304(3), 2A-305(3), 9-103(2)(b) and 9-103(2)(d) (now codified as Sections 9-303, 9-316, and 9-337).

Definitional Cross References:

“Goods”. Section 2A-103(1)(h).

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355.2A-106. Limitation on power of parties to consumer lease to choose applicable law and judicial forum.

  1. If the law chosen by the parties to a consumer lease is that of a jurisdiction other than a jurisdiction in which the lessee resides at the time the lease agreement becomes enforceable or within thirty (30) days thereafter or in which the goods are to be used, the choice is not enforceable.
  2. If the judicial forum chosen by the parties to a consumer lease is a forum that would not otherwise have jurisdiction over the lessee, the choice is not enforceable.

History. Enact. Acts 1990, ch. 363, § 6, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Unif. Consumer Credit Code § 1.201(8), 7A U.L.A. 36 (1974).

Changes:

Substantially revised.

Purposes:

There is a real danger that a lessor may induce a consumer lessee to agree that the applicable law will be a jurisdiction that has little effective consumer protection, or to agree that the applicable forum will be a forum that is inconvenient for the lessee in the event of litigation. As a result, this section invalidates these choice of law or forum clauses, except where the law chosen is that of the state of the consumer’s residence or where the goods will be kept, or the forum chosen is one that otherwise would have jurisdiction over the lessee.

Subsection (1) limits potentially abusive choice of law clauses in consumer leases. The 30-day rule in subsection (1) was suggested by Section 9-103(1)(c). This section has no effect on choice of law clauses in leases that are not consumer leases. Such clauses would be governed by other law.

Subsection (2) prevents enforcement of potentially abusive jurisdictional consent clauses in consumer leases. By using the term judicial forum, this section does not limit selection of a nonjudicial forum, such as arbitration. This section has no effect on choice of forum clauses in leases that are not consumer leases; such clauses are, as a matter of current law, “prima facie valid”. The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10 (1972). Such clauses would be governed by other law, including the Model Choice of Forum Act (1968).

Cross Reference:

Section 9-103(1)(c).

Definitional Cross Reference:

“Consumer lease”. Section 2A-103(1)(e). “Lease agreement”. Section 2A-103(1)(k). “Lessee”. Section 2A-103(1)(n). “Goods”. Section 2A-103(1)(h). “Party”. Section 1-201(29).

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355.2A-107. Waiver or renunciation of claim or right after default.

Any claim or right arising out of an alleged default or breach of warranty may be discharged in whole or in part without consideration by a written waiver or renunciation signed and delivered by the aggrieved party.

History. Enact. Acts 1990, ch. 363, § 7, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 1-107.

Changes:

Revised to reflect leasing practices and terminology. This clause is used throughout the official comments to this Article to indicate the scope of change in the provisions of the Uniform Statutory Source included in the section; these changes range from one extreme, e.g., a significant difference in practice (a warranty as to merchantability is not implied in a finance lease (Section 2A-212)) to the other extreme, e.g., a modest difference in style or terminology (the transaction governed is a lease not a sale (Section 2A-203)).

Cross References:

Sections 2A-103 and 2A-212.

Definitional Cross References:

“Aggrieved party”. Section 1-201(2). “Delivery”. Section 1-201(14). “Rights”. Section 1-201(36). “Signed”. Section 1-201(39). “Written”. Section 1-201(46).

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355.2A-108. Unconscionability.

  1. If the court as a matter of law finds a lease contract or any clause of a lease contract to have been unconscionable at the time it was made, the court may refuse to enforce the lease contract, or it may enforce the remainder of the lease contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.
  2. With respect to a consumer lease, if the court as a matter of law finds that a lease contract or any clause of a lease contract has been induced by unconscionable conduct or that unconscionable conduct has occurred in the collection of a claim arising from a lease contract, the court may grant appropriate relief.
  3. Before making a finding of unconscionability under subsection (1) or (2), the court, on its own motion or that of party, shall afford the parties a reasonable opportunity to present evidence as to the setting, purpose, and effect of the lease contract or clause thereof, or of the conduct.
  4. In an action in which the lessee claims unconscionability with respect to a consumer lease:
    1. If the court finds unconscionability under subsection (1) or (2), the court shall award reasonable attorney’s fees to the lessee.
    2. If the court does not find unconscionability, the court may award reasonable attorney’s fees to the party against whom the claim is made.
    3. In determining attorney’s fees, the amount of the recovery on behalf of the claimant under subsections (1) and (2) is not controlling.

History. Enact. Acts 1990, ch. 363, § 8, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-302 and Unif. Consumer Credit Code § 5.108 , 7A U.L.A. 167-69 (1974).

Changes:

Subsection (1) is taken almost verbatim from the provisions of Section 2-302(1). Subsection (2) is suggested by the provisions of Unif. Consumer Credit Code § 5.108(1), (2), 7A U.L.A. 167 (1974). Subsection (3), taken from the provisions of Section 2-302(2), has been expanded to cover unconscionable conduct. Unif. Consumer Credit Code § 5.108(3), 7A U.L.A. 167 (1974). The provision for the award of attorney’s fees to consumers, subsection (4), covers unconscionability under subsection (1) as well as (2). Subsection (4) is modeled on the provisions of Unif. Consumer Credit Code § 5.108(6), 7A U.L.A. 169 (1974).

Purposes:

Subsections (1) and (3) of this section apply the concept of unconscionability reflected in the provisions of Section 2-302 to leases. See Dillman & Assocs. v. Capitol Leasing Co., 110 Ill.App.3d 335, 342, 442 N.E.2d 311, 316 (App.Ct. 1982). Subsection (3) omits the adjective “commercial” found in subsection 2-302(2) because subsection (3) is concerned with all leases and the relevant standard of conduct is determined by the context.

The balance of the section is modeled on the provisions of Unif. Consumer Credit Code § 5.108 , 7A U.L.A. 167-69 (1974). Thus subsection (2) recognizes that a consumer lease or a clause in a consumer lease may not itself be unconscionable but that the agreement would never have been entered into if unconscionable means had not been employed to induce the consumer to agree. To make a statement to induce the consumer to lease the goods, in the expectation of invoking an integration clause in the lease to exclude the statement’s admissibility in a subsequent dispute, may be unconscionable. Subsection (2) also provides a consumer remedy for unconscionable conduct, such as using or threatening to use force or violence, in the collection of a claim arising from a lease contract. These provisions are not exclusive. The remedies of this section are in addition to remedies otherwise available for the same conduct under other law, for example, an action in tort for abusive debt collection or under another statute of this State for such conduct. The reference to appropriate relief in subsection (2) is intended to foster liberal administration of this remedy. Sections 2A-103(4) and 1-106(1).

Subsection (4) authorizes an award of reasonable attorney’s fees if the court finds unconscionability with respect to a consumer lease under subsections (1) or (2). Provision is also made for recovery by the party against whom the claim was made if the court does not find unconscionability and does find that the consumer knew the action to be groundless. Further, subsection (4)(b) is independent of, and thus will not override, a term in the lease agreement that provides for the payment of attorney’s fees.

Cross References:

Sections 1-106(1), 2-302 and 2A-103(4).

Definitional Cross Reference:

“Action”. Section 1-201(1). “Consumer lease”. Section 2A-103(1)(e). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Party”. Section 1-201(29).

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355.2A-109. Option to accelerate at will.

  1. A term providing that one (1) party or his successor in interest may accelerate payment or performance or require collateral or additional collateral “at will” or “when he deems himself insecure” or in words of similar import must be construed to mean that he has power to do so only if he in good faith believes that the prospect of payment or performance is impaired.
  2. With respect to a consumer lease, the burden of establishing good faith under subsection (1) is on the party who exercised the power; otherwise the burden of establishing lack of good faith is on the party against whom the power has been exercised.

History. Enact. Acts 1990, ch. 363, § 9, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 1-208 and Unif. Consumer Credit Code § 5.109(2), 7A U.L.A. 171 (1974).

Purposes:

Subsection (1) reflects modest changes in style to the provisions of the first sentence of Section 1-208.

Subsection (2), however, reflects a significant change in the provisions of the second sentence of Section 1-208 by creating a new rule with respect to a consumer lease. A lease provision allowing acceleration at the will of the lessor or when the lessor deems itself insecure is of critical importance to the lessee. In a consumer lease it is a provision that is not usually agreed to by the parties but is usually mandated by the lessor. Therefore, where its invocation depends not on specific criteria but on the discretion of the lessor, its use should be regulated to prevent abuse. Subsection (1) imposes a duty of good faith upon its exercises. Subsection (2) shifts the burden of establishing good faith to the lessor in the case of a consumer lease, but not otherwise.

Cross Reference:

Section 1-208.

Definitional Cross Reference:

“Burden of establishing”. Section 1-201(8). “Consumer lease”. Section 2A-103(1)(e). “Good faith”. Sections 1-201(19) and 2-103(1)(b). “Party”. Section 1-201(29). “Term”. Section 1-201(42)

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355.2A-110. Use of comments.

The comments of the National Conference of Commissioners on Uniform State Laws and the American Law Institute may be consulted in the construction and application of Article 2A but if the text and comment conflict, the text shall control.

History. Enact. Acts 1990, ch. 363, § 82, effective January 1, 1991.

Part 2. Formation and Construction of Lease Contract

355.2A-201. Statute of frauds.

  1. A lease contract is not enforceable by way of action or defense unless:
    1. The total payments to be made under the lease contract, excluding payments for options to renew or buy, are less than five hundred dollars ($500); or
    2. There is a writing, signed by the party against whom enforcement is sought or by that party’s authorized agent, sufficient to indicate that a lease contract has been made between the parties and to describe the goods leased and the lease term.
  2. Any description of leased goods or of the lease term is sufficient and satisfies subsection (1)(b), whether or not it is specific, if it reasonably identifies what is described.
  3. A writing is not insufficient because it omits or incorrectly states a term agreed upon, but the lease contract is not enforceable under subsection (1)(b) beyond the lease term and the quantity of goods shown in the writing.
  4. A lease contract that does not satisfy the requirements of subsection (1), but which is valid in other respects, is enforceable:
    1. If the goods are to be specially manufactured or obtained for the lessee and are not suitable for lease or sale to others in the ordinary course of the lessor’s business, and the lessor, before notice of repudiation is received and under circumstances that reasonably indicate that the goods are for the lessee, has made either a substantial beginning of their manufacture or commitments for their procurement;
    2. If the party against whom enforcement is sought admits in that party’s pleading, testimony or otherwise in court that lease contract was made, but the lease contract is not enforceable under this provision beyond the quantity of goods admitted; or
    3. With respect to goods that have been received and accepted by the lessee.
  5. The lease term under a lease contract referred to in subsection (4) is:
    1. If there is a writing signed by the party against whom enforcement is sought or by that party’s authorized agent specifying the lease term, the term so specified;
    2. If the party against whom enforcement is sought admits in that party’s pleading, testimony, or otherwise in court a lease term, the term so admitted; or
    3. A reasonable lease term.

History. Enact. Acts 1990, ch. 363, § 10, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Sections 2-201, 9-203(1) and 9-110 (now codified as Sections 9-203(b) and 9-108).

Changes:

This section is modeled on Section 2-201, with changes to reflect the differences between a lease contract and a contract for the sale of goods. In particular, subsection (1)(b) adds a requirement that the writing “describe the goods leased and the lease term”, borrowing that concept, with revisions, from the provisions of Section 9-203(1)(a) (now codified as Section 9-203(b)(3)(A)). Subsection (2), relying on the statutory analogue in Section 9-110 (now codified as Section 9-108), sets forth the minimum criterion for satisfying that requirement.

Purposes:

The changes in this section conform the provisions of Section 2-201 to custom and usage in lease transactions. Section 2-201(2), stating a special rule between merchants, was not included in this section as the number of such transactions involving leases, as opposed to sales, was thought to be modest. Subsection (d) creates no exception for transactions where payment has been made and accepted. This represents a departure from the analogue, Section 2-201(3)(c). The rationale for the departure is grounded in the distinction between sales and leases. Unlike a buyer in a sales transaction, the lessee does not tender payment in full for goods delivered, but only payment of rent for one or more months. It was decided that, as a matter of policy, this act of payment is not a sufficient substitute for the required memorandum. Subsection (5) was needed to establish the criteria for supplying the lease term if it is omitted, as the lease contract may still be enforceable under subsection (4).

Cross References:

Sections 2-201, 9-110 and 9-203(b)(3)(A).

Definitional Cross References:

“Action”. Section 1-201(1). “Agreed”. Section 1-201(3). “Buying”. Section 2A-103(1)(a). “Goods”. Section 2A-103(1)(h). “Lease”. Section 2A-103(1)(j). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Notice”. Section 1-201(25). “Party”. Section 1-201(29). “Sale”. Section 2-106(1). “Signed”. Section 1-201(39). “Term”. Section 1-201(42). “Writing”. Section 1-201(46).

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355.2A-202. Final written expression — Parol or extrinsic evidence.

Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented:

  1. By course of dealing or usage of trade or by course of performance; and
  2. By evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

History. Enact. Acts 1990, ch. 363, § 11, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-202.

Definitional Cross References:

“Agreement”. Section 1-201(3). “Course of dealing”. Section 1-205. “Party”. Section 1-201(29). “Term”. Section 1-201(42). “Usage of trade”. Section 1-205. “Writing”. Section 1-201(46).

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355.2A-203. Seals inoperative.

The affixing of a seal to a writing evidencing a lease contract or an offer to enter into a lease contract does not render the writing a sealed instrument and the law with respect to sealed instruments does not apply to the lease contract or offer.

History. Enact. Acts 1990, ch. 363, § 12, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-203.

Changes:

Revised to reflect leasing practices and terminology.

Definitional Cross References:

“Lease contract”. Section 2A-103(1)(). l “Writing”. Section 1-201(46).

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355.2A-204. Formation in general.

  1. A lease contract may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of a lease contract.
  2. An agreement sufficient to constitute a lease contract may be found although the moment of its making is undetermined.
  3. Although one (1) or more terms are left open, a lease contract does not fail for indefiniteness if the parties have intended to make a lease contract and there is a reasonably certain basis for giving an appropriate remedy.

History. Enact. Acts 1990, ch. 363, § 13, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-204.

Changes:

Revised to reflect leasing practices and terminology.

Definitional Cross References:

“Agreement”. Section 1-201(3). “Lease contract”. Section 2A-103(1)(). l “Party”. Section 1-201(29). “Remedy”. Section 1-201(34). “Term”. Section 1-201(42).

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355.2A-205. Firm offers.

An offer by a merchant to lease goods to or from another person in a signed writing that by its terms gives assurance it will be held open is not revocable, for lack of consideration, during the time stated or, if no time is stated, for a reasonable time, but in no event may the period of irrevocability exceed three (3) months. Any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.

History. Enact. Acts 1990, ch. 363, § 14, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-205.

Changes:

Revised to reflect leasing practices and terminology.

Definitional Cross References:

“Goods”. Section 2A-103(1)(h). “Lease”. Section 2A-103(1)(j). “Merchant”. Section 2-104(1) “Person”. Section 1-201(30). “Reasonable time”. Section 1-204(1) and (2). “Signed”. Section 1-201(39). “Term”. Section 1-201(42). “Writing”. Section 1-201(46).

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355.2A-206. Offer and acceptance in formation of lease contract.

  1. Unless otherwise unambiguously indicated by the language or circumstances, an offer to make a lease contract must be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances.
  2. If the beginning of a requested performance is a reasonable mode of acceptance, an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.

History. Enact. Acts 1990, ch. 363, § 15, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-206(1)(a) and (2).

Changes:

Revised to reflect leasing practices and terminology.

Definitional Cross References:

“Lease contract”. Section 2A-103(1)(). l “Notifies”. Section 1-201(26). “Reasonable time”. Section 1-204(1) and (2).

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355.2A-207. Course of performance or practical construction. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1990, ch. 363, § 16, effective January 1, 1991) was repealed by Acts 2006, ch. 242, § 64, effective July 12, 2006. For comparable provisions, see KRS 355.1-303 .

355.2A-208. Modification, rescission and waiver.

  1. An agreement modifying a lease contract needs no consideration to be binding.
  2. A signed lease agreement that excludes modification or rescission except by a signed writing may not be otherwise modified or rescinded, but, except as between merchants, such a requirement on a form supplied by a merchant must be separately signed by the other party.
  3. Although an attempt at modification or rescission does not satisfy the requirements of subsection (2), it may operate as a waiver.
  4. A party who has made a waiver affecting an executory portion of a lease contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.

History. Enact. Acts 1990, ch. 363, § 17, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-209.

Changes:

Revised to reflect leasing practices and terminology, except that the provisions of subsection 2-209(3) were omitted.

Purposes:

Section 2-209(3) provides that “the requirements of the statute of frauds section of this Article (Section 2-201) must be satisfied if the contract as modified is within its provisions.” This provision was not incorporated as it is unfair to allow an oral modification to make the entire lease contract unenforceable, e.g., if the modification takes it a few dollars over the dollar limit. At the same time, the problem could not be solved by providing that the lease contract would still be enforceable in its pre-modification state (if it then satisfied the statute of frauds) since in some cases that might be worse than no enforcement at all. Resolution of the issue is left to the courts based on the facts of each case.

Cross References:

Sections 2-201 and 2-209.

Definitional Cross References:

“Agreement”. Section 1-201(3). “Between merchants”. Section 2-104(3). “Lease agreement”. Section 2A-103(1)(k). “Lease contract”. Section 2A-103(1)(). l “Merchant”. Section 2-104(1). “Notification”. Section 1-201(26). “Party”. Section 1-201(29). “Signed”. Section 1-201(39). “Term”. Section 1-201(42). “Writing”. Section 1-201(46).

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355.2A-209. Lessee under finance lease as beneficiary of supply contract.

  1. The benefit of a supplier’s promises to the lessor under the supply contract and of all warranties, whether express or implied, including those of any third party provided in connection with or as part of the supply contract, extends to the lessee to the extent of the lessee’s leasehold interest under a finance lease related to the supply contract, but is subject to the terms of the warranty and of the supply contract and all defenses or claims arising therefrom.
  2. The extension of the benefit of a supplier’s promises and of warranties to the lessee (subsection (1) of this section) does not:
    1. Modify the rights and obligations of the parties to the supply contract, whether arising therefrom or otherwise, or
    2. Impose any duty or liability under the supply contract on the lessee.
  3. Any modification or rescission of the supply contract by the supplier and the lessor is effective between the supplier and the lessee unless, before the modification or rescission, the supplier has received notice that the lessee has entered into a finance lease related to the supply contract. If the modification or rescission is effective between the supplier and the lessee, the lessor is deemed to have assumed, in addition to the obligations of the lessor to the lessee under the lease contract, promises of the supplier to the lessor and warranties that were so modified or rescinded as they existed and were available to the lessee before modification or rescission.
  4. In addition to the extension of the benefit of the supplier’s promises and of warranties to the lessee under subsection (1), the lessee retains all rights that the lessee may have against the supplier which arise from an agreement between the lessee and the supplier or under other law.

History. Enact. Acts 1990, ch. 363, § 18, effective January 1, 1991; 1992, ch. 116, § 3, effective January 1, 1993.

Official Comment

Uniform Statutory Source:

None.

Changes:

This section is modeled on Section 9-318 (now codified as Sections 9-404 through 9-406), the Restatement (Second) of Contracts §§ 302-315 (1981), and leasing practices. See Earman Oil Co. v. Burroughs Corp. , 625 F.2d 1291, 1296-97 (5th Cir. 1980).

Purposes:

  1. The function performed by the lessor in a finance lease is extremely limited. Section 2A-103(1)(g). The lessee looks to the supplier of the goods for warranties and the like or, in some cases as to warranties, to the manufacturer if a warranty made by that person is passed on. That expectation is reflected in subsection (1), which is self-executing. As a matter of policy, the operation of this provision may not be excluded, modified or limited; however, an exclusion, modification, or limitation of any term of the supply contract or warranty, including any with respect to rights and remedies, and any defense or claim such as a statute of limitations, effective against the lessor as the acquiring party under the supply contract, is also effective against the lessee as the beneficiary designated under this provision. For example, the supplier is not precluded from excluding or modifying an express or implied warranty under a supply contract. Sections 2-312(2) and 2-316, or Section 2A-214. Further, the supplier is not precluded from limiting the rights and remedies of the lessor and from liquidating damages. Sections 2-718 and 2-719 or Sections 2A-503 and 2A-504. If the supply contract excludes or modifies warranties, limits remedies, or liquidates damages with respect to the lessor, such provisions are enforceable against the lessee as beneficiary. Thus, only selective discrimination against the beneficiaries designated under this section is precluded, i.e., exclusion of the supplier’s liability to the lessee with respect to warranties made to the lessor. This section does not affect the development of other law with respect to products liability.
  2. Enforcement of this benefit is by action. Sections 2A-103(4) and 1-106(2).
  3. The benefit extended by these provisions is not without a price, as this Article also provides in the case of a finance lease that is not a consumer lease that the lessee’s promises to the lessor under the lease contract become irrevocable and independent upon the lessee’s acceptance of the goods. Section 2A-407.
  4. Subsection (2) limits the effect of subsection (1) on the supplier and the lessor by preserving, notwithstanding the transfer of the benefits of the supply contract to the lessee, all of the supplier’s and the lessor’s rights and obligations with respect to each other and others; it further absolves the lessee of any duties with respect to the supply contract that might have been inferred from the extension of the benefits thereof.
  5. Subsections (2) and (3) also deal with difficult issues related to modification or rescission of the supply contract. Subsection (2) states a rule that determines the impact of the statutory extension of benefit contained in subsection (1) upon the relationship of the parties to the supply contract and, in a limited respect, upon the lessee. This statutory extension of benefit, like that contained in Sections 2A-216 and 2-318, is not a modification of the supply contract by the parties. Thus, subsection (3) states the rules that apply to a modification or rescission of the supply contract by the parties. Subsection (3) provides that a modification or rescission is not effective between the supplier and the lessee if, before the modification or rescission occurs, the supplier received notice that the lessee has entered into the finance lease. On the other hand, if the modification or rescission is effective, then to the extent of the modification or rescission of the benefit or warranty, the lessor by statutory dictate assumes an obligation to provide to the lessee that which the lessee would otherwise lose. For example, assume a reduction in an express warranty from four years to one year. No prejudice to the lessee may occur if the goods perform as agreed. If, however, there is a breach of the express warranty after one year and before four years pass, the lessor is liable. A remedy for any prejudice to the lessee because of the bifurcation of the lessee’s recourse resulting from the action of the supplier and the lessor is left to resolution by the courts based on the facts of each case.
  6. Subsection (4) makes it clear that the rights granted to the lessee by this section do not displace any rights the lessee otherwise may have against the supplier.

Cross References:

Sections 2A-103(1)(g), 2A-407, 9-404, 9-405 and 9-406.

Definitional Cross References:

“Action”. Section 1-201(1). “Finance lease”. Section 2A-103(1)(g). “Leasehold interest”. Section 2A-103(1)(m). “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Notice”. Section 1-201(25). “Party”. Section 1-201(29). “Rights”. Section 1-201(36). “Supplier”. Section 2A-103(1)(x). “Supply contract”. Section 2A-103(1)(y). “Term”. Section 1-201(42).

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355.2A-210. Express warranties.

  1. Express warranties by the lessor are created as follows:
    1. Any affirmation of fact or promise made by the lessor to the lessee which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods will conform to the affirmation or promise.
    2. Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods will conform to the description.
    3. Any sample or model that is made part of the basis of the bargain creates an express warranty that the whole of the goods will conform to the sample or model.
  2. It is not necessary to the creation of an express warranty that the lessor use formal words, such as “warrant” or “guarantee,” or that the lessor have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the lessor’s opinion or commendation of the goods does not create a warranty.

History. Enact. Acts 1990, ch. 363, § 19, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-313.

Changes:

Revised to reflect leasing practices and terminology.

Purposes:

All of the express and implied warranties of the Article on Sales (Article 2) are included in this Article, revised to reflect the differences between a sale of goods and a lease of goods. Sections 2A-210 through 2A-216. The lease of goods is sufficiently similar to the sale of goods to justify this decision. Hawkland, The Impact of the Uniform Commercial Code on Equipment Leasing , 1972 Ill.L.F. 446, 459-60. Many state and federal courts have reached the same conclusion.

Value of the goods, as used in subsection (2), includes rental value.

Cross References:

Article 2, esp. Section 2-313, and Sections 2A-210 through 2A-216.

Definitional Cross References:

“Conforming”. Section 2A-103(1)(d). “Goods”. Section 2A-103(1)(h). “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Value”. Section 1-201(44).

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355.2A-211. Warranties against interference and against infringement — Lessee’s obligation against infringement.

  1. There is in a lease contract a warranty that for the lease term no person holds a claim to or interest in the goods that arose from an act or omission of the lessor, other than a claim by way of infringement or the like, which will interfere with the lessee’s enjoyment of its leasehold interest.
  2. Except in a finance lease there is in a lease contract by a lessor who is a merchant regularly dealing in goods of the kind a warranty that the goods are delivered free of the rightful claim of any person by way of infringement or the like.
  3. A lessee who furnishes specifications to a lessor or a supplier shall hold the lessor and the supplier harmless against any claim by way of infringement or the like that arises out of compliance with the specifications.

History. Enact. Acts 1990, ch. 363, § 20, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-312.

Changes:

This section is modeled on the provisions of Section 2-312, with modifications to reflect the limited interest transferred by a lease contract and the total interest transferred by a sale. Section 2-312(2), which is omitted here, is incorporated in Section 2A-214. The warranty of quiet possession was abolished with respect to sales of goods. Section 2-312 official comment 1. Section 2A-211(1) reinstates the warranty of quiet possession with respect to leases. Inherent in the nature of the limited interest transferred by the lease — the right to possession and use of the goods — is the need of the lessee for protection greater than that afforded to the buyer. Since the scope of the protection is limited to claims or interests that arose from acts or omissions of the lessor, the lessor will be in position to evaluate the potential cost, certainly a far better position than that enjoyed by the lessee. Further, to the extent the market will allow, the lessor can attempt to pass on the anticipated additional cost to the lessee in the guise of higher rent.

Purposes:

General language was chosen for subsection (1) that expresses the essence of the lessee’s expectation: with an exception for infringement and the like, no person holding a claim or interest that arose from an act or omission of the lessor will be able to interfere with the lessee’s use and enjoyment of the goods for the lease term. Subsection (2), like other similar provisions in later sections, excludes the finance lessor from extending this warranty; with few exceptions (Sections 2A-210 and 2A-211(1)), the lessee under a finance lease is to look to the supplier for warranties and the like or, in some cases as to warranties, to the manufacturer if a warranty made by that person is passed on. Subsections (2) and (3) are derived from Section 2-312(3). These subsections, as well as the analogue, should be construed so that applicable principles of law and equity supplement their provisions. Sections 2A-103(4) and 1-103.

Cross References:

Sections 2-312, 2-312(1), 2-312(2), 2-312 official comment 1, 2A-210, 2A-211(1) and 2A-214.

Definitional Cross References:

“Delivery”. Section 1-201(14). “Finance lease”. Section 2A-103(1)(g). “Goods”. Section 2A-103(1)(h). “Lease”. Section 2A-103(1)(j). “Lease contract”. Section 2A-103(1)(). l “Leasehold interest”. Section 2A-103(1)(m). “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Merchant”. Section 2-104(1). “Person”. Section 1-201(30). “Supplier”. Section 2A-103(1)(x).

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355.2A-212. Implied warranty of merchantability.

  1. Except in a finance lease, a warranty that the goods will be merchantable is implied in a lease contract if the lessor is a merchant with respect to goods of that kind.
  2. Goods to be merchantable must be at least such as:
    1. Pass without objection in the trade under the description in the lease agreement;
    2. In the case of fungible goods, are of fair average quality within the description;
    3. Are fit for the ordinary purposes for which goods of that type are used;
    4. Run, within the variation permitted by the lease agreement, of even kind, quality, and quantity within each unit and among all units involved;
    5. Are adequately contained, packaged, and labeled as the lease agreement may require; and
    6. Conform to any promises or affirmations of fact made on the container or label.
  3. Other implied warranties may arise from course of dealing or usage of trade.

History. Enact. Acts 1990, ch. 363, § 21, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-314.

Changes:

Revised to reflect leasing practices and terminology. E.g. , Glenn Dick Equip. Co. v. Galey Constr., Inc. , 97 Idaho 216, 225, 541 P.2d 1184, 1193 (1975) (implied warranty of merchantability (Article 2) extends to lease transactions).

Definitional Cross References:

“Conforming”. Section 2A-103(1)(d). “Course of dealing”. Section 1-205. “Finance lease”. Section 2A-103(1)(g). “Fungible”. Section 1-201(17). “Goods”. Section 2A-103(1)(h). “Lease Agreement”. Section 2A-103(1)(k). “Lease contract”. Section 2A-103(1)(). l “Lessor”. Section 2A-103(1)(p). “Merchant”. Section 2-104(1). “Usage of trade”. Section 1-205.

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355.2A-213. Implied warranty of fitness for particular purpose.

Except in a finance lease, if the lessor at the time the lease contract is made has reason to know of any particular purpose for which the goods are required and that the lessee is relying on the lessor’s skill or judgment to select or furnish suitable goods, there is in the lease contract an implied warranty that the goods will be fit for that purpose.

History. Enact. Acts 1990, ch. 363, § 22, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-315.

Changes:

Revised to reflect leasing practices and terminology. E.g. , All-States Leasing Co. v. Bass , 96 Idaho 873, 879, 538 P.2d 1177, 1183 (1975) (implied warranty of fitness for a particular purpose (Article 2) extends to lease transactions).

Definitional Cross References:

“Finance lease”. Section 2A-103(1)(g). “Goods”. Section 2A-103(1)(h). “Knows”. Section 1-201(25). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p).

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355.2A-214. Exclusion or modification of warranties.

  1. Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit a warranty must be construed wherever reasonable as consistent with each other; but, subject to the provisions of KRS 355.2A-202 on parol or extrinsic evidence, negation or limitation is inoperative to the extent that the construction is unreasonable.
  2. Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any part of it the language must mention “merchantability,” be by a writing, and be conspicuous. Subject to subsection (3), to exclude or modify any implied warranty of fitness the exclusion must be by a writing and be conspicuous. Language to exclude all implied warranties of fitness is sufficient if it is in writing, is conspicuous and states, for example, “There is no warranty that the goods will be fit for a particular purpose.”
  3. Notwithstanding subsection (2), but subject to subsection (4):
    1. Unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like “as is,” or “with all faults,” or by other language that in common understanding calls the lessee’s attention to the exclusion of warranties and makes plain that there is no implied warranty, if in writing and conspicuous;
    2. If the lessee before entering into the lease contract has examined the goods or the sample or model as fully as desired or has refused to examine the goods, there is no implied warranty with regard to defects that an examination ought in the circumstances to have revealed; and
    3. An implied warranty may also be excluded or modified by course of dealing, course of performance, or usage of trade.
  4. To exclude or modify a warranty against interference or against infringement (KRS 355.2A-211 ) or any part of it, the language must be specific, be by a writing, and be conspicuous, unless the circumstances, including course of performance, course of dealing, or usage of trade, give the lessee reason to know that the goods are being leased subject to a claim or interest of any person.

History. Enact. Acts 1990, ch. 363, § 23, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Sections 2-316 and 2-312(2).

Changes:

Subsection (2) requires that a disclaimer of the warranty of merchantability be conspicuous and in writing as is the case for a disclaimer of the warranty of fitness; this is contrary to the rule stated in Section 2-316(2) with respect to the disclaimer of the warranty of merchantability. This section also provides that to exclude or modify the implied warranty of merchantability, fitness or against interference or infringement the language must be in writing and conspicuous. There are, however, exceptions to the rule. E.g., course of dealing, course of performance, or usage of trade may exclude or modify an implied warranty. Section 2A-214(3)(c). The analogue of Section 2-312(2) has been moved to subsection (4) of this section for a more unified treatment of disclaimers; there is no policy with respect to leases of goods that would justify continuing certain distinctions found in the Article on Sales (Article 2) regarding the treatment of the disclaimer of various warranties. Compare Sections 2-312(2) and 2-316(2). Finally, the example of a disclaimer of the implied warranty of fitness stated in subsection (2) differs from the analogue stated in Section 2-316(2); this example should promote a better understanding of the effect of the disclaimer.

Purposes:

These changes were made to reflect leasing practices. E.g. , FMC Finance Corp. v. Murphree , 632 F.2d 413, 418 (5th Cir.1980) (disclaimer of implied warranty under lease transactions must be conspicuous and in writing). The omission of the provisions of Section 2-316(4) was not substantive. Sections 2A-503 and 2A-504.

Cross References:

Article 2, esp. Sections 2-312(2) and 2-316, and Sections 2A-503 and 2A-504.

Definitional Cross References:

“Conspicuous”. Section 1-201(10). “Course of dealing”. Section 1-205. “Fault”. Section 2A-103(1)(f). “Goods”. Section 2A-103(1)(h). “Knows”. Section 1-201(25). “Lease”. Section 2A-103(1)(j). “Lease contract”. Section 2A-103(1)(). j “Lessee”. Section 2A-103(1)(n). “Person”. Section 1-201(30). “Usage of trade”. Section 1-205. “Writing”. Section 1-201(46).

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355.2A-215. Cumulation and conflict of warranties express or implied.

Warranties, whether express or implied, must be construed as consistent with each other and as cumulative, but if that construction is unreasonable, the intention of the parties determines which warranty is dominant. In ascertaining that intention the following rules apply:

  1. Exact or technical specifications displace an inconsistent sample or model or general language of description.
  2. A sample from an existing bulk displaces inconsistent general language of description.
  3. Express warranties displace inconsistent implied warranties other than an implied warranty of fitness for a particular purpose.

History. Enact. Acts 1990, ch. 363, § 24, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-317.

Definitional Cross Reference:

“Party”. Section 1-201(29).

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355.2A-216. Third-party beneficiaries of express and implied warranties.

A warranty to or for the benefit of a lessee under this article, whether express or implied, extends to any natural person who is in the family or household of the lessee or who is a guest in the lessee’s home if it is reasonable to expect that such person may use, consume, or be affected by the goods and who is injured in person by breach of the warranty. This section does not displace principles of law and equity that extend a warranty to or for the benefit of a lessee to other persons. The operation of this section may not be excluded, modified, or limited, but an exclusion, modification, or limitation of the warranty, including any with respect to rights and remedies, effective against the lessee is also effective against any beneficiary designated under this section.

History. Enact. Acts 1990, ch. 363, § 25, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-318.

Changes:

The provisions of Section 2-318 have been included in this section, modified in two respects: first, to reflect leasing practice, including the special practices of the lessor under a finance lease; second, to reflect and thus codify elements of the official comment to Section 2-318 with respect to the effect of disclaimers and limitations of remedies against third parties.

Purposes:

Alternative A is based on the 1962 version of Section 2-318 and is least favorable to the injured person as the doctrine of privity imposed by other law is abrogated to only a limited extent. Alternatives B and C are based on later additions to Section 2-318 and are more favorable to the injured person. In determining which alternative to select, the state legislature should consider making its choice parallel to the choice it made with respect to Section 2-318, as interpreted by the courts.

The last sentence of each of Alternatives A, B and C does not preclude the lessor from excluding or modifying an express or implied warranty under a lease. Section 2A-214. Further, that sentence does not preclude the lessor from limiting the rights and remedies of the lessee and from liquidating damages. Sections 2A-503 and 2A-504. If the lease excludes or modifies warranties, limits remedies for breach, or liquidates damages with respect to the lessee, such provisions are enforceable against the beneficiaries designated under this section. However, this last sentence forbids selective discrimination against the beneficiaries designated under this section, i.e., exclusion of the lessor’s liability to the beneficiaries with respect to warranties made by the lessor to the lessee.

Other law, including the Article on Sales (Article 2), may apply in determining the extent to which a warranty to or for the benefit of the lessor extends to the lessee and third parties. This is in part a function of whether the lessor has bought or leased the goods.

This Article does not purport to change the development of the relationship of the common law, with respect to products liability, including strict liability in tort (as restated in Restatement (Second) of Torts, § 402A (1965)), to the provisions of this Act. CompareCline v. Prowler Indus. of Maryland , 418 A.2d 968 (Del.1980) and Hawkins Constr. Co. v. Matthews Co. , 190 Neb. 546, 209 N.W.2d 643 (1973) with Dippel v. Sciano , 37 Wis.2d 443, 155 N.W.2d 55 (1967).

Cross References:

Article 2, esp. Section 2-318, and Sections 2A-214, 2A-503 and 2A-504.

Definitional Cross References:

“Goods”. Section 2A-103(1)(h). “Lessee”. Section 2A-103(1)(n). “Person”. Section 1-201(30). “Remedy”. Section 1-201(34). “Rights”. Section 1-201(36).

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355.2A-217. Identification.

Identification of goods as goods to which a lease contract refers may be made at any time and in any manner explicitly agreed to by the parties. In the absence of explicit agreement, identification occurs:

  1. When the lease contract is made if the lease contract is for a lease of goods that are existing and identified;
  2. When the goods are shipped, marked, or otherwise designated by the lessor as goods to which the lease contract refers, if the lease contract is for a lease of goods that are not existing and identified; or
  3. When the young are conceived, if the lease contract is for a lease of unborn young of animals.

History. Enact. Acts 1990, ch. 363, § 26, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-501.

Changes:

This section, together with Section 2A-218, is derived from the provisions of Section 2-501, with changes to reflect lease terminology; however, this section omits as irrelevant to leasing practice the treatment of special property.

Purposes:

With respect to subsection (b) there is a certain amount of ambiguity in the reference to when goods are designated, e.g., when the lessor is both selling and leasing goods to the same lessee/buyer and has marked goods for delivery but has not distinguished between those related to the lease contract and those related to the sales contract. As in Section 2-501(1)(b), this issue has been left to be resolved by the courts, case by case.

Cross References:

Sections 2-501 and 2A-218.

Definitional Cross References:

“Agreement”. Section 1-201(3). “Goods”. Section 2A-103(1)(h). “Lease”. Section 2A-103(1)(j). “Lease contract”. Section 2A-103(1)(). l “Lessor”. Section 2A-103(1)(p). “Party”. Section 1-201(29).

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355.2A-218. Insurance and proceeds.

  1. A lessee obtains an insurable interest when existing goods are identified to the lease contract even though the goods identified are nonconforming and the lessee has an option to reject them.
  2. If a lessee has an insurable interest only by reason of the lessor’s identification of the goods, the lessor, until default or insolvency or notification to the lessee that identification is final, may substitute other goods for those identified.
  3. Notwithstanding a lessee’s insurable interest under subsections (1) and (2), the lessor retains an insurable interest until an option to buy has been exercised by the lessee and risk of loss has passed to the lessee.
  4. Nothing in this section impairs any insurable interest recognized under any other statute or rule of law.
  5. The parties by agreement may determine that one (1) or more parties have an obligation to obtain and pay for insurance covering the goods and by agreement may determine the beneficiary of the proceeds of the insurance.

History. Enact. Acts 1990, ch. 363, § 27, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-501.

Changes:

This section, together with Section 2A-217, is derived from the provisions of Section 2-501, with changes and additions to reflect leasing practices and terminology.

Purposes:

Subsection (2) states a rule allowing substitution of goods by the lessor under certain circumstances, until default or insolvency of the lessor, or until notification to the lessee that identification is final. Subsection (3) states a rule regarding the lessor’s insurable interest that, by virtue of the difference between a sale and a lease, necessarily is different from the rule stated in Section 2-501(2) regarding the seller’s insurable interest. For this purpose the option to buy shall be deemed to have been exercised by the lessee when the resulting sale is closed, not when the lessee gives notice to the lessor. Further, subsection (5) is new and reflects the common practice of shifting the responsibility and cost of insuring the goods between the parties to the lease transaction.

Cross References:

Sections 2-501, 2-501(2) and 2A-217.

Definitional Cross References:

“Agreement”. Section 1-102(3). “Buying”. Section 2A-103(1)(a). “Conforming”. Section 2A-103(1)(d). “Goods”. Section 2A-103(1)(h). “Insolvent”. Section 1-201(23). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Notification”. Section 1-201(26). “Party”. Section 1-201(29).

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355.2A-219. Risk of loss.

  1. Except in the case of a finance lease, risk of loss is retained by the lessor and does not pass to the lessee. In the case of a finance lease, risk of loss passes to the lessee.
  2. Subject to the provisions of this article on the effect of default on risk of loss (KRS 355.2A-220 ), if risk of loss is to pass to the lessee and the time of passage is not stated, the following rules apply:
    1. If the lease contract requires or authorizes the goods to be shipped by carrier:
      1. And it does not require delivery at a particular destination, the risk of loss passes to the lessee when the goods are duly delivered to the carrier; but
      2. If it does require delivery at a particular destination and the goods are there duly tendered while in the possession of the carrier, the risk of loss passes to the lessee when the goods are there duly so tendered as to enable the lessee to take delivery.
    2. If the goods are held by a bailee to be delivered without being moved, the risk of loss passes to the lessee on acknowledgment by the bailee of the lessee’s right to possession of the goods.
    3. In any case not within subsection (a) or (b), the risk of loss passes to the lessee on the lessee’s receipt of the goods if the lessor, or, in the case of a finance lease, the supplier, is a merchant; otherwise the risk passes to the lessee on tender of delivery.

History. Enact. Acts 1990, ch. 363, § 28, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-509(1) through (3).

Changes:

Subsection (1) is new. The introduction to subsection (2) is new, but subparagraph (a) incorporates the provisions of Section 2-509(1); subparagraph (b) incorporates the provisions of Section 2-509(2) only in part, reflecting current practice in lease transactions.

Purposes:

Subsection (1) states rules related to retention or passage of risk of loss consistent with current practice in lease transactions. The provisions of subsection (4) of Section 2-509 are not incorporated as they are not necessary. This section does not deal with responsibility for loss caused by the wrongful act of either the lesser or the lessee.

Cross References:

Sections 2-509(1), 2-509(2) and 2-509(4).

Definitional Cross References:

“Delivery”. Section 1-201(14). “Finance lease”. Section 2A-103(1)(g). “Goods”. Section 2A-103(1)(h). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Merchant”. Section 2-104(1) “Receipt”. Section 2-103(1)(c). “Rights”. Section 1-201(36). “Supplier”. Section 2A-103(1)(x).

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355.2A-220. Effect of default on risk of loss.

  1. Where risk of loss is to pass to the lessee and the time of passage is not stated:
    1. If a tender or delivery of goods so fails to conform to the lease contract as to give a right of rejection, the risk of their loss remains with the lessor, or, in the case of a finance lease, the supplier, until cure or acceptance.
    2. If the lessee rightfully revokes acceptance, he, to the extent of any deficiency in his effective insurance coverage, may treat the risk of loss as having remained with the lessor from the beginning.
  2. Whether or not risk of loss is to pass to the lessee, if the lessee as to conforming goods already identified to a lease contract repudiates or is otherwise in default under the lease contract, the lessor, or, in the case of a finance lease, the supplier, to the extent of any deficiency in his effective insurance coverage may treat the risk of loss as resting on the lessee for a commercially reasonable time.

History. Enact. Acts 1990, ch. 363, § 29, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-510.

Changes:

Revised to reflect leasing practices and terminology. The rule in Section (1)(b) does not allow the lessee under a finance lease to treat the risk of loss as having remained with the supplier from the beginning. This is appropriate given the limited circumstances under which the lessee under a finance lease is allowed to revoke acceptance. Section 2A-517 and Section 2A-516 official comment.

Definitional Cross References:

“Conforming”. Section 2A-103(1)(i). “Delivery”. Section 1-201(14). “Finance lease”. Section 2A-103(1)(g). “Goods”. Section 2A-103(1)(h). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Reasonable time”. Section 1-204(1) and (2). “Rights”. Section 1-201(36). “Supplier”. Section 2A-103(1)(x).

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355.2A-221. Casualty to identified goods.

If a lease contract requires goods identified when the lease contract is made, and the goods suffer casualty without fault of the lessee, the lessor or the supplier before delivery, or the goods suffer casualty before risk of loss passes to the lessee pursuant to the lease agreement or KRS 355.2A-219 , then:

  1. If the loss is total, the lease contract is avoided; and
  2. If the loss is partial or the goods have so deteriorated as to no longer conform to the lease contract, the lessee may nevertheless demand inspection and at his option either treat the lease contract as avoided or, except in a finance lease that is not a consumer lease, accept the goods with due allowance from the rent payable for the balance of the lease term for the deterioration or the deficiency in quantity but without further right against the lessor.

History. Enact. Acts 1990, ch. 363, § 30, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-613.

Changes:

Revised to reflect leasing practices and terminology.

Purpose:

Due to the vagaries of determining the amount of due allowance (Section 2-613(b)), no attempt was made in subsection (b) to treat a problem unique to lease contracts and installment sales contracts: determining how to recapture the allowance, e.g., application to the first or last rent payments or allocation, pro rata, to all rent payments.

Cross References:

Section 2-613.

Definitional Cross References:

“Conforming”. Section 2A-103(1)(d). “Consumer lease”. Section 2A-103(1)(e). “Delivery”. Section 1-201(14). “Fault”. Section 2A-103(1)(f). “Finance lease”. Section 2A-103(1)(g). “Goods”. Section 2A-103(1)(h). “Lease”. Section 2A-103(1)(j). “Lease agreement”. Section 2A-103(1)(k). “Lease contract”. Section 2A-193(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Rights”. Section 1-201(36). “Supplier”. Section 2A-103(1)(x).

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Part 3. Effect of Lease Contract

355.2A-301. Enforceability of lease contract.

Except as otherwise provided in this article, a lease contract is effective and enforceable according to its terms between the parties, against purchasers of the goods and against creditors of the parties.

History. Enact. Acts 1990, ch. 363, § 31, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 9-201.

Changes:

The first sentence of Section 9-201 was incorporated, modified to reflect leasing terminology. The second sentence of Section 9-201 was eliminated as not relevant to leasing practices.

Purposes:

  1. This section establishes a general rule regarding the validity and enforceability of a lease contract. The lease contract is effective and enforceable between the parties and against third parties. Exceptions to this general rule arise where there is a specific rule to the contrary in this Article. Enforceability is, thus, dependent upon the lease contract meeting the requirements of the Statute of Frauds provisions of Section 2A-201. Enforceability is also a function of the lease contract conforming to the principles of construction and interpretation contained in the Article on General Provisions (Article 1). Section 2A-103(4).
  2. The effectiveness or enforceability of the lease contract is not dependent upon the lease contract or any financing statement or the like being filed or recorded; however, the priority of the interest of a lessor of fixtures with respect to the interests of certain third parties in such fixtures is subject to the provisions of the Article on Secured Transactions (Article 9). Section 2A-309. Prior to the adoption of this Article filing or recording was not required with respect to leases, only leases intended as security. The definition of security interest, as amended concurrently with the adoption of this Article, more clearly delineates leases and leases intended as security and thus signals the need to file. Section 1-201(37). Those lessors who are concerned about whether the transaction creates a lease or a security interest will continue to file a protective financing statement. Section 9-408. Coogan, Leasing and the Uniform Commercial Code, in Equipment Leasing-Leveraged Leasing 681, 744-46 (2d ed. 1980).
  3. Hypothetical:
    1. In construing this section it is important to recognize its relationship to other sections in this Article. This is best demonstrated by reference to a hypothetical. Assume that on February 1 A, a manufacturer of combines and other farm equipment, leased a fleet of six combines to B, a corporation engaged in the business of farming, for a 12 month term. Under the lease agreement between A and B, A agreed to defer B’s payment of the first two months’ rent to April 1. On March 1 B recognized that it would need only four combines and thus subleased two combines to C for an 11 month term.
    2. This hypothetical raises a number of issues that are answered by the sections contained in this part. Since lease is defined to include sublease (Section 2A-103(1)(j) and (w)), this section provides that the prime lease between A and B and the sublease between B and C are enforceable in accordance with their terms, except as otherwise provided in this Article; that exception, in this case, is one of considerable scope.
    3. The separation of ownership, which is in A, and possession, which is in B with respect to four combines and which is in C with respect to two combines, is not relevant. Section 2A-302. A’s interest in the six combines cannot be challenged simply because A parted with possession to B, who in turn parted with possession of some of the combines to C. Yet it is important to note that by the terms of Section 2A-302 this conclusion is subject to change if otherwise provided in this Article.
    4. B’s entering the sublease with C raises an issue that is treated by this part. In a dispute over the leased combines A may challenge B’s right to sublease. The rule is permissive as to transfers of interests under a lease contract, including subleases. Section 2A-303(2). However, the rule has two significant qualifications. If the prime lease contract between A and B prohibits B from subleasing the combines, or makes such a sublease an event of default, Section 2A-303(2) applies; thus, while B’s interest under the prime lease may not be transferred under the sublease to C, A may have a remedy pursuant to Section 2A-303(5). Absent a prohibition or default provision in the prime lease contract A might be able to argue that the sublease to C materially increases A’s risk; thus, while B’s interest under the prime lease may be transferred under the sublease to C, A may have a remedy pursuant to Section 2A-303(5). Section 2A-303(5)(b)(ii).
    5. Resolution of this issue is also a function of the section dealing with the sublease of goods by a prime lessee (Section 2A-305). Subsection (1) of Section 2A-305, which is subject to the rules of Section 2A-303 stated above, provides that C takes subject to the interest of A under the prime lease between A and B. However, there are two exceptions. First, if B is a merchant (Sections 2A-103(3) and 2-104(1)) dealing in goods of that kind and C is a sublessee in the ordinary course of business (Sections 2A-103(1)(o) and 2A-103(1)(n)), C takes free of the prime lease between A and B. Second, if B has rejected the six combines under the prime lease with A, and B disposes of the goods by sublease to C, C takes free of the prime lease if C can establish good faith. Section 2A-511(4).
    6. If the facts of this hypothetical are expanded and we assume that the prime lease obligated B to maintain the combines, an additional issue may be presented. Prior to entering the sublease, B, in satisfaction of its maintenance covenant, brought the two combines that it desired to sublease to a local independent dealer of A’s. The dealer did the requested work for B. C inspected the combines on the dealer’s lot after the work was completed. C signed the sublease with B two days later. C, however, was prevented from taking delivery of the two combines as B refused to pay the dealer’s invoice for the repairs. The dealer furnished the repair service to B in the ordinary course of the dealer’s business. If under applicable law the dealer has a lien on repaired goods in the dealer’s possession, the dealer’s lien will take priority over B’s and C’s interests, and also should take priority over A’s interest, depending upon the terms of the lease contract and the applicable law. Section 2A-306.
    7. Now assume that C is in financial straits and one of C’s creditors obtains a judgment against C. If the creditor levies on C’s subleasehold interest in the two combines, who will prevail? Unless the levying creditor also holds a lien covered by Section 2A-306, discussed above, the judgment creditor will take its interest subject to B’s rights under the sublease and A’s rights under the prime lease. Section 2A-307(1). The hypothetical becomes more complicated if we assume that B is in financial straits and B’s creditor holds the judgment. Here the judgment creditor takes subject to the sublease unless the lien attached to the two combines before the sublease contract became enforceable. Section 2A-307(2)(a). However, B’s judgment creditor cannot prime A’s interest in the goods because, with respect to A, the judgment creditor is a creditor of B in its capacity as lessee under the prime lease between A and B. Thus, here the judgment creditor’s interest is subject to the lease between A and B. Section 2A-307(1).
    8. Finally, assume that on April 1 B is unable to pay A the deferred rent then due under the prime lease, but that C is current in its payments under the sublease from B. What effect will B’s default under the prime lease between A and B have on C’s rights under the sublease between B and C? Section 2A-301 provides that a lease contract is effective against the creditors of either party. Since a lease contract includes a sublease contract (Section 2A-103(1)(l)), the sublease contract between B and C arguably could be enforceable against A, a prime lessor who has extended unsecured credit to B the prime lessee/sublessor, if the sublease contract meets the requirements of Section 2A-201. However, the rule stated in Section 2A-301 is subject to other provisions in this Article. Under Section 2A-305, C, as sublessee, would take subject to the prime lease contract in most cases. Thus, B’s default under the prime lease will in most cases lead to A’s recovery of the goods from C. Section 2A-523. A and C could provide otherwise by agreement. Section 2A-311. C’s recourse will be to assert a claim for damages against B. Sections 2A-211(1) and 2A-508.

      4. Relationship Between Sections:

      (a) As the analysis of the hypothetical demonstrates, Part 3 of the Article focuses on issues that relate to the enforceability of the lease contract (Sections 2A-301, 2A-302 and 2A-303) and to the priority of various claims to the goods subject to the lease contract (Sections 2A-304, 2A-305, 2A-306, 2A-307, 2A-308, 2A-309, 2A-310, and 2A-311).

      (b) This section states a general rule of enforceability, which is subject to specific rules to the contrary stated elsewhere in the Article. Section 2A-302 negates any notion that the separation of title and possession is fraudulent as a rule of law. Finally, Section 2A-303 states rules with respect to the transfer of the lessor’s interest (as well as the residual interest in the goods) or the lessee’s interest under the lease contract. Qualifications are imposed as a function of various issues, including whether the transfer is the creation or enforcement of a security interest or one that is material to the other party to the lease contract. In addition, a system of rules is created to deal with the rights and duties among assignor, assignee and the other party to the lease contract.

      (c) Sections 2A-304 and 2A-305 are twins that deal with good faith transferees of goods subject to the lease contract. Section 2A-304 creates a set of rules with respect to transfers by the lessor of goods subject to a lease contract; the transferee considered is a subsequent lessee of the goods. The priority dispute covered here is between the subsequent lessee and the original lessee of the goods (or persons claiming through the original lessee). Section 2A-305 creates a set of rules with respect to transfers by the lessee of goods subject to a lease contract; the transferees considered are buyers of the goods or sublessees of the goods. The priority dispute covered here is between the transferee and the lessor of the goods (or persons claiming through the lessor).

      (d) Section 2A-306 creates a rule with respect to priority disputes between holders of liens for services or materials furnished with respect to goods subject to a lease contract and the lessor or the lessee under that contract. Section 2A-307 creates a rule with respect to priority disputes between the lessee and creditors of the lessor and priority disputes between the lessor and creditors of the lessee.

      (e) Section 2A-308 creates a series of rules relating to allegedly fraudulent transfers and preferences. The most significant rule is that set forth in subsection (3) which validates sale-leaseback transactions if the buyer-lessor can establish that he or she bought for value and in good faith.

      (f) Sections 2A-309 and 2A-310 create a series of rules with respect to priority disputes between various third parties and a lessor of fixtures or accessions, respectively, with respect thereto.

      (g) Finally, Section 2A-311 allows parties to alter the statutory priorities by agreement.

Cross References:

Article 1, especially Section 1-201(37), and Sections 2-104(1), 2A-103(1)(j), 2A-103(1)( l ), 2A-103(1)(n), 2A-103(1)(o) and 2A-103(1)(w), 2A-103(3), 2A-103(4), 2A-201, 2A-301 through 2A-303, 2A-303(1), 2A-303(5), 2A-304 through 2A-307, 2A-307(1), 2A-307(2)(a), 2A-308 through 2A-311, 2A-508, 2A-511(4), 2A-523, Article 9, especially Sections 9-201 and 9-505.

Definitional Cross References:

“Creditor”. Section 1-201(12). “Goods”. Section 2A-103(1)(h). “Lease contract”. Section 2A-103(1)(). l “Party”. Section 1-201(29). “Purchaser”. Section 1-201(33). “Term”. Section 1-201(42).

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355.2A-302. Title to and possession of goods.

Except as otherwise provided in this article, each provision of this article applies whether the lessor or a third party has title to the goods, and whether the lessor, the lessee, or a third party has possession of the goods, notwithstanding any statute or rule of law that possession or the absence of possession is fraudulent.

History. Enact. Acts 1990, ch. 363, § 32, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 9-202 (now codified as Section 9-202).

Changes:

Section 9-202 was modified to reflect leasing terminology and to clarify the law of leases with respect to fraudulent conveyances or transfers.

Purposes:

The separation of ownership and possession of goods between the lessor and the lessee (or a third party) has created problems under certain fraudulent conveyance statutes. See, e.g. , In re Ludlum Enters. , 510 F.2d 996 (5th Cir. 1975); Suburbia Fed. Sav. & Loan Ass’n v. Bel-Air Conditioning Co. , 385 So.2d 1151 (Fla.Dist.Ct.App.1980). This section provides, among other things, that separation of ownership and possession per se does not affect the enforceability of the lease contract. Sections 2A-301 and 2A-308.

Cross References:

Sections 2A-301, 2A-308 and 9-202.

Definitional Cross References:

“Goods”. Section 2A-103(1)(h). “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p).

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355.2A-303. Alienability of party’s interest under lease contract or of lessor’s residual interest in goods — Delegation of performance — Transfer of rights.

  1. As used in this section, “creation of a security interest” includes the sale of a lease contract that is subject to Article 9, Secured Transactions, by reason of KRS 355.9-109 (1)(c).
  2. Except as provided in subsection (3) of this section and KRS 355.9-407 , a provision in a lease agreement which:
    1. Prohibits the voluntary or involuntary transfer, including a transfer by sale, sublease, creation, or enforcement of a security interest, or attachment, levy, or other judicial process, of an interest of a party under the lease contract or of the lessor’s residual interest in the goods; or
    2. Makes such a transfer an event of default, gives rise to the rights and remedies provided in subsection (4) of this section, but a transfer that is prohibited or is an event of default under the lease agreement is otherwise effective.
  3. A provision in a lease agreement which:
    1. Prohibits a transfer of a right to damages for default with respect to the whole lease contract or of a right to payment arising out of the transferor’s due performance of the transferor’s entire obligation; or
    2. Makes such a transfer an event of default,

      is not enforceable, and such a transfer is not a transfer that materially impairs the prospect of obtaining return performance by, materially changes the duty of, or materially increases the burden or risk imposed on, the other party to the lease contract within the purview of subsection (5).

  4. Subject to subsection (3) of this section and KRS 355.9-407 :
    1. If a transfer is made which is made an event of default under a lease agreement, the party to the lease contract not making the transfer, unless that party waives the default or otherwise agrees, has the rights and remedies described in KRS 355.2A-501 (2);
    2. If paragraph (a) is not applicable and if a transfer is made that:
      1. Is prohibited under a lease agreement; or
      2. Materially impairs the prospect of obtaining return performance by, materially changes the duty of, or materially increases the burden or risk imposed on, the other party to the lease contract, unless the party not making the transfer agrees at any time to the transfer in the lease contract or otherwise, then, except as limited by contract:
      3. The transferor is liable to the party not making the transfer for damages caused by the transfer to the extent that the damages could not reasonably be prevented by the party not making the transfer; and
      4. A court having jurisdiction may grant other appropriate relief, including cancellation of the lease contract or an injunction against the transfer.
  5. A transfer of “the lease” or of “all my rights under the lease”, or a transfer in similar general terms, is a transfer of rights and, unless the language or the circumstances, as in a transfer for security, indicate the contrary, the transfer is a delegation of duties by the transferor to the transferee. Acceptance by the transferee constitutes a promise by the transferee to perform those duties. The promise is enforceable by either the transferor or the other party to the lease contract.
  6. Unless otherwise agreed by the lessor and the lessee, a delegation of performance does not relieve the transferor as against the other party of any duty to perform or of any liability for default.
  7. In a consumer lease, to prohibit the transfer of an interest of a party under the lease contract or to make a transfer an event of default, the language must be specific, by a writing, and conspicuous.

History. Enact. Acts 1990, ch. 363, § 33, effective January 1, 1991; 1992, ch. 116, § 4, effective January 1, 1993; 2000, ch. 408, § 164, effective July 1, 2001.

Official Comment

Uniform Statutory Source:

Sections 2-210 and 9-311 (now codified as Section 9-401).

Changes:

The provisions of Section 2-210 and former Section 9-311 were incorporated in this section, with substantial modifications to reflect leasing terminology and practice and to harmonize the principles of the respective provisions, i.e., limitations on delegation of performance on the one hand and alienability of rights on the other. In addition, unlike Section 2-210 which deals only with voluntary transfers, this section deals with involuntary as well as voluntary transfers. Moreover, the principle of former Section 9-318(4) (now codified as Section 9-406) denying effectiveness to contractual terms prohibiting assignments of receivables due and to become due also is implemented.

Purposes:

  1. Subsection (2) states a rule, consistent with Section 9-401(b), that voluntary and involuntary transfers of an interest of a party under the lease contract or of the lessor’s residual interest, including by way of the creation or enforcement of a security interest, are effective, notwithstanding a provision in the lease agreement prohibiting the transfer or making the transfer an event of default. Although the transfers are effective, the provision in the lease agreement is nevertheless enforceable, but only as provided in subsection (4). Under subsection (4) the prejudiced party is limited to the remedies on “default under the lease contract” in this Article and, except as limited by this Article, as provided in the lease agreement, if the transfer has been made an event of default. Section 2A-501(2). Usually, there will be a specific provision to this effect or a general provision making a breach of a covenant an event of default. In those cases where the transfer is prohibited, but not made an event of default, the prejudiced party may recover damages; or, if the damage remedy would be ineffective adequately to protect that party, the court can order cancellation of the lease contract or enjoin the transfer. This rule that such provisions generally are enforceable is subject to subsections (3) and Section 9-407, which make such provisions unenforceable in certain instances.
  2. Under Section 9-407, a provision in a lease agreement which prohibits the creation or enforcement of a security interest, including sales of lease contracts subject to Article 9 (Section 9-109(a)(3)), or makes it an event of default is generally not enforceable, reflecting the policy of Section 9-406 and former Section 9-318(4).
  3. Subsection (3) is based upon Section 2-210(2) and Section 9-406. It makes unenforceable a prohibition against transfers of certain rights to payment or a provision making the transfer an event of default. It also provides that such transfers do not materially impair the prospect of obtaining return performance by, materially change the duty of, or materially increase the burden or risk imposed on, the other party to the lease contract so as to give rise to the rights and remedies stated in subsection (4). Accordingly, a transfer of a right to payment cannot be prohibited or made an event of default, or be one that materially impairs performance, changes duties or increases risk, if the right is already due or will become due without further performance being required by the party to receive payment. Thus, a lessor can transfer the right to future payments under the lease contract, including by way of a grant of a security interest, and the transfer will not give rise to the rights and remedies stated in subsection (4) if the lessor has no remaining performance under the lease contract. The mere fact that the lessor is obligated to allow the lessee to remain in possession and to use the goods as long as the lessee is not in default does not mean that there is remaining performance on the part of the lessor. Likewise, the fact that the lessor has potential liability under a “non-operating” lease contract for breaches of warranty does not mean that there is remaining performance. In contrast, the lessor would have remaining performance under a lease contract requiring the lessor to regularly maintain and service the goods or to provide “upgrades” of the equipment on a periodic basis in order to avoid obsolescence. The basic distinction is between a mere potential duty to respond which is not remaining performance, and an affirmative duty to render stipulated performance. Although the distinction may be difficult to draw in some cases, it is instructive to focus on the difference between “operating” and “non-operating” leases as generally understood in the marketplace. Even if there is remaining performance under a lease contract, a transfer for security of a right to payment that is made an event of default or that is in violation of a prohibition against transfer does not give rise to the rights and remedies under subsection (4) if it does not constitute an actual delegation of a material performance under Section 9-407.
  4. The application of either the rule of Section 9-407 or the rule of subsection (3) to the grant by the lessor of a security interest in the lessor’s right to future payment under the lease contract may produce the same result. Both provisions generally protect security transfers by the lessor in particular because the creation by the lessor of a security interest or the enforcement of that interest generally will not prejudice the lessee’s rights if it does not result in a delegation of the lessor’s duties. To the contrary, the receipt of loan proceeds or relief from the enforcement of an antecedent debt normally should enhance the lessor’s ability to perform its duties under the lease contract. Nevertheless, there are circumstances where relief might be justified. For example, if ownership of the goods is transferred pursuant to enforcement of a security interest to a party whose ownership would prevent the lessee from continuing to possess the goods, relief might be warranted. See 49 U.S.C. § 1401(a) and (b) which places limitations on the operation of aircraft in the United States based on the citizenship or corporate qualification of the registrant.
  5. Relief on the ground of material prejudice when the lease agreement does not prohibit the transfer or make it an event of default should be afforded only in extreme circumstances, considering the fact that the party asserting material prejudice did not insist upon a provision in the lease agreement that would protect against such a transfer.
  6. Subsection (4) implements the rule of subsection (2). Subsection (2) provides that, even though a transfer is effective, a provision in the lease agreement prohibiting it or making it an event of default may be enforceable as provided in subsection (4). See Brummond v. First National Bank of Clovis, 656 P.2d 884, 35 U.C.C. Rep. Serv. (Callaghan) 1311 (N. Mex. 1983), stating the analogous rule for Section 9-311. If the transfer prohibited by the lease agreement is made an event of default, then, under subsection (4)(a), unless the default is waived or there is an agreement otherwise, the aggrieved party has the rights and remedies referred to in Section 2A-501(2), viz. those in this Article and, except as limited in the Article, those provided in the lease agreement. In the unlikely circumstance that the lease agreement prohibits the transfer without making a violation of the prohibition an event of default or, even if there is no prohibition against the transfer, and the transfer is one that materially impairs performance, changes duties, or increases risk (for example, a sublease or assignment to a party using the goods improperly or for an illegal purpose), then subsection (4)(b) is applicable. In that circumstance, unless the party aggrieved by the transfer has otherwise agreed in the lease contract, such as by assenting to a particular transfer or to transfers in general, or agrees in some other manner, the aggrieved party has the right to recover damages from the transferor and a court may, in appropriate circumstances, grant other relief, such as cancellation of the lease contract or an injunction against the transfer.
  7. If a transfer gives rise to the rights and remedies provided in subsection (4), the transferee as an alternative may propose, and the other party may accept, adequate cure or compensation for past defaults and adequate assurance of future due performance under the lease contract. Subsection (4) does not preclude any other relief that may be available to a party to the lease contract aggrieved by a transfer subject to an enforceable prohibition, such as an action for interference with contractual relations.
  8. Subsection (7) requires that a provision in a consumer lease prohibiting a transfer, or making it an event of default, must be specific, written and conspicuous. See Section 1-201(10). This assists in protecting a consumer lessee against surprise assertions of default.
  9. Subsection (5) is taken almost verbatim from the provisions of Section 2-210(5). The subsection states a rule of construction that distinguishes a commercial assignment, which substitutes the assignee for the assignor as to rights and duties, and an assignment for security or financing assignment, which substitutes the assignee for the assignor only as to rights. Note that the assignment for security or financing assignment is a subset of all security interests. Security interest is defined to include “any interest of a buyer of … chattel paper”. Section 1-201(37). Chattel paper is defined to include a lease. Section 9-102. Thus, a buyer of leases is the holder of a security interest in the leases. That conclusion should not influence this issue, as the policy is quite different. Whether a buyer of leases is the holder of a commercial assignment, or an assignment for security or financing assignment should be determined by the language of the assignment or the circumstances of the assignment.

Cross References:

Sections 1-201(11), 1-201(37), 2-210, 2A-401, 9-102(a)(11), 9-109(a)(3), 9-406, and 9-407.

Definitional Cross References:

“Agreed” and “Agreement”. Section 1-201(c). “Conspicuous”. Section 1-201(10). “Goods”. Section 2A-103(1)(hi). “Lease”. Section 2A-103(1)(j). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103 (1)(p). “Lessor’s residual interest”. Section 2A-103(1)(q). “Notice”. Section 1-201(25). “Party”. Section 1-201(29). “Person”. Section 1-201(30). “Reasonable time”. Section 1-204(1) and (2). “Rights”. Section 1-201(36). “Term”. Section 1-201(42). “Writing”. Section 1-201(46).

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355.2A-304. Subsequent lease of goods by lessor.

  1. Subject to KRS 355.2A-303 , a subsequent lessee from a lessor of goods under an existing lease contract obtains, to the extent of the leasehold interest transferred, the leasehold interest in the goods that the lessor had or had power to transfer, and except as provided in subsection (2) of this section and subsection (4) of KRS 355.2A-527 , takes subject to the existing lease contract. A lessor with voidable title has power to transfer a good leasehold interest to a good faith subsequent lessee for value, but only to the extent set forth in the preceding sentence. If goods have been delivered under a transaction of purchase, the lessor has that power even though:
    1. The lessor’s transferor was deceived as to the identity of the lessor;
    2. The delivery was in exchange for a check which is later dishonored;
    3. It was agreed that the transaction was to be a “cash sale”; or
    4. The delivery was procured through fraud punishable as larcenous under the criminal law.
  2. A subsequent lessee in the ordinary course of business from a lessor who is a merchant dealing in goods of that kind to whom the goods were entrusted by the existing lessee of that lessor before the interest of the subsequent lessee became enforceable against that lessor obtains, to the extent of the leasehold interest transferred, all of that lessor’s and the existing lessee’s rights to the goods, and takes free of the existing lease contract.
  3. A subsequent lessee from the lessor of goods that are subject to an existing lease contract and are covered by a certificate of title issued under a statute of this state or of another jurisdiction takes no greater rights than those provided both by this section and by the certificate of title statute.

History. Enact. Acts 1990, ch. 363, § 34, effective January 1, 1991; 1992, ch. 116, § 5, effective January 1, 1993.

Official Comment

Uniform Statutory Source:

Section 2-403.

Changes:

While Section 2-403 was used as a model for this section, the provisions of Section 2-403 were significantly revised to reflect leasing practices and to integrate this Article with certificate of title statutes.

Purposes:

  1. This section must be read in conjunction with, as it is subject to, the provisions of Section 2A-303, which govern voluntary and involuntary transfers of rights and duties under a lease contract, including the lessor’s residual interest in the goods.
  2. This section must also be read in conjunction with Section 2-403. This section and Section 2A-305 are derived from Section 2-403, which states a unified policy on good faith purchases of goods. Given the scope of the definition of purchaser (Section 1-201(33)), a person who bought goods to lease as well as a person who bought goods subject to an existing lease from a lessor will take pursuant to Section 2-403. Further, a person who leases such goods from the person who bought them should also be protected under Section 2-403, first because the lessee’s rights are derivative and second because the definition of purchaser should be interpreted to include one who takes by lease; no negative implication should be drawn from the inclusion of lease in the definition of purchase in this Article. Section 2A-103(1)(v).
  3. There are hypotheticals that relate to an entrustee’s unauthorized lease of entrusted goods to a third party that are outside the provisions of Sections 2-403, 2A-304 and 2A-305. Consider a sale of goods by M, a merchant, to B, a buyer. After paying for the goods B allows M to retain possession of the goods as B is short of storage. Before B calls for the goods M leases the goods to L, a lessee. This transaction is not governed by Section 2-403(2) as L is not a buyer in the ordinary course of business. Section 1-201(9). Further, this transaction is not governed by Section 2A-304(2) as B is not an existing lessee. Finally, this transaction is not governed by Section 2A-305(2) as B is not M’s lessor. Section 2A-307(2) resolves the potential dispute between B, M and L. By virtue of B’s entrustment of the goods to M and M’s lease of the goods to L, B has a cause of action against M under the common law. Sections 2A-103(4) and 1-103. See, e.g., Restatement (Second) of Torts §§ 222A-243. Thus, B is a creditor of M. Sections 2A-103(4) and 1-201(12). Section 2A-307(2) provides that B, as M’s creditor, takes subject to M’s lease to L. Thus, if L does not default under the lease, L’s enjoyment and possession of the goods should be undisturbed. However, B is not without recourse. B’s action should result in a judgment against M providing, among other things, a turnover of all proceeds arising from M’s lease to L, as well as a transfer of all of M’s right, title and interest as lessor under M’s lease to L, including M’s residual interest in the goods. Section 2A-103(1)(q).
  4. Subsection (1) states a rule with respect to the leasehold interest obtained by a subsequent lessee from a lessor of goods under an existing lease contract. The interest will include such leasehold interest as the lessor has in the goods as well as the leasehold interest that the lessor had the power to transfer. Thus, the subsequent lessee obtains unimpaired all rights acquired under the law of agency, apparent agency, ownership or other estoppel, whether based upon statutory provisions or upon case law principles. Sections 2A-103(4) and 1-103. In general, the subsequent lessee takes subject to the existing lease contract, including the existing lessee’s rights thereunder. Furthermore, the subsequent lease contract is, of course, limited by its own terms, and the subsequent lessee takes only to the extent of the leasehold interest transferred thereunder.
  5. Subsection (1) further provides that a lessor with voidable title has power to transfer a good leasehold interest to a good faith subsequent lessee for value. In addition, subsections (1)(a) through (d) provide specifically for the protection of the good faith subsequent lessee for value in a number of specific situations which have been troublesome under prior law.
  6. The position of an existing lessee who entrusts leased goods to its lessor is not distinguishable from the position of other entrusters. Thus, subsection (2) provides that the subsequent lessee in the ordinary course of business takes free of the existing lease contract between the lessor entrustee and the lessee entruster, if the lessor is a merchant dealing in goods of that kind. Further, the subsequent lessee obtains all of the lessor entrustee’s and the lessee entruster’s rights to the goods, but only to the extent of the leasehold interest transferred by the lessor entrustee. Thus, the lessor entrustee retains the residual interest in the goods. Section 2A-103(1)(q). However, entrustment by the existing lessee must have occurred before the interest of the subsequent lessee became enforceable against the lessor. Entrusting is defined in Section 2-403(3) and that definition applies here. Section 2A-103(3).
  7. Subsection (3) states a rule with respect to a transfer of goods from a lessor to a subsequent lessee where the goods are subject to an existing lease and covered by a certificate of title. The subsequent lessee’s rights are no greater than those provided by this section and the applicable certificate of title statute, including any applicable case law construing such statute. Where the relationship between the certificate of title statute and Section 2-403, the statutory analogue to this section, has been construed by a court, that construction is incorporated here. Sections 2A-103(4) and 1-102(1) and (2). The better rule is that the certificate of title statutes are in harmony with Section 2-403 and thus would be in harmony with this section. E.g., Atwood Chevrolet-Olds v. Aberdeen Mun. School Dist., 431 So.2d 926, 928, (Miss.1983); Godfrey v. Gilsdorf, 476 P.2d 3, 6, 86 Nev. 714, 718 (1970); Martin v. Nager, 192 N.J.Super. 189, 197-98, 469 A.2d 519, 523 (Super. Ct. Ch. Div. 1983). Where the certificate of title statute is silent on this issue of transfer, this section will control.

Cross References:

Sections 1-102, 1-103, 1-201(33), 2-403, 2A-103(1)(v), 2A-103(3), 2A-103(4), 2A-303 and 2A-305.

Definitional Cross References:

“Agreed”. Section 1-201(3). “Delivery”. Section 1-201(14). “Entrusting”. Section 2-403(3). “Good faith”. Sections 1-201(19) and 2-103(1)(b). “Goods”. Section 2A-103(1)(h). “Lease”. Section 2A-103(1)(j). “Lease contract”. Section 2A-103(1)(). l “Leasehold interest”. Section 2A-103(1)(m). “Lessee”. Section 2A-103(1)(n). “Lessee in the ordinary course of business”. Section 2A-103(1)(o). “Lessor”. Section 2A-103(1)(p). “Merchant”. Section 2-104(1). “Purchase”. Section 2A-103(1)(v). “Rights”. Section 1-201(36). “Value”. Section 1-201(44).

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355.2A-305. Sale or sublease of goods by lessee.

  1. Subject to the provisions of KRS 355.2A-303 , a buyer or sublessee from the lessee of goods under an existing lease contract obtains, to the extent of the interest transferred, the leasehold interest in the goods that the lessee had or had power to transfer, and except as provided in subsection (2) of this section and subsection (4) of KRS 355.2A-511 , takes subject to the existing lease contract. A lessee with a voidable leasehold interest has power to transfer a good leasehold interest to a good faith buyer for value or a good faith sublessee for value, but only to the extent set forth in the preceding sentence. When goods have been delivered under a transaction of lease, the lessee has that power even though:
    1. The lessor was deceived as to the identity of the lessee;
    2. The delivery was in exchange for a check which is later dishonored; or
    3. The delivery was procured through fraud punishable as larcenous under the criminal law.
  2. A buyer in the ordinary course of business or a sublessee in the ordinary course of business from a lessee who is a merchant dealing in goods of that kind to whom the goods were entrusted by the lessor obtains, to the extent of the interest transferred, all of the lessor’s and lessee’s rights to the goods, and takes free of the existing lease contract.
  3. A buyer or sublessee from the lessee of goods that are subject to an existing lease contract and are covered by a certificate of title issued under a statute of this state or of another jurisdiction takes no greater rights than those provided both by this section and by the certificate of title statute.

History. Enact. Acts 1990, ch. 363, § 35, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-403.

Changes:

While Section 2-403 was used as a model for this section, the provisions of Section 2-403 were significantly revised to reflect leasing practice and to integrate this Article with certificate of title statutes.

Purposes:

This section, a companion to Section 2A-304, states the rule with respect to the leasehold interest obtained by a buyer or sublessee from a lessee of goods under an existing lease contract. Cf. Section 2A-304 official comment. Note that this provision is consistent with existing case law, which prohibits the bailee’s transfer of title to a good faith purchaser for value under Section 2-403(1). Rohweder v. Aberdeen Product. Credit Ass’n , 765 F.2d 109 (8th Cir.1985).

Subsection (2) is also consistent with existing case law. American Standard Credit, Inc. v. National Cement Co. , 643 F.2d 248, 269-70 (5th Cir.1981); but cf . Exxon Co., U.S.A. v. TLW Computer Indus. , 37 U.C.C. Rep. Serv. (Callaghan) 1052, 1057-58 (D.Mass.1983). Unlike Section 2A-304(2), this subsection does not contain any requirement with respect to the time that the goods were entrusted to the merchant. In Section 2A-304(2) the competition is between two customers of the merchant lessor; the time of entrusting was added as a criterion to create additional protection to the customer who was first in time: the existing lessee. In subsection (2) the equities between the competing interests were viewed as balanced.

There appears to be some overlap between Section 2-403(2) and Section 2A-305(2) with respect to a buyer in the ordinary course of business. However, an examination of this Article’s definition of buyer in the ordinary course of business (Section 2A-103(1)(a)) makes clear that this reference was necessary to treat entrusting in the context of a lease.

Subsection (3) states a rule of construction with respect to a transfer of goods from a lessee to a buyer or sublessee, where the goods are subject to an existing lease and covered by a certificate of title. Cf . Section 2A-304 official comment.

Cross References:

Sections 2-403, 2A-103(1)(a), 2A-304 and 2A-305(2).

Definitional Cross References:

“Buyer”. Section 2-103(1)(a). “Buyer in the ordinary course of business”. Section 2A-103(1)(a). “Delivery”. Section 1-201(14). “Entrusting”. Section 2-403(3). “Good faith”. Sections 1-201(19) and 2-103(1)(b). “Goods”. Section 2A-103(1)(h). “Lease”. Section 2A-103(1)(j). “Lease contract”. Section 2A-103(1)(). l “Leasehold interest”. Section 2A-103(1)(m). “Lessee”. Section 2A-103(1)(n). “Lessee in the ordinary course of business”. Section 2A-103(1)(o). “Lessor”. Section 2A-103(1)(p). “Merchant”. Section 2-104(1). “Rights”. Section 1-201(36). “Sale”. Section 2-106(1). “Sublease”. Section 2A-103(1)(w). “Value”. Section 1-201(44).

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355.2A-306. Priority of certain liens arising by operation of law.

If a person in the ordinary course of his business furnishes services or materials with respect to goods subject to a lease contract, a lien upon those goods in the possession of that person given by statute or rule of law for those materials or services takes priority over any interest of the lessor or lessee under the lease contract or this article unless the lien is created by statute and the statute provides otherwise or unless the lien is created by rule of law and the rule of law provides otherwise.

History. Enact. Acts 1990, ch. 363, § 36, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 9-310.

Changes:

The approach reflected in the provisions of Section 9-310 was included, but revised to conform to leasing terminology and to expand the exception to the special priority granted to protected liens to cover liens created by rule of law as well as those created by statute.

Purposes:

This section should be interpreted to allow a qualified lessor or a qualified lessee to be the competing lienholder if the statute or rule of law so provides. The reference to statute includes applicable regulations and cases; these sources must be reviewed in resolving a priority dispute under this section.

Cross Reference:

Section 9-310.

Definitional Cross References:

“Goods”. Section 2A-103(1)(h). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Lien”. Section 2A-103(1)(r). “Person”. Section 1-201(30).

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355.2A-307. Priority of liens arising by attachment or levy on, security interests in, and other claims to goods.

  1. Except as otherwise provided in KRS 355.2A-306 , a creditor of a lessee takes subject to the lease contract.
  2. Except as otherwise provided in subsection (3) of this section and in KRS 355.2A-306 and 355.2A-308 , a creditor of a lessor takes subject to the lease contract unless the creditor holds a lien that attached to the goods before the lease contract became enforceable.
  3. Except as otherwise provided in KRS 355.9-317 , 355.9-321 , and 355.9-323 , a lessee takes a leasehold interest subject to a security interest held by a creditor of the lessor.

History. Enact. Acts 1990, ch. 363, § 37, effective January 1, 1991; 1992, ch. 116, § 6, effective January 1, 1993; 2000, ch. 408, § 165, effective July 1, 2001.

Official Comment

Uniform Statutory Source:

None for subsection (1). The remainder of the section is derived from Sections 9-301 (now codified as Section 9-317), and 9-307(1) and (3) (now codified as Sections 9-320(a) and 9-323), respectively, and was substantially rewritten in conjunction the 1998 revisions of Article 9.

Changes:

The provisions of former Sections 9-301 and 9-307(1) and (3) were incorporated, and modified to reflect leasing terminology and the basic concepts reflected in this Article.

Purposes:

  1. Subsection (1) states a general rule of priority that a creditor of the lessee takes subject to the lease contract. The term lessee (Section 2A-103(1)(n)) includes sublessee. Therefore, this subsection not only covers disputes between the prime lessor and a creditor of the prime lessee but also disputes between the prime lessor, or the sublessor, and a creditor of the sublessee. Section 2A-301 official comment 3(g). Further, by using the term creditor (Section 1-201(12)), this subsection will cover disputes with a general creditor, a secured creditor, a lien creditor and any representative of creditors. Section 2A-103(4).
  2. Subsection (2) states a general rule of priority that a creditor of a lessor takes subject to the lease contract. Note the discussion above with regard to the scope of these rules. Section 2A-301 official comment 3(g). Thus, the section will not only cover disputes between the prime lessee and a creditor of the prime lessor but also disputes between the prime lessee, or the sublessee, and a creditor of the sublessor.
  3. To take priority over the lease contract, and the interests derived therefrom, the creditor must come within the exception stated in subsection (2) or within one of the provisions of Article 9 mentioned in subsection (3). Subsection (2) provides that where the creditor holds a lien (Section 2A-103(1)(r)) that attached before the lease contract became enforceable (Section 2A-301), the creditor does not take subject to the lease. Subsection (3) provides that a lessee takes its leasehold interest subject to a security interest except as otherwise provided in Sections 9-317, 9-321, or 9-323.
  4. The rules of this section operate in favor of whichever party to the lease contract may enforce it, even if one party perhaps may not, e.g., under Section 2A-201(1)(b).

Cross References:

Sections 1-201(12), 1-201(25), 1-201(37), 1-201(44), 2A-103(1)(n), 2A-103(1)(o), 2A-103(1)(r), 2A-103(4), 2A-201(1)(b), 2A-301 official comment 3(g), Article 9, especially Sections 9-317, 9-321 and 9-323.

Definitional Cross References:

“Creditor”. Section 1-201(12). “Goods”. Section 2A-103(1)(h). “Knowledge” and “Knows”. Section 1-201(25). “Lease”. Section 2A-103(1)(j). “Lease contract”. Section 2A-103(1)(). l “Leasehold interest”. Section 2A-103(1)(m). “Lessee”. Section 2A-103(1)(n). “Lessee in the ordinary course of business”. Section 2A-103(1)(o). “Lessor”. Section 2A-103(1)(p). “Lien”. Section 2A-103(1)(r). “Party”. Section 1-201(29). “Pursuant to commitment”. Section 2A-103(3). “Security interest”. Section 1-201(37).

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355.2A-308. Special rights of creditors.

  1. A creditor of a lessor in possession of goods subject to a lease contract may treat the lease contract as void if, as against the creditor, retention of possession by the lessor is fraudulent under any statute or rule of law, but retention of possession in good faith and current course of trade by the lessor for a commercially reasonable time after the lease contract becomes enforceable is not fraudulent.
  2. Nothing in this article impairs the rights of creditors of a lessor if the lease contract:
    1. Becomes enforceable, not in current course of trade but in satisfaction of or as security for a pre-existing claim for money, security, or the like; and
    2. Is made under circumstances which under any statute or rule of law apart from this article would constitute the transaction a fraudulent transfer or voidable preference.
  3. A creditor of a seller may treat a sale or an identification of goods to a contract for sale as void if, as against the creditor, retention of possession by the seller is fraudulent under any statute or rule of law, but retention of possession of the goods pursuant to a lease contract entered into by the seller as lessee and the buyer as lessor in connection with the sale or identification of the goods is not fraudulent if the buyer bought for value and in good faith.

History. Enact. Acts 1990, ch. 363, § 38, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-402(2) and (3)(b).

Changes:

Rephrased and new material added to conform to leasing terminology and practice.

Purposes:

Subsection (1) states a general rule of avoidance where the lessor has retained possession of goods if such retention is fraudulent under any statute or rule of law. However, the subsection creates an exception under certain circumstances for retention of possession of goods for a commercially reasonable time after the lease contract becomes enforceable.

Subsection (2) also preserves the possibility of an attack on the lease by creditors of the lessor if the lease was made in satisfaction of or as security for a pre-existing claim, and would constitute a fraudulent transfer or voidable preference under other law.

Finally, subsection (3) states a new rule with respect to sale-leaseback transactions, i.e., transactions where the seller sells goods to a buyer but possession of the goods is retained by the seller pursuant to a lease contract between the buyer as lessor and the seller as lessee. Notwithstanding any statute or rule of law that would treat such retention as fraud, whether per se, prima facie, or otherwise, the retention is not fraudulent if the buyer bought for value (Section 1-201(44)) and in good faith (Sections 1-201(19)) and 2-103(1)(b)). Section 2A-103(3) and (4). This provision overrides Section 2-402(2) to the extent it would otherwise apply to a sale-leaseback transaction.

Cross References:

Sections 1-201(19), 1-201(44), 2-402(2) and 2A-103(4).

Definitional Cross References:

“Buyer”. Section 2-103(1)(a). “Contract”. Section 1-201(11). “Creditor”. Section 1-201(12). “Good faith”. Sections 1-201(19) and 2-103(1)(b). “Goods”. Section 2A-103(1)(h). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Money”. Section 1-201(24). “Reasonable time”. Section 1-204(1) and (2). “Rights”. Section 1-201(36). “Sale”. Section 2-106(1). “Seller”. Section 2-103(1)(d). “Value”. Section 1-201(44).

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355.2A-309. Lessor’s and lessee’s rights when goods become fixtures.

  1. In this section:
    1. Goods are “fixtures” when they become so related to particular real estate that an interest in them arises under real estate law;
    2. A “fixture filing” is the filing, in the office where a record of a mortgage on the real estate would be filed or recorded, of a financing statement covering goods that are or are to become fixtures and conforming to the requirements of KRS 355.9-502 (1) and (2);
    3. A lease is a “purchase money lease” unless the lessee has possession or use of the goods or the right to possession or use of the goods before the lease agreement is enforceable;
    4. A mortgage is a “construction mortgage” to the extent it secures an obligation incurred for the construction of an improvement on land including the acquisition cost of the land, if the recorded writing so indicates; and
    5. “Encumbrance” includes real estate mortgages and other liens on real estate and all other rights in real estate that are not ownership interests.
  2. Under this article a lease may be of goods that are fixtures or may continue in goods that become fixtures, but no lease exists under this article of ordinary building materials incorporated into an improvement on land.
  3. This article does not prevent creation of a lease of fixtures pursuant to real estate law.
  4. The perfected interest of a lessor of fixtures has priority over a conflicting interest of an encumbrancer or owner of the real estate if:
    1. The lease is a purchase money lease, the conflicting interest of the encumbrancer or owner arises before the goods become fixtures, the interest of the lessor is perfected by a fixture filing before the goods become fixtures or within ten (10) days thereafter, and the lessee has an interest of record in the real estate or is in possession of the real estate; or
    2. The interest of the lessor is perfected by a fixture filing before the interest of the encumbrancer or owner is of record, the lessor’s interest has priority over any conflicting interest of a predecessor in title of the encumbrancer or owner, and the lessee has an interest of record in the real estate or is in possession of the real estate.
  5. The interest of a lessor of fixtures, whether or not perfected, has priority over the conflicting interest of an encumbrancer or owner of the real estate if:
    1. The fixtures are readily removable factory or office machines, readily removable equipment that is not primarily used or leased for use in the operation of the real estate, or readily removable replacements of domestic appliances that are goods subject to a consumer lease, and before the goods become fixtures the lease contract is enforceable; or
    2. The conflicting interest is a lien on the real estate obtained by legal or equitable proceedings after the lease contract is enforceable; or
    3. The encumbrancer or owner has consented in writing to the lease or has disclaimed an interest in the goods as fixtures; or
    4. The lessee has a right to remove the goods as against the encumbrancer or owner. If the lessee’s right to remove terminates, the priority of the interest of the lessor continues for a reasonable time.
  6. Notwithstanding subsection (4)(a) but otherwise subject to subsections (4) and (5), the interest of a lessor of fixtures, including the lessor’s residual interest, is subordinate to the conflicting interest of an encumbrancer of the real estate under a construction mortgage recorded before the goods become fixtures if the goods become fixtures before the completion of the construction. To the extent given to refinance a construction mortgage, the conflicting interest of an encumbrancer of the real estate under a mortgage has this priority to the same extent as the encumbrancer of the real estate under the construction mortgage.
  7. In cases not within the preceding subsections, priority between the interest of a lessor of fixtures, including the lessor’s residual interest, and the conflicting interest of an encumbrancer or owner of the real estate who is not the lessee is determined by the priority rules governing conflicting interests in real estate.
  8. If the interest of a lessor of fixtures including the lessor’s residual interest, has priority over all conflicting interests of all owners and encumbrancers of the real estate, the lessor or the lessee may:
    1. On default, expiration, termination, or cancellation of the lease agreement but subject to the lease agreement and this article; or
    2. If necessary to enforce other rights and remedies of the lessor or lessee under this article;

      remove the goods from the real estate, free and clear of all conflicting interests of all owners and encumbrancers of the real estate, but the lessor or lessee must reimburse any encumbrancer or owner of the real estate who is not the lessee and who has not otherwise agreed for the cost of repair of any physical injury, but not for any diminution in value of the real estate caused by the absence of the goods removed or by any necessity of replacing them. A person entitled to reimbursement may refuse permission to remove until the party seeking removal gives adequate security for the performance of this obligation.

  9. Even though the lease agreement does not create a security interest, the interest of a lessor of fixtures, including the lessor’s residual interest, is perfected by filing a financing statement as a fixture filing for leased goods that are or are to become fixtures in accordance with the relevant provisions of the article on secured transactions (Article 9).

History. Enact. Acts 1990, ch. 363, § 39, effective January 1, 1991; 1992, ch. 116, § 7, effective January 1, 1993; 2000, ch. 408, § 166, effective July 1, 2001.

Official Comment

Uniform Statutory Source:

Former Section 9-313.

Changes:

Revised to reflect leasing terminology and to add new material.

Purposes:

  1. While former Section 9-313 (now codified as Sections 9-334 and 9-604) provided a model for this section, certain provisions were substantially revised.
  2. Section 2A-309(1)(c), which is new, defines purchase money lease to exclude leases where the lessee had possession or use of the goods or the right thereof before the lease agreement became enforceable. This term is used in subsection (4)(a) as one of the conditions that must be satisfied to obtain priority over the conflicting interest of an encumbrancer or owner of the real estate.
  3. Section 2A-309(4), which states one of several priority rules found in this section, deletes reference to office machines and the like (Section 9-313(4)(c)) as well as certain liens (Section 9-313(4)(d)). However, these items are included in subsection (5), another priority rule that is more permissive than the rule found in subsection (4) as it applies whether or not the interest of the lessor is perfected. In addition, subsection (5)(a) expands the scope of the provisions of former Section 9-313(4)(c) (now codified as Section 9-334(e)(2)(A) to include readily removable equipment not primarily used or leased for use in the operation of real estate; the qualifier is intended to exclude from the expanded rule equipment integral to the operation of real estate, e.g., heating and air conditioning equipment.
  4. The rule stated in subsection (7) is more liberal than the rule stated in former Section 9-313(7) (now codified in Section 9-334(c)) in that issues of priority not otherwise resolved in this subsection are left for resolution by the priority rules governing conflicting interests in real estate, as opposed to the former Section 9-313(7) (now codified in Section 9-334(c)) automatic subordination of the security interest in fixtures. Note that, for the purpose of this section, where the interest of an encumbrancer or owner of the real estate is paramount to the intent of the lessor, the latter term includes the residual interest of the lessor.
  5. The rule stated in subsection (8) is more liberal than the rule stated in former Section 9-313(8) (now codified as Section 9-604) in that the right of removal is extended to both the lessor and the lessee and the occasion for removal includes expiration, termination or cancellation of the lease agreement, and enforcement of rights and remedies under this Article, as well as default. The new language also provides that upon removal the goods are free and clear of conflicting interests of owners and encumbrancers of the real estate.
  6. Finally, subsection (9) provides a mechanism for the lessor of fixtures to perfect its interest by filing a financing statement under the provisions of the Article on Secured Transactions (Article 9), even though the lease agreement does not create a security interest. Section 1-201(37). The relevant provisions of Article 9 must be interpreted permissively to give effect to this mechanism as it implicitly expands the scope of Article 9 so that its filing provisions apply to transactions that create a lease of fixtures, even though the lease agreement does not create a security interest. This mechanism is similar to that provided in Section 2-326(3)(c) for the seller of goods on consignment, even though the consignment is not “intended as security”. Section 1-201(37). Given the lack of litigation with respect to the mechanism created for consignment sales, this new mechanism should prove effective.

Cross References:

Sections 1-201(37), 2A-309(1)(c), 2A-309(4), Article 9, especially Sections 9-334, 9-604 and 9-505.

Definitional Cross References:

“Agreed”. Section 1-201(3). “Cancellation”. Section 2A-103(1)(b). “Conforming”. Section 2A-103(1)(d). “Consumer lease”. Section 2A-103(1)(e). “Goods”. Section 2A-103(1)(h). “Lease”. Section 2A-103(1)(j). “Lease agreement”. Section 2A-103(1)(k). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Lien”. Section 2A-103(1)(r). “Mortgage”. Section 9-102(a)(55). “Party”. Section 1-201(29). “Person”. Section 1-201(30). “Reasonable time”. Section 1-204(1) and (2). “Remedy”. Section 1-201(34). “Rights”. Section 1-201(36). “Security interest”. Section 1-201(37). “Termination”. Section 2A-103(1)(z). “Value”. Section 1-201(44). “Writing”. Section 1-201(46).

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Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Answer by Tenant That Items are Trade Fixtures, Form 302.02.

Caldwell’s Kentucky Form Book, 5th Ed., Complaint by Landlord Against Tenant for Fixtures Removed, Form 302.01.

355.2A-310. Lessor’s and lessee’s rights when goods become accessions.

  1. Goods are “accessions” when they are installed in or affixed to other goods.
  2. The interest of a lessor or a lessee under a lease contract entered into before the goods became accessions is superior to all interests in the whole except as stated in subsection (4).
  3. The interest of a lessor or a lessee under a lease contract entered into at the time or after the goods became accessions is superior to all subsequently acquired interests in the whole except as stated in subsection (4) but is subordinate to interests in the whole existing at the time the lease contract was made unless the holders of such interests in the whole have in writing consented to the lease or disclaimed an interest in the goods as part of the whole.
  4. The interest of a lessor or a lessee under a lease contract described in subsection (2) or (3) is subordinate to the interest of:
    1. A buyer in the ordinary course of business or a lessee in the ordinary course of business of any interest in the whole acquired after the goods became accessions; or
    2. A creditor with a security interest in the whole perfected before the lease contract was made to the extent that the creditor makes subsequent advances without knowledge of the lease contract.
  5. When under subsections (2) or (3) and (4) a lessor or a lessee of accessions holds an interest that is superior to all interests in the whole, the lessor or the lessee may:
    1. On default, expiration, termination, or cancellation of the lease contract by the other party but subject to the provisions of the lease contract and this article; or
    2. If necessary to enforce his other rights and remedies under this article;

remove the goods from the whole, free and clear of all interests in the whole, but he must reimburse any holder of an interest in the whole who is not the lessee and who has not otherwise agreed for the cost of repair of any physical injury but not for any diminution in value of the whole caused by the absence of the goods removed or by any necessity for replacing them. A person entitled to reimbursement may refuse permission to remove until the party seeking removal gives adequate security for the performance of this obligation.

History. Enact. Acts 1990, ch. 363, § 40, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Former Section 9-314 (now codified as Section 9-335).

Changes:

Revised to reflect leasing terminology and to add new material.

Purposes:

Subsection (1) defines “accessions.” Subsection (2) add leasing terminology to the priority rule that applies when the lease is entered into before the goods become accessions. Subsection (3) adds leasing terminology to the priority rule that applies when the lease is entered into on or after the goods become accessions.

Subsection (4) creates two exceptions to the priority rules stated in subsections (2) and (3).

Finally, subsection (5) is modeled on the provisions of former Section 9-314(4) (now codified as Section 9-335(d)) with respect to removal of accessions, restated to reflect the parallel changes in Section 2A-309(8).

Neither this section nor Section 9-335 governs where the accession to the goods is not subject to the interest of a lessor or a lessee under a lease contract and is not subject to the interest of a secured party under a security agreement. This issue is to be resolved by the courts, case by case.

Cross References:

Sections 2A-309(8), 9-102(a)(1), 9-335.

Definitional Cross References:

“Agreed”. Section 1-201(3). “Buyer in the ordinary course of business”. Section 2A-103(1)(a). “Cancellation”. Section 2A-103(1)(b). “Creditor”. Section 1-201(12). “Goods”. Section 2A-103(1)(h). “Holder”. Section 1-201(20). “Knowledge”. Section 1-201(25). “Lease”. Section 2A-103(1)(j). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessee in the ordinary course of business”. Section 2A-103(1)(o). “Lessor”. Section 2A-103(1)(p). “Party”. Section 1-201(29). “Person”. Section 1-201(30). “Remedy”. Section 1-201(34). “Rights”. Section 1-201(36). “Security interest”. Section 1-201(37). “Termination”. Section 2A-103(1)(z). “Value”. Section 1-201(44). “Writing”. Section 1-201(46).

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355.2A-311. Priority subject to subordination.

Nothing in this article prevents subordination by agreement by any person entitled to priority.

History. Enact. Acts 1992, ch. 116, § 8, effective January 1, 1993.

Official Comment

Uniform Statutory Source:

Former Section 9-316 (now codified as Section 9-339).

Purposes:

The several preceding sections deal with questions of priority. This section is inserted to make it entirely clear that a person entitled to priority may effectively agree to subordinate the claim. Only the person entitled to priority may make such an agreement: the rights of such a person cannot be adversely affected by an agreement to which that person is not a party.

Cross References:

Sections 1-102 and 2A-304 through 2A-310.

Definitional Cross References:

“Agreement”. Section 1-201(3). “Person”. Section 1-201(30).

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Part 4. Performance of Lease Contract: Repudiated, Substituted and Excused

355.2A-401. Insecurity: adequate assurance of performance.

  1. A lease contract imposes an obligation on each party that the other’s expectation of receiving due performance will not be impaired.
  2. If reasonable grounds for insecurity arise with respect to the performance of either party, the insecure party may demand in writing adequate assurance of due performance. Until the insecure party receives that assurance, if commercially reasonable the insecure party may suspend any performance for which he has not already received the agreed return.
  3. A repudiation of the lease contract occurs if assurance of due performance adequate under the circumstances of the particular case is not provided to the insecure party within a reasonable time, not to exceed thirty (30) days after receipt of a demand by the other party.
  4. Between merchants, the reasonableness of grounds for insecurity and the adequacy of any assurance offered must be determined according to commercial standards.
  5. Acceptance of any nonconforming delivery or payment does not prejudice the aggrieved party’s right to demand adequate assurance of future performance.

History. Enact. Acts 1990, ch. 363, § 41, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-609.

Changes:

Revised to reflect leasing practices and terminology. Note that in the analogue to subsection (3) (Section 2-609(4)), the adjective “justified” modifies demand. The adjective was deleted here as unnecessary, implying no substantive change.

Definitional Cross References:

“Aggrieved party”. Section 1-201(2). “Agreed”. Section 1-201(3). “Between merchants”. Section 2-104(3). “Conforming”. Section 2A-103(1)(d). “Delivery”. Section 1-201(14). “Lease contract”. Section 2A-103(1)(). l “Party”. Section 1-201(29). “Reasonable time”. Section 1-204(1) and (2). “Receipt”. Section 2-103(1)(c). “Rights”. Section 1-201(36). “Writing”. Section 1-201(46).

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355.2A-402. Anticipatory repudiation.

If either party repudiates a lease contract with respect to a performance not yet due under the lease contract, the loss of which performance will substantially impair the value of the lease contract to the other, the aggrieved party may:

  1. For a commercially reasonable time, await retraction of repudiation and performance by the repudiating party;
  2. Make demand pursuant to KRS 355.2A-401 and await assurance of future performance adequate under the circumstances of the particular case; or
  3. Resort to any right or remedy upon default under the lease contract or this article, even though the aggrieved party has notified the repudiating party that the aggrieved party would await the repudiating party’s performance and assurance and has urged retraction. In addition, whether or not the aggrieved party is pursuing one (1) of the foregoing remedies, the aggrieved party may suspend performance or, if the aggrieved party is the lessor, proceed in accordance with the provisions of this article on the lessor’s right to identify goods to the lease contract notwithstanding default or to salvage unfinished goods (KRS 355.2A-524 ).

History. Enact. Acts 1990, ch. 363, § 42, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-610.

Changes:

Revised to reflect leasing practices and terminology.

Definitional Cross References:

“Aggrieved party”. Section 1-201(2). “Goods”. Section 2A-103(1)(h). “Lease contract”. Section 2A-103(1)(). l “Lessor”. Section 2A-103(1)(n). “Notifies”. Section 1-201(26). “Party”. Section 1-201(29). “Reasonable time”. Section 1-204(1) and (2). “Remedy”. Section 1-201(34). “Rights”. Section 1-201(36). “Value”. Section 1-201(44).

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355.2A-403. Retraction of anticipatory repudiation.

  1. Until the repudiating party’s next performance is due, the repudiating party can retract the repudiation unless, since the repudiation, the aggrieved party has canceled the lease contract or materially changed the aggrieved party’s position or otherwise indicated that the aggrieved party considers the repudiation final.
  2. Retraction may be by any method that clearly indicates to the aggrieved party that the repudiating party intends to perform under the lease contract and includes any assurance demanded under KRS 355.2A-401 .
  3. Retraction reinstates a repudiating party’s rights under a lease contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation.

History. Enact. Acts 1990, ch. 363, § 43, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-611.

Changes:

Revised to reflect leasing practices and terminology. Note that in the analogue to subsection (2) (Section 2-611(2)) the adjective “justifiably” modifies demanded. The adjective was deleted here (as it was in Section 2A-401) as unnecessary, implying no substantive change.

Definitional Cross References:

“Aggrieved party”. Section 1-201(2). “Cancellation”. Section 2A-103(1)(b). “Lease contract”. Section 2A-103(1)(). l “Party”. Section 1-201(29). “Rights”. Section 1-201(36).

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355.2A-404. Substituted performance.

  1. If without fault of the lessee, the lessor and the supplier, the agreed berthing, loading, or unloading facilities fail or the agreed type of carrier becomes unavailable or the agreed manner of delivery otherwise becomes commercially impracticable, but a commercially reasonable substitute is available, the substitute performance must be tendered and accepted.
  2. If the agreed means or manner of payment fails because of domestic or foreign governmental regulation:
    1. The lessor may withhold or stop delivery or cause the supplier to withhold or stop delivery unless the lessee provides a means or manner of payment that is commercially a substantial equivalent; and
    2. If delivery has already been taken, payment by the means or in the manner provided by the regulation discharges the lessee’s obligation unless the regulation is discriminatory, oppressive, or predatory.

History. Enact. Acts 1990, ch. 363, § 44, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-614.

Changes:

Revised to reflect leasing practices and terminology.

Definitional Cross References:

“Agreed”. Section 1-201(3)). “Delivery”. Section 1-201(14). “Fault”. Section 2A-103(1)(f). “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Supplier”. Section 2A-103(1)(x).

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355.2A-405. Excused performances.

Subject to KRS 355.2A-404 on substituted performance, the following rules apply:

  1. Delay in delivery or nondelivery in whole or in part by a lessor or a supplier who complies with subsections (2) and (3) is not a default under the lease contract if performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the lease contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order, whether or not the regulation or order later proves to be invalid.
  2. If the causes mentioned in subsection (1) affect only part of the lessor’s or the supplier’s capacity to perform, he shall allocate production and deliveries among his customers but at his option may include regular customers not then under contract for sale or lease as well as his own requirements for further manufacture. He may so allocate in any manner that is fair and reasonable.
  3. The lessor seasonably shall notify the lessee and in the case of a finance lease the supplier seasonably shall notify the lessor and the lessee, if known, that there will be delay or nondelivery and, if allocation is required under subsection (2), of the estimated quota thus made available for the lessee.

History. Enact. Acts 1990, ch. 363, § 45, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-615.

Changes:

Revised to reflect leasing practices and terminology.

Definitional Cross References:

“Agreed”. Section 1-201(3). “Contract”. Section 1-201(11). “Delivery”. Section 1-201(14). “Finance lease”. Section 2A-103(1)(g). “Good faith”. Sections 1-201(19) and 2-103(1)(b). “Knows”. Section 1-201(25). “Lease”. Section 2A-103(1)(j). “Lease contract”. Section 2A-103(1)( ). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Notifies”. Section 1-201(26). “Sale”. Section 2-106(1). “Seasonably”. Section 1-204(3). “Supplier”. Section 2A-103(1)(x).

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355.2A-406. Procedure on excused performance.

  1. If the lessee receives notification of a material or indefinite delay or an allocation justified under KRS 355.2A-405 , the lessee may by written notification to the lessor as to any goods involved, and with respect to all of the goods if under an installment lease contract the value of the whole lease contract is substantially impaired (KRS 355.2A-510 ):
    1. Terminate the lease contract (subsection (2) of KRS 355.2A-505 ); or
    2. Except in a finance lease that is not a consumer lease, modify the lease contract by accepting the available quota in substitution, with due allowance from the rent payable for the balance of the lease term for the deficiency but without further right against the lessor.
  2. If, after receipt of a notification from the lessor under KRS 355.2A-405 , the lessee fails so to modify the lease agreement within a reasonable time not exceeding thirty (30) days, the lease contract lapses with respect to any deliveries affected.

History. Enact. Acts 1990, ch. 363, § 46, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-616(1) and (2).

Changes:

Revised to reflect leasing practices and terminology. Note that subsection (1)(a) allows the lessee under a lease, including a finance lease, the right to terminate the lease for excused performance (Sections 2A-404 and 2A-405). However, subsection (1)(b), which allows the lessee the right to modify the lease for excused performance, excludes a finance lease that is not a consumer lease. This exclusion is compelled by the same policy that led to codification of provisions with respect to irrevocable promises. Section 2A-407.

Definitional Cross References:

“Consumer lease”. Section 2A-103(1)(e). “Delivery”. Section 1-201(14). “Finance lease”. Section 2A-103(1)(g). “Goods”. Section 2A-103(1)(h). “Installment lease contract”. Section 2A-103(1)(i). “Lease agreement”. Section 2A-103(1)(k). “Lease contract”. Section 2A-103(1)( ). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Notice”. Section 1-201(25). “Reasonable time”. Section 1-204(1) and (2). “Receipt”. Section 2-103(1)(c). “Rights”. Section 1-201(36). “Termination”. Section 2A-103(1)(z). “Value”. Section 1-201(44). “Written”. Section 1-201(46).

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355.2A-407. Irrevocable promises: finance leases.

  1. In the case of a finance lease that is not a consumer lease, the lessee’s promises under the lease contract become irrevocable and independent upon the lessee’s acceptance of the goods.
  2. A promise that has become irrevocable and independent under subsection (1):
    1. Is effective and enforceable between the parties, and by or against third parties including assignees of the parties; and
    2. Is not subject to cancellation, termination, modification, repudiation, excuse, or substitution without the consent of the party to whom the promise runs.
  3. This section does not affect the validity under any other law of a covenant in any lease contract making the lessee’s promises irrevocable and independent upon the lessee’s acceptance of the goods.

History. Enact. Acts 1990, ch. 363, § 47, effective January 1, 1991; 1992, ch. 116, § 9, effective January 1, 1993.

Official Comment

Uniform Statutory Source:

None.

Purposes:

  1. This section extends the benefits of the classic “hell or high water” clause to a finance lease that is not a consumer lease. This section is self-executing; no special provision need be added to the contract. This section makes covenants in a finance lease irrevocable and independent due to the function of the finance lessor in a three party relationship: the lessee is looking to the supplier to perform the essential covenants and warranties. Section 2A-209. Thus, upon the lessee’s acceptance of the goods the lessee’s promises to the lessor under the lease contract become irrevocable and independent. The provisions of this section remain subject to the obligation of good faith (Sections 2A-103(4) and 1-203), and the lessee’s revocation of acceptance (Section 2A-517).
  2. The section requires the lessee to perform even if the lessor’s performance after the lessee’s acceptance is not in accordance with the lease contract; the lessee may, however, have and pursue a cause of action against the lessor, e.g., breach of certain limited warranties (Sections 2A-210 and 2A-211(1)). This is appropriate because the benefit of the supplier’s promises and warranties to the lessor under the supply contract and, in some cases, the warranty of a manufacturer who is not the supplier, is extended to the lessee under the finance lease. Section 2A-209. Despite this balance, this section excludes a finance lease that is a consumer lease. That a consumer be obligated to pay notwithstanding defective goods or the like is a principle that is not tenable under case law (Unico v. Owen, 50 N.J. 101, 232 A.2d 405 (1967)), state statute (Unif. Consumer Credit Code §§ 3.403-.405, 7A U.L.A. 126-31 (1974), or federal statute (15 U.S.C. § 1666i (1982)).
  3. The relationship of the three parties to a transaction that qualifies as a finance lease is best demonstrated by a hypothetical. A, the potential lessor, has been contracted by B, the potential lessee, to discuss the lease of an expensive line of equipment that B has recently placed an order for with C, the manufacturer of such goods. The negotiation is completed and A, as lessor, and B, as lessee, sign a lease of the line of equipment for a 60-month term. B, as buyer, assigns the purchase order with C to A. If this transaction creates a lease (Section 2A-103(1)(j)), this transaction should qualify as a finance lease. Section 2A-103(1)(g).
  4. The line of equipment is delivered by C to B’s place of business. After installation by C and testing by B, B accepts the goods by signing a certificate of delivery and acceptance, a copy of which is sent by B to A and C. One year later the line of equipment malfunctions and B falls behind in its manufacturing schedule.
  5. Under this Article, because the lease is a finance lease, no warranty of fitness or merchantability is extended by A to B. Sections 2A-212(1) and 2A-213. Absent an express provision in the lease agreement, application of Section 2A-210 or Section 2A-211(1), or application of the principles of law and equity, including the law with respect to fraud, duress, or the like (Sections 2A-103(4) and 1-103), B has no claim against A. B’s obligation to pay rent to A continues as the obligation became irrevocable and independent when B accepted the line of equipment (Section 2A-407(1)). B has no right to set-off with respect to any part of the rent still due under the lease. Section 2A-508(6). However, B may have another remedy. Despite the lack of privity between B and C (the purchase order with C having been assigned by B to A), B may have a claim against C. Section 2A-209(1).
  6. This section does not address whether a “hell or high water” clause, i.e., a clause that is to the effect of this section, is enforceable if included in a finance lease that is a consumer lease or a lease that is not a finance lease. That issue will continue to be determined by the facts of each case and other law which this section does not affect. Sections 2A-104, 2A-103(4), 9-206 and 9-318. However, with respect to finance leases that are not consumer leases courts have enforced “hell or high water” clauses. In re O.P.M. Leasing Servs., 21 Bankr. 993, 1006 (Bankr. S.D.N.Y. 1982).
  7. Subsection (2) further provides that a promise that has become irrevocable and independent under subsection (1) is enforceable not only between the parties but also against third parties. Thus, the finance lease can be transferred or assigned without disturbing enforceability. Further, subsection (2) also provides that the promise cannot, among other things, be cancelled or terminated without the consent of the lessor.

Cross References:

Sections 1-103, 1-203, 2A-103(1)(g), 2A-103(1)(j), 2A-103(4), 2A-104, 2A-209, 2A-209(1), 2A-210, 2A-211(1), 2A-212(1), 2A-213, 2A-517(1)(b), 9-403 and 9-404.

Definitional Cross References:

“Cancellation”. Section 2A-103(1)(b). “Consumer lease”. Section 2A-103(1)(e). “Finance lease”. Section 2A-103(1)(g). “Goods”. Section 2A-103(1)(h). “Lease contract”. Section 2A-103(1)( ). l “Lessee”. Section 2A-103(1)(n). “Party”. Section 1-201(29). “Termination”. Section 2A-103(1)(z).

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Part 5. Default

A. In General

355.2A-501. Default procedure.

  1. Whether the lessor or the lessee is in default under a lease contract is determined by the lease agreement and this article.
  2. If the lessor or the lessee is in default under the lease contract, the party seeking enforcement has rights and remedies as provided in this article and, except as limited by this article, as provided in the lease agreement.
  3. If the lessor or the lessee is in default under the lease contract, the party seeking enforcement may reduce the party’s claim to judgment, or otherwise enforce the lease contract by self-help or any available judicial procedure or nonjudicial procedure, including administrative proceeding, arbitration, or the like, in accordance with this article.
  4. Except as otherwise provided in KRS 355.1-305 (1) or this article or the lease agreement, the rights and remedies referred to in subsections (2) and (3) of this section are cumulative.
  5. If the lease agreement covers both real property and goods, the party seeking enforcement may proceed under this part as to the goods, or under other applicable law as to both the real property and the goods in accordance with that party’s rights and remedies in respect of the real property, in which case this part does not apply.

History. Enact. Acts 1990, ch. 363, § 48, effective January 1, 1991; 1992, ch. 116, § 10, effective January 1, 1993; 2006, ch. 242, § 28, effective July 12, 2006.

Official Comment

Uniform Statutory Source:

Former Section 9-501 (now codified as Sections 9-601 through 9-604).

Changes:

Substantially revised.

Purposes:

  1. Subsection (1) is new and represents a departure from the Article on Secured Transactions (Article 9) as the subsection makes clear that whether a party to the lease agreement is in default is determined by this Article as well as the agreement. Sections 2A-508 and 2A-523. It further departs from Article 9 in recognizing the potential default of either party, a function of the bilateral nature of the obligations between the parties to the lease contract.
  2. Subsection (2) is a version of the first sentence of Section 9-601(a), revised to reflect leasing terminology.
  3. Subsection (3), an expansive version of the second sentence of Section 9-601(a), lists the procedures that may be followed by the party seeking enforcement; in effect, the scope of the procedures listed in subsection (3) is consistent with the scope of the procedures available to the foreclosing secured party.
  4. Subsection (4) establishes that the parties’ rights and remedies are cumulative. DeKoven, Leases of Equipment: Puritan Leasing Company v. August, A Dangerous Decision, 12 U.S. F.L.Rev. 257, 276-80 (1978). Cumulation, and largely unrestricted selection, of remedies is allowed in furtherance of the general policy of the Commercial Code, stated in Section 1-305, that remedies be liberally administered to put the aggrieved party in as good a position as if the other party had fully performed. Therefore, cumulation of, or selection among, remedies is available to the extent necessary to put the aggrieved party in as good a position as it would have been in had there been full performance. However, cumulation of, or selection among, remedies is not available to the extent that the cumulation or selection would put the aggrieved party in a better position than it would have been in had there been full performance by the other party.
  5. Section 9-602, which, among other things, states that certain rules, to the extent they give rights to the debtor and impose duties on the secured party, may not be waived or varied, is not incorporated in this Article. Given the significance of freedom of contract in the development of the common law as it applies to bailments for hire and the lessee’s lack of an equity of redemption, there is no reason to impose that restraint.

Cross References:

Sections 1-305, 2A-508, 2A-523, Article 9, especially Sections 9-601 and 9-602.

Definitional Cross References:

“Goods”. Section 2A-103(1)(h). “Lease agreement”. Section 2A-103(1)(k). “Lease contract”. Section 2A-103(1)( ). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Party”. Section 1-201(b)(26). “Remedy”. Section 1-201(b)(32). “Rights”. Section 1-201(b)(34).

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355.2A-502. Notice after default.

Except as otherwise provided in this article or the lease agreement, the lessor or lessee in default under the lease contract is not entitled to notice of default or notice of enforcement from the other party to the lease agreement.

History. Enact. Acts 1990, ch. 363, § 49, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

None.

Purposes:

This section makes clear that absent agreement to the contrary or provision in this Article to the contrary, e.g., Section 2A-516(3)(a), the party in default is not entitled to notice of default or enforcement. While a review of Part 6 of Article 9 leads to the same conclusion with respect to giving notice of default to the debtor, it is never stated. Although Article 9 requires notice of disposition and strict foreclosure, the different scheme of lessors’ and lessees’ rights and remedies developed under the common law, and codified by this Article, generally does not require notice of enforcement; furthermore, such notice is not mandated by due process requirements. However, certain sections of this Article do require notice. E.g., Section 2A-517(4).

Cross References:

Sections 2A-516(3)(a), 2A-517(4), and Article 9, esp. Part 6.

Definitional Cross References:

“Lease agreement”. Section 2A-103(1)(k). “Lease contract”. Section 2A-103(1)( ). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Notice”. Section 1-201(25). “Party”. Section 1-201(29).

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355.2A-503. Modification or impairment of rights and remedies.

  1. Except as otherwise provided in this article, the lease agreement may include rights and remedies for default in addition to or in substitution for those provided in this article and may limit or alter the measure of damages recoverable under this article.
  2. Resort to a remedy provided under this article or in the lease agreement is optional unless the remedy is expressly agreed to be exclusive. If circumstances cause an exclusive or limited remedy to fail of its essential purpose, or provision for an exclusive remedy is unconscionable, remedy may be had as provided in this article.
  3. Consequential damages may be liquidated under KRS 355.2A-504 , or may otherwise be limited, altered, or excluded unless the limitation, alteration, or exclusion is unconscionable. Limitation, alteration, or exclusion of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation, alteration, or exclusion of damages where the loss is commercial is not prima facie unconscionable.
  4. Rights and remedies on default by the lessor or the lessee with respect to any obligation or promise collateral or ancillary to the lease contract are not impaired by this article.

History. Enact. Acts 1990, ch. 363, § 50, effective January 1, 1991; 1992, ch. 116, § 11, effective January 1, 1993.

Official Comment

Uniform Statutory Source:

Sections 2-719 and 2-701.

Changes:

Rewritten to reflect lease terminology and to clarify the relationship between this section and Section 2A-504.

Purposes:

  1. A significant purpose of this Part is to provide rights and remedies for those parties to a lease who fail to provide them by agreement or whose rights and remedies fail of their essential purpose or are unenforceable. However, it is important to note that this implies no restriction on freedom to contract. Sections 2A-103(4) and 1-102(3). Thus, subsection (1), a revised version of the provisions of Section 2-719(1), allows the parties to the lease agreement freedom to provide for rights and remedies in addition to or in substitution for those provided in this Article and to alter or limit the measure of damages recoverable under this Article. Except to the extent otherwise provided in this Article (e.g., Sections 2A-105, 106 and 108(1) and (2)), this Part shall be construed neither to restrict the parties’ ability to provide for rights and remedies or to limit or alter the measure of damages by agreement, nor to imply disapproval of rights and remedy schemes other than those set forth in this Part.
  2. Subsection (2) makes explicit with respect to this Article what is implicit in Section 2-719 with respect to the Article on Sales (Article 2): if an exclusive remedy is held to be unconscionable, remedies under this Article are available. Section 2-719 official comment 1.
  3. Subsection (3), a revision of Section 2-719(3), makes clear that consequential damages may also be liquidated. Section 2A-504(1).
  4. Subsection (4) is a revision of the provisions of Section 2-701. This subsection leaves the treatment of default with respect to obligations or promises collateral or ancillary to the lease contract to other law. Sections 2A-103(4) and 1-103. An example of such an obligation would be that of the lessor to the secured creditor which has provided the funds to leverage the lessor’s lease transaction; an example of such a promise would be that of the lessee, as seller, to the lessor, as buyer, in a sale-leaseback transaction.

Cross References:

Sections 1-102(3), 1-103, Article 2, especially Sections 2-701, 2-719, 2-719(1), 2-719(3), 2-719 official comment 1, and Sections 2A-103(4), 2A-105, 2A-106, 2A-108(1), 2A-108(2), and 2A-504.

Definitional Cross References:

“Agreed”. Section 1-201(3). “Consumer goods”. Section 9-102(a)(23). “Lease agreement”. Section 2A-103(1)(k). “Lease contract”. Section 2A-103(1)( ). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Person”. Section 1-201(30). “Remedy”. Section 1-201(34). “Rights”. Section 1-201(36).

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355.2A-504. Liquidation of damages.

  1. Damages payable by either party for default, or any other act or omission, including indemnity for loss or diminution of anticipated tax benefits or loss or damage to lessor’s residual interest, may be liquidated in the lease agreement but only at an amount or by a formula that is reasonable in light of the then anticipated harm caused by the default or other act or omission.
  2. If the lease agreement provides for liquidation of damages, and such provision does not comply with subsection (1), or such provision is an exclusive or limited remedy that circumstances cause to fail of its essential purpose, remedy may be had as provided in this article.
  3. If the lessor justifiably withholds or stops delivery of goods because of the lessee’s default or insolvency (KRS 355.2A-525 or 355.2A-526 ), the lessee is entitled to restitution of any amount by which the sum of his payments exceeds:
    1. The amount to which the lessor is entitled by virtue of terms liquidating the lessor’s damages in accordance with subsection (1); or
    2. In the absence of those terms, twenty percent (20%) of the then present value of the total rent the lessee was obligated to pay for the balance of the lease term, or, in the case of a consumer lease, the lesser of such amount or five hundred dollars ($500).
  4. A lessee’s right to restitution under subsection (3) is subject to offset to the extent the lessor establishes:
    1. A right to recover damages under the provisions of this article other than subsection (1); and
    2. The amount or value of any benefits received by the lessee directly or indirectly by reason of the lease contract.

History. Enact. Acts 1990, ch. 363, § 51, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Sections 2-718(1), (2), (3) and 2-719(2).

Changes:

Substantially rewritten.

Purposes:

Many leasing transactions are predicated on the parties’ ability to agree to an appropriate amount of damages or formula for damages in the event of default or other act or omission. The rule with respect to sales of goods (Section 2-718) may not be sufficiently flexible to accommodate this practice. Thus, consistent with the common law emphasis upon freedom to contract with respect to bailments for hire, this section has created a revised rule that allows greater flexibility with respect to leases of goods.

Subsection (1), a significantly modified version of the provisions of Section 2-718(1), provides for liquidation of damages in the lease agreement at an amount or by a formula. Section 2-718(a) does not by its express terms include liquidation by a formula; this change was compelled by modern leasing practice. Subsection (1), in a further expansion of Section 2-718(1), provides for liquidation of damages for default as well as any other act or omission.

A liquidated damages formula that is common in leasing practice provides that the sum of lease payments past due, accelerated future lease payments, and the lessor’s estimated residual interest, less the net proceeds of disposition (whether by sale or re-lease) of the leased goods is the lessor’s damages. Tax indemnities, costs, interest and attorney’s fees are also added to determine the lessor’s damages. Another common liquidated damages formula utilizes a periodic depreciation allocation as a credit to the aforesaid amount in mitigation of a lessor’s damages. A third formula provides for a fixed number of periodic payments as a means of liquidating damages. Stipulated loss or stipulated damage schedules are also common. Whether these formulae are enforceable will be determined in the context of each case by applying a standard of reasonableness in light of the harm anticipated when the formula was agreed to. Whether the inclusion of these formulae will affect the classification of the transaction as a lease or a security interest is to be determined by the facts of each case. Section 1-201(37). E.g. , In re Noack , 44 Bankr. 172, 174-75 (Bankr. E.D.Wis.1984).

This section does not incorporate two other tests that under sales law determine enforceability of liquidated damages, i.e., difficulties of proof of loss and inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. The ability to liquidate damages is critical to modern leasing practice; given the parties’ freedom to contract at common law, the policy behind retaining these two additional requirements here was thought to be outweighed. Further, given the expansion of subsection (a1) to enable the parties to liquidate the amount payable with respect to an indemnity for loss or diminution of anticipated tax benefits resulted in another change: the last sentence of Section 2-718(1), providing that a term fixing unreasonably large liquidated damages is void as a penalty, was also not incorporated. The impact of local, state and federal tax laws on a leasing transaction can result in an amount payable with respect to the tax indemnity many times greater than the original purchase price of the goods. By deleting the reference to unreasonably large liquidated damages the parties are free to negotiate a formula, restrained by the rule of reasonableness in this section. These changes should invite the parties to liquidate damages. Peters, Remedies for Breach of Contracts Relating to the Sale of Goods Under the Uniform Commercial Code: A Roadmap for Article Two , 73 Yale L.J. 199, 278 (1963).

Subsection (2), a revised version of Section 2-719(2), provides that if the liquidated damages provision is not enforceable or fails of its essential purpose, remedy may be had as provided in this Article.

Subsection (3)(b) of this section differs from subsection (2)(b) of Section 2-718; in the absence of a valid liquidated damages amount or formula the lessor is permitted to retain 20 percent of the present value of the total rent payable under the lease. The alternative limitation of $500 contained in Section 2-718 is deleted as unrealistically low with respect to a lease other than a consumer lease.

Cross References:

Sections 1-201(37), 2-718, 2-718(1), 2-718(2)(b) and 2-719(2).

Definitional Cross References:

“Consumer lease”. Section 2A-103(1)(e). “Delivery”. Section 1-201(14). “Goods”. Section 2A-103(1)(h). “Insolvent”. Section 1-201(23). “Lease agreement”. Section 2A-103(1)(k). “Lease contract”. Section 2A-103(1)( ). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Lessor’s residual interest”. Section 2A-103(1)(q). “Party”. Section 1-201(29). “Present value”. Section 2A-103(1)(u). “Remedy”. Section 1-201(34). “Rights”. Section 1-201(36). “Term”. Section 1-201(42). “Value”. Section 1-201(44).

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355.2A-505. Cancellation and termination and effect of cancellation, termination, rescission, or fraud on rights and remedies.

  1. On cancellation of the lease contract, all obligations that are still executory on both sides are discharged, but any right based on prior default or performance survives, and the canceling party also retains any remedy for default of the whole lease contract or any unperformed balance.
  2. On termination of the lease contract, all obligations that are still executory on both sides are discharged but any right based on prior default or performance survives.
  3. Unless the contrary intention clearly appears, expressions of “cancellation,” “rescission,” or the like of the lease contract may not be construed as a renunciation or discharge of any claim in damages for an antecedent default.
  4. Rights and remedies for material misrepresentation or fraud include all rights and remedies available under this article for default.
  5. Neither rescission nor a claim for rescission of the lease contract nor rejection or return of the goods may bar or be deemed inconsistent with a claim for damages or other right or remedy.

History. Enact. Acts 1990, ch. 363, § 52, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Sections 2-106(3) and (4), 2-720 and 2-721.

Changes:

Revised to reflect leasing practices and terminology.

Definitional Cross References:

“Cancellation”. Section 2A-103(1)(b). “Goods”. Section 2A-103(1)(h). “Lease contract”. Section 2A-103(1)( ). l “Party”. Section 1-201(29). “Remedy”. Section 1-201(34). “Rights”. Section 1-201(36). “Termination”. Section 2A-103(1)(z).

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355.2A-506. Statute of limitations.

  1. An action for default under a lease contract, including breach of warranty or indemnity, must be commenced within four (4) years after the cause of action accrued. By the original lease contract the parties may reduce the period of limitation to not less than one (1) year.
  2. A cause of action for default accrues when the act or omission on which the default or breach of warranty is based is or should have been discovered by the aggrieved party, or when the default occurs, whichever is later. A cause of action for indemnity accrues when the act or omission on which the claim for indemnity is based is or should have been discovered by the indemnified party, whichever is later.
  3. If an action commenced within the time limited by subsection (1) is so terminated as to leave available a remedy by another action for the same default or breach of warranty or indemnity, the other action may be commenced after the expiration of the time limited and within six (6) months after the termination of the first action unless the termination resulted from voluntary discontinuance or from dismissal for failure or neglect to prosecute.
  4. This section does not alter the law on tolling of the statute of limitations nor does it apply to causes of action that have accrued before this article becomes effective.

History. Enact. Acts 1990, ch. 363, § 53, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-725.

Changes:

Substantially rewritten.

Purposes:

Subsection (1) does not incorporate the limitation found in Section 2-725(1) prohibiting the parties from extending the period of limitation. Breach of warranty and indemnity claims often arise in a lease transaction; with the passage of time such claims often diminish or are eliminated. To encourage the parties to commence litigation under these circumstances makes little sense.

Subsection (2) states two rules for determining when a cause of action accrues. With respect to default, the rule of Section 2-725(2) is not incorporated in favor of a more liberal rule of the later of the date when the default occurs or when the act or omission on which it is based is or should have been discovered. With respect to indemnity, a similarly liberal rule is adopted.

Cross References:

Sections 2-725(1) and 2-725(2).

Definitional Cross References:

“Action”. Section 1-201(1). “Aggrieved party”. Section 1-201(2). “Lease contract”. Section 2A-103(1)(). l “Party”. Section 1-201(29). “Remedy”. Section 1-201(34). “Termination”. Section 2A-103(1)(z).

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355.2A-507. Proof of market rent: time and place.

  1. Damages based on market rent (KRS 355.2A-519 or 355.2A-528 ) are determined according to the rent for the use of the goods concerned for a lease term identical to the remaining lease term of the original lease agreement and prevailing at the times specified in KRS 355.2A-519 and 355.2A-528 .
  2. If evidence of rent for the use of the goods concerned for a lease term identical to the remaining lease term of the original lease agreement and prevailing at the times or places described in this article is not readily available, the rent prevailing within any reasonable time before or after the time described or at any other place or for a different lease term which in commercial judgment or under usage of trade would serve as a reasonable substitute for the one described may be used, making any proper allowance for the difference, including the cost of transporting the goods to or from the other place.
  3. Evidence of a relevant rent prevailing at a time or place or for a lease term other than the one described in this article offered by one party is not admissible unless and until he has given the other party notice the court finds sufficient to prevent unfair surprise.
  4. If the prevailing rent or value of any goods regularly leased in any established market is in issue, reports in official publications or trade journals or in newspapers or periodicals of general circulation published as the reports of that market are admissible in evidence. The circumstances of the preparation of the report may be shown to affect its weight but not its admissibility.

History. Enact. Acts 1990, ch. 363, § 54, effective January 1, 1991; 1992, ch. 116, § 12, effective January 1, 1993.

Official Comment

Uniform Statutory Source:

Sections 2-723 and 2-724.

Changes:

Revised to reflect leasing practices and terminology. Sections 2A-519 and 2A-528 specify the times as of which market rent is to be determined.

Definitional Cross References:

“Goods”. Section 2A-103(1)(h). “Lease”. Section 2A-103(1)(j). “Lease agreement”. Section 2A-103(1)(k). “Notice”. Section 1-201(25). “Party”. Section 1-201(29). “Reasonable time”. Section 1-204(1) and (2). “Usage of trade”. Section 1-205. “Value”. Section 1-201(44).

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B. Default by Lessor

355.2A-508. Lessee’s remedies.

  1. If a lessor fails to deliver the goods in conformity to the lease contract (KRS 355.2A-509 ) or repudiates the lease contract (KRS 355.2A-402 ), or a lessee rightfully rejects the goods (KRS 355.2A-509 ) or justifiably revokes acceptance of the goods (KRS 355.2A-517 ), then with respect to any goods involved, and with respect to all of the goods if under an installment lease contract the value of the whole lease contract is substantially impaired (KRS 355.2A-510 ), the lessor is in default under the lease contract and the lessee may:
    1. Cancel the lease contract (subsection (1) of KRS 355.2A-505 );
    2. Recover so much of the rent and security as has been paid and is just under the circumstances;
    3. Cover and recover damages as to all goods affected whether or not they have been identified to the lease contract (KRS 355.2A-518 and 355.2A-520 ), or recover damages for nondelivery (KRS 355.2A-519 and 355.2A-520 );
    4. Exercise any other rights or pursue any other remedies provided in the lease contract.
  2. If a lessor fails to deliver the goods in conformity to the lease contract or repudiates the lease contract, the lessee may also:
    1. If the goods have been identified, recover them (KRS 355.2A-522 ); or
    2. In a proper case, obtain specific performance or replevy the goods (KRS 355.2A-521 ).
  3. If a lessor is otherwise in default under a lease contract, the lessee may exercise the rights and pursue the remedies provided in the lease contract, which may include a right to cancel the lease, and in KRS 355.2A-519 (3).
  4. If a lessor has breached a warranty, whether express or implied, the lessee may recover damages (subsection (4) of KRS 355.2A-519 ).
  5. On rightful rejection or justifiable revocation of acceptance, a lessee has a security interest in goods in the lessee’s possession or control for any rent and security that has been paid and any expenses reasonably incurred in their inspection, receipt, transportation, and care and custody and may hold those goods and dispose of them in good faith and in a commercially reasonable manner, subject to subsection (5) of KRS 355.2A-527 .
  6. Subject to the provisions of KRS 355.2A-407 , a lessee, on notifying the lessor of the lessee’s intention to do so, may deduct all or any part of the damages resulting from any default under the lease contract from any part of the rent still due under the same lease contract.

History. Enact. Acts 1990, ch. 363, § 55, effective January 1, 1991; 1992, ch. 116, § 13, effective January 1, 1993.

Official Comment

Uniform Statutory Source:

Sections 2-711 and 2-717.

Changes:

Substantially rewritten.

Purposes:

  1. This section is an index to Sections 2A-509 through 522 which set out the lessee’s rights and remedies after the lessor’s default. The lessor and the lessee can agree to modify the rights and remedies available under this Article; they can, among other things, provide that for defaults other than those specified in subsection (1) the lessee can exercise the rights and remedies referred to in subsection (1); and they can create a new scheme of rights and remedies triggered by the occurrence of the default. Sections 2A-103(4) and 1-102(3).
  2. Subsection (1), a substantially rewritten version of the provisions of Section 2-711(1), lists three cumulative remedies of the lessee where the lessor has failed to deliver conforming goods or has repudiated the contract, or the lessee has rightfully rejected or justifiably revoked. Sections 2A-501(2) and (4). Subsection (1) also allows the lessee to exercise any contractual remedy. This Article rejects any general doctrine of election of remedy. To determine if one remedy bars another in a particular case is a function of whether the lessee has been put in as good a position as if the lessor had fully performed the lease agreement. Use of multiple remedies is barred only if the effect is to put the lessee in a better position than it would have been in had the lessor fully performed under the lease. Sections 2A-103(4), 2A-501(4), and 1-106(1). Subsection (1)(b), in recognition that no bright line can be created that would operate fairly in all installment lease cases and in recognition of the fact that a lessee may be able to cancel the lease (revoke acceptance of the goods) after the goods have been in use for some period of time, does not require that all lease payments made by the lessee under the lease be returned upon cancellation. Rather, only such portion as is just of the rent and security payments made may be recovered. If a defect in the goods is discovered immediately upon tender to the lessee and the goods are rejected immediately, then the lessee should recover all payments made. If, however, for example, a 36-month equipment lease is terminated in the 12th month because the lessor has materially breached the contract by failing to perform its maintenance obligations, it may be just to return only a small part or none of the rental payments already made.
  3. Subsection (2), a version of the provisions of Section 2-711(2) revised to reflect leasing terminology, lists two alternative remedies for the recovery of the goods by the lessee; however, each of these remedies is cumulative with respect to those listed in subsection (1).
  4. Subsection (3) is new. It covers defaults which do not deprive the lessee of the goods and which are not so serious as to justify rejection or revocation of acceptance under subsection (a). It also covers defaults for which the lessee could have rejected or revoked acceptance of the goods but elects not to do so and retains the goods. In either case, a lessee which retains the goods is entitled to recover damages as stated in Section 2A-519(3). That measure of damages is “the loss resulting in the ordinary course of events from the lessor’s default as determined in any manner that is reasonable together with incidental and consequential damages, less expenses saved in consequence of the lessor’s breach.”
  5. Subsection (1)(d) and subsection (3) recognize that the lease agreement may provide rights and remedies in addition to or different from those which Article 2A provides. In particular, subsection (3) provides that the lease agreement may give the remedy of cancellation of the lease for defaults by the lessor that would not otherwise be material defaults which would justify cancellation under subsection (1). If there is a right to cancel, there is, of course, a right to reject or revoke acceptance of the goods.
  6. Subsection (4) is new and merely adds to the completeness of the index by including a reference to the lessee’s recovery of damages upon the lessor’s breach of warranty; such breach may not rise to the level of a default by the lessor justifying revocation of acceptance. If the lessee properly rejects or revokes acceptance of the goods because of a breach of warranty, the rights and remedies are those provided in subsection (1) rather than those in Section 2A-519(4).
  7. Subsection (5), a revised version of the provisions of Section 2-711(3), recognizes, on rightful rejection or justifiable revocation, the lessee’s security interest in goods in its possession and control. Section 9-113 (now codified as Section 9-110), which recognized security interests arising under the Article on Sales (Article 2), was amended with the adoption of this Article to reflect the security interests arising under this Article. Pursuant to Section 2A-511(4), a purchaser who purchases goods from the lessee in good faith takes free of any rights of the lessor, or in the case of a finance lease the supplier. Such goods, however, must have been rightfully rejected and disposed of pursuant to Section 2A-511 or 2A-512. However, Section 2A-517(5) provides that the lessee will have the same rights and duties with respect to goods where acceptance has been revoked as with respect to goods rejected. Thus, Section 2A-511(4) will apply to the lessee’s disposition of such goods.
  8. Pursuant to Section 2A-527(5), the lessee must account to the lessor for the excess proceeds of such disposition, after satisfaction of the claim secured by the lessee’s security interest.
  9. Subsection (6), a slightly revised version of the provisions of Section 2-717, sanctions a right of set-off by the lessee, subject to the rule of Section 2A-407 with respect to irrevocable promises in a finance lease that is not a consumer lease, and further subject to an enforceable “hell or high water” clause in the lease agreement. Section 2A-407 official comment. No attempt is made to state how the set-off should occur; this is to be determined by the facts of each case.
  10. There is no special treatment of the finance lease in this section. Absent supplemental principles of law and equity to the contrary, in the case of most finance leases, following the lessee’s acceptance of the goods the lessee will have no rights or remedies against the lessor, because the lessor’s obligations to the lessee are minimal. Sections 2A-210 and 2A-211(1). Since the lessee will look to the supplier for performance, this is appropriate. Section 2A-209.

Cross References:

Sections 1-102(3), 1-103, 1-106(1), Article 2, especially Sections 2-711, 2-717 and Sections 2A-103(4), 2A-209, 2A-210, 2A-211(1), 2A-407, 2A-501(2), 2A-501(4), 2A-509 through 2A-522, 2A-511(3), 2A-517(5), 2A-527(5) and Section 9-110.

Definitional Cross References:

“Conforming”. Section 2A-103(1)(d). “Delivery”. Section 1-201(14). “Good faith”. Sections 1-201(19) and 2-103(1)(b). “Goods”. Section 2A-103(1)(h). “Installment lease contract”. Section 2A-103(1)(i). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Notifies”. Section 1-201(26). “Receipt”. Section 2-103(1)(c). “Remedy”. Section 1-201(34). “Rights”. Section 1-201(36). “Security interest”. Section 1-201(37). “Value”. Section 1-201(44).

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355.2A-509. Lessee’s rights on improper delivery — Rightful rejection.

  1. Subject to the provisions of KRS 355.2A-510 on default in installment lease contracts, if the goods or the tender or delivery fail in any respect to conform to the lease contract, the lessee may reject or accept the goods or accept any commercial unit or units and reject the rest of the goods.
  2. Rejection of goods is ineffective unless it is within a reasonable time after tender or delivery of the goods and the lessee seasonably notifies the lessor.

History. Enact. Acts 1990, ch. 363, § 56, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Sections 2-601 and 2-602(1).

Changes:

Revised to reflect leasing practices and terminology.

Definitional Cross References:

“Commercial unit”. Section 2A-103(1)(c). “Conforming”. Section 2A-103(1)(d). “Delivery”. Section 1-201(14). “Goods”. Section 2A-103(1)(h). “Installment lease contract”. Section 2A-103(1)(i). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Notifies”. Section 1-201(26). “Reasonable time”. Section 1-204(1) and (2). “Rights”. Section 1-201(36). “Seasonably”. Section 1-204(3).

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355.2A-510. Installment lease contracts: rejection and default.

  1. Under an installment lease contract a lessee may reject any delivery that is nonconforming if the nonconformity substantially impairs the value of that delivery and cannot be cured or the nonconformity is a defect in the required documents; but if the nonconformity does not fall within subsection (2) and the lessor or the supplier gives adequate assurance of its cure, the lessee must accept that delivery.
  2. Whenever nonconformity or default with respect to one (1) or more deliveries substantially impairs the value of the installment lease contract as a whole there is a default with respect to the whole. But, the aggrieved party reinstates the installment lease contract as a whole if the aggrieved party accepts a nonconforming delivery without seasonably notifying of cancellation or brings an action with respect only to past deliveries or demands performance as to future deliveries.

History. Enact. Acts 1990, ch. 363, § 57, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-612.

Changes:

Revised to reflect leasing practices and terminology.

Definitional Cross References:

“Action”. Section 1-201(1). “Aggrieved party”. Section 1-201(2). “Cancellation”. Section 2A-103(1)(b). “Conforming”. Section 2A-103(1)(d). “Delivery”. Section 1-201(14). “Installment lease contract”. Section 2A-103(1)(i). “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Notifies”. Section 1-201(26). “Seasonably”’. Section 1-204(3). “Supplier”. Section 2A-103(1)(x). “Value”. Section 1-201(44).

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355.2A-511. Merchant lessee’s duties as to rightfully rejected goods.

  1. Subject to any security interest of a lessee (subsection (5) of KRS 355.2A-508 ), if a lessor or a supplier has no agent or place of business at the market of rejection, a merchant lessee, after rejection of goods in his possession or control, shall follow any reasonable instructions received from the lessor or the supplier with respect to the goods. In the absence of those instructions, a merchant lessee shall make reasonable efforts to sell, lease, or otherwise dispose of the goods for the lessor’s account if they threaten to decline in value speedily. Instructions are not reasonable if on demand indemnity for expenses is not forthcoming.
  2. If a merchant lessee (subsection (1)) or any other lessee (KRS 355.2A-512 ) disposes of goods, he is entitled to reimbursement either from the lessor or the supplier or out of the proceeds for reasonable expenses of caring for and disposing of the goods and, if the expenses include no disposition commission, to such commission as is usual in the trade, or if there is none, to a reasonable sum not exceeding ten percent (10%) of the gross proceeds.
  3. In complying with this section or KRS 355.2A-512 , the lessee is held only to good faith. Good faith conduct hereunder is neither acceptance or conversion nor the basis of an action for damages.
  4. A purchaser who purchases in good faith from a lessee pursuant to this section or KRS 355.2A-512 takes the goods free of any rights of the lessor and the supplier even though the lessee fails to comply with one (1) or more of the requirements of this article.

History. Enact. Acts 1990, ch. 363, § 58, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Sections 2-603 and 2-706(5).

Changes:

Revised to reflect leasing practices and terminology. This section, by its terms, applies to merchants as well as others. Thus, in construing the section it is important to note that under this Act the term good faith is defined differently for merchants (Section 2-103(1)(b)) than for others (Section 1-201(19)). Section 2A-103(3) and (4).

Definitional Cross References:

“Action”. Sections 1-201(1). “Good faith”. Sections 1-201(19) and 2-103(1)(b). “Goods”. Section 2A-103(1)(h). “Lease”. Section 2A-103(1)(j). “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Merchant lessee”. Section 2A-103(1)(t). “Purchaser”. Section 1-201(33). “Rights”. Section 1-201(36). “Security interest”. Section 1-201(37). “Supplier”. Section 2A-103(1)(x). “Value”. Section 1-201(44).

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355.2A-512. Lessee’s duties as to rightfully rejected goods.

  1. Except as otherwise provided with respect to goods that threaten to decline in value speedily (KRS 355.2A-511 ) and subject to any security interest of a lessee (subsection (5) of KRS 355.2A-508 ):
    1. The lessee, after rejection of goods in the lessee’s possession, shall hold them with reasonable care at the lessor’s or the supplier’s disposition for a reasonable time after the lessee’s seasonable notification of rejection;
    2. If the lessor or the supplier gives no instructions within a reasonable time after notification of rejection, the lessee may store the rejected goods for the lessor’s or the supplier’s account or ship them to the lessor or the supplier or dispose of them for the lessor’s or the supplier’s account with reimbursement in the manner provided in KRS 355.2A-511 ; but
    3. The lessee has no further obligations with regard to goods rightfully rejected.
  2. Action by the lessee pursuant to subsection (1) is not acceptance or conversion.

History. Enact. Acts 1990, ch. 363, § 59, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Sections 2-602(2)(b) and (c) and 2-604.

Changes:

Substantially rewritten.

Purposes:

The introduction to subsection (1) references goods that threaten to decline in value speedily and not perishables, the reference in Section 2-604, the statutory analogue. This is a change in style, not substance, as the first phrase includes the second. Subparagraphs (1)(a) and (c) are revised versions of the provisions of Section 2-602(2)(b) and (c). Subparagraph (1)(a) states the rule with respect to the lessee’s treatment of goods in its possession following rejection; subparagraph (1)(b) states the rule regarding such goods if the lessor or supplier then fails to give instructions to the lessee. If the lessee performs in a fashion consistent with subparagraphs (1)(a) and (1)(b), subparagraph (1)(c) exonerates the lessee.

Cross References:

Sections 2-602(2)(b), 2-602(2)(c) and 2-604.

Definitional Cross References:

“Action”. Section 1-201(1). “Goods”. Section 2A-103(1)(h). “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Notification”. Section 1-201(26). “Reasonable time”. Section 1-204(1) and (2). “Seasonably”. Section 1-204(3). “Security interest”. Section 1-201(37). “Supplier”. Section 2A-103(1)(x). “Value”. Section 1-201(44).

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355.2A-513. Cure by lessor of improper tender or delivery — Replacement.

  1. If any tender or delivery by the lessor or the supplier is rejected because nonconforming and the time for performance has not yet expired, the lessor or the supplier may seasonably notify the lessee of the lessor’s or the supplier’s intention to cure and may then make a conforming delivery within the time provided in the lease contract.
  2. If the lessee rejects a nonconforming tender that the lessor or the supplier had reasonable grounds to believe would be acceptable with or without money allowance, the lessor or the supplier may have a further reasonable time to substitute a conforming tender if he seasonably notifies the lessee.

History. Enact. Acts 1990, ch. 363, § 60, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-508.

Changes:

Revised to reflect leasing practices and terminology.

Definitional Cross References:

“Conforming”. Section 2A-103(1)(d). “Delivery”. Section 1-201(14). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Money”. Section 1-201(24). “Notifies”. Section 1-201(26). “Reasonable time”. Section 1-204(1) and (2). “Seasonably”. Section 1-204(3). “Supplier”. Section 2A-103(1)(x).

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355.2A-514. Waiver of lessee’s objections.

  1. In rejecting goods, a lessee’s failure to state a particular defect that is ascertainable by reasonable inspection precludes the lessee from relying on the defect to justify rejection or to establish default:
    1. If, stated seasonably, the lessor or the supplier could have cured it (KRS 355.2A-513 ); or
    2. Between merchants if the lessor or the supplier after rejection has made a request in writing for a full and final written statement of all defects on which the lessee proposes to rely.
  2. A lessee’s failure to reserve rights when paying rent or other consideration against documents precludes recovering of the payment for defects apparent in the documents.

History. Enact. Acts 1990, ch. 363, § 61, effective January 1, 1991; 2012, ch. 132, § 55, effective July 12, 2012.

Official Comment

Uniform Statutory Source:

Section 2-605.

Changes:

Revised to reflect leasing practices and terminology.

Purposes:

The principles applicable to the commercial practice of payment against documents (subsection 2) are explained in official comment 4 to Section 2-605, the statutory analogue to this section.

Cross Reference:

Section 2-605 official comment 4.

Definitional Cross References:

“Between merchants”. Section 2-104(3). “Goods”. Section 2A-103(1)(h). “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Rights”. Section 1-201(36). “Seasonably”. Section 1-204(3). “Supplier”. Section 2A-103(1)(x). “Writing”. Section 1-201(46).

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355.2A-515. Acceptance of goods.

  1. Acceptance of goods occurs after the lessee has had a reasonable opportunity to inspect the goods; and
    1. The lessee signifies or acts with respect to the goods in a manner that signifies to the lessor or the supplier that the goods are conforming or that the lessee will take or retain them in spite of their nonconformity; or
    2. The lessee fails to make an effective rejection of the goods (subsection (2) of KRS 355.2A-509 ).
  2. Acceptance of a part of any commercial unit is acceptance of that entire unit.

History. Enact. Acts 1990, ch. 363, § 62, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-606.

Changes:

The provisions of Section 2-606(1)(a) were substantially rewritten to provide that the lessee’s conduct may signify acceptance. Further, the provisions of Section 2-606(1)(c) were not incorporated as irrelevant given the lessee’s possession and use of the leased goods.

Cross References:

Sections 2-606(1)(a) and 2-606(1)(c).

Definitional Cross References:

“Commercial unit”. Section 2A-103(1)(c). “Conforming”. Section 2A-103(1)(d). “Goods”. Section 2A-103(1)(h). “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Supplier”. Section 2A-103(1)(x).

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355.2A-516. Effect of acceptance of goods — Notice of default — Burden of establishing default after acceptance — Notice of claim or litigation to person answerable over.

  1. A lessee must pay rent for any goods accepted in accordance with the lease contract, with due allowance for goods rightfully rejected or not delivered.
  2. A lessee’s acceptance of goods precludes rejection of the goods accepted. In the case of a finance lease, if made with knowledge of a nonconformity, acceptance cannot be revoked because of it. In any other case, if made with knowledge of a nonconformity, acceptance cannot be revoked because of it unless the acceptance was on the reasonable assumption that the nonconformity would be seasonably cured. Acceptance does not of itself impair any other remedy provided by this article or the lease agreement for nonconformity.
  3. If a tender has been accepted:
    1. Within a reasonable time after the lessee discovers or should have discovered any default, the lessee shall notify the lessor and the supplier, if any, or be barred from any remedy against the party not notified;
    2. Except in the case of a consumer lease, within a reasonable time after the lessee receives notice of litigation for infringement or the like (KRS 355.2A-211 ) the lessee shall notify the lessor or be barred from any remedy over for liability established by the litigation; and
    3. The burden is on the lessee to establish any default.
  4. If a lessee is sued for breach of a warranty or other obligation for which a lessor or a supplier is answerable over the following apply:
    1. The lessee may give the lessor or the supplier, or both, written notice of the litigation. If the notice states that the person notified may come in and defend and that if the person notified does not do so, that person will be bound in any action against that person by the lessee by any determination of fact common to the two (2) litigations, then unless the person notified after seasonable receipt of the notice does come in and defend that person is so bound.
    2. The lessor or the supplier may demand in writing that the lessee turn over control of the litigation including settlement if the claim is one for infringement or the like (KRS 355.2A-211 ) or else be barred from any remedy over. If the demand states that the lessor or the supplier agrees to bear all expense and to satisfy any adverse judgment, then unless the lessee after seasonable receipt of the demand does turn over control the lessee is so barred.
  5. Subsections (3) and (4) apply to any obligation of a lessee to hold the lessor or the supplier harmless against infringement or the like (KRS 355.2A-211 ).

History. Enact. Acts 1990, ch. 363, § 63, effective January 1, 1991; 1992, ch. 116, § 14, effective January 1, 1993.

Official Comment

Uniform Statutory Source:

Section 2-607.

Changes:

Substantially revised.

Purposes:

  1. Subsection (2) creates a special rule for finance leases, precluding revocation if acceptance is made with knowledge of nonconformity with respect to the lease agreement, as opposed to the supply agreement; this is not inequitable as the lessee has a direct claim against the supplier. Section 2A-209(1). Revocation of acceptance of a finance lease is permitted if the lessee’s acceptance was without discovery of the nonconformity (with respect to the lease agreement, not the supply agreement) and was reasonably induced by the lessor’s assurances. Section 2A-517(1)(b). Absent exclusion or modification, the lessor under a finance lease makes certain warranties to the lessee. Sections 2A-210 and 2A-211(1). Revocation of acceptance is not prohibited even after the lessee’s promise has become irrevocable and independent. Section 2A-407 official comment. Where the finance lease creates a security interest, the rule may be to the contrary. General Elec. Credit Corp. of Tennessee v. Ger-Beck Mach. Co., 806 F.2d 1207 (3rd Cir. 1986).
  2. Subsection (3)(a) requires the lessee to give notice of default, within a reasonable time after the lessee discovered or should have discovered the default. In a finance lease, notice may be given either to the supplier, the lessor, or both, but remedy is barred against the party not notified. In a finance lease, the lessor is usually not liable for defects in the goods and the essential notice is to the supplier. While notice to the finance lessor will often not give any additional rights to the lessee, it would be good practice to give the notice since the finance lessor has an interest in the goods. Subsection (3)(a) does not use the term finance lease, but the definition of supplier is a person from whom a lessor buys or leases goods to be leased under a finance lease. Section 2A-103(1)(x). Therefore, there can be a “supplier” only in a finance lease. Subsection (4) applies similar notice rules as to lessors and suppliers if a lessee is sued for a breach of warranty or other obligation for which a lessor or supplier is answerable over.
  3. Subsection (3)(b) requires the lessee to give the lessor notice of litigation for infringement or the like. There is an exception created in the case of a consumer lease. While such an exception was considered for a finance lease, it was not created because it was not necessary — the lessor in a finance lease does not give a warranty against infringement. Section 2A-211(2). Even though not required under subsection (3)(b), the lessee who takes under a finance lease should consider giving notice of litigation for infringement or the like to the supplier, because the lessee obtains the benefit of the suppliers’ promises subject to the suppliers’ defenses or claims. Sections 2A-209(1) and 2-607(3)(b).

Cross References:

Sections 2-607(3)(b), 2A-103(1)(x), 2A-209(1), 2A-210, 2A-211(1), 2A-211(2), 2A-407 official comment and 2A-517(1)(b).

Definitional Cross References:

“Action”. Section 1-201(1). “Agreement”. Section 1-201(3). “Burden of establishing”. Section 1-201(8). “Conforming”. Section 2A-103(1)(d). “Consumer lease”. Section 2A-103(1)(e). “Delivery”. Section 1-201(14). “Discover”. Section 1-201(25). “Finance lease”. Section 2A-103(1)(g). “Goods”. Section 2A-103(1)(h). “Knowledge”. Section 1-201(25). “Lease agreement”. Section 2A-103(1)(k). “Lease contract”. Section 2A-103(1)( ). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Notice”. Section 1-201(25). “Notifies”. Section 1-201(26). “Person”. Section 1-201(30). “Reasonable time”. Section 1-204(1) and (2). “Receipt”. Section 2-103(1)(3). “Remedy”. Section 1-201(34). “Seasonably”. Section 1-204(3). “Supplier”. Section 2A-103(1)(x). “Written”. Section 1-201(46).

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355.2A-517. Revocation of acceptance of goods.

  1. A lessee may revoke acceptance of a lot or commercial unit whose nonconformity substantially impairs its value to the lessee if the lessee has accepted it:
    1. Except in the case of a finance lease, on the reasonable assumption that its nonconformity would be cured and it has not been seasonably cured; or
    2. Without discovery of the nonconformity if the lessee’s acceptance was reasonably induced either by the lessor’s assurances or, except in the case of a finance lease, by the difficulty of discovery before acceptance.
  2. Except in the case of a finance lease that is not a consumer lease, a lessee may revoke acceptance of a lot or commercial unit if the lessor defaults under the lease contract and the default substantially impairs the value of that lot or commercial unit to the lessee.
  3. If the lease agreement so provides, the lessee may revoke acceptance of a lot or commercial unit because of other defaults by the lessor.
  4. Revocation of acceptance must occur within a reasonable time after the lessee discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by the nonconformity. Revocation is not effective until the lessee notifies the lessor.
  5. A lessee who so revokes has the same rights and duties with regard to the goods involved as if the lessee had rejected them.

History. Enact. Acts 1990, ch. 363, § 64, effective January 1, 1991; 1992, ch. 116, § 15, effective January 1, 1993.

Official Comment

Uniform Statutory Source:

Section 2-608.

Changes:

Revised to reflect leasing practices and terminology. Note that in the case of a finance lease the lessee retains a limited right to revoke acceptance. Sections 2A-517(1)(b) and 2A-516 official comment. New subsections (2) and (3) added.

Purposes:

  1. The section states the situations under which the lessee may return the goods to the lessor and cancel the lease. Subsection (2) recognizes that the lessor may have continuing obligations under the lease and that a default as to those obligations may be sufficiently material to justify revocation of acceptance of the leased items and cancellation of the lease by the lessee. For example, a failure by the lessor to fulfill its obligation to maintain leased equipment or to supply other goods which are necessary for the operation of the leased equipment may justify revocation of acceptance and cancellation of the lease.
  2. Subsection (3) specifically provides that the lease agreement may provide that the lessee can revoke acceptance for defaults by the lessor which in the absence of such an agreement might not be considered sufficiently serious to justify revocation. That is, the parties are free to contract on the question of what defaults are so material that the lessee can cancel the lease.

Cross References:

Section 2A-516 official comment.

Definitional Cross References:

“Commercial unit”. Section 2A103 (1)(c). “Conforming”. Section 2A-103(1)(d). “Discover”. Section 1-201(25). “Finance lease”. Section 2A-103(1)(g). “Goods”. Section 2A-103(1)(h). “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Lot”. Section 2A-103(1)(s). “Notifies”. Section 1-201(26). “Reasonable time”. Section 1-204(1) and (2). “Rights”. Section 1-201(36). “Seasonably”. Section 1-204(3). “Value”. Section 1-201(44).

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355.2A-518. Cover — Substitute goods.

  1. After a default by a lessor under the lease contract of the type described in KRS 355.2A-508 (1), or, if agreed, after other default by the lessor, the lessee may cover by making any purchase or lease of or contract to purchase or lease goods in substitution for those due from the lessor.
  2. Except as otherwise provided with respect to damages liquidated in the lease agreement (KRS 355.2A-504 ) or otherwise determined pursuant to agreement of the parties (KRS 355.1-302 and 355.2A-503 ), if a lessee’s cover is by a lease agreement substantially similar to the original lease agreement and the new lease agreement is made in good faith and in a commercially reasonable manner, the lessee may recover from the lessor as damages:
    1. The present value, as of the date of the commencement of the term of the new lease agreement, of the rent under the new lease agreement applicable to that period of the new lease term which is comparable to the then remaining term of the original lease agreement minus the present value as of the same date of the total rent for the then remaining lease term of the original lease agreement; and
    2. Any incidental or consequential damages, less expenses saved in consequence of the lesser’s default.
  3. If a lessee’s cover is by lease agreement that for any reason does not qualify for treatment under subsection (2) of this section, or is by purchase or otherwise, the lessee may recover from the lessor as if the lessee had elected not to cover and KRS 355.2A-519 governs.

History. Enact. Acts 1990, ch. 363, § 65, effective January 1, 1991; 1992, ch. 116, § 16, effective January 1, 1993; 2006, ch. 242, § 29, effective July 12, 2006.

Official Comment

Uniform Statutory Source:

Section 2-712.

Changes:

Substantially revised.

Purposes:

  1. Subsection (1) allows the lessee to take action to fix its damages after default by the lessor. Such action may consist of the lease of goods. The decision to cover is a function of commercial judgment, not a statutory mandate replete with sanctions for failure to comply. Cf. Section 9-625.
  2. Subsection (2) states a rule for determining the amount of lessee’s damages provided that there is no agreement to the contrary. The lessee’s damages will be established using the new lease agreement as a measure if the following three criteria are met: (i) the lessee’s cover is by lease agreement, (ii) the lease agreement is substantially similar to the original lease agreement, and (iii) such cover was effected in good faith, and in a commercially reasonable manner. Thus, the lessee will be entitled to recover from the lessor the present value, as of the date of commencement of the term of the new lease agreement, of the rent under the new lease agreement applicable to that period which is comparable to the then remaining term of the original lease agreement less the present value of the rent reserved for the remaining term under the original lease, together with incidental or consequential damages less expenses saved in consequence of the lessor’s default. Consequential damages may include loss suffered by the lessee because of deprivation of the use of the goods during the period between the default and the acquisition of the goods under the new lease agreement. If the lessee’s cover does not satisfy the criteria of subsection (2), Section 2A-519 governs.
  3. Two of the three criteria to be met by the lessee are familiar, but the concept of the new lease agreement being substantially similar to the original lease agreement is not. Given the many variables facing a party who intends to lease goods and the rapidity of change in the market place, the policy decision was made not to draft with specificity. It was thought unwise to seek to establish certainty at the cost of fairness. Thus, the decision of whether the new lease agreement is substantially similar to the original will be determined case by case.
  4. While the section does not draw a bright line, it is possible to describe some of the factors that should be considered in finding that a new lease agreement is substantially similar to the original. First, the goods subject to the new lease agreement should be examined. For example, in a lease of computer equipment the new lease might be for more modern equipment. However, it may be that at the time of the lessor’s breach it was not possible to obtain the same type of goods in the market place. Because the lessee’s remedy under Section 2A-519 is intended to place the lessee in essentially the same position as if he had covered, if goods similar to those to have been delivered under the original lease are not available, then the computer equipment in this hypothetical should qualify as a commercially reasonable substitute. See Section 2-712(1).
  5. Second, the various elements of the new lease agreement should also be examined. Those elements include the presence or absence of options to purchase or release; the lessor’s representations, warranties and covenants to the lessee, as well as those to be provided by the lessee to the lessor; and the services, if any, to be provided by the lessor or by the lessee. All of these factors allocate cost and risk between the lessor and the lessee and thus affect the amount of rent to be paid. If the differences between the original lease and the new lease can be easily valued, it would be appropriate for a court to adjust the difference in rental to take account of the difference between the two leases, find that the new lease is substantially similar to the old lease, and award cover damages under this section. If, for example, the new lease requires the lessor to insure the goods in the hands of the lessee, while the original lease required the lessee to insure, the usual cost of such insurance could be deducted from the rent due under the new lease before determining the difference in rental between the two leases.
  6. Having examined the goods and the agreement, the test to be applied is whether, in light of these comparisons, the new lease agreement is substantially similar to the original lease agreement. These findings should not be made with scientific precision, as they are a function of economics, nor should they be made independently with respect to the goods and each element of the agreement, as it is important that a sense of commercial judgment pervade the finding. To establish the new lease as a proper measure of damage under subsection (2), these factors, taken as a whole, must result in a finding that the new lease agreement is substantially similar to the original.
  7. A new lease can be substantially similar to the original lease even though its term extends beyond the remaining term of the original lease, so long as both (a) the lease terms are commercially comparable (e.g., it is highly unlikely that a one-month rental and a five-year lease would reflect similar commercial realities), and (b) the court can fairly apportion a part of the rental payments under the new lease to that part of the term of the new lease which is comparable to the remaining lease term under the original lease. Also, the lease term of the new lease may be comparable to the term of the original lease even though the beginning and ending dates of the two leases are not the same. For example, a two-month lease of agricultural equipment for the months of August and September may be comparable to a two-month lease running from the 15th of August to the 15th of October if in the particular location two-month leases beginning on August 15th are basically interchangeable with two-month leases beginning August 1st. Similarly, the term of a one-year truck lease beginning on the 15th of January may be comparable to the term of a one-year truck lease beginning January 2d. If the lease terms are found to be comparable, the court may base cover damages on the entire difference between the costs under the two leases.

Cross References:

Sections 2-712(1), 2A-519 and 9-625.

Definitional Cross References:

“Agreement”. Section 1-201(b)(3). “Contract”. Section 1-201(b)(12). “Good faith”. Sections 1-201(b)(20). “Goods”. Section 2A-103(1)(h). “Lease”. Section 2A-103(1)(j). “Lease agreement”. Section 2A-103(1)(k). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Party”. Section 1-201(b)(26). “Present value”. Section 2A-201(b)(28). “Purchase”. Section 2A-103(1)(v).

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355.2A-519. Lessee’s damages for nondelivery, repudiation, default, and breach of warranty in regard to accepted goods.

  1. Except as otherwise provided with respect to damages liquidated in the lease agreement (KRS 355.2A-504 ) or otherwise determined pursuant to agreement of the parties (KRS 355.1-302 and 355.2A-503 ), if a lessee elects not to cover or a lessee elects to cover and the cover is by lease agreement that for any reason does not qualify for treatment under subsection (2) of KRS 355.2A-518 , or is by purchase or otherwise, the measure of damages for nondelivery or repudiation by the lessor or for rejection or revocation of acceptance by the lessee is the present value, as of the date of the default, of the then market rent minus the present value as of the same date of the original rent, computed for the remaining lease term of the original lease agreement, together with incidental and consequential damages, less expenses saved in consequence of the lessor’s default.
  2. Market rent is to be determined as of the place for tender or, in cases of rejection after arrival or revocation of acceptance, as of the place of arrival.
  3. Except as otherwise agreed, if the lessee has accepted goods and given notification (KRS 355.2A-516 (3)), the measure of damages for nonconforming tender or delivery or other default by a lessor is the loss resulting in the ordinary course of events from the lessor’s default as determined in any manner that is reasonable together with incidental and consequential damages, less expenses saved in consequence of the lessor’s default.
  4. Except as otherwise agreed, the measure of damages for breach of warranty is the present value at the time and place of acceptance of the difference between the value of the use of the goods accepted and the value if they had been as warranted for the lease term, unless special circumstances show proximate damages of a different amount, together with incidental and consequential damages, less expenses saved in consequence of the lessor’s default or breach of warranty.

History. Enact. Acts 1990, ch. 363, § 66, effective January 1, 1991; 1992, ch. 116, § 17, effective January 1, 1993; 2006, ch. 242, § 30, effective July 12, 2006.

Official Comment

Uniform Statutory Source:

Sections 2-713 and 2-714.

Changes:

Substantially revised.

Purposes:

  1. Subsection (1), a revised version of the provisions of Section 2-713(1), states the basic rule governing the measure of lessee’s damages for non-delivery or repudiation by the lessor or for rightful rejection or revocation of acceptance by the lessee. This measure will apply, absent agreement to the contrary, if the lessee does not cover or if the cover does not qualify under Section 2A-518. There is no sanction for cover that does not qualify.
  2. The measure of damage is the present value, as of the date of default, of the market rent for the remaining term of the lease less the present value of the original rent for the remaining term of the lease, plus incidental and consequential damages less expenses saved in consequence of the default. Note that the reference in Section 2A-519(1) is to the date of default not to the date of an event of default. An event of default under a lease agreement becomes a default under a lease agreement only after the expiration of any relevant period of grace and compliance with any notice requirements under this Article and the lease agreement. American Bar Foundation, Commentaries on Indentures, § 5-1, at 216-217 (1971). Section 2A-501(1). This conclusion is also a function of whether, as a matter of fact or law, the event of default has been waived, suspended or cured. Sections 2A-103(4) and 1-103.
  3. Subsection (2), a revised version of the provisions of Section 2-713(2), states the rule with respect to determining market rent.
  4. Subsection (3), a revised version of the provisions of Section 2-714(1) and (3), states the measure of damages where goods have been accepted and acceptance is not revoked. The subsection applies both to defaults which occur at the inception of the lease and to defaults which occur subsequently, such as failure to comply with an obligation to maintain the leased goods. The measure in essence is the loss, in the ordinary course of events, flowing from the default.
  5. Subsection (4), a revised version of the provisions of Section 2-714(2), states the measure of damages for breach of warranty. The measure in essence is the present value of the difference between the value of the goods accepted and of the goods if they had been as warranted.
  6. Subsections (1), (3) and (4) specifically state that the parties may by contract vary the damages rules stated in those subsections.

Cross References:

Sections 2-713(1), 2-713(2), 2-714 and Section 2A-518.

Definitional Cross References:

“Conforming”. Section 2A-103(1)(d). “Delivery”. Section 1-201(b)(15). “Goods”. Section 2A-103(1)(h). “Lease”. Section 2A-103(1)(j). “Lease agreement”. Section 2A-103(1)(k). “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Notification”. Section 1-202. “Present value”. Section 1-201(b)(28). “Value”. Section 1-204.

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355.2A-520. Lessee’s incidental and consequential damages.

  1. Incidental damages resulting from a lessor’s default include expenses reasonably incurred in inspection, receipt, transportation, and care and custody of goods rightfully rejected or goods the acceptance of which is justifiably revoked, any commercially reasonable charges, expenses or commissions in connection with effecting cover, and any other reasonable expense incident to the default.
  2. Consequential damages resulting from a lessor’s default include:
    1. Any loss resulting from general or particular requirements and needs of which the lessor at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and
    2. Injury to person or property proximately resulting from any breach of warranty.

History. Enact. Acts 1990, ch. 363, § 67, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-715.

Changes:

Revised to reflect leasing terminology and practices.

Purposes:

Subsection (1), a revised version of the provisions of Section 2-715(1), lists some examples of incidental damages resulting from a lessor’s default; the list is not exhaustive. Subsection (1) makes clear that it applies not only to rightful rejection, but also to justifiable revocation.

Subsection (2), a revised version of the provisions of Section 2-715(2), lists some examples of consequential damages resulting from a lessor’s default; the list is not exhaustive.

Cross References:

Section 2-715.

Definitional Cross References:

“Goods”. Section 2A-103(1)(h). “Knows”. Section 1-201(25). “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Person”. Section 1-201(30). “Receipt”. Section 2-103(1)(c).

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355.2A-521. Lessee’s right to specific performance or replevin.

  1. Specific performance may be decreed if the goods are unique or in other proper circumstances.
  2. A decree for specific performance may include any terms and conditions as to payment of the rent, damages, or other relief that the court deems just.
  3. A lessee has a right of replevin, detinue, sequestration, claim and delivery, writ of possession, or the like for goods identified to the lease contract if after reasonable effort the lessee is unable to effect cover for those goods or the circumstances reasonably indicate that the effort will be unavailing.

History. Enact. Acts 1990, ch. 363, § 68, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-716.

Changes:

Revised to reflect leasing practices and terminology, and to expand the reference to the right of replevin in subsection (3) to include other similar rights of the lessee.

Definitional Cross References:

“Delivery”. Section 1-201(14). “Goods”. Section 2A-103(1)(h). “Lease contract”. Section 2A-103(1)( ). l “Lessee”. Section 2A-103(1)(n). “Rights”. Section 1-201(36). “Term”. Section 1-201(42).

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355.2A-522. Lessee’s right to goods on lessor’s insolvency.

  1. Subject to subsection (2) and even though the goods have not been shipped, a lessee who has paid a part or all of the rent and security for goods identified to a lease contract (KRS 355.2A-217 ) on making and keeping good a tender of any unpaid portion of the rent and security due under the lease contract may recover the goods identified from the lessor if the lessor becomes insolvent within ten (10) days after receipt of the first installment of rent and security.
  2. A lessee acquires the right to recover goods identified to a lease contract only if they conform to the lease contract.

History. Enact. Acts 1990, ch. 363, § 69, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-502.

Changes:

Revised to reflect leasing practices and terminology.

Definitional Cross References:

“Conforming”. Section 2A-103(1)(d). “Goods”. Section 2A-103(1)(h). “Insolvent”. Section 1-201(23). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Receipt”. Section 2-103(1)(c). “Rights”. Section 1-201(36).

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C. Default by Lessee

355.2A-523. Lessor’s remedies.

  1. If a lessee wrongfully rejects or revokes acceptance of goods or fails to make a payment when due or repudiates with respect to a part or the whole, then, with respect to any goods involved, and with respect to all of the goods if under an installment lease contract the value of the whole lease contract is substantially impaired (KRS 355.2A-510 ), the lessee is in default under the lease contract and the lessor may:
    1. Cancel the lease contract (subsection (1) of KRS 355.2A-505 );
    2. Proceed respecting goods not identified to the lease contract (KRS 355.2A-524 );
    3. Withhold delivery of the goods and take possession of goods previously delivered (KRS 355.2A-525 );
    4. Stop delivery of the goods by any bailee (KRS 355.2A-526 );
    5. Dispose of the goods and recover damages (KRS 355.2A-527 ), or retain the goods and recover damages (KRS 355.2A-528 ), or in a proper case recover rent (KRS 355.2A-529 );
    6. Exercise any other rights or pursue any other remedies provided in the lease contract.
  2. If a lessor does not fully exercise a right or obtain a remedy to which the lessor is entitled under subsection (1), the lessor may recover the loss resulting in the ordinary course of events from the lessee’s default as determined in any reasonable manner, together with incidental damages, less expenses saved in consequence of the lessee’s default.
  3. If a lessee is otherwise in default under a lease contract, the lessor may exercise the rights and pursue the remedies provided in the lease contract, which may include a right to cancel the lease. In addition, unless otherwise provided in the lease contract:
    1. If the default substantially impairs the value of the lease contract to the lessor, the lessor may exercise the rights and pursue the remedies provided in subsection (1) or (2); or
    2. If the default does not substantially impair the value of the lease contract to the lessor, the lessor may recover as provided in subsection (2).

History. Enact. Acts 1990, ch. 363, § 70, effective January 1, 1991; 1992, ch. 116, § 18, effective January 1, 1993.

Official Comment

Uniform Statutory Source:

Section 2-703.

Changes:

Substantially revised.

Purposes:

  1. Subsection (1) is an index to Sections 2A-524 through 2A-531 and states that the remedies provided in those sections are available for the defaults referred to in subsection (1): wrongful rejection or revocation of acceptance, failure to make a payment when due, or repudiation. In addition, remedies provided in the lease contract are available. Subsection (2) sets out a remedy if the lessor does not pursue to completion a right or actually obtain a remedy available under subsection (1), and subsection (3) sets out statutory remedies for defaults not specifically referred to in subsection (1). Subsection (3) provides that, if any default by the lessee other than those specifically referred to in subsection (1) is material, the lessor can exercise the remedies provided in subsection (1) or (2); otherwise the available remedy is as provided in subsection (3). A lessor who has brought an action seeking or has nonjudicially pursued one or more of the remedies available under subsection (1) may amend so as to claim or may nonjudicially pursue a remedy under subsection (2) unless the right or remedy first chosen has been pursued to an extent actually inconsistent with the new course of action. The intent of the provision is to reject the doctrine of election of remedies and to permit an alteration of course by the lessor unless such alteration would actually have an effect on the lessee that would be unreasonable under the circumstances. Further, the lessor may pursue remedies under both subsections (1) and (2) unless doing so would put the lessor in a better position than it would have been in had the lessee fully performed.
  2. The lessor and the lessee can agree to modify the rights and remedies available under the Article; they can, among other things, provide that for defaults other than those specified in subsection (1) the lessor can exercise the rights and remedies referred to in subsection (1), whether or not the default would otherwise be held to substantially impair the value of the lease contract to the lessor; they can also create a new scheme of rights and remedies triggered by the occurrence of the default. Sections 2A-103(4) and 1-102(3).
  3. Subsection (1), a substantially rewritten version of Section 2-703, lists various cumulative remedies of the lessor where the lessee wrongfully rejects or revokes acceptance, fails to make a payment when due, or repudiates. Section 2A-501(2) and (4). The subsection also allows the lessor to exercise any contractual remedy.
  4. This Article rejects any general doctrine of election of remedy. Whether, in a particular case, one remedy bars another, is a function of whether lessor has been put in as good a position as if the lessee had fully performed the lease contract. Multiple remedies are barred only if the effect is to put the lessor in a better position than it would have been in had the lessee fully performed under the lease. Sections 2A-103(4), 2A-501(4), and 1-106(1).
  5. Hypothetical: To better understand the application of subparagraphs (1)(a) through (e), it is useful to review a hypothetical. Assume that A is a merchant in the business of selling and leasing new bicycles of various types. B is about to engage in the business of subleasing bicycles to summer residents of and visitors to an island resort. A, as lessor, has agreed to lease 60 bicycles to B. While there is one master lease, deliveries and terms are staggered. 20 bicycles are to be delivered by A to B’s island location on June 1; the term of the lease of these bicycles is four months. 20 bicycles are to be delivered by A to B’s island location on July 1; the term of the lease of these bicycles is three months. Finally, 20 bicycles are to be delivered by A to B’s island location on August 1; the term of the lease of these bicycles is two months. B is obligated to pay rent to A on the 15th day of each month during the term for the lease. Rent is $50 per month, per bicycle. B has no option to purchase or release and must return the bicycles to A at the end of the term, in good condition, reasonable wear and tear excepted. Since the retail price of each bicycle is $400 and bicycles used in the retail rental business have a useful economic life of 36 months, this transaction creates a lease. Sections 2A-103(1)(j) and 1-201(37).
  6. A’s current inventory of bicycles is not large. Thus, upon signing the lease with B in February, A agreed to purchase 60 new bicycles from A’s principal manufacturer, with special instructions to drop ship the bicycles to B’s island location in accordance with the delivery schedule set forth in the lease.
  7. The first shipment of 20 bicycles was received by B on May 21. B inspected the bicycles, accepted the same as conforming to the lease and signed a receipt of delivery and acceptance. However, due to poor weather that summer, business was terrible and B was unable to pay the rent due on June 15. Pursuant to the lease A sent B notice of default and proceeded to enforce his rights and remedies against B.
  8. A’s counsel first advised A that under Section 2A-510(2) and the terms of the lease B’s failure to pay was a default with respect to the whole. Thus, to minimize A’s continued exposure, A was advised to take possession of the bicycles. If A had possession of the goods A could refuse to deliver. Section 2A-525(1). However, the facts here are different. With respect to the bicycles in B’s possession, A has the right to take possession of the bicycles, without breach of the peace. Section 2A-525(2). If B refuses to allow A access to the bicycles, A can proceed by action, including replevin or injunctive relief.
  9. With respect to the 40 bicycles that have not been delivered, this Article provides various alternatives. First, assume that 20 of the remaining 40 bicycles have been manufactured and delivered by the manufacturer to a carrier for shipment to B. Given the size of the shipment, the carrier was using a small truck for the delivery and the truck had not yet reached the delivery and the truck had not yet reached the island ferry when the manufacturer (at the request of A) instructed the carrier to divert the shipment to A’s place of business. A’s right to stop delivery is recognized under these circumstances. Section 2A-526(1). Second, assume that the 20 remaining bicycles were in the process of manufacture when B defaulted. A retains the right (as between A as lessor and B as lessee) to exercise reasonable commercial judgment whether to complete manufacture or to dispose of the unfinished goods for scrap. Since A is not the manufacturer and A has a binding contract to buy the bicycles, A elected to allow the manufacturer to complete the manufacture of the bicycles, but instructed the manufacturer to deliver the completed bicycles to A’s place of business. Section 2A-524(2).
  10. Thus, so far A has elected to exercise the remedies referred to in subparagraphs (b) through (d) in subsection (1). None of these remedies bars any of the others because A’s election and enforcement merely resulted in A’s possession of the bicycles. Had B performed A would have recovered possession of the bicycles. Thus A is in the process of obtaining the benefit of his bargain. Note that A could exercise any other rights or pursue any other remedies provided in the lease contract (Section 2A-523(1)(f)), or elect to recover his loss due to the lessee’s default under Section 2A-523(2).
  11. A’s counsel next would determine what action, if any, should be taken with respect to the goods. As stated in subparagraph (e) and as discussed fully in Section 2A-527(1) the lessor may, but has no obligation to, dispose of the goods by a substantially similar lease (indeed, the lessor has no obligation whatsoever to dispose of the goods at all) and recover damages based on that action, but lessor will not be able to recover damages which put it in a better position than performance would have done, nor will it be able to recover damages for losses which it could have reasonably avoided. In this case, since A is in the business of leasing and selling bicycles, A will probably inventory the 60 bicycles for its retail trade.
  12. A’s counsel then will determine which of the various means of ascertaining A’s damages against B are available. Subparagraph (e) catalogues each relevant section. First, under Section 2A-527(2) the amount of A’s claim is computed by comparing the original lease between A and B with any subsequent lease of the bicycles but only if the subsequent lease is substantially similar to the original lease contract. While the section does not define this term, the official comment does establish some parameters. If, however, A elects to lease the bicycles to his retail trade, it is unlikely that the resulting lease will be substantially similar to the original, as leases to retail customers are considerably different from leases to wholesale customers like B. If, however, the leases were substantially similar, the damage claim is for accrued and unpaid rent to the beginning of the new lease, plus the present value as of the same date, of the rent reserved under the original lease for the balance of its term less the present value as of the same date of the rent reserved under the replacement lease for a term comparable to the balance of the term of the original lease, together with incidental damages less expenses saved in consequence of the lessee’s default.
  13. If the new lease is not substantially similar or if A elects to sell the bicycles or to hold the bicycles, damages are computed under Section 2A-528 or 2A-529.
  14. If A elects to pursue his claim under Section 2A-528(1) the damage rule is the same as that stated in Section 2A-527(2) except that damages are measured from default if the lessee never took possession of the goods or from the time when the lessor did or could have regained possession and that the standard of comparison is not the rent reserved under a substantially similar lease entered into by the lessor but a market rent, as defined in Section 2A-507. Further, if the facts of this hypothetical were more elaborate A may be able to establish that the measure of damage under subsection (1) is inadequate to put him in the same position that B’s performance would have, in which case A can claim the present value of his lost profits.
  15. Yet another alternative for computing A’s damage claim against B which will be available in some situations is recovery of the present value, as of entry of judgment, of the rent for the then remaining lease term under Section 2A-529. However, this formulation is not available if the goods have been repossessed or tendered back to A. For the 20 bicycles repossessed and the remaining 40 bicycles, A will be able to recover the present value of the rent only if A is unable to dispose of them, or circumstances indicate the effort will be unavailing. If A has prevailed in an action for the rent, at any time up to collection of a judgment by A against B, A might dispose of the bicycles. In such case A’s claim for damages against B is governed by Section 2A-527 or 2A-528. Section 2A-529(3). The resulting recalculation of claim should reduce the amount recoverable by A against B and the lessor is required to cause an appropriate credit to be entered against the earlier judgment. However, the nature of the post-judgment proceedings to resolve the issue, and the sanctions for a failure to comply, if any, will be determined by other law.
  16. Finally, if the lease agreement had so provided pursuant to subparagraph (f), A’s claim against B would not be determined under any of these statutory formulae, but pursuant to a liquidated damages clause. Section 2A-504(1).
  17. These various methods of computing A’s damage claim against B are alternatives subject to Section 2A-501(4). However, the pursuit of any one of these alternatives is not a bar to, nor has it been barred by, A’s earlier action to obtain possession of the 60 bicycles. These formulae, which vary as a function of an overt or implied mitigation of damage theory, focus on allowing A a recovery of the benefit of his bargain with B. Had B performed, A would have received the rent as well as the return of the 60 bicycles at the end of the term.
  18. Finally, A’s counsel should also advise A of his right to cancel the lease contract under subparagraph (a). Section 2A-505(1). Cancellation will discharge all existing obligations but preserve A’s rights and remedies.
  19. Subsection (2) recognizes that a lessor who is entitled to exercise the rights or to obtain a remedy granted by subsection (1) may choose not to do so. In such cases, the lessor can recover damages as provided in subsection (2). For example, for non-payment of rent, the lessor may decide not to take possession of the goods and cancel the lease, but rather to merely sue for the unpaid rent as it comes due plus lost interest or other damages “determined in any reasonable manner.” Subsection (2) also negates any loss of alternative rights and remedies by reason of having invoked or commenced the exercise or pursuit of any one or more rights or remedies.
  20. Subsection (3) allows the lessor access to a remedy scheme provided in this Article as well as that contained in the lease contract if the lessee is in default for reasons other than those stated in subsection (1). Note that the reference to this Article includes supplementary principles of law and equity, e.g., fraud, misrepresentation and duress. Sections 2A-103(4) and 1-103.
  21. There is no special treatment of the finance lease in this section. Absent supplementary principles of law to the contrary, in most cases the supplier will have no rights or remedies against the defaulting lessee. Section 2A-209(2). Given that the supplier will look to the lessor for payment, this is appropriate. However, there is a specific exception to this rule with respect to the right to identify goods to the lease contract. Section 2A-524(2). The parties are free to create a different result in a particular case. Sections 2A-103(4) and 1-102(3).

Cross References:

Sections 1-102(3), 1-103, 1-106(1), 1-201(37), 2-703, 2A-103(1)(j), 2A-103(4), 2A-209(2)(ii), 2A-501(4), 2A-504(1), 2A-505(1), 2A-507, 2A-510(2), 2A-524 through 2A-531, 2A-524(2), 2A-525(1), 2A-525(2), 2A-526(1), 2A-527(1), 2A-527(2), 2A-528(1) and 2A-529(3).

Definitional Cross References:

“Delivery”. Section 1-201(14). “Goods”. Section 2A-103(1)(h). “Installment lease contract”. Section 2A-103(1)(i). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Remedy”. Section 1-201(34). “Rights”. Section 1-201(36). “Value”. Section 1-201(44).

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355.2A-524. Lessor’s right to identify goods to lease contract.

  1. A lessor aggrieved under subsection (1) of KRS 355.2A-523 may:
    1. Identify to the lease contract conforming goods not already identified if at the time the lessor learned of the default they were in the lessor’s or the supplier’s possession or control; and
    2. Dispose of goods (subsection (1) of KRS 355.2A-527 ) that demonstrably have been intended for the particular lease contract even though those goods are unfinished.
  2. If the goods are unfinished, in the exercise of reasonable commercial judgment for the purposes of avoiding loss and of effective realization, an aggrieved lessor or the supplier may either complete manufacture and wholly identify the goods to the lease contract or cease manufacture and lease, sell, or otherwise dispose of the goods for scrap or salvage value or proceed in any other reasonable manner.

History. Enact. Acts 1990, ch. 363, § 71, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-704.

Changes:

Revised to reflect leasing practices and terminology.

Purposes:

The remedies provided by this section are available to the lessor (i) if there has been a default by the lessee which falls within Section 2A-523(1) or 2A-523(3)(a), or (ii) if there has been any other default for which the lease contract gives the lessor the remedies provided by this section. Under “(iii)”, the lease contract may give the lessor the remedies of identification and disposition provided by this section in various ways. For example, a lease provisions might specifically refer to the remedies of identification and disposition, or it might refer to this section by number (i.e., 2A-524), or it might do so by a more general reference such as “all rights and remedies provided by Article 2A for default by the lessee.”.

Definitional Cross References:

“Aggrieved party”. Section 1-201(2). “Conforming”. Section 2A-103(1)(d). “Goods”. Section 2A-103(1)(h). “Learn”. Section 1-201(25). “Lease”. Section 2A-103(1)(j). “Lease contract”. Section 2A-103(1)(). l “Lessor”. Section 2A-103(1)(n). “Rights”. Section 1-201(36). “Supplier”. Section 2A-103(1)(x). “Value”. Section 1-201(44).

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355.2A-525. Lessor’s right to possession of goods.

  1. If a lessor discovers the lessee to be insolvent, the lessor may refuse to deliver the goods.
  2. After a default by the lessee under the lease contract of the type described in KRS 355.2A-523 (1) or 355.2A-523 (3)(a) or, if agreed, after other default by the lessee, the lessor has the right to take possession of the goods. If the lease contract so provides, the lessor may require the lessee to assemble the goods and make them available to the lessor at a place to be designated by the lessor which is reasonably convenient to both parties. Without removal, the lessor may render unusable any goods employed in trade or business, and may dispose of goods on the lessee’s premises (KRS 355.2A-527 ).
  3. The lessor may proceed under subsection (2) without judicial process if it can be done without breach of the peace or the lessor may proceed by action.

History. Enact. Acts 1990, ch. 363, § 72, effective January 1, 1991; 1992, ch. 116, § 19, effective January 1, 1993.

Official Comment

Uniform Statutory Source:

Sections 2-702(1) and 9-503.

Changes:

Substantially revised.

Purposes:

  1. Subsection (1), a revised version of the provisions of Section 2-702(a), allows the lessor to refuse to deliver goods if the lessee is insolvent. Note that the provisions of Section 2-702(b), granting the unpaid seller certain rights of reclamation, were not incorporated in this section. Subsection (2) made this unnecessary.
  2. Subsection (2), a revised version of the provisions of former Section 9-503 (now codified as Section 9-609), allows the lessor, on a Section 2A-523(1) or 2A-523(3)(a) default by the lessee, the right to take possession of or reclaim the goods. Also, the lessor can contract for the right to take possession of the goods for other defaults by the lessee. Therefore, since the lessee’s insolvency is an event of default in a standard lease agreement, subsection (2) is the functional equivalent of Section 2-702(2). Further, subsection (2) sanctions the classic crate and delivery clause obligating the lessee to assemble the goods and to make them available to the lessor. Finally, the lessor may leave the goods in place, render them unusable (if they are goods employed in trade or business), and dispose of them on the lessee’s premises.
  3. Subsection (3), a revised version of the provisions of former Section 9-503 (now codified as Section 9-609), allows the lessor to proceed under subsection (2) without judicial process, absent breach of the peace, or by action. Sections 2A-501(3), 2A-103(4) and 1-201(1). In the appropriate case action includes injunctive relief. Clark Equip. Co. v. Armstrong Equip. Co., 431 F.2d 54 (5th Cir. 1970), cert. denied, 402 U.S. 909 (1971). This Section, as well as a number of other Sections in this Part, are included in the Article to codify the lessor’s common law right to protect the lessor’s reversionary interest in the goods. Section 2A-103(1)(q). These Sections are intended to supplement and not displace principles of law and equity with respect to the protection of such interest. Sections 2A-103(d) and 1-103. Such principles apply in many instances, e.g., loss or damage to goods if risk of loss passes to the lessee, failure of the lessee to return goods to the lessor in the condition stipulated in the lease, and refusal of the lessee to return goods to the lessor after termination or cancellation of the lease. See also Section 2A-532.

Cross References:

Sections 1-106(b2), 2-702(2), 2-702(2), 2A-103(4), 2A-501(3), 2A-532 and 9-609.

Definitional Cross References:

“Action”. Section 1-201(1). “Delivery”. Section 1-201(14). “Discover”. Section 1-201(25). “Goods”. Section 2A-103(1)(h). “Insolvent”. Section 1-201(23). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Party”. Section 1-201(29). “Rights”. Section 1-201(36).

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355.2A-526. Lessor’s stoppage of delivery in transit or otherwise.

  1. A lessor may stop delivery of goods in the possession of a carrier or other bailee if the lessor discovers the lessee to be insolvent and may stop delivery of carload, truckload, planeload, or larger shipments of express or freight if the lessee repudiates or fails to make a payment due before delivery, whether for rent, security or otherwise under the lease contract, or for any other reason the lessor has a right to withhold or take possession of the goods.
  2. In pursuing its remedies under subsection (1), the lessor may stop delivery until:
    1. Receipt of the goods by the lessee;
    2. Acknowledgment to the lessee by any bailee of the goods, except a carrier, that the bailee holds the goods for the lessee; or
    3. Such an acknowledgment to the lessee by a carrier via reshipment or as a warehouse.
    1. To stop delivery, a lessor shall so notify as to enable the bailee by reasonable diligence to prevent delivery of the goods. (3) (a) To stop delivery, a lessor shall so notify as to enable the bailee by reasonable diligence to prevent delivery of the goods.
    2. After notification, the bailee shall hold and deliver the goods according to the directions of the lessor, but the lessor is liable to the bailee for any ensuing charges or damages.
    3. A carrier who has issued a nonnegotiable bill of lading is not obliged to obey a notification to stop received from a person other than the consignor.

History. Enact. Acts 1990, ch. 363, § 73, effective January 1, 1991; 2012, ch. 132, § 56, effective July 12, 2012.

Official Comment

Uniform Statutory Source:

Section 2-705.

Changes:

Revised to reflect leasing practices and terminology.

Definitional Cross References:

“Bill of lading”. Section 1-201(6). “Delivery”. Section 1-201(14). “Discover”. Section 1-201(25). “Goods”. Section 2A-103(1)(h). “Insolvent”. Section 1-201(23). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Notifies” and “Notification”. Section 1-201(26). “Person”. Section 1-201(30). “Receipt”. Section 2-103(1)(c). “Remedy”. Section 1-201(34). “Rights”. Section 1-201(36).

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355.2A-527. Lessor’s rights to dispose of goods.

  1. After a default by a lessee under the lease contract of the type described in KRS 355.2A-523 (1) or 355.2A-523 (3)(a) or after the lessor refuses to deliver or takes possession of goods (KRS 355.2A-525 or 355.2A-526 ), or, if agreed, after other default by a lessee, the lessor may dispose of the goods concerned or the undelivered balance thereof by lease, sale, or otherwise.
  2. Except as otherwise provided with respect to damages liquidated in the lease agreement (KRS 355.2A-504 ) or otherwise determined pursuant to agreement of the parties (KRS 355.1-302 and 355.2A-503 ), if the disposition is by lease agreement substantially similar to the original lease agreement and the new lease agreement is made in good faith and in a commercially reasonable manner, the lessor may recover from the lessee as damages:
    1. Accrued and unpaid rent as of the date of the commencement of the term of the new lease agreement;
    2. The present value, as of the same date of the total rent for the then remaining lease term of the original lease agreement minus the present value, as of the same date, of the rent under the new lease agreement applicable to that period of the new lease term which is comparable to the then remaining term of the original lease agreement; and
    3. Any incidental damages allowed under KRS 355.2A-530 , less expenses saved in consequence of the lessee’s default.
  3. If the lessor’s disposition is by lease agreement that for any reason does not qualify for treatment under subsection (2) of this section, or is by sale or otherwise, the lessor may recover from the lessee as if the lessor had elected not to dispose of the goods and KRS 355.2A-528 governs.
  4. A subsequent buyer or lessee who buys or leases from the lessor in good faith for value as a result of a disposition under this section takes the goods free of the original lease contract and any rights of the original lessee even though the lessor fails to comply with one (1) or more of the requirements of this article.
  5. The lessor is not accountable to the lessee for any profit made on any disposition. A lessee who has rightfully rejected or justifiably revoked acceptance shall account to the lessor for any excess over the amount of the lessee’s security interest (subsection (5) of KRS 355.2A-508 ).

History. Enact. Acts 1990, ch. 363, § 74, effective January 1, 1991; 1992, ch. 116, § 20, effective January 1, 1993; 2006, ch. 242, § 31, effective July 12, 2006.

Official Comment

Uniform Statutory Source:

Section 2-706(1), (5) and (19).

Changes:

Substantially revised.

Purposes:

  1. Subsection (1), a revised version of the first sentence of subsection 2-706(1), allows the lessor the right to dispose of goods after a statutory or other material default by the lessee (even if the goods remain in the lessee’s possession — Section 2A-525(2)), after the lessor refuses to deliver or takes possession of the goods, or, if agreed, after other contractual default. The lessor’s decision to exercise this right is a function of a commercial judgment, not a statutory mandate replete with sanctions for failure to comply. Cf. Section 9-625. As the owner of the goods, in the case of a lessor, or as the prime lessee of the goods, in the case of a sublessor, compulsory disposition of the goods is inconsistent with the nature of the interest held by the lessor or the sublessor and is not necessary because the interest held by the lessee or the sublessee is not protected by a right of redemption under the common law or this Article. Subsection 2A-527(5).
  2. The rule for determining the measure of damages recoverable by the lessor against the lessee is a function of several variables. If the lessor has elected to effect disposition under subsection (1) and such disposition is by lease that qualifies under subsection (2), the measure of damages set forth in subsection (2) will apply, absent agreement to the contrary. Sections 2A-504, 2A-103(4) and 1-302.
  3. The lessor’s damages will be established using the new lease agreement as a measure if the following three criteria are satisfied: (i) the lessor disposed of the goods by lease, (ii) the lease agreement is substantially similar to the original lease agreement, and (iii) such disposition was in good faith, and in a commercially reasonable manner. Thus, the lessor will be entitled to recover from the lessee the accrued and unpaid rent as of the date of commencement of the term of the new lease, and the present value, as of the same date of the rent under the original lease for the then remaining term less the present value as of the same date of the rent under the new lease agreement applicable to the period of the new lease comparable to the remaining term under the original lease, together with incidental damages less expenses saved in consequence of the lessee’s default. If the lessor’s disposition does not satisfy the criteria of subsection (2), the lessor may calculate its claim against the lessee pursuant to Section 2A-528. Section 2A-523(1)(e).
  4. Two of the three criteria to be met by the lessor are familiar, but the concept of the new lease agreement that is substantially similar to the original lease agreement is not. Given the many variables facing a party who intends to lease goods and the rapidity of change in the market place, the policy decision was made not to draft with specificity. It was thought unwise to seek to establish certainty at the cost of fairness. The decision of whether the new lease agreement is substantially similar to the original will be determined case by case.
  5. While the section does not draw a bright line, it is possible to describe some of the factors that should be considered in a finding that a new lease agreement is substantially similar to the original. The various elements of the new lease agreement should be examined. Those elements include the options to purchase or release; the lessor’s representations, warranties and covenants to the lessee as well as those to be provided by the lessee to the lessor; and the services, if any, to be provided by the lessor or by the lessee. All of these factors allocate cost and risk between the lessor and the lessee and thus affect the amount of rent to be paid. These findings should not be made with scientific precision, as they are a function of economics, nor should they be made independently, as it is important that a sense of commercial judgment pervade the finding. See Section 2A-507(2). To establish the new lease as a proper measure of damage under subsection (2), these various factors, taken as a whole, must result in a finding that the new lease agreement is substantially similar to the original. If the differences between the original lease and the new lease can be easily valued, it would be appropriate for a court to find that the new lease is substantially similar to the old lease, adjust the difference in the rent between the two leases to take account of the differences, and award damages under this section. If, for example, the new lease requires the lessor to insure the goods in the hands of the lessee, while the original lease required the lessee to insure, the usual cost of such insurance could be deducted from rent due under the new lease before the difference in rental between the two leases is determined.
  6. The following hypothetical illustrates the difficulty of providing a bright line. Assume that A buys a jumbo tractor for $1 million and then leases the tractor to B for a term of 36 months. The tractor is delivered to and is accepted by B on May 1. On June 1 B fails to pay the monthly rent to A. B returns the tractor to A, who immediately releases the tractor to C for a term identical to the term remaining under the lease between A and B. All terms and conditions under the lease between A and C are identical to those under the original lease between A and B, except that C does not provide any property damage or other insurance coverage, and B agreed to provide complete coverage. Coverage is expensive and difficult to obtain. It is a question of fact whether it is so difficult to adjust the recovery to take account of the difference between the two leases as to insurance that the second lease is not substantially similar to the original.
  7. A new lease can be substantially similar to the original lease even though its term extends beyond the remaining term of the original lease, so long as both (a) the lease terms are commercially comparable (e.g., it is highly unlikely that a one-month rental and a five-year lease would reflect similar realities), and (b) the court can fairly apportion a part of the rental payments under the new lease to that part of the term of the new lease which is comparable to the remaining lease term under the original lease. Also, the lease term of the new lease may be comparable to the remaining term of the original lease even though the beginning and ending dates of the two leases are not the same. For example, a two-month lease of agricultural equipment for the months of August and September may be comparable to a two-month lease running from the 15th of August to the 15th of October if in the particular location two-month leases beginning on August 15th are basically interchangeable with two-month leases beginning August 1st. Similarly, the term of a one-year truck lease beginning on the 15th of January may be comparable to the term of a one-year truck lease beginning January 2nd. If the lease terms are found to be comparable, the court may base cover damages on the entire difference between the costs under the two leases.
  8. Subsection (3), which is new, provides that if the lessor’s disposition is by lease that does not qualify under subsection (2), or is by sale or otherwise, Section 2A-528 governs.
  9. Subsection (4), a revised version of subsection 2-706(5), applies to protect a subsequent buyer or lessee who buys or leases from the lessor in good faith and for value, pursuant to disposition under this section. Note that by its terms, the rule in subsection 2A-304(1), which provides that the subsequent lessee takes subject to the original lease contract, is controlled by the rule stated in this subsection.
  10. Subsection (5), a revised version of subsection 2-706(7), provides that the lessor is not accountable to the lessee for any profit made by the lessor on a disposition. This rule follows from the fundamental premise of the bailment for hire that the lessee under a lease of good has no equity of redemption to protect.

Cross References:

Sections 1-302, 2-706(1), 2-706(5), 2-706(6), 2A-103(4), 2A-304(1), 2A-504, 2A-507(2), 2A-523(1)(e), 2A-525(2), 2A-517(5), 2A-528 and 9-625.

Definitional Cross References:

“Buyer” and “Buying”. Section 2-103(1)(a). “Delivery”. Section 1-201(b)(15). “Good faith”. Sections 1-201(b)(20). “Goods”. Section 2A-103(1)(h). “Lease”. Section 2A-103(1)(j). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Present value”. Section 2A-201(b)(28). “Rights”. Section 1-201(b)(34). “Sale”. Section 2-106(1). “Security interest”. Section 1-201(b)(35) and 1-203. “Value”. Section 1-204.

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355.2A-528. Lessor’s damages for nonacceptance, failure to pay repudiation, or other default.

  1. Except as otherwise provided with respect to damages liquidated in the lease agreement (KRS 355.2A-504 ) or otherwise determined pursuant to agreement of the parties (KRS 355.1-302 and 355.2A-503 ), if a lessor elects to retain the goods or a lessor elects to dispose of the goods and the disposition is by lease agreement that for any reason does not qualify for treatment under KRS 355.2A-527 (2), or is by sale or otherwise, the lessor may recover from the lessee as damages for a default of the type described in KRS 355.2A-523 (1) or 355.2A-523 (3)(a), or, if agreed, for other default by the lessee:
    1. Accrued and unpaid rent as of the date of default if the lessee has never taken possession of the goods, or, if the lessee has taken possession of the goods, as of the date the lessor repossesses the goods or an earlier date on which the lessee makes a tender of the goods to the lessor;
    2. The present value as of the date determined under clause (a) of the total rent for the then remaining lease term of the original lease agreement minus the present value as of the same date of the market rent at the place where the goods are located computed for the same lease term; and
    3. Any incidental damages allowed under KRS 355.2A-530 , less expenses saved in consequence of the lessee’s default.
  2. If the measure of damages provided in subsection (1) of this section is inadequate to put a lessor in as good a position as performance would have, the measure of damages is the present value of the profit, including reasonable overhead, the lessor would have made from full performance by the lessee, together with any incidental damages allowed under KRS 355.2A-530 , due allowance for costs reasonably incurred and due credit for payments or proceeds of disposition.

History. Enact. Acts 1990, ch. 363, § 75, effective January 1, 1991; 1992, ch. 116, § 21, effective January 1, 1993; 2006, ch. 242, § 32, effective July 12, 2006.

Official Comment

Uniform Statutory Source:

Section 2-708.

Changes:

Substantially revised.

Purposes:

  1. Subsection (1), a substantially revised version of Section 2-708(1), states the basic rule governing the measure of lessor’s damages for a default described in Section 2A-523(1) or (3)(a), and, if agreed, for a contractual default. This measure will apply if the lessor elects to retain the goods (whether undelivered, returned by the lessee, or repossessed by the lessor after acceptance and default by the lessee) or if the lessor’s disposition does not qualify under subsection 2A-527(2). Section 2A-527(3). Note that under some of these conditions, the lessor may recover damages from the lessee pursuant to the rule set forth in Section 2A-529. There is no sanction for disposition that does not qualify under subsection 2A-527(2). Application of the rule set forth in this section is subject to agreement to the contrary. Sections 2A-504, 2A-103(4) and 1-302.
  2. If the lessee has never taken possession of the goods, the measure of damage is the accrued and unpaid rent as of the date of default together with the present value, as of the date of default, of the original rent for the remaining term of the lease less the present value as of the same date of market rent, and incidental damages, less expenses saved in consequence of the default. Note that the reference in Section 2A-528(1)(i) and (ii) is to the date of default not to the date of an event of default. An event of default under a lease agreement becomes a default under a lease agreement only after the expiration of any relevant period of grace and compliance with any notice requirements under this Article and the lease agreement. American Bar Foundation, Commentaries on Indentures, § 5-1, at 216-217 (1971). Section 2A-501(1). This conclusion is also a function of whether, as a matter of fact or law, the event of default has been waived, suspended or cured. Sections 2A-103(4) and 1-103. If the lessee has taken possession of the goods, the measure of damages is the accrued and unpaid rent as of the earlier of the time the lessor repossesses the goods or the time the lessee tenders the goods to the lessor plus the difference between the present value, as of the same time, of the rent under the lease for the remaining lease term and the present value, as of the same time, of the market rent.
  3. Market rent will be computed pursuant to Section 2A-507.
  4. Subsection (2), a somewhat revised version of the provisions of subsection 2-708(2), states a measure of damages which applies if the measure of damages in subsection (1) is inadequate to put the lessor in as good a position as performance would have. The measure of damage is the lessor’s profit, including overhead, together with incidental damages, with allowance for costs reasonably incurred and credit for payments or proceeds of disposition. In determining the amount of due credit with respect to proceeds of disposition a proper value should be attributed to the lessor’s residual interest in the goods. Sections 2A-103(1)(q) and 2A-507(d).
  5. In calculating profit, a court should include any expected appreciation of the goods, e.g. the foal of a leased brood mare. Because this subsection is intended to give the lessor the benefit of the bargain, a court should consider any reasonable benefit or profit expected by the lessor from the performance of the lease agreement. See Honeywell, Inc. v. Lithonia Lighting, Inc., 317 F.Supp. 406, 413 (N.D.Ga.1970); Locks v. Wade, 36 N.J.Super. 128, 131, 114 A.2d 875, 877 (Super.Ct.App.Div.1955). Further, in calculating profit the concept of present value must be given effect. Taylor v. Commercial Credit Equip. Corp., 170 Ga.App. 322, 316 S.E.2d 788 (Ct.App.1984). See generally Section 2A-103(1)(u).

Cross References:

Sections 1-302, 2-708, 2A-103(1)(u), 2A-402, 2A-504, 2A-507, 2A-527(2) and 2A-529.

Definitional Cross References:

“Agreement”. Section 1-201(b)(3). “Goods”. Section 2A-103(1)(h). “Lease”. Section 2A-103(1)(j). “Lease agreement”. Section 2A-103(1)(k). “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Party”. Section 1-201(b)(26). “Present value”. Section 1-201(b)(28). “Sale”. Section 2-106(1).

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355.2A-529. Lessor’s action for rent.

  1. After default by the lessee under the lease contract of the type described in KRS 355.2A-523 (1) or 355.2A-523 (3)(a) or, if agreed, after other default by the lessee, if the lessor complies with subsection (2), the lessor may recover from the lessee as damages:
    1. For goods accepted by the lessee and not repossessed by or tendered to the lessor, and for conforming goods lost or damaged within a commercially reasonable time after risk of loss passes to the lessee (KRS 355.2A-219 ):
      1. Accrued and unpaid rent as of the date of entry of judgment in favor of the lessor;
      2. The present value as of the same date of the rent for the then remaining lease term of the lease agreement; and
      3. Any incidental damages allowed under KRS 355.2A-530 , less expenses saved in consequence of the lessee’s default; and
    2. For goods identified to the lease contract if the lessor is unable after reasonable effort to dispose of them at a reasonable price or the circumstances reasonably indicate that effort will be unavailing:
      1. Accrued and unpaid rent as of the date of entry of judgment in favor of the lessor;
      2. The present value as of the same date of the rent for the then remaining lease term of the lease agreement; and
      3. Any incidental damages allowed under KRS 355.2A-530 , less expenses saved in consequence of the lessee’s default.
  2. Except as provided in subsection (3), the lessor shall hold for the lessee for the remaining lease term of the lease agreement any goods that have been identified to the lease contract and are in the lessor’s control.
  3. The lessor may dispose of the goods at any time before collection of the judgment for damages obtained pursuant to subsection (1). If the disposition is before the end of the remaining lease term of the lease agreement, the lessor’s recovery against the lessee for damages is governed by KRS 355.2A-527 or 355.2A-528 and the lessor will cause an appropriate credit to be provided against a judgment for damages to the extent that the amount of the judgment exceeds the recovery available pursuant to KRS 355.2A-527 or 355.2A-528 .
  4. Payment of the judgment for damages obtained pursuant to subsection (1) entitles the lessee to the use and possession of the goods not then disposed of for the remaining lease term of and in accordance with the lease agreement.
  5. After default by the lessee under the lease contract of the type described in KRS 355.2A-523 (1) or 355.2A-523 (3)(a) or, if agreed, after other default by the lessee, a lessor who is held not entitled to rent under this section must nevertheless be awarded damages for nonacceptance under KRS 355.2A-527 or 355.2A-528 .

History. Enact. Acts 1990, ch. 363, § 76, effective January 1, 1991; 1992, ch. 116, § 22, effective January 1, 1993.

Official Comment

Uniform Statutory Source:

Section 2-709.

Changes:

Substantially revised.

Purposes:

  1. Absent a lease contract provision to the contrary, an action for the full unpaid rent (discounted to present value as of the time of entry of judgment as to rent due after that time) is available as to goods not lost or damaged only if the lessee retains possession of the goods or the lessor is or apparently will be unable to dispose of them at a reasonable price after reasonable effort. There is no general right in a lessor to recover the full rent from the lessee upon holding the goods for the lessee. If the lessee tenders goods back to the lessor, and the lessor refuses to accept the tender, the lessor will be limited to the damages it would have suffered had it taken back the goods. The rule in Article 2 that the seller can recover the price of accepted goods is rejected here. In a lease, the lessor always has a residual interest in the goods which the lessor usually realizes upon at the end of a lease term by either sale or a new lease. Therefore, it is not a substantial imposition on the lessor to require it to take back and dispose of the goods if the lessee chooses to tender them back before the end of the lease term: the lessor will merely do earlier what it would have done any way, sell or relet the goods. Further, the lessee will frequently encounter substantial difficulties if the lessee attempts to sublet the goods for the remainder of the lease term. In contrast to the buyer who owns the entire interest in goods and can easily dispose of them, the lessee is selling only the right to use the goods under the terms of the lease and the sublessee must assume a relationship with the lessor. In that situation, it is usually more efficient to eliminate the original lessee as a middleman by allowing the lessee to return the goods to the lessor who can then redispose of them.
  2. In some situations even where possession of the goods is reacquired, a lessor will be able to recover as damages the present value of the full rent due, not under this section, but under 2A-528(2) which allows a lost profit recovery if necessary to put the lessor in the position it would have been in had the lessee performed. Following is an example of such a case. A is a lessor of construction equipment and maintains a substantial inventory. B leases from A a backhoe for a period of two weeks at a rental of $1,000. After three days, B returns the backhoe and refuses to pay the rent. A has five backhoes in inventory, including the one returned by B. During the next 11 days after the return by B of the backhoe, A rents no more than three backhoes at any one time and, therefore, always has two on hand. If B had kept the backhoe for the full rental period. A would have earned the full rental on that backhoe, plus the rental on the other backhoes it actually did rent during that period. Getting this backhoe back before the end of the lease term did not enable A to make any leases it would not otherwise have made. The only way to put A in the position it would have been in had the lessee fully performed is to give the lessor the full rentals. A realized no savings at all because the backhoe was returned early and might even have incurred additional expense if it was paying for parking space for equipment in inventory. A has no obligation to relet the backhoe for the benefit of B rather than leasing the backhoe or any other in inventory for its own benefit. Further, it is probably not reasonable to expect A to dispose of the backhoe by sale when it is returned in an effort to reduce damages suffered by B. Ordinarily, the loss of a two-week rental would not require A to reduce the size of its backhoe inventory. Whether A would similarly be entitled to full rentals as lost profit in a one-year lease of a backhoe is a question of fact: in any event the lessor, subject to mitigation of damages rules, is entitled to be put in as good a position as it would have been had the lessee fully performed the lease contract.
  3. Under subsection (2) a lessor who is able and elects to sue for the rent due under a lease must hold goods not lost or damaged for the lessee. Subsection (3) creates an exception to the subsection (2) requirement. If the lessor disposes of those goods prior to collection of the judgment (whether as a matter of law or agreement), the lessor’s recovery is governed by the measure of damages in Section 2A-527 if the disposition is by lease that is substantially similar to the original lease, or otherwise by the measure of damages in Section 2A-528. Section 2A-523 official comment.
  4. Subsection (4), which is new, further reinforces the requisites of Subsection (2). In the event the judgment for damages obtained by the lessor against the lessee pursuant to subsection (1) is satisfied, the lessee regains the right to use and possession of the remaining goods for the balance of the original lease term; a partial satisfaction of the judgment creates no right in the lessee to use and possession of the goods.
  5. The relationship between subsections (2) and (4) is important to understand. Subsection (2) requires the lessor to hold for the lessee identified goods in the lessor’s possession. Absent agreement to the contrary, whether in the lease or otherwise, under most circumstances the requirement that the lessor hold the goods for the lessee for the term will mean that the lessor is not allowed to use them. Sections 2A-103(d) and 1-203. Further, the lessor’s use of the goods could be viewed as a disposition of the goods that would bar the lessor from recovery under this section, remitting the lessor to the two preceding sections for a determination of the lessor’s claim for damages against the lessee.
  6. Subsection (5), the analogue of subsection 2-709(3), further reinforces the thrust of subsection (3) by stating that a lessor who is held not entitled to rent under this section has not elected a remedy; the lessor must be awarded damages under Sections 2A-527 and 2A-528. This is a function of two significant policies of this Article — that resort to a remedy is optional, unless expressly agreed to be exclusive (Section 2A-503(2)) and that rights and remedies provided in this Article generally are cumulative. (Section 2A-501(2) and (4).

Cross References:

Sections 1-203, 2-709, 2-709(1), 2A-103(4), 2A-501(2), 2A-501(4), 2A-503(2), 2A-504, 2A-523(1)(e), 2A-525(2), 2A-527, 2A-528 and 2A-529(2).

Definitional Cross References:

“Action”. Section 1-201(1). “Conforming”. Section 2A-103(1)(d). “Goods”. Section 2A-103(1)(h). “Lease”. Section 2A-103(1)(j). “Lease agreement”. Section 2A-103(1)(k). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-102(1)(n). “Lessor”. Section 2A-103(1)(p). “Present value”. Section 2A-103(1)(u). “Reasonable time”. Section 1-204(1) and (2).

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355.2A-530. Lessor’s incidental damages.

Incidental damages to an aggrieved lessor include any commercially reasonable charges, expenses, or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the lessee’s default, in connection with return or disposition of the goods, or otherwise resulting from the default.

History. Enact. Acts 1990, ch. 363, § 77, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-710.

Changes:

Revised to reflect leasing practices and terminology.

Definitional Cross References:

“Aggrieved party”. Section 1-201(2). “Delivery”. Section 1-201(14). “Goods”. Section 2A-103(1)(h). “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p).

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355.2A-531. Standing to sue third parties for injury to goods.

  1. If a third party so deals with goods that have been identified to a lease contract as to cause actionable injury to a party to the lease contract (a) the lessor has a right of action against the third party, and (b) the lessee also has a right of action against the third party if the lessee:
    1. Has a security interest in the goods;
    2. Has an insurable interest in the goods; or
    3. Bears the risk of loss under the lease contract or has since the injury assumed that risk as against the lessor and the goods have been converted or destroyed.
  2. If at the time of the injury the party plaintiff did not bear the risk of loss as against the other party to the lease contract and there is no arrangement between them for disposition of the recovery, his suit or settlement, subject to his own interest, is as a fiduciary for the other party to the lease contract.
  3. Either party with the consent of the other may sue for the benefit of whom it may concern.

History. Enact. Acts 1990, ch. 363, § 78, effective January 1, 1991.

Official Comment

Uniform Statutory Source:

Section 2-722.

Changes:

Revised to reflect leasing practices and terminology.

Definitional Cross References:

“Action”. Section 1-201(1). “Goods”. Section 2A-103(1)(h). “Lease contract”. Section 2A-103(1)(). l “Lessee”. Section 2A-103(1)(n). “Lessor”. Section 2A-103(1)(p). “Party”. Section 1-201(29). “Rights”. Section 1-201(36). “Security interest”. Section 1-201(37).

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355.2A-532. Lessor’s rights to residual interest.

In addition to any other recovery permitted by this article or other law, the lessor may recover from the lessee an amount that will fully compensate the lessor for any loss of or damage to the lessor’s residual interest in the goods caused by the default of the lessee.

History. Enact. Acts 1992, ch. 116, § 23, effective January 1, 1993.

Official Comment

Uniform Statutory Source:

None.

This section recognizes the right of the lessor to recover under this Article (as well as under other law) from the lessee for failure to comply with the lease obligations as to the condition of leased goods when returned to the lessor, for failure to return the goods at the end of the lease, or for any other default which causes loss or injury to the lessor’s residual interest in the goods.

Article 3. Negotiable Instruments

Compiler’s Notes.

The official comments in this article are copyrighted by the National Conference of Commissioners of Uniform State Laws and the American Law Institute, and are reproduced by permission.

Part 1. General Provisions and Definitions

355.3-101. Short title.

This article may be cited as Uniform Commercial Code — Negotiable Instruments.

History. Created 1958 Ky. Acts ch. 77, sec. 3-101, effective July 1, 1960; repealed and reenact. Acts 1996, ch. 130, § 1, effective January 1, 1997.

Compiler’s Notes.

Section 183 of Acts 1996, ch. 130 read:

“(1) This Act does not affect an action or proceeding commenced before this act takes effect.

“(2) If a security interest in a security is perfected at the date this Act takes effect [January 1, 1997], and the action by which the security was perfected would suffice to perfect a security interest under this Act, no further action is required to continue perfection. If a security interest in a security is perfected at the date this Act takes effect but the action by which the security interest was perfected would not suffice to perfect a security interest under this Act, the security interest remains prefected for a period of four months after the effective date and continues perfected thereafter if appropriate action to perfect under this Act is taken within that period. If a security interest is perfected at the date this Act takes effect and the security interest can be perfected by filing under this Act, a financing statement signed by the secured party instead of the debtor may be filed within that period to continue perfection or thereafter to perfect.”

Section 184 of Acts 1996, ch. 130 read: “This Act becomes effective January 1, 1997.”

NOTES TO DECISIONS

1.Applicability.

Article 3 deals exclusively with negotiable instruments and, therefore, does not apply to a mortgage, since a mortgage is not a negotiable instrument. First Commonwealth Bank of Prestonsburg v. West, 27 S.W.3d 472, 2000 Ky. App. LEXIS 98 (Ky. Ct. App. 2000).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Commercial Paper, § 191.00.

355.3-102. Subject matter.

  1. This article applies to negotiable instruments. It does not apply to money, to payment orders governed by Article 4A of this chapter, or to securities governed by Article 8 of this chapter.
  2. If there is conflict between this article and Article 4 or 9 of this chapter, Articles 4 and 9 of this chapter govern.
  3. Regulations of the Board of Governors of the Federal Reserve System and operating circulars of the Federal Reserve Banks supersede any inconsistent provision of this article to the extent of the inconsistency.

History. Created 1958 Ky. Acts ch. 77, sec. 3-102, effective July 1, 1960; repealed and reenact. Acts 1996, ch. 130, § 2, effective January 1, 1997.

Official Comment

  1. Former Article 3 had no provision affirmatively stating its scope. Former Section 3-103 was a limitation on scope. In revised Article 3, Section 3-102 states that Article 3 applies to “negotiable instruments,” defined in Section 3-104. Section 3-104(b) also defines the term “instrument” as a synonym for “negotiable instrument.” In most places Article 3 uses the shorter term “instrument.” This follows the convention used in former Article 3.
  2. The reference in former Section 3-103(1) to “documents of title” is omitted as superfluous because these documents contain no promise to pay money. The definition of “payment order” in Section 4A-103(a)(1)(iii) excludes drafts which are governed by Article 3. Section 3-102(a) makes clear that a payment order governed by Article 4A is not governed by Article 3. Thus, Article 3 and Article 4A are mutually exclusive.

    Article 8 states in Section 8-103(d) that “A writing that is a security certificate is governed by this Article and not by Article 3, even though it also meets the requirements of that Article.” Section 3-102(a) conforms to this provision. With respect to some promises or orders to pay money, there may be a question whether the promise or order is an instrument under Section 3-104(a) or a certificated security under Section 8-102(a)(4) and (15). Whether a writing is covered by Article 3 or Article 8 has important consequences. Among other things, under Section 8-207, the issuer of a certificated security may treat the registered owner as the owner for all purposes until the presentment for registration of a transfer. The issuer of a negotiable instrument, on the other hand, may discharge its obligation to pay the instrument only by paying a person entitled to enforce under Section 3-301. There are also important consequences to an indorser. An indorser of a security does not undertake the issuer’s obligation or make any warranty that the issuer will honor the underlying obligation, while an indorser of a negotiable instrument becomes secondarily liable on the underlying obligation.

    Ordinarily the distinction between instruments and certificated securities in non-bearer form should be relatively clear. A certificated security under Article 8 must be in registered form (Section 8-102(a)(13)) so that it can be registered on the issuer’s records. By contrast, registration plays no part in Article 3. The distinction between an instrument and a certificated security in bearer form may be somewhat more difficult and will generally lie in the economic functions of the two writings. Ordinarily, negotiable instruments under Article 3 will be separate and distinct instruments, while certificated securities under Article 8 will be either one of a class or series or by their terms divisible into a class or series (Section 8-102(a)(15)(ii)). Thus, a promissory note in bearer form could come under either Article 3 if it were simply an individual note, or under Article 8 if it were one of a series of notes or divisible into a series. An additional distinction is whether the instrument is of the type commonly dealt in on securities exchanges or markets or commonly recognized as a medium for investment (Section 8-102(a)(15)(iii)). Thus, a check written in bearer form (i.e., a check made payable to “cash”) would not be a certificated security within Article 8 of the Uniform Commercial Code.

    Occasionally, a particular writing may fit the definition of both a negotiable instrument under Article 3 and of an investment security under Article 8. In such cases, the instrument is subject exclusively to the requirements of Article 8. Section 8-103(d) and Section 3-102(a).

  3. Although the terms of Article 3 apply to transactions by Federal Reserve Banks, federal preemption would make ineffective any Article 3 provision that conflicts with federal law. The activities of the Federal Reserve Banks are governed by regulations of the Federal Reserve Board and by operating circulars issued by the Reserve Banks themselves. In some instances, the operating circulars are issued pursuant to a Federal Reserve Board regulation. In other cases, the Reserve Bank issues the operating circular under its own authority under the Federal Reserve Act, subject to review by the Federal Reserve Board. Section 3-102(c) states that Federal Reserve Board regulations and operating circulars of the Federal Reserve Banks supersede any inconsistent provision of Article 3 to the extent of the inconsistency. Federal Reserve Board regulations, being valid exercises of regulatory authority pursuant to a federal statute, take precedence over state law if there is an inconsistency. Childs v. Federal Reserve Bank of Dallas, 719 F.2d 812 (5th Cir. 1983), reh. den. 724 F.2d 127 (5th Cir. 1984). Section 3-102(c) treats operating circulars as having the same effect whether issued under the Reserve Bank’s own authority or under a Federal Reserve Board regulation. Federal statutes may also preempt article 3. For example, the Expedited Funds Availability Act, 12 U.S.C. § 4001 et seq., provides that the Act and the regulations issued pursuant to the Act supersede any inconsistent provisions of the UCC. 12 U.S.C. § 4007(b).
  4. In Clearfield Trust Co. v. United States, 318 U.S. 363 (1943), the Court held that if the United States is party to an instrument, its rights and duties are governed by federal common law in the absence of a specific federal statute or regulation. In United States v. Kimbell Foods, Inc., 440 U.S. 715 (1979), the Court stated a three-pronged test to ascertain whether the federal common-law rule should follow the state rule. In most instances courts under the Kimbell test have shown a willingness to adopt UCC rules in formulating federal common law on the subject. In Kimbell the Court adopted the priorities rules of Article 9.
  5. In 1989 the United Nations Commission on International Trade Law completed a Convention on International Bills of Exchange and International Promissory Notes. If the United States becomes a party to this Convention, the Convention will preempt state law with respect to international bills and notes governed by the Convention. Thus, an international bill of exchange or promissory note that meets the definition of instrument in Section 3-104 will not be governed by Article 3 if it is governed by the Convention. That Convention applies only to bills and notes that indicate on their face that they involve cross-border transactions. It does not apply at all to checks. Convention Articles 1(3), 2(1), 2(2). Moreover, because it applies only if the bill or note specifically calls for application of the Convention, Convention Article 1, there is little chance that the Convention will apply accidentally to a transaction that the parties intended to be governed by this Article.

355.3-103. Definitions.

  1. In this article:
    1. “Acceptor” means a drawee who has accepted a draft;
    2. “Consumer account” means an account established by an individual primarily for personal, family, or household purposes;
    3. “Consumer transaction” means a transaction in which an individual incurs an obligation primarily for personal, family, or household purposes;
    4. “Drawee” means a person ordered in a draft to make payment;
    5. “Drawer” means a person who signs or is identified in a draft as a person ordering payment;
    6. (Reserved)
    7. “Maker” means a person who signs or is identified in a note as a person undertaking to pay;
    8. “Order” means a written instruction to pay money signed by the person giving the instruction. The instruction may be addressed to any person, including the person giving the instruction, or to one (1) or more persons jointly or in the alternative but not in succession. An authorization to pay is not an order unless the person authorized to pay is also instructed to pay;
    9. “Ordinary care” in the case of a person engaged in business means observance of reasonable commercial standards, prevailing in the area in which the person is located, with respect to the business in which the person is engaged. In the case of a bank that takes an instrument for processing for collection or payment by automated means, reasonable commercial standards do not require the bank to examine the instrument if the failure to examine does not violate the bank’s prescribed procedures and the bank’s procedures do not vary unreasonably from general banking usage not disapproved by this article or Article 4 of this chapter;
    10. “Party” means a party to an instrument;
    11. “Principal obligor,” with respect to an instrument, means the accommodated party or any other party to the instrument against whom a secondary obligor has recourse under this article;
    12. “Promise” means a written undertaking to pay money signed by the person undertaking to pay. An acknowledgment of an obligation by the obligor is not a promise unless the obligor also undertakes to pay the obligation;
    13. “Prove” with respect to a fact means to meet the burden of establishing the fact (KRS 355.1-201 (2));
    14. (Reserved)
    15. “Remitter” means a person who purchases an instrument from its issuer if the instrument is payable to an identified person other than the purchaser;
    16. “Remotely created item” means an item drawn on an account, which is not created by the payor bank and does not bear a handwritten signature purporting to be the signature of the drawer; and
    17. “Secondary obligor,” with respect to an instrument, means:
      1. An indorser or an accommodation party;
      2. A drawer having the obligation described in KRS 355.3-414 (4); or
      3. Any other party to the instrument that has recourse against another party to the instrument pursuant to KRS 355.3-116 (2).
  2. Other definitions applying to this article and the sections in which they appear are:
    1. “Acceptance.” KRS 355.3-409 ;
    2. “Accommodated party.” KRS 355.3-419 ;
    3. “Accommodation party.” KRS 355.3-419 ;
    4. “Account.” KRS 355.4-104 ;
    5. “Alteration.” KRS 355.3-407 ;
    6. “Anomalous indorsement.” KRS 355.3-205 ;
    7. “Blank indorsement.” KRS 355.3-205 ;
    8. “Cashier’s check.” KRS 355.3-104 ;
    9. “Certificate of deposit.” KRS 355.3-104 ;
    10. “Certified check.” KRS 355.3-409 ;
    11. “Check.” KRS 355.3-104;
    12. “Consideration.” KRS 355.3-303 ;
    13. “Draft.” KRS 355.3-104;
    14. “Holder in due course.” KRS 355.3-302 ;
    15. “Incomplete instrument.” KRS 355.3-115 ;
    16. “Indorsement.” KRS 355.3-204 ;
    17. “Indorser.” KRS 355.3-204 ;
    18. “Instrument.” KRS 355.3-104;
    19. “Issue.” KRS 355.3-105 ;
    20. “Issuer.” KRS 355.3-105 ;
    21. “Negotiable instrument.” KRS 355.3-104;
    22. “Negotiation.” KRS 355.3-201 ;
    23. “Note.” KRS 355.3-104;
    24. “Payable at a definite time.” KRS 355.3-108 ;
    25. “Payable on demand.” KRS 355.3-108 ;
    26. “Payable to bearer.” KRS 355.3-109 ;
    27. “Payable to order.” KRS 355.3-109 ;
    28. “Payment.” KRS 355.3-602 ;
    29. “Person entitled to enforce.” KRS 355.3-301 ;
    30. “Presentment.” KRS 355.3-501 ;
    31. “Reacquisition.” KRS 355.3-207 ;
    32. “Special indorsement.” KRS 355.3-205;
    33. “Teller’s check.” KRS 355.3-104;
    34. “Transfer of instrument.” KRS 355.3-203 ;
    35. “Traveler’s check.” KRS 355.3-104; and
    36. “Value.” KRS 355.3-303 .
  3. The following definitions in other articles apply to this article:
    1. “Banking day.” KRS 355.4-104 ;
    2. “Clearing house.” KRS 355.4-104 ;
    3. “Collecting bank.” KRS 355.4-105 ;
    4. “Depositary bank.” KRS 355.4-105 ;
    5. “Documentary draft.” KRS 355.4-104;
    6. “Intermediary bank.” KRS 355.4-105;
    7. “Item.” KRS 355.4-104;
    8. “Payor bank.” KRS 355.4-105; and
    9. “Suspends payments.” KRS 355.4-104.
  4. In addition, Article 1 of this chapter contains general definitions and principles of construction and interpretation applicable throughout this article.

History. Enact. Acts 1958, ch. 77, § 3-103, effective July 1, 1960; repealed and reenact. Acts 1996, ch. 130, § 3, effective January 1, 1997; 2006, ch. 242, § 33, effective July 12, 2006.

Legislative Research Commission Note.

(7/12/2006). Under the authority of KRS 7.136(1), the Reviser of Statutes has added paragraph headings [(a), (b), etc.] before terms referenced in subsection (2) of this statute that are defined in other statutes. The words in the text were not changed.

Official Comment

  1. Subsection (a) defines some common terms used throughout the Article that were not defined by former Article 3 and adds the definitions of “order” and “promise” found in former Section 3-102(1)(b) and (c).
  2. The definition of “order” includes an instruction given by the signer to itself. The most common example of this kind of order is a cashier’s check: a draft with respect to which the drawer and drawee are the same bank or branches of the same bank. Former Section 3-118(a) treated a cashier’s check as a note. It stated “a draft drawn on the drawer is effective as a note.” Although it is technically more correct to treat a cashier’s check as a promise by the issuing bank to pay rather than an order to pay, a cashier’s check is in the form of a check and it is normally referred to as a check. Thus, revised Article 3 follows banking practice in referring to a cashier’s check as both a draft and a check rather than a note. Some insurance companies also follow the practice of issuing drafts in which the drawer draws on itself and makes the draft payable at or through a bank. These instruments are also treated as drafts. The obligation of the drawer of a cashier’s check or other draft drawn on the drawer is stated in Section 3-412.

    An order may be addressed to more than one person as drawee either jointly or in the alternative. The authorization of alternative drawees follows former Section 3-102(1)(b) and recognizes the practice of drawers, such as corporations issuing dividend checks, who for commercial convenience name a number of drawees, usually in different parts of the country. Section 3-501(b)(1) provides that presentment may be made to any one of multiple drawees. Drawees in succession are not permitted because the holder should not be required to make more than one presentment. Dishonor by any drawee named in the draft entitles the holder to rights of recourse against the drawer or indorsers.

  3. The last sentence of subsection (a)(12) is intended to make it clear that an I.O.U. or other written acknowledgement of indebtedness is not a note unless there is also an undertaking to pay the obligation.
  4. This Article now uses the broadened definition of good faith in revised Article 1. The definition requires not only honesty in fact, but also “observance of reasonable commercial standards of fair dealing.” Although fair dealing is a broad term that must be defined in context, it is clear that it is concerned with the fairness of conduct rather than the care with which an act is performed. Failure to exercise ordinary care in conducting a transaction is an entirely different concept than failure to deal fairly in conducting the transaction. Both fair dealing and ordinary care, which is defined in Section 3-103(a)(9), are to be judged in the light of reasonable commercial standards, but those standards in each case are directed to different aspects of commercial conduct.
  5. Subsection (a)(9) is a definition of ordinary care which is applicable not only to Article 3 but to Article 4 as well. See Section 4-104(c). The general rule is stated in the first sentence of subsection (a)(9) and it applies both to banks and to persons engaged in businesses other than banking. Ordinary care means observance of reasonable commercial standards of the relevant business prevailing in the area in which the person is located. The second sentence of subsection (a)(9) is a particular rule limited to the duty of a bank to examine an instrument taken by a bank for processing for collection or payment by automated means. This particular rule applies primarily to Section 4-406 and it is discussed in Comment 4 to that section. Nothing in Section 3-103(a)(7) is intended to prevent a customer from proving that the procedures followed by a bank are unreasonable, arbitrary, or unfair.
  6. The definition of consumer account includes a joint account established by more than one individual. See Section 1-106(1).

Research References and Practice Aids

Northern Kentucky Law Review.

Article: From Main Street to Wall Street: Mortgage Loan Securitization and New Challenges Facing Foreclosure Plaintiffs in Kentucky, 36 N. Ky. L. Rev. 395 (2009).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint of Payee Against Drawer on Drawee Bank’s Refusal to Make Payment, Form 191.04.

355.3-104. Negotiable instrument.

  1. Except as provided in subsections (3) and (4) of this section, “negotiable instrument” means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it:
    1. Is payable to bearer or to order at the time it is issued or first comes into possession of a holder;
    2. Is payable on demand or at a definite time; and
    3. Does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain:
      1. An undertaking or power to give, maintain, or protect collateral to secure payment;
      2. An authorization or power to the holder to confess judgment or realize on or dispose of collateral; or
      3. A waiver of the benefit of any law intended for the advantage or protection of an obligor.
  2. “Instrument” means a negotiable instrument.
  3. An order that meets all of the requirements of subsection (1) of this section, except paragraph (a) of that subsection, and otherwise falls within the definition of “check” in subsection (6) of this section is a negotiable instrument and a check.
  4. A promise or order other than a check is not an instrument if, at the time it is issued or first comes into possession of a holder, it contains a conspicuous statement, however expressed, to the effect that the promise or order is not negotiable or is not an instrument governed by this article.
  5. An instrument is a “note” if it is a promise and is a “draft” if it is an order. If an instrument falls within the definition of both “note” and “draft,” a person entitled to enforce the instrument may treat it as either.
  6. “Check” means:
    1. A draft, other than a documentary draft, payable on demand and drawn on a bank; or
    2. A cashier’s check or teller’s check. An instrument may be a check even though it is described on its face by another term, such as “money order.”
  7. “Cashier’s check” means a draft with respect to which the drawer and drawee are the same bank or branches of the same bank.
  8. “Teller’s check” means a draft drawn by a bank:
    1. On another bank; or
    2. Payable at or through a bank.
  9. “Traveler’s check” means an instrument that:
    1. Is payable on demand;
    2. Is drawn on or payable at or through a bank;
    3. Is designated by the term “traveler’s check” or by a substantially similar term; and
    4. Requires, as a condition to payment, a countersignature by a person whose specimen signature appears on the instrument.
  10. “Certificate of deposit” means an instrument containing an acknowledgment by a bank that a sum of money has been received by the bank and a promise by the bank to repay the sum of money. A certificate of deposit is a note of the bank.

History. Enact. Acts 1958, ch. 77, § 3-104, effective July 1, 1960; repealed and reenact. Acts 1996, ch. 130, § 4, effective January 1, 1997.

Official Comment

  1. The definition of “negotiable instrument” defines the scope of Article 3 since Section 3-102 states: “This Article applies to negotiable instruments.” The definition in Section 3-104(a) incorporates other definitions in Article 3. An instrument is either a “promise,” defined in Section 3-103(a)(12), or “order,” defined in Section 3-103(a)(8). A promise is a written undertaking to pay money signed by the person undertaking to pay. An order is a written instruction to pay money signed by the person giving the instruction. Thus, the term “negotiable instrument” is limited to a signed writing that orders or promises payment of money. “Money” is defined in Section 1-201(a)(24) and is not limited to United States dollars. It also includes a medium of exchange established by a foreign government or monetary units of account established by an intergovernmental organization or by agreement between two or more nations. Five other requirements are stated in Section 3-104(a): First, the promise or order must be “unconditional.” The quoted term is explained in Section 3-106. Second, the amount of money must be “a fixed amount * * * with or without interest or other charges described in the promise or order.” Section 3-112(b) relates to “interest.” Third, the promise or order must be “payable to bearer or to order.” The quoted phrase is explained in Section 3-109. An exception to this requirement is stated in subsection (c). Fourth, the promise or order must be payable “on demand or at a definite time.” The quoted phrase is explained in Section 3-108. Fifth, the promise or order may not state “any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money” with three exceptions. The quoted phrase is based on the first sentence of N.I.L. Section 5 which is the precursor of “no other promise, order, obligation or power given by the maker or drawer” appearing in former Section 3-104(1)(b). The words “instruction” and “undertaking” are used instead of “order” and “promise” that are used in the N.I.L. formulation because the latter words are defined terms that include only orders or promises to pay money. The three exceptions stated in Section 3-104(a)(3) are based on and are intended to have the same meaning as former Section 3-112(1)(b), (c), (d), and (e), as well as N.I.L. § 5(1), (2), and (3). Subsection (b) states that “instrument” means a “negotiable instrument.” This follows former Section 3-102(1)(e) which treated the two terms as synonymous.
  2. Unless subsection (c) applies, the effect of subsection (a)(1) and Section 3-102(a) is to exclude from Article 3 any promise or order that is not payable to bearer or to order. There is no provision in revised Article 3 that is comparable to former Section 3-805. The Comment to former Section 3-805 states that the typical example of a writing covered by that section is a check reading “Pay John Doe.” Such a check was governed by former Article 3 but there could not be a holder in due course of the check. Under Section 3-104(c) such a check is governed by revised Article 3 and there can be a holder in due course of the check. But subsection (c) applies only to checks. The Comment to former Section 3-805 does not state any example other than the check to illustrate that section. Subsection (c) is based on the belief that it is good policy to treat checks, which are payment instruments, as negotiable instruments whether or not they contain the words “to the order of”. These words are almost always pre-printed on the check form. Occasionally the drawer of a check may strike out these words before issuing the check. In the past some credit unions used check forms that did not contain the quoted words. Such check forms may still be in use but they are no longer common. Absence of the quoted words can easily be overlooked and should not affect the rights of holders who may pay money or give credit for a check without being aware that it is not in the conventional form.

    Total exclusion from Article 3 of other promises or orders that are not payable to bearer or to order serves a useful purpose. It provides a simple device to clearly exclude a writing that does not fit the pattern of typical negotiable instruments and which is not intended to be a negotiable instrument. If a writing could be an instrument despite the absence of “to order” or “to bearer” language and a dispute arises with respect to the writing, it might be argued that the writing is a negotiable instrument because the other requirements of subsection (a) are somehow met. Even if the argument is eventually found to be without merit it can be used as a litigation ploy. Words making a promise or order payable to bearer or to order are the most distinguishing feature of a negotiable instrument and such words are frequently referred to as “words of negotiability.” Article 3 is not meant to apply to contracts for the sale of goods or services or the sale or lease of real property or similar writings that may contain a promise to pay money. The use of words of negotiability in such contracts would be an aberration. Absence of the words precludes any argument that such contracts might be negotiable instruments.

    An order or promise that is excluded from Article 3 because of the requirements of Section 3-104(a) may nevertheless be similar to a negotiable instrument in many respects. Although such a writing cannot be made a negotiable instrument within Article 3 by contract or conduct of its parties, nothing in Section 3-104 or in Section 3-102 is intended to mean that in a particular case involving such a writing a court could not arrive at a result similar to the result that would follow if the writing were a negotiable instrument. For example, a court might find that the obligor with respect to a promise that does not fall within Section 3-104(a) is precluded from asserting a defense against a bona fide purchaser. The preclusion could be based on estoppel or ordinary principles of contract. It does not depend upon the law of negotiable instruments. An example is stated in the paragraph following Case #2 in Comment 4 to Section 3-302.

    Moreover, consistent with the principle stated in Section 1-102(b)(2), the immediate parties to an order or promise that is not an instrument may provide by agreement that one or more of the provisions of Article 3 determine their rights and obligations under the writing. Upholding the parties’ choice is not inconsistent with Article 3. Such an agreement may bind a transferee of the writing if the transferee has notice of it or the agreement arises from usage of trade and the agreement does not violate other law or public policy. An example of such an agreement is a provision that a transferee of the writing has the rights of a holder in due course stated in Article 3 if the transferee took rights under the writing in good faith, for value, and without notice of a claim or defense.

    Even without an agreement of the parties to an order or promise that is not an instrument, it may be appropriate, consistent with the principles stated in Section 1-102(b), for a court to apply one or more provisions of Article 3 to the writing by analogy, taking into account the expectations of the parties and the differences between the writing and an instrument governed by Article 3. Whether such application is appropriate depends upon the facts of each case.

  3. Subsection (d) allows exclusion from Article 3 of a writing that would otherwise be an instrument under subsection (a) by a statement to the effect that the writing is not negotiable or is not governed by Article 3. For example, a promissory note can be stamped with the legend NOT NEGOTIABLE. The effect under subsection (d) is not only to negate the possibility of a holder in due course, but to prevent the writing from being a negotiable instrument for any purpose. Subsection (d) does not, however, apply to a check. If a writing is excluded from Article 3 by subsection (d), a court could, nevertheless, apply Article 3 principles to it by analogy as stated in Comment 2.
  4. Instruments are divided into two general categories: drafts and notes. A draft is an instrument that is an order. A note is an instrument that is a promise. Section 3-104(e). The term “bill of exchange” is not used in Article 3. It is generally understood to be a synonym for the term “draft.” Subsections (f) through (j) define particular instruments that fall within the categories of draft and note. The term “draft,” defined in subsection (e), includes a “check” which is defined in subsection (f). “Check” includes a share draft drawn on a credit union payable through a bank because the definition of bank (Section 4-105) includes credit unions. However, a draft drawn on an insurance company payable through a bank is not a check because it is not drawn on a bank. “Money orders” are sold both by banks and non-banks. They vary in form and their form determines how they are treated in Article 3. The most common form of money order sold by banks is that of an ordinary check drawn by the purchaser except that the amount is machine impressed. That kind of money order is a check under Article 3 and is subject to a stop order by the purchaser-drawer as in the case of ordinary checks. The seller bank is the drawee and has no obligation to a holder to pay the money order. If a money order falls within the definition of a teller’s check, the rules applicable to teller’s checks apply. Postal money orders are subject to federal law. “Teller’s check” is separately defined in subsection (h). A teller’s check is always drawn by a bank and is usually drawn on another bank. In some cases a teller’s check is drawn on a nonbank but is made payable at or through a bank. Article 3 treats both types of teller’s checks identically, and both are included in the definition of “check.” A cashier’s check, defined in subsection (g), is also included in the definition of “check.” Traveler’s checks are issued both by banks and non-banks and may be in the form of a note or draft. Subsection (i) states the essential characteristics of a traveler’s check. The requirement that the instrument be “drawn on or payable at or through a bank” may be satisfied without words on the instrument that identify a bank as drawee or paying agent so long as the instrument bears an appropriate routing number that identifies a bank as paying agent.

    The definitions in Regulation CC § 229.2 of the terms “check,” “cashier’s check,” “teller’s check,” and “traveler’s check” are different from the definitions of those terms in Article 3.

    Certificates of deposit are treated in former Article 3 as a separate type of instrument. In revised Article 3, Section 3-104(j) treats them as notes.

  5. There are some differences between the requirements of Article 3 and the requirements included in Article 3 of the International Convention on International Bills of Exchange and International Promissory Notes. Most obviously, the Convention does not include the limitation on extraneous undertakings set forth in Section 3-104(a)(3), and does not permit documents payable to bearer that would be permissible under Section 3-104(a)(1) and Section 3-109. See Convention Article 3. In most respects, however, the requirements of Section 3-104 and Article 3 of the Convention are quite similar.

NOTES TO DECISIONS

1.“Check.”

A check is a draft under the definition contained in this section. Farmers Cooperative Livestock Market, Inc. v. Second Nat'l Bank, 427 S.W.2d 247, 1968 Ky. LEXIS 676 ( Ky. 1968 ) (decided under prior law).

As a creditor’s depositing of a Chapter 7 debtor’s prepetition checks (which were returned marked “account closed”), without more, was not harassment, but was a “presentment” of “negotiable instruments” under KRS 355.3-104 and 355.3-501 , its acts fell within the exception to the automatic stay set forth in 11 USCS § 362(b)(11). In re Noffsinger, 316 B.R. 283, 2004 Bankr. LEXIS 1700 (Bankr. W.D. Ky. 2004 ).

A parcel delivery service did not violate its bailment contract of delivery with a knife supplier, where the supplier directed the delivery service upon delivering knives it was shipping to accept cash or a company check, and the delivery service took a check from the purchaser that contained a handwritten notation at the top of the check giving the name and address of the purchaser’s purported company, rather than a more formal imprinted check bearing the company’s name. (decided under prior law) Shockley v. United Parcel Service, Inc., 664 S.W.2d 523, 1983 Ky. App. LEXIS 387 (Ky. Ct. App. 1983).

2.Fully Drawn Check.

Where defendant was found in possession of United States Treasury check endorsed by someone other than payee third party and which was fully drawn with respect to every essential feature under this section, defendant could not be convicted of criminal possession of forged instrument in the first degree under KRS 516.050 since the evidence showed that no one other than the ostensible drawer, the United States government, created the instrument and no one altered any part of it; thus, the check itself was not forged since defendant had not acted to “falsely alter,” “falsely complete” or “falsely make” the instrument under KRS 516.010 and if an alleged forger has done nothing to falsify an already complete written instrument, he cannot be guilty of forging that instrument. (decided under prior law) Frazier v. Commonwealth, 613 S.W.2d 423, 1981 Ky. LEXIS 228 ( Ky. 1981 ).

3.Guaranty Agreement.

Where the guaranty agreement signed by the defendant guarantor did not specify a “sum certain,” since it provided only that the guarantor’s liability “shall not exceed” $50,000, was payable neither at a particular time or on demand, since it was a “continuing” guaranty, and was made payable neither to order nor to bearer, the agreement did not constitute a negotiable instrument within the purview of KRS 355.3-115 (1). (decided under prior law) Brooks v. United Kentucky Bank, 659 S.W.2d 213, 1983 Ky. App. LEXIS 392 (Ky. Ct. App. 1983).

4.Promissory Note.

The phrase “First Lien Note” at the top of a promissory note did not constitute a substantive condition breached by subordination of the lien, so as to discharge the liability of a co-maker who was unaware of the subordination; if such a provision were enforced, the instrument would not be “unconditional” and thus not a negotiable instrument. (decided under prior law) Schmuckie v. Alvey, 758 S.W.2d 31, 1988 Ky. LEXIS 60 ( Ky. 1988 ).

Promissory note was a negotiable instrument because the note was not “subject to” any other contract or agreement, nor did it state that the parties’ rights and obligations were stated in another agreement; because the note only referenced another agreement and did not impose any conditions to payment, the note was an unconditional promise to pay a fixed amount of money. Cmty. Fin. Servs. Bank v. Stamper, 586 S.W.3d 737, 2019 Ky. LEXIS 479 ( Ky. 2019 ).

As a negotiable instrument, a promissory note was subject to the six-year statute of limitations of the statute; the bank’s suit to enforce the promissory note was barred by the statute of limitations because it was untimely whether the cause of action accrued on the note’s stated due date or on the date the borrower was required to pay the balance. Cmty. Fin. Servs. Bank v. Stamper, 586 S.W.3d 737, 2019 Ky. LEXIS 479 ( Ky. 2019 ).

5.Money Orders.

Although at the time of presentation, stolen money orders were nonnegotiable, that finding is not dispositive of their value; the fact that something further would have to be done to them to negotiate them and obtain their face value, whether or not that something would amount to forgery, does not render them valueless. (decided under prior law) Commonwealth v. Gilbert, 768 S.W.2d 62, 1989 Ky. App. LEXIS 48 (Ky. Ct. App. 1989).

6.Certificate of Deposit.

Although disputed certificates of deposit were originally issued by the bank, assignee of the certificates had a superior lien on them because assignee deposited the certificates in the bank for safekeeping with a legend attached describing the assignment and acknowledging the certificates were held by the bank for safekeeping. (decided under prior law) Federal Deposit Ins. Corp. v. Cardinal Resources, Inc., 724 F. Supp. 466, 1989 U.S. Dist. LEXIS 13322 (E.D. Ky.), aff'd, 888 F.2d 127, 1989 U.S. App. LEXIS 16179 (6th Cir. Ky. 1989 ).

Cited in:

Stamper v. Cmty. Fin. Servs., 2018 Ky. App. LEXIS 175 (Ky. Ct. App. June 1, 2018).

Research References and Practice Aids

Northern Kentucky Law Review.

Article: From Main Street to Wall Street: Mortgage Loan Securitization and New Challenges Facing Foreclosure Plaintiffs in Kentucky, 36 N. Ky. L. Rev. 395 (2009).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint of Payee Against Drawer on Drawee Bank’s Refusal to Make Payment, Form 191.04.

355.3-105. Issue of instrument.

  1. “Issue” means the first delivery of an instrument by the maker or drawer, whether to a holder or nonholder, for the purpose of giving rights on the instrument to any person.
  2. An unissued instrument, or an unissued incomplete instrument that is completed, is binding on the maker or drawer, but nonissuance is a defense. An instrument that is conditionally issued or is issued for a special purpose is binding on the maker or drawer, but failure of the condition or special purpose to be fulfilled is a defense.
  3. “Issuer” applies to issued and unissued instruments and means a maker or drawer of an instrument.

History. Enact. Acts 1958, ch. 77, § 3-105, effective July 1, 1960; 1964, ch. 130, § 2, effective July 1, 1964; repealed and reenact., Acts 1996, ch. 130, § 5, effective January 1, 1997.

Official Comment

  1. Under former Section 3-102(1)(a) “issue” was defined as the first delivery to a “holder or a remitter” but the term “remitter” was neither defined nor otherwise used. In revised Article 3, Section 3-105(a) defines “issue” more broadly to include the first delivery to anyone by the drawer or maker for the purpose of giving rights to anyone on the instrument. “Delivery” with respect to instruments is defined in Section 1-201(14) as meaning “voluntary transfer of possession.”
  2. Subsection (b) continues the rule that nonissuance, conditional issuance or issuance for a special purpose is a defense of the maker or drawer of an instrument. Thus, the defense can be asserted against a person other than a holder in due course. The same rule applies to nonissuance of an incomplete instrument later completed.
  3. Subsection (c) defines “issuer” to include the signer of an unissued instrument for convenience of reference in the statute.

NOTES TO DECISIONS

1.Issuance of Check.

Retirement system’s refusal to allow a retiree to change his retirement payment option was improper because, although the first retirement check had been produced by the time the retiree notified the retirement system of the change, the check had not been delivered to the retiree, and thus the request was timely for purposes of KRS 61.590(3), which limited changes to the time before the first retirement allowance payment had been issued by the Kentucky state treasurer; under KRS 355.3-105 (1), “issue” meant delivery, under KRS 355.1-201 (2)(o), “delivery” meant transfer of possession, and thus, printing a retirement check at some unknown point in time did not make it issued, but rather, it had to have been delivered to the beneficiary to have been a “payment.” Lawson v. Ky. Ret. Sys., 291 S.W.3d 679, 2009 Ky. LEXIS 82 ( Ky. 2009 ).

355.3-106. Unconditional promise or order.

  1. Except as provided in this section, for the purposes of KRS 355.3-104 (1), a promise or order is unconditional unless it states:
    1. An express condition to payment;
    2. That the promise or order is subject to or governed by another record; or
    3. That rights or obligations with respect to the promise or order are stated in another record. A reference to another record does not of itself make the promise or order conditional.
  2. A promise or order is not made conditional:
    1. By a reference to another record for a statement of rights with respect to collateral, prepayment, or acceleration; or
    2. Because payment is limited to resort to a particular fund or source.
  3. If a promise or order requires, as a condition to payment, a countersignature by a person whose specimen signature appears on the promise or order, the condition does not make the promise or order conditional for the purposes of KRS 355.3-104 (1). If the person whose specimen signature appears on an instrument fails to countersign the instrument, the failure to countersign is a defense to the obligation of the issuer, but the failure does not prevent a transferee of the instrument from becoming a holder of the instrument.
  4. If a promise or order at the time it is issued or first comes into possession of a holder contains a statement, required by applicable statutory or administrative law, to the effect that the rights of a holder or transferee are subject to claims or defenses that the issuer could assert against the original payee, the promise or order is not thereby made conditional for the purposes of KRS 355.3-104 (1); but if the promise or order is an instrument, there cannot be a holder in due course of the instrument.

History. Enact. Acts 1958, ch. 77, § 3-106; 1964, ch. 130, §§ 24, 25, effective July 1, 1964; 1990, ch. 478, § 1, effective July 13, 1990; repealed and reenact., Acts 1996, ch. 130, § 6, effective January 1, 1997; 2006, ch. 242, § 34, effective July 12, 2006.

Official Comment

  1. This provision replaces former Section 3-105. Its purpose is to define when a promise or order fulfills the requirement in Section 3-104(a) that it be an “unconditional” promise or order to pay. Under Section 3-106(a) a promise or order is deemed to be unconditional unless one of the two tests of the subsection make the promise or order conditional. If the promise or order states an express condition to payment, the promise or order is not an instrument. For example, a promise states, “I promise to pay $100,000 to the order of John Doe if he conveys title to Blackacre to me.” The promise is not an instrument because there is an express condition to payment. However, suppose a promise states, “In consideration of John Doe’s promise to convey title to Blackacre I promise to pay $100,000 to the order of John Doe.” That promise can be an instrument if Section 3-104 is otherwise satisfied. Although the recital of the executory promise of Doe to convey Blackacre might be read as an implied condition that the promise be performed, the condition is not an express condition as required by Section 3-106(a)(1). This result is consistent with former Section 3-105(1)(a) and (b). Former Section 3-105(1)(b) is not repeated in Section 3-106 because it is not necessary. It is an example of an implied condition. Former Section 3-105(1)(d), (e), and (f) and the first clause of former Section 3-105(1)(c) are other examples of implied conditions. They are not repeated in Section 3-106 because they are not necessary. The law is not changed.

    Section 3-106(a)(ii) and (iii) carry forward the substance of former Section 3-105(2)(a). The only change is the use of “writing” instead of “agreement” and a broadening of the language that can result in conditionality. For example, a promissory note is not an instrument defined by Section 3-104 if it contains any of the following statements: 1. “This note is subject to a contract of sale dated April 1, 1990 between the payee and maker of this note.” 2. “This note is subject to a loan and security agreement dated April 1, 1990 between the payee and the maker of this note.” 3. “Rights and obligations of the parties with respect to this note are stated in an agreement dated April 1, 1990 between the payee and maker of this note.” It is not relevant whether any condition to payment is or is not stated in the writing to which reference is made. The rationale is that the holder of a negotiable instrument should not be required to examine another document to determine rights with respect to payment. But subsection (b)(1) permits reference to a separate writing for information with respect to collateral, prepayment, or acceleration.

    Many notes issued in commercial transactions are secured by collateral, are subject to acceleration in the event of default, or are subject to prepayment. A statement of rights and obligations concerning collateral, prepayment, or acceleration does not prevent the note from being an instrument if the statement is in the note itself. See Section 3-104(a)(3) and Section 3-108(b). In some cases it may be convenient not to include a statement concerning collateral, prepayment, or acceleration in the note, but rather to refer to an accompanying loan agreement, security agreement or mortgage for that statement. Subsection (b)(1) allows a reference to the appropriate writing for a statement of these rights. For example, a note would not be made conditional by the following statement: “This note is secured by a security interest in collateral described in a security agreement dated April 1, 1990 between the payee and maker of this note. Rights and obligations with respect to collateral are [stated in] [governed by] the security agreement.” The bracketed words are alternatives, either of which complies.

    Subsection (b)(ii) addresses the issues covered by former Section 3-105(1)(f), (g), and (h) and Section 3-105(2)(b). Under Section 3-106(a) a promise or order is not made conditional because payment is limited to payment from a particular source or fund. This reverses the result of former Section 3-105(2)(b). There is no cogent reason why the general credit of a legal entity must be pledged to have a negotiable instrument. Market forces determine the marketability of instruments of this kind. If potential buyers don’t want promises or orders that are payable only from a particular source or fund, they won’t take them, but Article 3 should apply.

  2. Subsection (c) applies to traveler’s checks or other instruments that may require a countersignature. Although the requirement of a countersignature is a condition to the obligation to pay, traveler’s checks are treated in the commercial world as money substitutes and therefore should be governed by Article 3. The first sentence of subsection (c) allows a traveler’s check to meet the definition of instrument by stating that the countersignature condition does not make it conditional for the purposes of Section 3-104. The second sentence states the effects of a failure to meet the condition. Suppose a thief steals a traveler’s check and cashes it by skillfully imitating the specimen signature so that the countersignature appears to be authentic. The countersignature is for the purpose of identification of the owner of the instrument. It is not an indorsement. Subsection (c) provides that the failure of the owner to countersign does not prevent a transferee from becoming a holder. Thus, the merchant or bank that cashed the traveler’s check becomes a holder when the traveler’s check is taken. The forged countersignature is a defense to the obligation of the issuer to pay the instrument, and is included in defenses under Section 3-305(a)(2). These defenses may not be asserted against a holder in due course. Whether a holder has notice of the defense is a factual question. If the countersignature is a very bad forgery, there may be notice. But if the merchant or bank cashed a traveler’s check and the countersignature appeared to be similar to the specimen signature, there might not be notice that the countersignature was forged. Thus, the merchant or bank could be a holder in due course.
  3. Subsection (d) concerns the effect of a statement to the effect that the rights of a holder or transferee are subject to the claims and defenses that the issuer could assert against the original payee. The subsection applies only if the statement is required by statutory or administrative law. The prime example is the Federal Trade Commission Rule (16 C.F.R. Part 433) preserving consumers’ claims and defenses in consumer credit sales. The intent of the FTC rule is to make it impossible for there to be a holder in due course of a note bearing the FTC legend and undoubtedly that is the result. But, under former Article 3, the legend may also have had the unintended effect of making the note conditional, thus excluding the note from former Article 3 altogether. Subsection (d) is designed to make it possible to preclude the possibility of a holder in due course without excluding the instrument from Article 3. Most of the provisions of Article 3 are not affected by the holder-in-due-course doctrine and there is no reason why Article 3 should not apply to a note bearing the FTC legend if the holder-in-due-course rights are not involved. Under subsection (d) the statement does not make the note conditional. If the note otherwise meets the requirements of Section 3-104(a) it is a negotiable instrument for all purposes except that there cannot be a holder in due course of the note. No particular form of legend or statement is required by subsection (d). The form of a particular legend or statement may be determined by the other statute or administrative law. For example, the FTC legend required in a note taken by the seller in a consumer sale of goods or services is tailored to that particular transaction and therefore uses language that is somewhat different from that stated in subsection (d), but the difference in expression does not affect the essential similarity of the message conveyed. The effect of the FTC legend is to make the rights of a holder or transferee subject to claims or defenses that the issuer could assert against the original payee of the note.

NOTES TO DECISIONS

1.Content of Instrument.

The determination of whether an instrument is unconditional must be made from the content of the instrument itself. (decided under prior law) Schmuckie v. Alvey, 758 S.W.2d 31, 1988 Ky. LEXIS 60 ( Ky. 1988 ).

2.Unconditional Promise to Pay.

Where check had “for three sound mules” written across face, it was not thereby made conditional. Roberts v. Drovers' Nat'l Bank, 199 Ky. 439 , 251 S.W. 198, 1923 Ky. LEXIS 852 ( Ky. 1923 ).

Where a check bore the printed notation “Agent’s Disbursing Account,” such merely indicated a direction to debit a particular fund and did not make the promise to pay conditional. (decided under prior law) National Deposit Bank v. Ohio Oil Co., 250 Ky. 288 , 62 S.W.2d 1048, 1933 Ky. LEXIS 686 ( Ky. 1933 ).

Promissory note was a negotiable instrument because the note was not “subject to” any other contract or agreement, nor did it state that the parties’ rights and obligations were stated in another agreement; because the note only referenced another agreement and did not impose any conditions to payment, the note was an unconditional promise to pay a fixed amount of money. Cmty. Fin. Servs. Bank v. Stamper, 586 S.W.3d 737, 2019 Ky. LEXIS 479 ( Ky. 2019 ).

3.Lien Subordination.

The phrase “First Lien Note” at the top of a promissory note did not constitute a substantive condition breached by subordination of the lien, so as to discharge the liability of a co-maker who was unaware of the subordination; if such a provision were enforced, the instrument would not be “unconditional” and thus not a negotiable instrument. (decided under prior law) Schmuckie v. Alvey, 758 S.W.2d 31, 1988 Ky. LEXIS 60 ( Ky. 1988 ).

4.Subject to Other Agreements.

That a note contained an order for merchandise, in addition to its own essentials, did not render it nonnegotiable. (decided under prior law) Remedial Plan, Inc. v. Ott, 199 Ky. 161 , 250 S.W. 825, 1923 Ky. LEXIS 785 ( Ky. 1923 ).

5.Payable from Designated Funds.

Where county bonds were on their face unconditional obligations, negotiability was not affected by indication that they were to be paid out of funds from a certain tax levy. (decided under prior law) Pulaski County v. Eichstaedt, 110 F.2d 79, 1940 U.S. App. LEXIS 4484 (6th Cir. Ky. 1940 ).

Even though bonds were payable only from revenue derived from sewer system and thus did not qualify as negotiable, irrespective of such a conditional promise, the legislature could provide that such instruments were negotiable in character. (decided under prior law) Erlanger v. Berkemeyer, 207 F.2d 832, 1953 U.S. App. LEXIS 2983 (6th Cir. Ky.), cert. denied, 346 U.S. 915, 74 S. Ct. 275, 98 L. Ed. 411, 1953 U.S. LEXIS 1370 (U.S. 1953).

6.Limitation as to Use of Note.

Where transferee possessed note under a limitation as to its use and negotiated it in violation of that limitation, a defective title was credited. (decided under prior law) Montenegro-Riehm Music Co. v. Illinois Trust & Sav. Bank, 164 Ky. 608 , 176 S.W. 32, 1915 Ky. LEXIS 430 ( Ky. 1915 ); Citizens' Trust & Guaranty Co. v. Hays, 167 Ky. 560 , 180 S.W. 811, 1915 Ky. LEXIS 870 ( Ky. 1915 ).

Research References and Practice Aids

Northern Kentucky Law Review.

Article: From Main Street to Wall Street: Mortgage Loan Securitization and New Challenges Facing Foreclosure Plaintiffs in Kentucky, 36 N. Ky. L. Rev. 395 (2009).

355.3-107. Instrument payable in foreign money.

Unless the instrument otherwise provides, an instrument that states the amount payable in foreign money may be paid in the foreign money or in an equivalent amount in dollars calculated by using the current bank-offered spot rate at the place of payment for the purchase of dollars on the day on which the instrument is paid.

History. Enact. Acts 1958, ch. 77, § 3-107, effective July 1, 1960; repealed and reenact. Acts 1996, ch. 130, § 7, effective January 1, 1997.

Official Comment

The definition of instrument in Section 3-104 requires that the promise or order be payable in “money.” That term is defined in Section 1-201(24) and is not limited to United States dollars. Section 3-107 states that an instrument payable in foreign money may be paid in dollars if the instrument does not prohibit it. It also states a conversion rate which applies in the absence of a different conversion rate stated in the instrument. The reference in former Section 3-107(1) to instruments payable in “currency” or “current funds” has been dropped as superfluous.

355.3-108. Payable on demand or at definite time.

  1. A promise or order is “payable on demand” if it:
    1. States that it is payable on demand or at sight, or otherwise indicates that it is payable at the will of the holder; or
    2. Does not state any time of payment.
  2. A promise or order is “payable at a definite time” if it is payable on elapse of a definite period of time after sight or acceptance or at a fixed date or dates or at a time or times readily ascertainable at the time the promise or order is issued, subject to rights of:
    1. Prepayment;
    2. Acceleration;
    3. Extension at the option of the holder; or
    4. Extension to a further definite time at the option of the maker or acceptor or automatically upon or after a specified act or event.
  3. If an instrument, payable at a fixed date, is also payable upon demand made before the fixed date, the instrument is payable on demand until the fixed date and, if demand for payment is not made before that date, becomes payable at a definite time on the fixed date.

History. Enact. Acts 1958, ch. 77, § 3-107, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 8, effective January 1, 1997.

Official Comment

This section is a restatement of former Section 3-108 and Section 3-109. Subsection (b) broadens former Section 3-109 somewhat by providing that a definite time includes a time readily ascertainable at the time the promise or order is issued. Subsection (b)(iii) and (iv) restates former Section 3-109(1)(d). It adopts the generally accepted rule that a clause providing for extension at the option of the holder, even without a time limit, does not affect negotiability since the holder is given only a right which the holder would have without the clause. If the extension is to be at the option of the maker or the acceptor or is to be automatic, a definite time limit must be stated or the time of payment remains uncertain and the order or promise is not a negotiable instrument. If a definite time limit is stated, the effect upon certainty of time of payment is the same as if the instrument were made payable at the ultimate date with a term providing for acceleration.

NOTES TO DECISIONS

1.Designated Time of Payment.

Where payment clause in note read “within ten _________ ,” indicating omission of apparently intended word “months,” it was payable on demand. (decided under prior law) Remedial Plan, Inc. v. Ott, 199 Ky. 161 , 250 S.W. 825, 1923 Ky. LEXIS 785 ( Ky. 1923 ).

2.Indorsement After Maturity.

A note indorsed after maturity was payable on demand. (decided under prior law) Moriarty v. Howard, 258 Ky. 629 , 80 S.W.2d 526, 1935 Ky. LEXIS 178 ( Ky. 1935 ).

3.Duty of Good Faith.

A duty of good faith is not owed in calling a demand note, as to impose a duty of good faith in calling demand notes would prevent lenders from enforcing their legal rights. (decided under prior law) Christie v. First Am.Bank, 908 S.W.2d 679, 1995 Ky. App. LEXIS 184 (Ky. Ct. App. 1995).

4.Requirements Fulfilled.

Where notes very specifically set out the amount of the debt, interest payments, dates and time of installment payments and final payment date, the notes fulfilled the requirements of this section which sets out what must be in a note in order for it to be classified as payable at a definite time, rather than payable on demand. (decided under prior law) Corbin Deposit Bank & Trust Co. v. Mullins Enterprises, Inc., 641 S.W.2d 760, 1982 Ky. App. LEXIS 264 (Ky. Ct. App. 1982).

5.Fixed Period After Stated Date.

The words “one hundred and eighty days pay to the order of” imported that the bill of exchange was due 180 days after date. (decided under prior law) Moreland's Adm'r v. Citizens' Sav. Bank, 114 Ky. 577 , 71 S.W. 520, 24 Ky. L. Rptr. 1354 , 1903 Ky. LEXIS 15 ( Ky. 1903 ).

6.Fixed or Determinable Date.

Where security was deposited with note containing provision that upon depreciation additional security would be deposited or note would immediately mature, note was payable at “a fixed or determinable” time. (decided under prior law) Finley v. Smith, 165 Ky. 445 , 177 S.W. 262, 1915 Ky. LEXIS 552 ( Ky. 1915 ) ( Ky. 1915 ).

7.— Withholding Payment.

Where a certificate of deposit permitted the maker to withhold payment at his option for 30 days after the date fixed on the instrument, such instrument was, nevertheless, negotiable. (decided under prior law) Day & Night Nat'l Bank v. Coffey, 25 F.2d 403, 1928 U.S. App. LEXIS 2973 (6th Cir. Ky. 1928 ).

8.Specified Time After Death.

An instrument payable on or at a specified period after the death of the maker or of a third person was valid and negotiable. (decided under prior law) Murrell v. Gibbs' Adm'r, 275 Ky. 124 , 120 S.W.2d 1018, 1938 Ky. LEXIS 376 ( Ky. 1938 ).

9.Acceleration.

The due date of a note for the purchase of land payable in ten years was not accelerated by abandonment and renunciation by defendants seven years before the due date. (decided under prior law) Huffman v. Martin, 226 Ky. 137 , 10 S.W.2d 636, 1928 Ky. LEXIS 48 ( Ky. 1928 ).

10.— Series of Notes.

A series of notes, all of which were to become immediately due at option of holder if any one was not paid at maturity, was payable at a definite time. (decided under prior law) Farmers' Bank & Trust Co. v. Dent, 206 Ky. 405 , 267 S.W. 202, 1924 Ky. LEXIS 352 ( Ky. 1924 ).

Where series of notes provided for acceleration, at holder’s option, upon default in payment, filing of suit on all immediately after default on one was irrevocable exercise of that option. (decided under prior law) Farmers' Bank & Trust Co. v. Dent, 206 Ky. 405 , 267 S.W. 202, 1924 Ky. LEXIS 352 ( Ky. 1924 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint in Action for the Value of Goods Delivered to a Third Person, on the Defendant’s Order to Pay Money, Form 191.05.

355.3-109. Payable to bearer or order.

  1. A promise or order is payable to bearer if it:
    1. States that it is payable to bearer or to the order of bearer or otherwise indicates that the person in possession of the promise or order is entitled to payment;
    2. Does not state a payee; or
    3. States that it is payable to or to the order of cash or otherwise indicates that it is not payable to an identified person.
    1. A promise or order that is not payable to bearer is payable to order if it is payable: (2) (a) A promise or order that is not payable to bearer is payable to order if it is payable:
      1. To the order of an identified person; or
      2. To an identified person or order.
    2. A promise or order that is payable to order is payable to the identified person.
  2. An instrument payable to bearer may become payable to an identified person if it is specially indorsed pursuant to KRS 355.3-205 (1). An instrument payable to an identified person may become payable to bearer if it is indorsed in blank pursuant to KRS 355.3-205 (2).

History. Enact. Acts 1958, ch. 77, § 3-109, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 9, effective January 1, 1997.

Official Comment

  1. Under Section 3-104(a), a promise or order cannot be an instrument unless the instrument is payable to bearer or to order when it is issued or unless Section 3-104(c) applies. The terms “payable to bearer” and “payable to order” are defined in Section 3-109. The quoted terms are also relevant in determining how an instrument is negotiated. If the instrument is payable to bearer it can be negotiated by delivery alone. Section 3-201(b). An instrument that is payable to an identified person cannot be negotiated without the indorsement of the identified person. Section 3-201(b). An instrument payable to order is payable to an identified person. Section 3-109(b). Thus, an instrument payable to order requires the indorsement of the person to whose order the instrument is payable.
  2. Subsection (a) states when an instrument is payable to bearer. An instrument is payable to bearer if it states that it is payable to bearer, but some instruments use ambiguous terms. For example, check forms usually have the words “to the order of” printed at the beginning of the line to be filled in for the name of the payee. If the drawer writes in the word “bearer” or “cash,” the check reads “to the order of bearer” or “to the order of cash.” In each case the check is payable to bearer. Sometimes the drawer will write the name of the payee “John Doe” but will add the words “or bearer.” In that case the check is payable to bearer. Subsection (a). Under subsection (b), if an instrument is payable to bearer it can’t be payable to order. This is different from former Section 3-110(3). An instrument that purports to be payable both to order and bearer states contradictory terms. A transferee of the instrument should be able to rely on the bearer term and acquire rights as a holder without obtaining the indorsement of the identified payee. An instrument is also payable to the bearer if it does not state a payee. Instruments that do not state a payee are in most cases incomplete instruments. In some cases the drawer of a check may deliver or mail it to the person to be paid without filling in the line for the name of the payee. Under subsection (a) the check is payable to bearer when it is sent or delivered. It is also an incomplete instrument. This case is discussed in Comment 2 to Section 3-115. Subsection (a)(iii) contains the words “otherwise indicates that it is not payable to an identified person.” The quoted words are meant to cover uncommon cases in which an instrument indicates that it is not meant to be payable to a specific person. Such an instrument is treated like a check payable to “cash.” The quoted words are not meant to apply to an instrument stating that it is payable to an identified person such as “ABC Corporation” if ABC Corporation is a nonexistent company. Although the holder of the check cannot be the nonexistent company, the instrument is not payable to bearer. Negotiation of such an instrument is governed by Section 3-404(b).

NOTES TO DECISIONS

1.Payee Blank.

An instrument on which the name of the payee was left blank was “payable in effect to bearer.” (decided under prior law) Finley v. Rose, 189 Ky. 359 , 224 S.W. 1059, 1920 Ky. LEXIS 431 ( Ky. 1920 ).

2.Fictitious Person.

When the drawer of a check knowingly made it payable to a fictitious person, the indorsement of the name of the payee did not constitute a forgery, since the check was a bearer instrument and did not require an indorsement and any indorsement was wholly superfluous and of no significance. (decided under prior law) Louisville Credit Men's Asso. v. Louisville Trust Co., 422 S.W.2d 421, 1967 Ky. LEXIS 40 ( Ky. 1967 ).

3.Unnamed Payee.

Check payable to payee only was not payable to order and was not a negotiable instrument. (decided under prior law) Haggard v. Mutual Oil & Refining Co., 204 Ky. 209 , 263 S.W. 745, 1924 Ky. LEXIS 429 ( Ky. 1924 ).

4.Payee as Joint Maker.

Note was invalid because payee was also joint maker. (decided under prior law) Melton v. Pensacola Bank & Trust Co., 190 F. 126, 1911 U.S. App. LEXIS 4430 (6th Cir. Ky. 1911 ).

5.“Himself Order.”

Certificate of deposit payable to “himself order . . . . . on return of this certificate properly indorsed” was payable to order. (decided under prior law) Coffey v. Day & Night Nat'l Bank, 21 F.2d 661, 1926 U.S. Dist. LEXIS 1781 (D. Ky. 1926 ), aff'd, 25 F.2d 403, 1928 U.S. App. LEXIS 2973 (6th Cir. Ky. 1928 ).

6.Transfer of Order Instrument.

Possession of an order instrument could be transferred without indorsement. (decided under prior law) Lawyers' Realty Co. v. Bank of Ludlow, 256 Ky. 675 , 76 S.W.2d 920, 1934 Ky. LEXIS 469 ( Ky. 1934 ).

355.3-110. Identification of person to whom instrument is payable.

  1. The person to whom an instrument is initially payable is determined by the intent of the person, whether or not authorized, signing as, or in the name or behalf of, the issuer of the instrument. The instrument is payable to the person intended by the signer even if that person is identified in the instrument by a name or other identification that is not that of the intended person. If more than one person signs in the name or behalf of the issuer of an instrument and all the signers do not intend the same person as payee, the instrument is payable to any person intended by one or more of the signers.
  2. If the signature of the issuer of an instrument is made by automated means, such as a check-writing machine, the payee of the instrument is determined by the intent of the person who supplied the name or identification of the payee, whether or not authorized to do so.
  3. A person to whom an instrument is payable may be identified in any way, including by name, identifying number, office, or account number. For the purpose of determining the holder of an instrument, the following rules apply:
    1. If an instrument is payable to an account and the account is identified only by number, the instrument is payable to the person to whom the account is payable. If an instrument is payable to an account identified by number and by the name of a person, the instrument is payable to the named person, whether or not that person is the owner of the account identified by number.
    2. If an instrument is payable to:
      1. A trust, an estate, or a person described as trustee or representative of a trust or estate, the instrument is payable to the trustee, the representative, or a successor of either, whether or not the beneficiary or estate is also named;
      2. A person described as agent or similar representative of a named or identified person, the instrument is payable to the represented person, the representative, or a successor of the representative;
      3. A fund or organization that is not a legal entity, the instrument is payable to a representative of the members of the fund or organization; or
      4. An office or to a person described as holding an office, the instrument is payable to the named person, the incumbent of the office, or a successor to the incumbent.
  4. If an instrument is payable to two (2) or more persons alternatively, it is payable to any of them and may be negotiated, discharged, or enforced by any or all of them in possession of the instrument. If an instrument is payable to two (2) or more persons not alternatively, it is payable to all of them and may be negotiated, discharged, or enforced only by all of them. If an instrument payable to two (2) or more persons is ambiguous as to whether it is payable to the persons alternatively, the instrument is payable to the persons alternatively.

History. Enact. Acts 1958, ch. 77, § 3-110, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 10, effective January 1, 1997.

Official Comment

  1. Section 3-110 states rules for determining the identity of the person to whom an instrument is initially payable if the instrument is payable to an identified person. This issue usually arises in a dispute over the validity of an indorsement in the name of the payee. Subsection (a) states the general rule that the person to whom an instrument is payable is determined by the intent of “the person, whether or not authorized, signing as, or in the name or behalf of, the issuer of the instrument.” “Issuer” means the maker or drawer of the instrument. Section 3-105(c). If X signs a check as drawer of a check on X’s account, the intent of X controls. If X, as President of Corporation, signs a check as President in behalf of Corporation as drawer, the intent of X controls. If X forges Y’s signature as drawer of a check, the intent of X also controls. Under Section 3-103(a)(3), Y is referred to as the drawer of the check because the signing of Y’s name identifies Y as the drawer. But since Y’s signature was forged Y has no liability as drawer (Section 3-403(a)) unless some other provision of Article 3 or Article 4 makes Y liable. Since X, even though unauthorized, signed in the name of Y as issuer, the intent of X determines to whom the check is payable.

    In the case of a check payable to “John Smith,” since there are many people in the world named “John Smith” it is not possible to identify the payee of the check unless there is some further identification or the intention of the drawer is determined. Name alone is sufficient under subsection (a), but the intention of the drawer determines which John Smith is the person to whom the check is payable. The same issue is presented in cases of misdescriptions of the payee. The drawer intends to pay a person known to the drawer as John Smith. In fact that person’s name is James Smith or John Jones or some other entirely different name. If the check identifies the payee as John Smith, it is nevertheless payable to the person intended by the drawer. That person may indorse the check in either the name John Smith or the person’s correct name or in both names. Section 3-204(d). The intent of the drawer is also controlling in fictitious payee cases. Section 3-404(b). The last sentence of subsection (a) refers to the rare cases in which the signature of an organization requires more than one signature and the persons signing on behalf of the organization do not all intend the same person as payee. Any person intended by a signer for the organization is the payee and an indorsement by that person is an effective indorsement.

    Subsection (b) recognizes the fact that in a large number of cases there is no human signer of an instrument because the instrument, usually a check, is produced by automated means such as a check-writing machine. In that case, the relevant intent is that of the person who supplied the name of the payee. In most cases that person is an employee of the drawer, but in some cases the person could be an outsider who is committing a fraud by introducing names of payees of checks into the system that produces the checks. A check-writing machine is likely to be operated by means of a computer in which is stored information as to name and address of the payee and the amount of the check. Access to the computer may allow production of fraudulent checks without knowledge of the organization that is the issuer of the check. Section 3-404(b) is also concerned with this issue. See Case #4 in Comment 2 to Section 3-404.

  2. Subsection (c) allows the payee to be identified in any way including the various ways stated. Subsection (c)(1) relates to the instruments payable to bank accounts. In some cases the account might be identified by name and number, and the name and number might refer to different persons. For example, a check is payable to “X Corporation Account No. 12345 in Bank of Podunk.” Under the last sentence of subsection (c)(1), this check is payable to X Corporation and can be negotiated by X Corporation even if Account No. 12345 is some other person’s account or the check is not deposited in that account. In other cases the payee is identified by an account number and the name of the owner of the account is not stated. For example, Debtor pays Creditor by issuing a check drawn on Payor Bank. The check is payable to a bank account owned by Creditor but identified only by number. Under the first sentence of subsection (c)(1) the check is payable to the Creditor and, under Section 1-201(20), Creditor becomes the holder when the check is delivered. Under Section 3-201(b), further negotiation of the check requires the indorsement of Creditor. But under Section 4-205(a), if the check is taken by a depositary bank for collection, the bank may become a holder without the indorsement. Under Section 3-102(b), provisions of Article 4 prevail over those of Article 3. The depositary bank warrants that the amount of the check was credited to the payee’s account.
  3. Subsection (c)(2) replaces former Section 3-117 and subsections (1)(e), (f), and (g) of former Section 3-110. This provision merely determines who can deal with an instrument as a holder. It does not determine ownership of the instrument or its proceeds. Subsection (c)(2)(i) covers trusts and estates. If the instrument is payable to the trust or estate or to the trustee or representative of the trust or estate, the instrument is payable to the trustee or representative or any successor. Under subsection (c)(2)(ii), if the instrument states that it is payable to Doe, President of X Corporation, either Doe or X Corporation can be holder of the instrument. Subsection (c)(2)(iii) concerns informal organizations that are not legal entities such as unincorporated clubs and the like. Any representative of the members of the organization can act as holder. Subsection (c)(2)(iv) applies principally to instruments payable to public offices such as a check payable to County Tax Collector.
  4. Subsection (d) replaces former Section 3-116. An instrument payable to X or Y is governed by the first sentence of subsection (d). An instrument payable to X and Y is governed by the second sentence of subsection (d). If an instrument is payable to X or Y, either is the payee and if either is in possession that person is the holder and the person entitled to enforce the instrument. Section 3-301. If an instrument is payable to X and Y, neither X nor Y acting alone is the person to whom the instrument is payable. Neither person, acting alone, can be the holder of the instrument. The instrument is “payable to an identified person.” The “identified person” is X and Y acting jointly. Section 3-109(b) and Section 1-102(5)(a). Thus, under Section 1-201(20) X or Y, acting alone, cannot be the holder or the person entitled to enforce or negotiate the instrument because neither, acting alone, is the identified person stated in the instrument.

    The third sentence of subsection (d) is directed to cases in which it is not clear whether an instrument is payable to multiple payees alternatively. In the case of ambiguity persons dealing with the instrument should be able to rely on the indorsement of a single payee. For example, an instrument payable to X and/or Y is treated like an instrument payable to X or Y.

NOTES TO DECISIONS

1.Copayee Indorsement.

Bank’s negotiation of an insurer’s reimbursement check that named a mobile home owner and a holder of a security interest in the mobile home as non-alternative co-payees, despite receiving the check with only the owner’s indorsement, was a violation of KRS 355.3-110 (4) and entitled the security interest holder to summary judgment on an action sounding in conversion under KRS 355.3-420 ; since the action was for statutory conversion and was not a statutory warranty action under KRS 355.4-207 (1), that statute’s 30-day notice requirement was inapplicable. Since the action was filed within 18 months of when the action accrued, the security interest holder satisfied the three (3) year statute of limitations for conversion actions under KRS 355.3-118 (7). Tri-County Nat'l Bank v. Greenpoint Credit, LLC, 190 S.W.3d 360, 2006 Ky. App. LEXIS 104 (Ky. Ct. App. 2006).

355.3-111. Place of payment.

Except as otherwise provided for items in Article 4 of this chapter, an instrument is payable at the place of payment stated in the instrument. If no place of payment is stated, an instrument is payable at the address of the drawee or maker stated in the instrument. If no address is stated, the place of payment is the place of business of the drawee or maker. If a drawee or maker has more than one (1) place of business, the place of payment is any place of business of the drawee or maker chosen by the person entitled to enforce the instrument. If the drawee or maker has no place of business, the place of payment is the residence of the drawee or maker.

History. Enact. Acts 1958, ch. 77, § 3-111, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 11, effective January 1, 1997.

Official Comment

If an instrument is payable at a bank in the United States, Section 3-501(b)(1) states that presentment must be made at the place of payment, i.e. the bank. The place of presentment of a check is governed by Regulation CC § 229.36.

355.3-112. Interest.

  1. Unless otherwise provided in the instrument:
    1. An instrument is not payable with interest; and
    2. Interest on an interest-bearing instrument is payable from the date of the instrument.
  2. Interest may be stated in an instrument as a fixed or variable amount of money or it may be expressed as a fixed or variable rate or rates. The amount or rate of interest may be stated or described in the instrument in any manner and may require reference to information not contained in the instrument. If an instrument provides for interest, but the amount of interest payable cannot be ascertained from the description, interest is payable at the judgment rate in effect at the place of payment of the instrument and at the time interest first accrues.

History. Enact. Acts 1958, ch. 77, § 3-112, effective July 1, 1960; 1964, ch. 130, § 3, effective July 1, 1964; repealed and reenact., Acts 1996, ch. 130, § 12, effective January 1, 1997.

Official Comment

  1. Under Section 3-104(a) the requirement of a “fixed amount” applies only to principal. The amount of interest payable is that described in the instrument. If the description of interest in the instrument does not allow for the amount of interest to be ascertained, interest is payable at the judgment rate. Hence, if an instrument calls for interest, the amount of interest will always be determinable. If a variable rate of interest is prescribed, the amount of interest is ascertainable by reference to the formula or index described or referred to in the instrument. The last sentence of subsection (b) replaces subsection (d) of former Section 3-118.
  2. The purpose of subsection (b) is to clarify the meaning of “interest” in the introductory clause of Section 3-104(a). It is not intended to validate a provision for interest in an instrument if that provision violates other law.

355.3-113. Date of instrument.

  1. An instrument may be antedated or postdated. The date stated determines the time of payment if the instrument is payable at a fixed period after date. Except as provided in KRS 355.4-401 (3), an instrument payable on demand is not payable before the date of the instrument.
  2. If an instrument is undated, its date is the date of its issue or, in the case of an unissued instrument, the date it first comes into possession of a holder.

History. Enact. Acts 1958, ch. 77, § 3-113, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 13, effective January 1, 1997.

Official Comment

This section replaces former Section 3-114. Subsections (1) and (3) of former Section 3-114 are deleted as unnecessary. Section 3-113(a) is based in part on subsection (2) of former Section 3-114. The rule that a demand instrument is not payable before the date of the instrument is subject to Section 4-401(c) which allows the payor bank to pay a postdated check unless the drawer has notified the bank of the postdating pursuant to a procedure prescribed in that subsection. With respect to an undated instrument, the date is the date of issue.

NOTES TO DECISIONS

1.Postdating.

Giving postdated check as payment of insurance premium in violation of terms of policy was not illegal or fraudulent purpose. (decided under prior law) Republic Life & Acci. Ins. Co. v. Hatcher, 244 Ky. 574 , 51 S.W.2d 922, 1932 Ky. LEXIS 482 ( Ky. 1932 ).

2.Presumption Payable at Place Where Dated.

A note was presumed to be payable at the place where it was dated. (decided under prior law) Hughes v. R. O. Campbell Coal Co., 201 Ky. 839 , 258 S.W. 671, 1924 Ky. LEXIS 645 ( Ky. 1924 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint of Payee Against Drawer of Check, Form 191.11.

355.3-114. Contradictory terms of instrument.

If an instrument contains contradictory terms, typewritten terms prevail over printed terms, handwritten terms prevail over both, and words prevail over numbers.

History. Enact. Acts 1958, ch. 77, § 3-114, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 14, effective January 1, 1997.

Official Comment

Section 3-114 replaces subsections (b) and (c) of former Section 3-118.

355.3-115. Incomplete instrument.

  1. “Incomplete instrument” means a signed writing, whether or not issued by the signer, the contents of which show at the time of signing that it is incomplete but that the signer intended it to be completed by the addition of words or numbers.
  2. Subject to subsection (3) of this section, if an incomplete instrument is an instrument under KRS 355.3-104 , it may be enforced according to its terms if it is not completed, or according to its terms as augmented by completion. If an incomplete instrument is not an instrument under KRS 355.3-104 , but, after completion, the requirements of KRS 355.3-104, are met, the instrument may be enforced according to its terms as augmented by completion.
  3. If words or numbers are added to an incomplete instrument without authority of the signer, there is an alteration of the incomplete instrument under KRS 355.3-407 .
  4. The burden of establishing that words or numbers were added to an incomplete instrument without authority of the signer is on the person asserting the lack of authority.

History. Enact. Acts 1958, ch. 77, § 3-115, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 15, effective January 1, 1997.

Official Comment

  1. This section generally carries forward the rules set out in former Section 3-115. The term “incomplete instrument” applies both to an “instrument,” i.e. a writing meeting all the requirements of Section 3-104, and to a writing intended to be an instrument that is signed but lacks some element of an instrument. The test in both cases is whether the contents show that it is incomplete and that the signer intended that additional words or numbers be added.
  2. If an incomplete instrument meets the requirements of Section 3-104 and is not completed it may be enforced in accordance with its terms. Suppose, in the following two cases, that a note delivered to the payee is incomplete solely because a space on the pre-printed note form for the due date is not filled in:

    Case #1. If the incomplete instrument is never completed, the note is payable on demand. Section 3-108(a)(ii). However, if the payee and the maker agreed to a due date, the maker may have a defense under Section 3-117 if the demand for payment is made before the due date agreed to by the parties.

    Case #2. If the payee completes the note by filling in the due date agreed to by the parties, the note is payable on the due date stated. However, if the due date filled in was not the date agreed to by the parties there is an alteration of the note. Section 3-407 governs the case.

    Suppose Debtor pays Creditor by giving Creditor a check on which the space for the name of the payee is left blank. The check is an instrument but it is incomplete. The check is enforceable in its incomplete form and it is payable to the bearer because it does not state a payee. Section 3-109(a)(2). Thus, Creditor is a holder of the check. Normally in this kind of case Creditor would simply fill in the space with Creditor’s name. When that occurs the check becomes payable to the Creditor.

  3. In some cases the incomplete instrument does not meet the requirements of Section 3-104. An example is a check with the amount not filled in. The check cannot be enforced until the amount is filled in. If the payee fills in an amount authorized by the drawer the check meets the requirements of Section 3-104 and is enforceable as completed. If the payee fills in an unauthorized amount there is an alteration of the check and Section 3-407 applies.
  4. Section 3-302(a)(1) also bears on the problem of incomplete instruments. Under that section a person cannot be a holder in due course of the instrument if it is so incomplete as to call into question its validity. Subsection (d) of Section 3-115 is based on the last clause of subsection (2) of the former Section 3-115.

NOTES TO DECISIONS

1.Authorization to Fill in Blanks.

Where surety signed a blank note form with understanding that it was to be used to borrow money for maker’s business, and note was given to payee in consideration of his paying a judgment to prevent the sale of maker’s business, there was no violation of authority granted by surety. (decided under prior law) Hermann's Ex'r v. Gregory, 131 Ky. 819 , 115 S.W. 809, 1909 Ky. LEXIS 65 ( Ky. 1909 ).

Where it was represented to surety that amount of money needed would be certain sum and, pursuant to an agreement to go surety, he signed a blank note form, filling note in for reasonably higher amount than anticipated was not a violation of authority where the money was used for the general purpose intended. (decided under prior law) White v. Shepherd, 140 Ky. 349 , 131 S.W. 17, 1910 Ky. LEXIS 248 ( Ky. 1910 ).

Where surety signed a blank note form, nothing being said to or by him about interest, addition of interest from date was a violation of authority and released him from liability. (decided under prior law) White v. Shepherd, 140 Ky. 349 , 131 S.W. 17, 1910 Ky. LEXIS 248 ( Ky. 1910 ).

Where payee produced signed blank note which bank’s cashier filled up as payee instructed, which was in violation of payee’s authority, and note was indorsed to bank, bank could recover only amount authorized by maker. (decided under prior law) Hannen v. People's State Bank, 195 Ky. 58 , 241 S.W. 355, 1922 Ky. LEXIS 275 ( Ky. 1922 ).

Where drawer signed blank check, instructing his agent to draw it payable to X, have X indorse to Y and forward to Y, agent drew it payable to Y and forwarded it to him. There was an absolute delivery of a completed instrument and drawer was liable thereon. (decided under prior law) Thomson v. Peck, 217 Ky. 766 , 290 S.W. 722, 1927 Ky. LEXIS 79 ( Ky. 1927 ).

Where maker signed blank check, instructing agent to make it payable to X, have X indorse and send check to Y, his instructions were carried out if check was made payable directly to Y. (decided under prior law) Thomson v. Peck, 217 Ky. 766 , 290 S.W. 722, 1927 Ky. LEXIS 79 ( Ky. 1927 ).

Where maker signed blank check, instructing agent to make X payee, have X indorse, and forward to Y, but agent made Y payee, agent’s act was act of principal. (decided under prior law) Thomson v. Peck, 217 Ky. 766 , 290 S.W. 722, 1927 Ky. LEXIS 79 ( Ky. 1927 ).

The legal effect of giving an incomplete promissory note to another with the authorization to fill in the blanks is the same as delivering a complete instrument. (decided under prior law) Davis v. Commonwealth, 399 S.W.2d 711, 1965 Ky. LEXIS 34 ( Ky. 1965 ), cert. denied, 385 U.S. 831, 87 S. Ct. 67, 17 L. Ed. 2d 66, 1966 U.S. LEXIS 698 (U.S. 1966).

2.— Implied.

Where maker sent forth an instrument with payee’s name blank, he impliedly authorized any holder to insert holder’s name thereon. (decided under prior law) Finley v. Rose, 189 Ky. 359 , 224 S.W. 1059, 1920 Ky. LEXIS 431 ( Ky. 1920 ).

3.Absence of “to Order” or “to Bearer.”

Absence of “to order” or “to bearer” or equivalent words rendered note nonnegotiable. (decided under prior law) Wettlaufer v. Baxter, 137 Ky. 362 , 125 S.W. 741, 1910 Ky. LEXIS 579 ( Ky. 1910 ); Eades v. Muhlenberg County Sav. Bank, 157 Ky. 416 , 163 S.W. 494, 1914 Ky. LEXIS 324 ( Ky. 1914 ); Pond Creek Coal Co. v. Riley Lester & Bros., 171 Ky. 811 , 188 S.W. 907, 1916 Ky. LEXIS 440 ( Ky. 1916 ); Haggard v. Mutual Oil & Refining Co., 204 Ky. 209 , 263 S.W. 745, 1924 Ky. LEXIS 429 ( Ky. 1924 ); Owings v. Rider, 241 Ky. 750 , 241 Ky. 756 , 45 S.W.2d 487, 1931 Ky. LEXIS 165 ( Ky. 1931 ).

4.Payee’s Name Left Blank.

An instrument on which the payee’s name was left blank was payable to bearer, and was a negotiable instrument. (decided under prior law) Finley v. Rose, 189 Ky. 359 , 224 S.W. 1059, 1920 Ky. LEXIS 431 ( Ky. 1920 ).

Where payee who held a note on which the payee’s name was blank was deceased, his administrators could fill in such payee’s name. (decided under prior law) Finley v. Rose, 189 Ky. 359 , 224 S.W. 1059, 1920 Ky. LEXIS 431 ( Ky. 1920 ).

Note which read: “1 year after date for value received, the undersigned maker(s) (Aubrey E. Davis) promise to pay to the order of: . . . . . ” was not a bearer instrument under any of the statutory examples set out in this section. This instrument is incomplete and cannot be enforced until completed. (decided under prior law) Davis v. Davis, 838 S.W.2d 415, 1992 Ky. App. LEXIS 103 (Ky. Ct. App. 1992).

5.Omission of Time for Payment.

Where payment clause in a note read “within ten _________ ,” indicating omission of apparently intended word “months,” it was nevertheless negotiable, being payable on demand. (decided under prior law) Remedial Plan, Inc. v. Ott, 199 Ky. 161 , 250 S.W. 825, 1923 Ky. LEXIS 785 ( Ky. 1923 ).

6.Place of Payment.

Where maker, using printed form, failed to fill in line indicated for place of payment, any holder was by such action impliedly authorized to complete it, even with a place beyond the state where note was made. (decided under prior law) Diamond Distilleries Co. v. Gott, 137 Ky. 585 , 126 S.W. 131, 1910 Ky. LEXIS 603 ( Ky. 1910 ).

7.No Pronoun in Promise to Pay Clause.

Where a blank note form was used by the maker, the fact that no pronoun was inserted in the “promise to pay” clause did not render the instrument nonnegotiable. (decided under prior law) Securities Inv. Co. v. Harrod Bros., 225 Ky. 12 , 7 S.W.2d 492, 1928 Ky. LEXIS 692 ( Ky. 1928 ).

8.Omission of All Words of Negotiability.

Deposit certificate containing no words of negotiability was not negotiable even though it provided for payment “on return of this certificate properly indorsed.” (decided under prior law) Fields' Adm'r v. Perry County State Bank, 214 Ky. 24 , 282 S.W. 555, 1926 Ky. LEXIS 260 ( Ky. 1926 ).

9.Reasonable Time for Completion.

Where joint makers were still alive, note was complete except for name of payee, note had not been negotiated and there was no evidence of prejudice to maker’s rights, seven years was not an unreasonable time to fill in payee’s name. (decided under prior law) Finley v. Rose, 189 Ky. 359 , 224 S.W. 1059, 1920 Ky. LEXIS 431 ( Ky. 1920 ).

10.Enforcement by Holder in Due Course.

Where, on an instrument, the payee’s name was left blank and was filled up in violation of authority by maker’s agent, an innocent purchaser from such maker was able to enforce it according to its terms. (decided under prior law) Melton v. Pensacola Bank & Trust Co., 190 F. 126, 1911 U.S. App. LEXIS 4430 (6th Cir. Ky. 1911 ).

11.Suit Before Completion.

Where in a blank note form, pronoun was omitted from the “promise to pay” clause, it was not necessary to fill in such blank before bringing suit thereon. (decided under prior law) Securities Inv. Co. v. Harrod Bros., 225 Ky. 12 , 7 S.W.2d 492, 1928 Ky. LEXIS 692 ( Ky. 1928 ).

12.Continuing Guaranty Agreement.

Where the guaranty agreement signed by the defendant guarantor did not specify a “sum certain,” since it provided only that the guarantor’s liability “shall not exceed” $50,000, was payable neither at a particular time or on demand, since it was a “continuing” guaranty, and was payable neither to order nor to bearer, the agreement did not constitute a negotiable instrument within the purview of subsection (1). (decided under prior law) Brooks v. United Kentucky Bank, 659 S.W.2d 213, 1983 Ky. App. LEXIS 392 (Ky. Ct. App. 1983).

355.3-116. Joint and several liability — Contribution.

  1. Except as otherwise provided in the instrument, two (2) or more persons who have the same liability on an instrument as makers, drawers, acceptors, indorsers who indorse as joint payees, or anomalous indorsers are jointly and severally liable in the capacity in which they sign.
  2. Except as provided in KRS 355.3-419 (6) or by agreement of the affected parties, a party having joint and several liability who pays the instrument is entitled to receive from any party having the same joint and several liability contribution in accordance with applicable law.

History. Enact. Acts 1958, ch. 77, § 3-116, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 16, effective January 1, 1997; 2006, ch. 242, § 35, effective July 12, 2006.

Official Comment

  1. Subsection (a) replaces subsection (e) of former Section 3-118. Subsection (b) states contribution rights of parties with joint and several liability by referring to applicable law. But subsection (b) is subject to Section 3-419(f). If one of the parties with joint and several liability is an accommodation party and the other is the accommodated party, Section 3-419(f) applies. Because one of the joint and several obligors may have recourse against the other joint and several obligor under subsection (b), each party that is jointly and severally liable under subsection (a) is a secondary obligor in part and a principal obligor in part as those terms are defined in Section 3-103(a). Accordingly, Section 3-605 determines the effect of a release, and extension of time, or a modification of the obligation of one of the joint and several obligors, as well as the effect of an impairment of collateral by one of those obligors.
  2. Indorsers normally do not have joint and several liability. Rather, an earlier indorser has liability to a later indorser. But indorsers can have joint and several liability in two cases. If an instrument is payable to two payees jointly, both payees must indorse. The indorsement is a joint indorsement and the indorsers have joint and several liability and subsection (b) applies. The other case is that of two or more anomalous indorsers. The term is defined in Section 3-205(d). An anomalous indorsement normally indicates that the indorser signed as an accommodation party. If more than one accommodation party indorses a note as an accommodation to the maker, the indorsers have joint and several liability and subsection (b) applies.

355.3-117. Other agreements affecting instrument.

Subject to applicable law regarding exclusion of proof of contemporaneous or previous agreements, the obligation of a party to an instrument to pay the instrument may be modified, supplemented, or nullified by a separate agreement of the obligor and a person entitled to enforce the instrument, if the instrument is issued or the obligation is incurred in reliance on the agreement or as part of the same transaction giving rise to the agreement. To the extent an obligation is modified, supplemented, or nullified by an agreement under this section, the agreement is a defense to the obligation.

History. Enact. Acts 1958, ch. 77, § 3-117, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 17, effective January 1, 1997.

Official Comment

  1. The separate agreement might be a security agreement or mortgage or it might be an agreement that contradicts the terms of the instrument. For example, a person may be induced to sign an instrument under an agreement that the signer will not be liable on the instrument unless certain conditions are met. Suppose X requested credit from Creditor who is willing to give the credit only if an acceptable accommodation party will sign the note of X as co-maker. Y agrees to sign as co-maker on the condition that the Creditor also obtain the signature of Z as co-maker. Creditor agrees and Y signs as co-maker with X. Creditor fails to obtain the signature of Z on the note. Under Sections 3-412 and 3-419(b), Y is obliged to pay the note, but Section 3-117 applies. In this case, the agreement modifies the terms of the note by stating a condition to the obligation of Y to pay the note. This case is essentially similar to a case in which the maker of a note is induced to sign the note by fraud of the holder. Although the agreement that Y not be liable on the note unless Z also signs may not have been fraudulently made, a subsequent attempt by Creditor to require Y to pay the note in violation of the agreement is a bad faith act. Section 3-117, in treating the agreement as a defense, allows Y to assert the agreement against the Creditor, but the defense would not be good against a subsequent holder in due course of the note that took it without notice of the agreement. If there cannot be a holder in due course because of Section 3-106(d), a subsequent holder that took the note in good faith, for value and without knowledge of the agreement would not be able to enforce the liability of Y. This result is consistent with the risk that a holder not in due course takes with respect to fraud in inducing issuance of an instrument.
  2. The effect of merger or integration clauses to the effect that a writing is intended to be the complete and exclusive statement of the terms of the agreement or that the agreement is not subject to conditions is left to the supplementary law of the jurisdiction pursuant to Section 1-103. Thus, in the case discussed in Comment 1, whether Y is permitted to prove the condition to Y’s obligation to pay the note is determined by that law. Moreover, nothing in this section is intended to validate an agreement which is fraudulent or void as against public policy, as in the case of a note given to deceive a bank examiner.

355.3-118. Statute of limitations.

  1. Except as provided in subsection (5) of this section, an action to enforce the obligation of a party to pay a note payable at a definite time must be commenced within six (6) years after the due date or dates stated in the note or, if a due date is accelerated, within six (6) years after the accelerated due date.
  2. Except as provided in subsection (4) or (5) of this section, if demand for payment is made to the maker of a note payable on demand, an action to enforce the obligation of a party to pay the note must be commenced within six (6) years after the demand. If no demand for payment is made to the maker, an action to enforce the note is barred if neither principal nor interest on the note has been paid for a continuous period of ten (10) years.
  3. Except as provided in subsection (4) of this section, an action to enforce the obligation of a party to an unaccepted draft to pay the draft must be commenced within three (3) years after dishonor of the draft or ten (10) years after the date of the draft, whichever period expires first.
  4. An action to enforce the obligation of the acceptor of a certified check or the issuer of a teller’s check, cashier’s check, or traveler’s check must be commenced within three (3) years after demand for payment is made to the acceptor or issuer, as the case may be.
  5. An action to enforce the obligation of a party to a certificate of deposit to pay the instrument must be commenced within six (6) years after demand for payment is made to the maker, but if the instrument states a due date and the maker is not required to pay before that date, the six (6) year period begins when a demand for payment is in effect and the due date has passed.
  6. An action to enforce the obligation of a party to pay an accepted draft, other than a certified check, must be commenced:
    1. Within six (6) years after the due date or dates stated in the draft or acceptance if the obligation of the acceptor is payable at a definite time; or
    2. Within six (6) years after the date of the acceptance if the obligation of the acceptor is payable on demand.
  7. Unless governed by other law regarding claims for indemnity or contribution, an action:
    1. For conversion of an instrument, for money had and received, or like action based on conversion;
    2. For breach of warranty; or
    3. To enforce an obligation, duty, or right arising under this article and not governed by this section

must be commenced within three (3) years after the claim for relief accrues.

History. Enact. Acts 1958, ch. 77, § 3-118, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 18, effective January 1, 1997.

Official Comment

  1. Section 3-118 differs from former Section 3-122, which states when a cause of action accrues on an instrument. Section 3-118 does not define when a cause of action accrues. Accrual of a cause of action is stated in other sections of Article 3 such as those that state the various obligations of parties to an instrument. The only purpose of Section 3-118 is to define the time within which an action to enforce an obligation, duty, or right arising under Article 3 must be commenced. Section 3-118 does not attempt to state all rules with respect to a statute of limitations. For example, the circumstances under which the running of a limitations period may be tolled is left to other law pursuant to Section 1-103.
  2. The first six subsections apply to actions to enforce an obligation of any party to an instrument to pay the instrument. This changes present law in that indorsers who may become liable on an instrument after issue are subject to a period of limitations running from the same date as that of the maker or drawer. Subsections (a) and (b) apply to notes. If the note is payable at a definite time, a six-year limitations period starts at the due date of the note, subject to prior acceleration. If the note is payable on demand, there are two limitations periods. Although a note payable on demand could theoretically be called a day after it was issued, the normal expectation of the parties is that the note will remain outstanding until there is some reason to call it. If the law provides that the limitations period does not start until demand is made, the cause of action to enforce it may never be barred. On the other hand, if the limitations period starts when demand for payment may be made, i.e. at any time after the note was issued, the payee of a note on which interest or portions of principal are being paid could lose the right to enforce the note even though it was treated as a continuing obligation by the parties. Some demand notes are not enforced because the payee has forgiven the debt. This is particularly true in family and other noncommercial transactions. A demand note found after the death of the payee may be presented for payment many years after it was issued. The maker may be a relative and it may be difficult to determine whether the note represents a real or forgiven debt. Subsection (b) is designed to bar notes that no longer represent a claim to payment and to require reasonably prompt action to enforce notes on which there is default. If a demand for payment is made to the maker, a six-year limitations period starts to run when demand is made. The second sentence of subsection (b) bars an action to enforce a demand note if no demand has been made on the note and no payment of interest or principal has been made for a continuous period of 10 years. This covers the case of a note that does not bear interest or a case in which interest due on the note has not been paid. This kind of case is likely to be a family transaction in which a failure to demand payment may indicate that the holder did not intend to enforce the obligation but neglected to destroy the note. A limitations period that bars stale claims in this kind of case is appropriate if the period is relatively long.
  3. Subsection (c) applies primarily to personal uncertified checks. Checks are payment instruments rather than credit instruments. The limitations period expires three years after the date of dishonor or 10 years after the date of the check, whichever is earlier. Teller’s checks, cashier’s checks, certified checks, and traveler’s checks are treated differently under subsection (d) because they are commonly treated as cash equivalents. A great delay in presenting a cashier’s check for payment in most cases will occur because the check was mislaid during that period. The person to whom traveler’s checks are issued may hold them indefinitely as a safe form of cash for use in an emergency. There is no compelling reason for barring the claim of the owner of the cashier’s check or traveler’s check. Under subsection (d) the claim is never barred because the three-year limitations period does not start to run until demand for payment is made. The limitations period in subsection (d) in effect applies only to cases in which there is a dispute about the legitimacy of the claim of the person demanding payment.
  4. Subsection (e) covers certificates of deposit. The limitations period of six years doesn’t start to run until the depositor demands payment. Most certificates of deposit are payable on demand even if they state a due date. The effect of a demand for payment before maturity is usually that the bank will pay, but that a penalty will be assessed against the depositor in the form of a reduction in the amount of interest that is paid. Subsection (e) also provides for cases in which the bank has no obligation to pay until the due date. In that case the limitations period doesn’t start to run until there is a demand for payment in effect and the due date has passed.
  5. Subsection (f) applies to accepted drafts other than certified checks. When a draft is accepted it is in effect turned into a note of the acceptor. In almost all cases the acceptor will agree to pay at a definite time. Subsection (f) states that in that case the six-year limitations period starts to run on the due date. In the rare case in which the obligation of the acceptor is payable on demand, the six-year limitations period starts to run at the date of the acceptance.
  6. Subsection (g) covers warranty and conversion cases and other actions to enforce obligations or rights arising under Article 3. A three-year period is stated and subsection (g) follows general law in stating that the period runs from the time the cause of action accrues. Since the traditional term “cause of action” may have been replaced in some states by “claim for relief” or some equivalent term, the words “cause of action” have been bracketed to indicate that the words may be replaced by an appropriate substitute to conform to local practice.
  7. One of the most significant differences between this Article and the Convention on International Bills of Exchange and International Promissory Notes is that the statute of limitations under the Convention is only four years, rather than the six years provided by this section. See Convention Article 84.

NOTES TO DECISIONS

1.In General.

Bank’s negotiation of an insurer’s reimbursement check that named a mobile home owner and a holder of a security interest in the mobile home as non-alternative co-payees, despite receiving the check with only the owner’s indorsement, was a violation of KRS 355.3-110 (4) and entitled the security interest holder to summary judgment on an action sounding in conversion under KRS 355.3-420 ; since the action was filed within 18 months of when the action accrued, the security interest holder satisfied the three (3) year statute of limitations for conversion actions under KRS 355.3-118 (7). Tri-County Nat'l Bank v. Greenpoint Credit, LLC, 190 S.W.3d 360, 2006 Ky. App. LEXIS 104 (Ky. Ct. App. 2006).

Bank’s claim against a borrower following a default on a loan did not accrue until the date of maturity on the note at issue. Because the note at issue was a negotiable instrument, the statutory six-year limitations period governed and rendered the bank’s action against the borrower untimely. Stamper v. Cmty. Fin. Servs., 2018 Ky. App. LEXIS 175 (Ky. Ct. App. June 1, 2018), aff'd, 586 S.W.3d 737, 2019 Ky. LEXIS 479 ( Ky. 2019 ).

355.3-119. Notice of right to defend action.

In an action for breach of an obligation for which a third person is answerable over pursuant to this article or Article 4 of this chapter, the defendant may give the third person notice of the litigation in a record, and the person notified may then give similar notice to any other person who is answerable over. If the notice states:

  1. That the person notified may come in and defend; and
  2. That failure to do so will bind the person notified in an action later brought by the person giving the notice as to any determination of fact common to the two (2) litigations,

the person notified is so bound unless after seasonable receipt of the notice the person notified does come in and defend.

History. Enact. Acts 1958, ch. 77, § 3-119, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 19, effective January 1, 1997; 2006, ch. 242, § 36, effective July 12, 2006.

Official Comment

This section is a restatement of former section 3-803.

355.3-120. Instruments “payable through” bank. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 3-120, effective July 1, 1960) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.3-121. Instruments payable at bank. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 3-121, effective July 1, 1960) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.3-122. Accrual of cause of action. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 3-122; 1964, ch. 130, § 4) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

Part 2. Negotiation, Transfer, and Indorsement

355.3-201. Negotiation.

  1. “Negotiation” means a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder.
  2. Except for negotiation by a remitter, if an instrument is payable to an identified person, negotiation requires transfer of possession of the instrument and its indorsement by the holder. If an instrument is payable to bearer, it may be negotiated by transfer of possession alone.

History. Enact. Acts 1958, ch. 77, § 3-201, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 20, effective January 1, 1997.

Official Comment

  1. Subsections (a) and (b) are based in part on subsection (1) of former Section 3-202. A person can become holder of an instrument when the instrument is issued to that person, or the status of holder can arise as the result of an event that occurs after issuance. “Negotiation” is the term used in Article 3 to describe this post-issuance event. Normally, negotiation occurs as the result of a voluntary transfer of possession of an instrument by a holder to another person who becomes the holder as a result of the transfer. Negotiation always requires a change in possession of the instrument because nobody can be a holder without possessing the instrument, either directly or through an agent. But in some cases the transfer of possession is involuntary and in some cases the person transferring possession is not a holder. In defining “negotiation” former Section 3-202(1) used the word “transfer,” an undefined term, and “delivery,” defined in Section 1-201(14) to mean voluntary change of possession. Instead, subsections (a) and (b) use the term “transfer of possession” and, subsection (a) states that negotiation can occur by an involuntary transfer of possession. For example, if an instrument is payable to bearer and it is stolen by Thief or is found by Finder, Thief or Finder becomes the holder of the instrument when possession is obtained. In this case there is an involuntary transfer of possession that results in negotiation to Thief or Finder.
  2. In most cases negotiation occurs by a transfer of possession by a holder or a remitter. Remitter transactions usually involve a cashier’s or teller’s check. For example, Buyer buys goods from the Seller and pays for them with a cashier’s check of Bank that Buyer buys from Bank. The check is issued by Bank when it is delivered to Buyer, regardless of whether the check is payable to Buyer or to Seller. Section 3-105(a). If the check is payable to Buyer, negotiation to Seller is done by delivery of the check to Seller after it is indorsed by Buyer. It is more common, however, that the check when issued will be payable to Seller. In that case Buyer is referred to as the “remitter.” Section 3-103(a)(15). The remitter, although not a party to the check, is the owner of the check until ownership is transferred to Seller by delivery. This transfer is a negotiation because Seller becomes the holder of the check when Seller obtains possession. In some cases Seller may have acted fraudulently in obtaining possession of the check. In those cases Buyer may be entitled to rescind the transfer to Seller because of the fraud and assert a claim of ownership to the check under Section 3-306 against Seller or a subsequent transferee of the check. Section 3-202(b) provides for rescission of negotiation, and that provision applies to rescission by a remitter as well as by a holder.
  3. Other sections of Article 3 may modify the rule stated in the first sentence of subsection (b). See for example, Sections 3-404, 3-405, and 3-406.

NOTES TO DECISIONS

1.Negotiation.

Transfer of unindorsed order instrument was not negotiation. Foster's Adm'r v. Metcalfe, 144 Ky. 385 , 138 S.W. 314, 1911 Ky. LEXIS 633 ( Ky. 1911 ).

Delivery to payee was not a negotiation. (decided under prior law) Southern Nat'l Life Realty Corp. v. People's Bank of Bardstown, 178 Ky. 80 , 198 S.W. 543, 1917 Ky. LEXIS 685 ( Ky. 1917 ), modified, 179 Ky. 113 , 200 S.W. 313, 1918 Ky. LEXIS 172 ( Ky. 1918 ); Fidelity & Columbia Trust Co. v. Nordeman, 266 Ky. 106 , 98 S.W.2d 47, 1936 Ky. LEXIS 601 ( Ky. 1936 ).

“Issue” was the first delivery of an instrument to a holder, as distinguished from negotiation. (decided under prior law) Southern Nat'l Life Realty Corp. v. People's Bank of Bardstown, 178 Ky. 80 , 198 S.W. 543, 1917 Ky. LEXIS 685 ( Ky. 1917 ), modified, 179 Ky. 113 , 200 S.W. 313, 1918 Ky. LEXIS 172 ( Ky. 1918 ).

Where X took note as holder in due course on purchase price of house, and later agreed payments, which had been made, were to be retained as rent and sale called off, there was no new negotiation. (decided under prior law) Spicer v. Reynolds, 226 Ky. 820 , 11 S.W.2d 948, 1928 Ky. LEXIS 178 ( Ky. 1928 ).

Indorsement without delivery was not a negotiation. (decided under prior law) Commerce Union Bank v. Seese, 237 Ky. 384 , 35 S.W.2d 544, 1931 Ky. LEXIS 610 ( Ky. 1931 ).

Where a nondrawee bank received and cashed a forged check, it was a subsequent holder and its indorsement and mailing of the check for collection was an act of negotiation making it liable to the drawee bank for the amount the drawee bank paid the correspondent bank prior to discovery of the forgery. (decided under prior law) Louisa Nat'l Bank v. Kentucky Nat'l Bank, 239 Ky. 302 , 39 S.W.2d 497, 1931 Ky. LEXIS 776 ( Ky. 1931 ).

A new corporation was organized for the sole purpose of taking and litigating the assets of the old corporation, there being no change in officers or stockholders and no new money invested. Where, pursuant thereto, notes were transferred to the new corporation, such transfer was not a negotiation. (decided under prior law) Coral Gables, Inc. v. Barnes, 247 Ky. 292 , 57 S.W.2d 18, 1933 Ky. LEXIS 396 ( Ky. 1933 ).

Where buyer entered into agreements with two (2) sellers and gave sellers two (2) promissory notes which were subsequently transferred to third party, one (1) with indorsement and one (1) without indorsement, and said notes were subsequently transferred to bank, such transferee was a holder without indorsement throughout the entire time the notes were in its possession and the notes were payable to order and as such could only be negotiated by indorsement; thus transferee had the right to indorsement when it assigned its rights to bank and such right necessarily passed to bank; however without the indorsement, the requirement of prior negotiation was absent and bank was a mere transferee and not a holder in due course and as a transferee, the bank was subject to buyer’s defenses and claims regarding the notes. (decided under prior law) J.P. Morgan Delaware v. Onyx Arabians II, Ltd., 825 F. Supp. 146, 1993 U.S. Dist. LEXIS 8694 (W.D. Ky. 1993 ).

2.Interest Coupons.

Where interest coupons were in proper form, they were negotiated independent of the bond from which they had been detached. (decided under prior law) Mt. Sterling Water, Light & Ice Co. v. First Nat'l Bank, 147 Ky. 376 , 144 S.W. 370, 1912 Ky. LEXIS 268 ( Ky. 1912 ).

3.Delivery.

Where indorser instrument was placed in envelope bearing indorsee’s name but kept in indorser’s possession, there was no delivery. (decided under prior law) Hughes v. West, 217 Ky. 40 , 288 S.W. 1011, 1926 Ky. LEXIS 4 ( Ky. 1926 ).

Delivery was necessary part of negotiation of notes payable to order. (decided under prior law) Tandy v. Wolfe, 270 Ky. 556 , 110 S.W.2d 277, 1937 Ky. LEXIS 117 ( Ky. 1937 ).

4.Transfer Without Indorsement.

A negotiable note payable to maker and delivered without indorsement created no liability against maker to transferee, since until indorsement it was only a promise to pay himself the amount of the note but by indorsement he would transfer that promise to pay to the transferee with the right of the transferee to so indicate in writing above the name of the indorser. (decided under prior law) Wilson v. Hillman, 306 Ky. 508 , 208 S.W.2d 493, 1948 Ky. LEXIS 592 ( Ky. 1948 ).

Bank was not liable to prisoners for conversion because it did not make payment with respect to an instrument for a person not entitled to enforce the instrument; a county jail became a nonholder in possession of the instrument and had the rights of a holder when it lawfully confiscated prisoners' checks, and thus, the jail was entitled to enforce the confiscated checks. Cole v. Warren Cnty., 495 S.W.3d 712, 2015 Ky. App. LEXIS 157 (Ky. Ct. App. 2015).

5.Signature Without Designating Capacity.

Where signatures were placed on the back of a note before delivery to a bank without words indicating any intention to be bound in any other capacity than as indorsers and no notice of dishonor of the note was given them, they were discharged. (decided under prior law) First Nat'l Bank v. Bickel, 143 Ky. 754 , 137 S.W. 790, 1911 Ky. LEXIS 529 ( Ky. 1911 ).

Where a resolution attached to a note simply recited that the board of directors of a corporation would “sign the note for security of the money” without in any manner indicating whether they would sign the note as makers, drawers, acceptors, sureties or indorsers, the signatures on the back were treated as indorsements. (decided under prior law) First Nat'l Bank v. Bickel, 154 Ky. 11 , 156 S.W. 856, 1913 Ky. LEXIS 2 ( Ky. 1913 ).

6.Surety’s Signature on Back.

Surety could enforce mortgage on ten acres of strawberries given him to sign note as surety, though instead of writing his name on face of note containing a waiver of notice of dishonor clause, he wrote it on the back of the note, and maker took it to the bank and cashed it and maker failed to pay the note at maturity, and surety paid the note and bank assigned the note to surety, as there was no substantial difference between surety’s obligation and maker’s rights were not prejudiced. (decided under prior law) Roberts v. Byars, 210 Ky. 788 , 276 S.W. 839, 1925 Ky. LEXIS 779 ( Ky. 1925 ).

7.Authority to Sign for Indorser.

Requirement that agent’s authority be in writing applied to signature of indorser. (decided under prior law) Commercial Bank of Grayson v. Arden & Fraley, 177 Ky. 520 , 177 Ky. 620 , 197 S.W. 951, 1917 Ky. LEXIS 615 ( Ky. 1917 ) ( Ky. 1917 ); Inter-Southern Life Ins. Co. v. First Nat'l Bank, 178 Ky. 95 , 198 S.W. 563, 1917 Ky. LEXIS 692 (Ky. 1917); Kentucky Title Sav. Bank & Trust Co. v. Dunavan, 205 Ky. 801 , 266 S.W. 667, 1924 Ky. LEXIS 245 ( Ky. 1924 ).

Power of attorney under which trade acceptances were indorsed was sufficient when read in connection with letter of introduction. (decided under prior law) Melton Electric Co. v. Central Credit Corp., 234 Ky. 469 , 28 S.W.2d 507, 1930 Ky. LEXIS 213 ( Ky. 1930 ).

Where note payable to bank was indorsed by “W. H. McCoy, President,” such indorsement was not sufficient to establish title in plaintiff bank, which had possession of note, in absence of proof that McCoy was president of payee bank and had authority to assign note. (decided under prior law) Cumberland Bank & Trust Co. v. Buchanan, 291 Ky. 300 , 164 S.W.2d 473, 1942 Ky. LEXIS 228 ( Ky. 1942 ).

8.Separate Instrument as Indorsement.

A separate paper signed by corporate officers agreeing to be jointly bound to bank on all of corporation’s obligations in consideration for loans to corporation was a separate agreement on which officers were bound and did not make the officers liable merely as indorsers on the notes. (decided under prior law) First Nat'l Bank v. Doherty, 156 Ky. 386 , 161 S.W. 211, 1913 Ky. LEXIS 444 ( Ky. 1913 ).

9.Transfer of Part of Instrument.

An attempt to transfer only a part of the unpaid amount of a negotiable note destroyed its negotiability, and the transferee was not a holder in due course. (decided under prior law) White v. Sharp, 275 Ky. 671 , 122 S.W.2d 474, 1938 Ky. LEXIS 473 ( Ky. 1938 ).

10.Return to Payee After Indorsement.

Where holder of a negotiable instrument transferred it by indorsement back to payee who assigned the note, the assignee was a holder in due course from payee and the holder who indorsed it back to payee was not liable on the note. (decided under prior law) Denniston's Adm'r v. Jackson, 304 Ky. 261 , 200 S.W.2d 477, 1947 Ky. LEXIS 625 ( Ky. 1947 ).

11.Liability of Indorser.

Liability of indorser was not affected by failure of corporation to become liable as drawer because act of corporation in becoming drawer was ultra vires. (decided under prior law) M. V. Monarch Co. v. Farmers' & Drovers' Bank, 105 Ky. 430 , 49 S.W. 317, 20 Ky. L. Rptr. 1351 , 1899 Ky. LEXIS 235 ( Ky. 1899 ).

12.Notes Given by Infants.

Promissory note given by infant was voidable at the election of the infant even against holders in due course and even though it was for necessities. (decided under prior law) Universal Credit Co. v. Hibbard, 273 Ky. 597 , 117 S.W.2d 583, 1938 Ky. LEXIS 686 ( Ky. 1938 ).

13.Question of Proper Indorsement.

Signature of payee on back of bill below writing that he had delivered ties to drawee’s agent and would not claim wharfage or bankage on them was complete in itself and was not a contract of indorsement. (decided under prior law) Gray Tie & Lumber Co. v. Farmers' Bank, 109 Ky. 694 , 60 S.W. 537, 22 Ky. L. Rptr. 1333 , 1901 Ky. LEXIS 32 ( Ky. 1901 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint by Assignee Against Payor, Form 191.03.

355.3-202. Negotiation subject to rescission.

  1. Negotiation is effective even if obtained:
    1. From an infant, a corporation exceeding its powers, or a person without capacity;
    2. By fraud, duress, or mistake; or
    3. In breach of duty or as part of an illegal transaction.
  2. To the extent permitted by other law, negotiation may be rescinded or may be subject to other remedies, but those remedies may not be asserted against a subsequent holder in due course or a person paying the instrument in good faith and without knowledge of facts that are a basis for rescission or other remedy.

History. Enact. Acts 1958, ch. 77, § 3-202, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 21, effective January 1, 1997.

Official Comment

  1. This section is based on former Section 3-207. Subsection (2) of former Section 3-207 prohibited rescission of a negotiation against holders in due course. Subsection (b) of Section 3-202 extends this protection to payor banks.
  2. Subsection (a) applies even though the lack of capacity or the illegality, is of a character which goes to the essence of the transaction and makes it entirely void. It is inherent in the character of negotiable instruments that any person in possession of an instrument which by its terms is payable to that person or to bearer is a holder and may be dealt with by anyone as a holder. The principle finds its most extreme application in the well settled rule that a holder in due course may take the instrument even from a thief and be protected against the claim of the rightful owner. The policy of subsection (a) is that any person to whom an instrument is negotiated is a holder until the instrument has been recovered from that person’s possession. The remedy of a person with a claim to an instrument is to recover the instrument by replevin or otherwise; to impound it or to enjoin its enforcement, collection or negotiation; to recover its proceeds from the holder; or to intervene in any action brought by the holder against the obligor. As provided in Section 3-305(c), the claim of the claimant is not a defense to the obligor unless the claimant defends the action.
  3. There can be no rescission or other remedy against a holder in due course or a person who pays in good faith and without notice, even though the prior negotiation may have been fraudulent or illegal in its essence and entirely void. As against any other party the claimant may have any remedy permitted by law. This section is not intended to specify what that remedy may be, or to prevent any court from imposing conditions or limitations such as prompt action or return of the consideration received. All such questions are left to the law of the particular jurisdiction. Section 3-202 gives no right that would not otherwise exist. The section is intended to mean that any remedies afforded by other law are cut off only by a holder in due course.

355.3-203. Transfer of instrument — Rights acquired by transfer.

  1. An instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.
  2. Transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument, including any right as a holder in due course, but the transferee cannot acquire rights of a holder in due course by a transfer, directly or indirectly, from a holder in due course if the transferee engaged in fraud or illegality affecting the instrument.
  3. Unless otherwise agreed, if an instrument is transferred for value and the transferee does not become a holder because of lack of indorsement by the transferor, the transferee has a specifically enforceable right to the unqualified indorsement of the transferor, but negotiation of the instrument does not occur until the indorsement is made.
  4. If a transferor purports to transfer less than the entire instrument, negotiation of the instrument does not occur. The transferee obtains no rights under this article and has only the rights of a partial assignee.

History. Enact. Acts 1958, ch. 77, § 3-203, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 22, effective January 1, 1997.

Official Comment

  1. Section 3-203 is based on former Section 3-201 which stated that a transferee received such rights as the transferor had. The former section was confusing because some rights of the transferor are not vested in the transferee unless the transfer is a negotiation. For example, a transferee that did not become the holder could not negotiate the instrument, a right that the transferor had. Former Section 3-201 did not define “transfer.” Subsection (a) defines transfer by limiting it to cases in which possession of the instrument is delivered for the purpose of giving to the person receiving delivery the right to enforce the instrument.

    Although transfer of an instrument might mean in a particular case that title to the instrument passes to the transferee, that result does not follow in all cases. The right to enforce an instrument and ownership of the instrument are two different concepts. A thief who steals a check payable to bearer becomes the holder of the check and a person entitled to enforce it, but does not become the owner of the check. If the thief transfers the check to a purchaser the transferee obtains the right to enforce the check. If the purchaser is not a holder in due course, the owner’s claim to the check may be asserted against the purchaser. Ownership rights in instruments may be determined by the principles of the law of property, independent of Article 3, which do not depend upon whether the instrument was transferred under Section 3-203. Moreover, a person who has an ownership right in an instrument might not be a person entitled to enforce the instrument. For example, suppose X is the owner and holder of an instrument payable to X. X sells the instrument to Y but is unable to deliver immediate possession to Y. Instead, X signs a document conveying all of X’s right, title, and interest in the instrument to Y. Although the document may be effective to give Y a claim to ownership of the instrument, Y is not a person entitled to enforce the instrument until Y obtains possession of the instrument. No transfer of the instrument occurs under Section 3-203(a) until it is delivered to Y.

    An instrument is a reified right to payment. The right is represented by the instrument itself. The right to payment is transferred by delivery of possession of the instrument “by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.” The quoted phrase excludes issue of an instrument, defined in Section 3-105, and cases in which a delivery of possession is for some purpose other than the transfer of the right to enforce. For example, if a check is presented for payment by delivering the check to the drawee, no transfer of the check to the drawee occurs because there is no intent to give the drawee the right to enforce the check.

  2. Subsection (b) states that transfer vests in the transferee any right of the transferor to enforce the instrument “including any right as a holder in due course.” If the transferee is not a holder because the transferor did not indorse; the transferee is nevertheless a person entitled to enforce the instrument under Section 3-301 if the transferor was a holder at the time of transfer. Although the transferee is not a holder, under subsection (b) the transferee obtained the rights of the transferor as holder. Because the transferee’s rights are derivative of the transferor’s rights, those rights must be proved. Because the transferee is not a holder, there is no presumption under Section 3-308 that the transferee, by producing the instrument, is entitled to payment. The instrument, by its terms, is not payable to the transferee and the transferee must account for possession of the unindorsed instrument by proving the transaction through which the transferee acquired it. Proof of a transfer to the transferee by a holder is proof that the transferee has acquired the rights of a holder. At that point the transferee is entitled to the presumption under Section 3-308.

    Under subsection (b) a holder in due course that transfers an instrument transfers those rights as a holder in due course to the purchaser. The policy is to assure the holder in due course a free market for the instrument. There is one exception to this rule stated in the concluding clause of subsection (b). A person who is party to fraud or illegality affecting the instrument is not permitted to wash the instrument clean by passing it into the hands of a holder in due course and then repurchasing it.

  3. Subsection (c) applies only to a transfer for value. It applies only if the instrument is payable to order or specially indorsed to the transferor. The transferee acquires, in the absence of a contrary agreement, the specifically enforceable right to the indorsement of the transferor. Unless otherwise agreed, it is a right to the general indorsement of the transferor with full liability as indorser, rather than to an indorsement without recourse. The question may arise if the transferee has paid in advance and the indorsement is omitted fraudulently or through oversight. A transferor who is willing to indorse only without recourse or unwilling to indorse at all should make those intentions clear before transfer. The agreement of the transferee to take less than an unqualified indorsement need not be an express one, and the understanding may be implied from conduct, from past practice, or from the circumstances of the transaction. Subsection (c) provides that there is no negotiation of the instrument until the indorsement by the transferor is made. Until that time the transferee does not become a holder, and if earlier notice of a defense or claim is received, the transferee does not qualify as a holder in due course under Section 3-302.
  4. The operation of Section 3-203 is illustrated by the following cases. In each case Payee, by fraud, induced Maker to issue a note to Payee. The fraud is a defense to the obligation of Maker to pay the note under Section 3-305(a)(2).

    Case #1. Payee negotiated the note to X who took as a holder in due course. After the instrument became overdue X negotiated the note to Y who had notice of the fraud. Y succeeds to X’s rights as a holder in due course and takes free of Maker’s defense of fraud.

    Case #2. Payee negotiated the note to X who took as a holder in due course. Payee then repurchased the note from X. Payee does not succeed to X’s rights as a holder in due course and is subject to Maker’s defense of fraud.

    Case #3. Payee negotiated the note to X who took as a holder in due course. X sold the note to Purchaser who received possession. The note, however, was indorsed to X and X failed to indorse it. Purchaser is a person entitled to enforce the instrument under Section 3-301 and succeeds to the rights of X as holder in due course. Purchaser is not a holder, however, and under Section 3-308 Purchaser will have to prove the transaction with X under which the rights of X as holder in due course were acquired.

    Case #4. Payee sold the note to Purchaser who took for value, in good faith and without notice of the defense of the Maker. Purchaser received possession of the note but payee neglected to indorse it. Purchaser became a person entitled to enforce the instrument but did not become the holder because of the missing indorsement. If Purchaser received notice of the defense of Maker before obtaining the indorsement of Payee, Purchaser cannot become a holder in due course because at the time notice was received the note had not been negotiated to Purchaser. If indorsement by Payee was made after Purchaser received notice, Purchaser had notice of the defense when it became the holder.

  5. Subsection (d) restates former Section 3-202(3). The cause of action on an instrument cannot be split. Any indorsement which purports to convey to any party less than the entire amount of the instrument is not effective for negotiation. This is true of either “Pay A one-half,” or “Pay A two-thirds and B one-third.” Neither A nor B becomes a holder. On the other hand, an indorsement reading merely “Pay A and B” is effective, since it transfers the entire cause of action to A and B as tenants in common. An indorsement purporting to convey less than the entire instrument does, however, operate as a partial assignment of the cause of action. Subsection (d) makes no attempt to state the legal effect of such an assignment, which is left to other law. A partial assignee of an instrument has rights only to the extent the applicable law gives rights, either at law or in equity, to a partial assignee.
  6. The rules for transferring instruments set out in this section are similar to the rules in Article 13 of the Convention on International Bills of Exchange and International Promissory Notes.

NOTES TO DECISIONS

1.Form of Indorsement.

An unattached contract by which parties thereto agreed to be jointly bound on all notes indorsed by any of such parties was not an indorsement. (decided under prior law) First Nat'l Bank v. Doherty, 156 Ky. 386 , 161 S.W. 211, 1913 Ky. LEXIS 444 ( Ky. 1913 ).

Signature of indorser alone was sufficient. (decided under prior law) Roberts v. Byars, 210 Ky. 788 , 276 S.W. 839, 1925 Ky. LEXIS 779 ( Ky. 1925 ).

In view of definition of indorsement as “indorsement means an indorsement completed by delivery,” indorsement with rubber stamp was sufficient. (decided under prior law) Security Finance Co. v. Collins, 224 Ky. 134 , 5 S.W.2d 886, 1928 Ky. LEXIS 539 ( Ky. 1928 ).

2.Joint Payees.

Where second of joint payees indorsed after maturity, the indorsement took effect at that time and did not relate back to when first joint payee indorsed. (decided under prior law) Karsner v. Cooper, 195 Ky. 8 , 241 S.W. 346, 1922 Ky. LEXIS 274 ( Ky. 1922 ).

3.Corporate Name.

An indorsement by corporate name was sufficient even though it failed to indicate the position or authority of the person signing for such company. (decided under prior law) Commerce Union Bank v. Seese, 237 Ky. 384 , 35 S.W.2d 544, 1931 Ky. LEXIS 610 ( Ky. 1931 ).

4.Surety.

Where party intended to sign as surety, an indorsement on back of instrument was sufficient. (decided under prior law) Roberts v. Byars, 210 Ky. 788 , 276 S.W. 839, 1925 Ky. LEXIS 779 ( Ky. 1925 ).

5.Right to Require Indorsement.

The right to require an indorsement was limited by the five (5) year statute of limitations. (decided under prior law) Farmers' Trust Co. v. Threlkeld's Adm'x, 257 Ky. 211 , 77 S.W.2d 616, 1934 Ky. LEXIS 538 ( Ky. 1934 ).

6.Indorsement After Maturity.

Where there was conflict in the evidence as to whether holder took the instrument before it was overdue or not, a motion for a directed verdict for the holder should have been overruled, as note was subject to same defenses against assignee of note after maturity as against original payees. (decided under prior law) Barnard v. Napier, 167 Ky. 824 , 181 S.W. 624, 1916 Ky. LEXIS 483 ( Ky. 1916 ).

7.For Use as Collateral Only.

Where indorsed notes to Y were to be used as collateral for a certain note which Y owed bank, and Y pledged notes for his general indebtedness at bank, the bank was allowed to retain the amount collected on such notes to the extent of Y’s general indebtedness. (decided under prior law) American Nat'l Bank v. J. S. Minor & Son, 142 Ky. 792 , 135 S.W. 278, 1911 Ky. LEXIS 287 ( Ky. 1911 ).

8.Ownership of Unindorsed Note.

Mere possession of a note payable to order without a proper indorsement was not prima facie evidence of ownership as against either payee or maker. (decided under prior law) Harponola Co. v. Conkin, 205 Ky. 436 , 205 Ky. 736 , 266 S.W. 626, 1924 Ky. LEXIS 221 ( Ky. 1924 ).

9.Time of Negotiation.

Transferee became a holder in due course at the time the indorsement was made. (decided under prior law) Bank of Commerce v. Abell, 298 Ky. 736 , 184 S.W.2d 86, 1944 Ky. LEXIS 995 ( Ky. 1944 ).

10.Actions.

Where payee sued on an unindorsed order instrument which had been lost, it was not necessary that he file indemnity bond, as a finder would have been subject to all defenses. (decided under prior law) Foster's Adm'r v. Metcalfe, 144 Ky. 385 , 138 S.W. 314, 1911 Ky. LEXIS 633 ( Ky. 1911 ).

Where petition alleged testatrix’s acquisition of title to notes and possession of them and notes were filed therewith, petition was sufficient in a suit by executrix to recover thereon. (decided under prior law) Herrell v. Davenport's Ex'x, 259 Ky. 514 , 82 S.W.2d 506, 1935 Ky. LEXIS 338 ( Ky. 1935 ).

Colleague validly possessed the ability to enforce a cashier's check because he validly purchased the cashier's check using an attorney's funds through his apparent authority over the bank account of the attorney's limited liability companies; once the colleague negotiated the cashier's check to a third party, his ability to enforce the cashier's check passed to the third party. Ford v. Baerg, 532 S.W.3d 638, 2017 Ky. LEXIS 445 ( Ky. 2017 ).

11.— By Transferee Without Indorsement.

Where petition alleged execution and delivery of note but failed to allege assignment by payee to holder bringing suit, such petition was sufficient. (decided under prior law) Callahan v. Louisville Dry Goods Co., 140 Ky. 712 , 131 S.W. 995, 1910 Ky. LEXIS 366 ( Ky. 1910 ).

Where indorsement on the back of a note showed an assignment for value received, and there was an assignment purporting to vest title in another on the back of a sales agreement which was attached to the note but separated by a perforated line, the transferee in possession of the note and attached sales agreement could sue the maker in his own name, and payment to him discharged the instrument, since the assignment on the back of the sales agreement without delivery was of no effect and the holder of an instrument payable to his order could strike out any assignment or indorsement not necessary to his title and could transfer it for value without indorsing it, which vested such title as the transferor had in the transferee. (decided under prior law) Commerce Union Bank v. Seese, 237 Ky. 384 , 35 S.W.2d 544, 1931 Ky. LEXIS 610 ( Ky. 1931 ).

Transferee could maintain suit on a note without its being indorsed to him, but it was subject to the defense that the maker received no consideration for it. (decided under prior law) Lawyers' Realty Co. v. Bank of Ludlow, 256 Ky. 675 , 76 S.W.2d 920, 1934 Ky. LEXIS 469 ( Ky. 1934 ).

Where an order instrument had not been indorsed by payee, the transferee could nevertheless maintain suit thereon in his own name. (decided under prior law) Lawyers' Realty Co. v. Bank of Ludlow, 256 Ky. 675 , 76 S.W.2d 920, 1934 Ky. LEXIS 469 ( Ky. 1934 ).

12.Pleadings.

Reliance on the fact that predecessor in title was a holder in due course had to be pleaded. (decided under prior law) Childers v. Billiter, 144 Ky. 53 , 137 S.W. 795, 1911 Ky. LEXIS 547 ( Ky. 1911 ).

13.Release by Bankruptcy.

Allegations in counterclaim that bank owned, held and had interest in notes, including note without indorsement, was sufficient to sustain judgment of ownership and, even though bankruptcy released maker’s personal liability on the notes, it did not release bank’s lien on life insurance policies held as collateral and excepted as exempt property in the bankruptcy. (decided under prior law) Archer v. Citizens Fidelity Bank & Trust Co., 365 S.W.2d 727, 1962 Ky. LEXIS 297 ( Ky. 1962 ).

14.Buyer’s Defenses and Claims.

Where buyer entered into agreements with two (2) sellers and gave sellers two (2) promissory notes which were subsequently transferred to third party, one (1) with indorsement and one (1) without indorsement, and said notes were subsequently transferred to bank, such transferee was a holder without indorsement throughout the entire time the notes were in its possession and the notes were payable to order and as such could only be negotiated by indorsement; thus transferee had the right to indorsement when it assigned its rights to bank and such right necessarily passed to bank; however without the indorsement, the requirement of prior negotiation was absent and bank was a mere transferee and not a holder in due course and as a transferee, the bank was subject to buyer’s defenses and claims regarding the notes. (decided under prior law) J.P. Morgan Delaware v. Onyx Arabians II, Ltd., 825 F. Supp. 146, 1993 U.S. Dist. LEXIS 8694 (W.D. Ky. 1993 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint of Assignee Against Assignor of Notes, Form 191.07.

355.3-204. Indorsement.

  1. “Indorsement” means a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of:
    1. Negotiating the instrument;
    2. Restricting payment of the instrument; or
    3. Incurring indorser’s liability on the instrument,

      but regardless of the intent of the signer, a signature and its accompanying words is an indorsement unless the accompanying words, terms of the instrument, place of the signature, or other circumstances unambiguously indicate that the signature was made for a purpose other than indorsement. For the purpose of determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument.

  2. “Indorser” means a person who makes an indorsement.
  3. For the purpose of determining whether the transferee of an instrument is a holder, an indorsement that transfers a security interest in the instrument is effective as an unqualified indorsement of the instrument.
  4. If an instrument is payable to a holder under a name that is not the name of the holder, indorsement may be made by the holder in the name stated in the instrument or in the holder’s name or both, but signature in both names may be required by a person paying or taking the instrument for value or collection.

History. Enact. Acts 1958, ch. 77, § 3-204, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 23, effective January 1, 1997.

Official Comment

  1. Subsection (a) is a definition of “indorsement,” a term which was not defined in former Article 3. Indorsement is defined in terms of the purpose of the signature. If a blank or special indorsement is made to give rights as a holder to a transferee the indorsement is made for the purpose of negotiating the instrument. Subsection (a)(i). If the holder of a check has an account in the drawee bank and wants to be sure that payment of the check will be made by credit to the holder’s account, the holder can indorse the check by signing the holder’s name with the accompanying words “for deposit only” before presenting the check for payment to the drawee bank. In that case the purpose of the quoted words is to restrict payment of the instrument. Subsection (a)(ii). If X wants to guarantee payment of a note signed by Y as maker, X can do so by signing X’s name to the back of the note as an indorsement. This indorsement is known as an anomalous indorsement (Section 3-205(d)) and is made for the purpose of incurring indorser’s liability on the note. Subsection (a)(iii). In some cases an indorsement may serve more than one purpose. For example, if the holder of a check deposits it to the holder’s account in a depositary bank for collection and indorses the check by signing the holder’s name with the accompanying words “for deposit only” the purpose of the indorsement is both to negotiate the check to the depositary bank and to restrict payment of the check.

    The “but” clause of the first sentence of subsection (a) elaborates on former Section 3-402. In some cases it may not be clear whether a signature was meant to be that of an indorser, a party to the instrument in some other capacity such as drawer, maker or acceptor, or a person who was not signing as a party. The general rule is that a signature is an indorsement if the instrument does not indicate an unambiguous intent of the signer not to sign as an indorser. Intent may be determined by words accompanying the signature, the place of the signature, or other circumstances. For example, suppose a depositary bank gives cash for a check properly indorsed by the payee. The bank requires the payee’s employee to sign the back of the check as evidence that the employee received the cash. If the signature consists only of the initials of the employee it is not reasonable to assume that it was meant to be an indorsement. If there was a full signature but accompanying words indicated that it was meant as a receipt for the cash given for the check, it is not an indorsement. If the signature is not qualified in any way and appears in the place normally used for indorsements, it may be an indorsement even though the signer intended the signature to be a receipt. To take another example, suppose the drawee of a draft signs the draft on the back in the space usually used for indorsements. No words accompany the signature. Since the drawee has no reason to sign a draft unless the intent is to accept the draft, the signature is effective as an acceptance. Custom and usage may be used to determine intent. For example, by long-established custom and usage, a signature in the lower right hand corner of an instrument indicates an intent to sign as the maker of a note or the drawer of a draft. Any similar clear indication of an intent to sign in some other capacity or for some other purpose may establish that a signature is not an indorsement. For example, if the owner of a traveler’s check countersigns the check in the process of negotiating it, the countersignature is not an indorsement. The countersignature is a condition to the issuer’s obligation to pay and its purpose is to provide a means of verifying the identity of the person negotiating the traveler’s check by allowing comparison of the specimen signature and the countersignature. The countersignature is not necessary for negotiation and the signer does not incur indorser’s liability. See Comment 2 to Section 3-106.

    The last sentence of subsection (a) is based on subsection (2) of former Section 3-202. An indorsement on an allonge is valid even though there is sufficient space on the instrument for an indorsement.

  2. Assume that Payee indorses a note to Creditor as security for a debt. Under subsection (b) of Section 3-203 Creditor takes Payee’s rights to enforce or transfer the instrument subject to the limitations imposed by Article 9. Subsection (c) of Section 3-204 makes clear that the Payee’s indorsement to Creditor, even though it mentions creation of a security interest, is an unqualified indorsement that gives to Creditor the right to enforce the note as its holder.
  3. Subsection (d) is a restatement of former Section 3-203. Section 3-110(a) states that an instrument is payable to the person intended by the person signing as or in the name or behalf of the issuer even if that person is identified by a name that is not the true name of the person. In some cases the name used in the instrument is a misspelling of the correct name and in some cases the two names may be entirely different. The payee may indorse in the name used in the instrument, in the payee’s correct name, or in both. In each case the indorsement is effective. But because an indorsement in a name different from that used in the instrument may raise a question about its validity and an indorsement in a name that is not the correct name of the payee may raise a problem of identifying the indorser, the accepted commercial practice is to indorse in both names. Subsection (d) allows a person paying or taking the instrument for value or collection to require indorsement in both names.

NOTES TO DECISIONS

1.Bankruptcy.

Any interest of a Chapter 7 Trustee in debtors’ property under 11 U.S.C.S. § 544 was inferior to a creditor’s properly perfect secured interest. The first allonge was a valid indorsement of the original payee because there was no requirement under KRS 355.3-204 (1) that the indorsements be dated and there was unrefuted evidence that the mortgage manager was authorized to execute and bind the original payee to the first allonge under KRS 355.3-402 (1); the note was then negotiated by valid second allonge to the creditor, who, as holder, was entitled to enforce it under KRS 355.3-301 . Rogan v. Branch Banking & Trust Co. (In re Asberry), 2013 Bankr. LEXIS 788 (Bankr. E.D. Ky. Mar. 1, 2013).

2.Sufficiency.

Chapter 7 trustee could not avoid a bank’s interest pursuant to 11 U.S.C.S. § 544, despite an illegible signature on mortgage note indorsement, because KRS 355.3-204 did not require signer to be identified. Indorsement contained a signature and unambiguous language showing an intent to negotiate; that was all that was required under § 355.3-204 (1). Rogan v. EquiFirst Corp. (In re Vickers), 2013 Bankr. LEXIS 1596 (Bankr. E.D. Ky. Apr. 15, 2013).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint of Indorsee Against the Payor, Payee, and Second Indorser of a Negotiable, Discounted Note, Form 191.06.

355.3-205. Special indorsement — Blank indorsement — Anomalous indorsement.

  1. If an indorsement is made by the holder of an instrument, whether payable to an identified person or payable to bearer, and the indorsement identifies a person to whom it makes the instrument payable, it is a “special indorsement.” When specially indorsed, an instrument becomes payable to the identified person and may be negotiated only by the indorsement of that person. The principles stated in KRS 355.3-110 apply to special indorsements.
  2. If an indorsement is made by the holder of an instrument and it is not a special indorsement, it is a “blank indorsement.” When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed.
  3. The holder may convert a blank indorsement that consists only of a signature into a special indorsement by writing, above the signature of the indorser, words identifying the person to whom the instrument is made payable.
  4. “Anomalous indorsement” means an indorsement made by a person who is not the holder of the instrument. An anomalous indorsement does not affect the manner in which the instrument may be negotiated.

History. Enact. Acts 1958, ch. 77, § 3-205, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 24, effective January 1, 1997.

Official Comment

  1. Subsection (a) is based on subsection (1) of former Section 3-204. It states the test of a special indorsement to be whether the indorsement identifies a person to whom the instrument is payable. Section 3-110 states rules for identifying the payee of an instrument. Section 3-205(a) incorporates the principles stated in Section 3-110 in identifying an indorsee. The language of Section 3-110 refers to language used by the issuer of the instrument. When that section is used with respect to an indorsement, Section 3-110 must be read as referring to the language used by the indorser.
  2. Subsection (b) is based on subsection (2) of former Section 3-204. An indorsement made by the holder is either a special or blank indorsement. If the indorsement is made by a holder and is not a special indorsement, it is a blank indorsement. For example, the holder of an instrument, intending to make a special indorsement, writes the words “Pay to the order of” without completing the indorsement by writing the name of the indorsee. The holder’s signature appears under the quoted words. The indorsement is not a special indorsement because it does not identify a person to whom it makes the instrument payable. Since it is not a special indorsement it is a blank indorsement and the instrument is payable to bearer. The result is analogous to that of a check in which the name of the payee is left blank by the drawer. In that case the check is payable to bearer. See the last paragraphs of Comment 2 to Section 3-115.

    A blank indorsement is usually the signature of the indorser on the back of the instrument without other words. Subsection (c) is based on subsection (3) of former Section 3-204. A “restrictive indorsement” described in Section 3-206 can be either a blank indorsement or a special indorsement. “Pay to T, in trust for B” is a restrictive indorsement. It is also a special indorsement because it identifies T as the person to whom the instrument is payable. “For deposit only” followed by the signature of the payee of a check is a restrictive indorsement. It is also a blank indorsement because it does not identify the person to whom the instrument is payable.

  3. The only effect of an “anomalous indorsement,” defined in subsection (d), is to make the signer liable on the instrument as an indorser. Such an indorsement is normally made by an accommodation party. Section 3-419.
  4. Articles 14 and 16 of the Convention on International Bills of Exchange and International Promissory Notes include similar rules for blank and special indorsements.

NOTES TO DECISIONS

1.Blank Indorsements.

Where the assignment of a mortgage to the bank was recorded after the bankruptcy was filed, because of an indorsement in blank, the note was negotiated by transfer alone pursuant to KRS 355.3-205 (2),and the bank’s possession of the note, coupled with its status as a bona fide purchaser rendered it a bearer, pursuant to KRS 355.1-201 (2) and KRS 355.3-301 , that was able to enforce the note against the debtors under KRS 355.9-330 (4); moreover the bank did not violate the automatic stay because it simply recorded its equitable interest in the property, which did not belong to the debtors. Rogan v. Bank One, N.A. (In re Cook), 457 F.3d 561, 2006 FED App. 0284P, 2006 U.S. App. LEXIS 20377 (6th Cir. Ky. 2006 ).

Trial court erred in granting a mortgage servicer summary judgment because the evidence was insufficient to establish whether it was the holder of the mortgagors’ original note and thus, the real party in interest at the time the foreclosure action was filed; where a plaintiff attempts to enforce bearer paper as the holder, and a defendant raises an issue as to actual possession of the original note, the purported holder has a duty to establish such as required by the Uniform Commercial Code. Acuff v. Wells Fargo Bank, N.A., 460 S.W.3d 335, 2014 Ky. App. LEXIS 72 (Ky. Ct. App. 2014).

355.3-206. Restrictive indorsement.

  1. An indorsement limiting payment to a particular person or otherwise prohibiting further transfer or negotiation of the instrument is not effective to prevent further transfer or negotiation of the instrument.
  2. An indorsement stating a condition to the right of the indorsee to receive payment does not affect the right of the indorsee to enforce the instrument. A person paying the instrument or taking it for value or collection may disregard the condition, and the rights and liabilities of that person are not affected by whether the condition has been fulfilled.
    1. If an instrument bears an indorsement: (3) (a) If an instrument bears an indorsement:
      1. Described in KRS 355.4-201 (2); or
      2. In blank or to a particular bank using the words “for deposit,” “for collection,” or other words indicating a purpose of having the instrument collected by a bank for the indorser or for a particular account, the rules set out in paragraph (b) of this subsection apply.
      1. A person, other than a bank, who purchases the instrument when so indorsed converts the instrument unless the amount paid for the instrument is received by the indorser or applied consistently with the indorsement. (b) 1. A person, other than a bank, who purchases the instrument when so indorsed converts the instrument unless the amount paid for the instrument is received by the indorser or applied consistently with the indorsement.
      2. A depositary bank that purchases the instrument or takes it for collection when so indorsed converts the instrument unless the amount paid by the bank with respect to the instrument is received by the indorser or applied consistently with the indorsement.
      3. A payor bank that is also the depositary bank or that takes the instrument for immediate payment over the counter from a person other than a collecting bank converts the instrument unless the proceeds of the instrument are received by the indorser or applied consistently with the indorsement.
      4. Except as otherwise provided in subparagraph 3. of this paragraph, a payor bank or intermediary bank may disregard the indorsement and is not liable if the proceeds of the instrument are not received by the indorser or applied consistently with the indorsement.
  3. Except for an indorsement covered by subsection (3) of this section, if an instrument bears an indorsement using words to the effect that payment is to be made to the indorsee as agent, trustee, or other fiduciary for the benefit of the indorser or another person, the following rules apply:
    1. Unless there is notice of breach of fiduciary duty as provided in KRS 355.3-307 , a person who purchases the instrument from the indorsee or takes the instrument from the indorsee for collection or payment may pay the proceeds of payment or the value given for the instrument to the indorsee without regard to whether the indorsee violates a fiduciary duty to the indorser.
    2. A subsequent transferee of the instrument or person who pays the instrument is neither given notice nor otherwise affected by the restriction in the indorsement unless the transferee or payor knows that the fiduciary dealt with the instrument or its proceeds in breach of fiduciary duty.
  4. The presence on an instrument of an indorsement to which this section applies does not prevent a purchaser of the instrument from becoming a holder in due course of the instrument unless the purchaser is a converter under subsection (3) of this section or has notice or knowledge of breach of fiduciary duty as stated in subsection (4) of this section.
  5. In an action to enforce the obligation of a party to pay the instrument, the obligor has a defense if payment would violate an indorsement to which this section applies and the payment is not permitted by this section.

History. Enact. Acts 1958, ch. 77, § 3-206, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 25, effective January 1, 1997.

Official Comment

  1. This section replaces former Sections 3-205 and 3-206 and clarifies the law of restrictive indorsements.
  2. Subsection (a) provides that an indorsement that purports to limit further transfer or negotiation is ineffective to prevent further transfer or negotiation. If a payee indorses “Pay A only,” A may negotiate the instrument to subsequent holders who may ignore the restriction on the indorsement. Subsection (b) provides that an indorsement that states a condition to the right of a holder to receive payment is ineffective to condition payment. Thus if a payee indorses “Pay A if A ships goods complying with our contract,” the right of A to enforce the instrument is not affected by the condition. In the case of a note, the obligation of the maker to pay A is not affected by the indorsement. In the case of a check, the drawee can pay A without regard to the condition, and if the check is dishonored the drawer is liable to pay A. If the check was negotiated by the payee to A in return for a promise to perform a contract and the promise was not kept, the payee would have a defense or counterclaim against A if the check were dishonored and A sued the payee as indorser, but the payee would have that defense or counterclaim whether or not the condition to the right of A was expressed in the indorsement. Former Section 3-206 treated a conditional indorsement like indorsements for deposit or collection. In revised Article 3, Section 3-206(b) rejects that approach and makes the conditional indorsement ineffective with respect to parties other than the indorser and indorsee. Since the indorsements referred to in subsections (a) and (b) are not effective as restrictive indorsements, they are no longer described as restrictive indorsements.
  3. The great majority of restrictive indorsements are those that fall within subsection (c) which continues previous law. The depositary bank or the payor bank, if it takes the check for immediate payment over the counter, must act consistently with the indorsement, but an intermediary bank or payor bank that takes the check from a collecting bank is not affected by the indorsement. Any other person is also bound by the indorsement. For example, suppose a check is payable to X, who indorses in blank but writes above the signature the words “For deposit only.” The check is stolen and is cashed at a grocery store by the thief. The grocery store indorses the check and deposits it in Depositary Bank. The account of the grocery store is credited and the check is forwarded to Payor Bank which pays the check. Under subsection (c), the grocery store and Depositary Bank are converters of the check because X did not receive the amount paid for the check. Payor Bank and any intermediary bank in the collection process are not liable to X. This Article does not displace the law of waiver as it may apply to restrictive indorsements. The circumstances under which a restrictive indorsement may be waived by the person who made it is not determined by this Article.
  4. Subsection (d) replaces subsection (4) of former Section 3-206. Suppose Payee indorses a check “Pay to T in trust for B.” T indorses in blank and delivers it to (a) Holder for value; (b) Depositary Bank for collection; or (c) Payor Bank for payment. In each case these takers can safely pay T so long as they have no notice under Section 3-307 of any breach of fiduciary duty that T may be committing. For example, under subsection (b) of Section 3-307 these takers have notice of a breach of trust if the check was taken in any transaction known by the taker to be for T’s personal benefit. Subsequent transferees of the check from Holder or Depositary Bank are not affected by the restriction unless they have knowledge that T dealt with the check in breach of trust.
  5. Subsection (f) allows a restrictive indorsement to be used as a defense by a person obliged to pay the instrument if that person would be liable for paying in violation of the indorsement.

NOTES TO DECISIONS

1.Without Recourse.

“Without recourse on me” was not such indorsement as destroyed negotiability. (decided under prior law) Sweeney v. Taylor's Ex'r, 205 Ky. 390 , 266 S.W. 665, 1924 Ky. LEXIS 244 ( Ky. 1924 ).

2.Pay to the Order.

“Pay to the order of X, Y” was not a restrictive indorsement. (decided under prior law) Holt Bros. Mining Co. v. Stewart, 250 Ky. 199 , 61 S.W.2d 1073, 1933 Ky. LEXIS 643 ( Ky. 1933 ).

3.For Collection.

Indorsee for collection could sue in its own name, but defense of payment to principal would defeat suit. (decided under prior law) Commercial Nat'l Bank v. First Nat'l Bank, 158 Ky. 392 , 165 S.W. 398, 1914 Ky. LEXIS 621 ( Ky. 1914 ).

355.3-207. Reacquisition.

Reacquisition of an instrument occurs if it is transferred to a former holder, by negotiation or otherwise. A former holder who reacquires the instrument may cancel indorsements made after the reacquirer first became a holder of the instrument. If the cancellation causes the instrument to be payable to the reacquirer or to bearer, the reacquirer may negotiate the instrument. An indorser whose indorsement is canceled is discharged, and the discharge is effective against any subsequent holder.

History. Enact. Acts 1958, ch. 77, § 3-207, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 26, effective January 1, 1997.

Official Comment

Section 3-207 restates former Section 3-208. Reacquisition refers to cases in which a former holder reacquires the instrument either by negotiation from the present holder or by a transfer other than negotiation. If the reacquisition is by negotiation, the former holder reacquires the status of holder. Although Section 3-207 allows the holder to cancel all indorsements made after the holder first acquired holder status, cancellation is not necessary. Status of holder is not affected by whether or not cancellation is made. But if the reacquisition is not the result of negotiation the former holder can obtain holder status only by striking the former holder’s indorsement and any subsequent indorsements. The latter case is an exception to the general rule that if an instrument is payable to an identified person, the indorsement of that person is necessary to allow a subsequent transferee to obtain the status of holder. Reacquisition without indorsement by the person to whom the instrument is payable is illustrated by two examples:

Case #1. X, a former holder, buys the instrument from Y, the present holder. Y delivers the instrument to X but fails to indorse it. Negotiation does not occur because the transfer of possession did not result in X’s becoming holder. Section 3-201(a). The instrument by its terms is payable to Y, not to X. But X can obtain the status of holder by striking X’s indorsement and all subsequent indorsements. When these indorsements are struck, the instrument by its terms is payable either to X or to bearer, depending on how X originally became holder. In either case X becomes holder. Section 1-201(a)(xx).

Case #2. X, the holder of an instrument payable to X, negotiates it to Y by special indorsement. The negotiation is part of an underlying transaction between X and Y. The underlying transaction is rescinded by agreement of X and Y, and Y returns the instrument without Y’s indorsement. The analysis is the same as that in Case #1. X can obtain holder status by canceling X’s indorsement to Y.

In Case #1 and Case #2, X acquired ownership of the instrument after reacquisition, but X’s title was clouded because the instrument by its terms was not payable to X. Normally, X can remedy the problem by obtaining Y’s indorsement, but in some cases X may not be able to conveniently obtain that indorsement. Section 3-207 is a rule of convenience which relieves X of the burden of obtaining an indorsement that serves no substantive purpose. The effect of cancellation of any indorsement under Section 3-207 is to nullify it. Thus, the person whose indorsement is canceled is relieved of indorser’s liability. Since cancellation is notice of discharge, discharge is effective even with respect to the rights of a holder in due course. Sections 3-601 and 3-604.

NOTES TO DECISIONS

1.Repurchase by Payee.

A payee who repurchased a note occupied the same position as if it had never been negotiated and not that of an intervening holder in due course. (decided under prior law) Coral Gables, Inc. v. Barnes, 247 Ky. 292 , 57 S.W.2d 18, 1933 Ky. LEXIS 396 ( Ky. 1933 ).

2.Cancellation of Indorsements.

Where conflicting indorsements appeared on an instrument, holder could strike such as raised a question to his title. (decided under prior law) Commerce Union Bank v. Seese, 237 Ky. 384 , 35 S.W.2d 544, 1931 Ky. LEXIS 610 ( Ky. 1931 ).

3.Renegotiation by Payee After Maturity.

Where an instrument which was once in hands of a holder in due course had been retransferred to the payee who, after maturity, negotiated it to a new holder, such final holder took only the payee’s rights and not those of the holder in due course. (decided under prior law) Sweeney v. Taylor's Ex'r, 205 Ky. 390 , 266 S.W. 665, 1924 Ky. LEXIS 244 ( Ky. 1924 ).

4.Discharge of Parties.

Where holder of a negotiable instrument transferred it by indorsement back to payee who assigned the note, the assignee was a holder in due course from payee and the holder who indorsed it back to payee was not liable on the note. (decided under prior law) Denniston's Adm'r v. Jackson, 304 Ky. 261 , 200 S.W.2d 477, 1947 Ky. LEXIS 625 ( Ky. 1947 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint by Assignee Against Payor, Form 191.03.

Caldwell’s Kentucky Form Book, 5th Ed., Complaint of Indorsee Against the Payor, Payee, and Second Indorser of a Negotiable, Discounted Note, Form 191.05.

355.3-208. Reacquisition. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 3-208, effective July 1, 1960) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

Part 3. Enforcement of Instruments

355.3-301. Person entitled to enforce instrument.

“Person entitled to enforce” an instrument means:

  1. The holder of the instrument;
  2. A nonholder in possession of the instrument who has the rights of a holder; or
  3. A person not in possession of the instrument who is entitled to enforce the instrument pursuant to KRS 355.3-309 or KRS 355.3-418 (4). A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.

History. Enact. Acts 1958, ch. 77, § 3-301, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 27, effective January 1, 1997.

Official Comment

This section replaces former Section 3-301 that stated the rights of a holder. The rights stated in former Section 3-301 to transfer, negotiate, enforce, or discharge an instrument are stated in other sections of Article 3. In revised Article 3, Section 3-301 defines “person entitled to enforce” an instrument. The definition recognizes that enforcement is not limited to holders. The quoted phrase includes a person enforcing a lost or stolen instrument. Section 3-309. It also includes a person in possession of an instrument who is not a holder. A nonholder in possession of an instrument includes a person that acquired rights of a holder by subrogation or under Section 3-203(a). It also includes both a remitter that has received an instrument from the issuer but has not yet transferred or negotiated the instrument to another person and also any other person who under applicable law is a successor to the holder or otherwise acquires the holder’s rights.

NOTES TO DECISIONS

1.Presumption of Lawful Possession.

Holder was presumed to have come into possession of an instrument lawfully. (decided under prior law) Callahan v. Louisville Dry Goods Co., 140 Ky. 712 , 131 S.W. 995, 1910 Ky. LEXIS 366 ( Ky. 1910 ).

Where note in suit was attached to the petition, delivery to the party suing was presumed. (decided under prior law) Doherty v. First Nat'l Bank, 170 Ky. 810 , 186 S.W. 937, 1916 Ky. LEXIS 142 ( Ky. 1916 ); Commerce Union Bank v. Seese, 237 Ky. 384 , 35 S.W.2d 544, 1931 Ky. LEXIS 610 ( Ky. 1931 ).

Where petition alleged testatrix’s acquisition of title to notes and possession of them, and notes were filed with petition, the allegation was sufficient when an executrix sought to recover on such notes. (decided under prior law) Herrell v. Davenport's Ex'x, 259 Ky. 514 , 82 S.W.2d 506, 1935 Ky. LEXIS 338 ( Ky. 1935 ).

2.Bearer Instrument.

In suit on bearer instrument, possession thereof established right to sue. (decided under prior law) Mt. Sterling Water, Light & Ice Co. v. First Nat'l Bank, 147 Ky. 376 , 144 S.W. 370, 1912 Ky. LEXIS 268 ( Ky. 1912 ).

3.For Collection.

One who held note for collection only could sue thereon in his own name. (decided under prior law) Harrison v. Pearcy & Coleman, 174 Ky. 485 , 192 S.W. 513, 1917 Ky. LEXIS 203 ( Ky. 1917 ); Harrison v. Union Store Co., 179 Ky. 672 , 201 S.W. 31, 1918 Ky. LEXIS 273 ( Ky. 1918 ); Cox v. Riggins, 223 Ky. 510 , 4 S.W.2d 403, 1928 Ky. LEXIS 397 ( Ky. 1928 ).

Where bank accepted depositor’s check for collection, with right to charge back should check be uncollectable, bank was such holder as could sue in its own name. (decided under prior law) National Deposit Bank v. Ohio Oil Co., 250 Ky. 288 , 62 S.W.2d 1048, 1933 Ky. LEXIS 686 ( Ky. 1933 ).

4.As Collateral Security.

Where note was held as collateral security, payment could be enforced without first exhausting other collateral held to secure the same primary obligation. (decided under prior law) Elk Valley Coal Co. v. Third Nat'l Bank, 157 Ky. 617 , 163 S.W. 766, 1914 Ky. LEXIS 344 ( Ky. 1914 ).

Where indorsee of a note, held as collateral security, sued thereon, payee was not a necessary party to maker’s counterclaim for cancellation on ground of payee’s fraud (at least if indorsee held note as collateral for a debt of payee in excess of the amount of the note). (decided under prior law) Sparr v. Fulton Nat'l Bank, 179 Ky. 755 , 201 S.W. 310, 1918 Ky. LEXIS 286 ( Ky. 1918 ).

Holder of note as collateral security could maintain action thereon in his own name. (decided under prior law) Roberts v. Allen, 244 Ky. 353 , 50 S.W.2d 965, 1932 Ky. LEXIS 429 ( Ky. 1932 ); Melton v. Pensacola Bank & Trust Co., 190 F. 126, 1911 U.S. App. LEXIS 4430 (6th Cir. Ky. 1911 ); Pensacola State Bank v. Melton, 210 F. 57, 1913 U.S. Dist. LEXIS 1024 (D. Ky. 1913 ).

5.Without Indorsement.

Where payee had failed to indorse, holder could, nevertheless, maintain suit. (decided under prior law) Lawyers' Realty Co. v. Bank of Ludlow, 256 Ky. 675 , 76 S.W.2d 920, 1934 Ky. LEXIS 469 ( Ky. 1934 ).

Where the assignment of a mortgage to the bank was recorded after the bankruptcy was filed, because of an indorsement in blank, the note was negotiated by transfer alone pursuant to KRS 355.3-205 (2),and the bank’s possession of the note, coupled with its status as a bona fide purchaser rendered it a bearer, pursuant to KRS 355.1-201 (2) and KRS 355.3-301 , that was able to enforce the note against the debtors under KRS 355.9-330 (4); moreover the bank did not violate the automatic stay because it simply recorded its equitable interest in the property, which did not belong to the debtors. Rogan v. Bank One, N.A. (In re Cook), 457 F.3d 561, 2006 FED App. 0284P, 2006 U.S. App. LEXIS 20377 (6th Cir. Ky. 2006 ).

Where assignee of the mortgagee’s interest in debtors’ real property failed to obtain a valid assignment of debtors’ promissory note, the claim to the proceeds of the sale of the real property could be avoided pursuant to 11 U.S.C.S. § 544, as both the note and the mortgage had to be held by the assignee pursuant to valid indorsement and assignment to be enforceable. Where the signature on the instrument is valid, the entity producing the instrument is entitled to payment if such entity proves entitlement to enforce the instrument under KRS 355.3-301 . Rogan v. Vanderbilt Mortg. & Fin., Inc. (In re Dorsey), 491 B.R. 464, 2013 Bankr. LEXIS 1994 (Bankr. E.D. Ky. 2013 ), aff'd, 2014 Bankr. LEXIS 875 (B.A.P. 6th Cir. Mar. 7, 2014).

6.Not in Due Course.

Where defendant failed to prove any defense which would have defeated recovery by original payee had he sued, a holder was able to recover on notes even though the evidence failed to establish that he was a holder in due course. (decided under prior law) Stevens v. Chatfield, 230 Ky. 194 , 18 S.W.2d 1006, 1929 Ky. LEXIS 63 ( Ky. 1929 ).

7.Purchaser After Maturity.

Indorsee who purchased note after maturity was “holder” and could sue in his own name. (decided under prior law) Ohio Valley Banking & Trust Co. v. Great Southern Fire Ins. Co., 176 Ky. 694 , 197 S.W. 399, 1917 Ky. LEXIS 105 ( Ky. 1917 ); Cox v. Riggins, 223 Ky. 510 , 4 S.W.2d 403, 1928 Ky. LEXIS 397 ( Ky. 1928 ).

One who acquired negotiable instruments after maturity as collateral security could sue thereon in his own name. (decided under prior law) Sparr v. Fulton Nat'l Bank, 179 Ky. 755 , 201 S.W. 310, 1918 Ky. LEXIS 286 ( Ky. 1918 ).

8.Checks.

Where, despite evidence of a custom among bankers to look to their immediate indorser in suing on a check and of the solvency of such immediate indorser, the ultimate holder insisted upon suing the maker, there was no evidence of bad faith. (decided under prior law) Choteau Trust & Banking Co. v. Smith, 133 Ky. 418 , 118 S.W. 279, 1909 Ky. LEXIS 186 ( Ky. 1909 ).

Holder of a check could maintain an action on it. (decided under prior law) Thomson v. Peck, 217 Ky. 766 , 290 S.W. 722, 1927 Ky. LEXIS 79 ( Ky. 1927 ); Republic Life & Acci. Ins. Co. v. Hatcher, 244 Ky. 574 , 51 S.W.2d 922, 1932 Ky. LEXIS 482 ( Ky. 1932 ).

9.Discharge by Paying Assignee.

Where holder of negotiable instrument sued on it, the arrangement between the holder, who had legal title, and his assignor, who had vested legal title in him, was no concern of payor, as he could discharge the instrument by paying such assignee. (decided under prior law) McGowan v. People's Bank, 185 Ky. 20 , 213 S.W. 579, 1919 Ky. LEXIS 231 ( Ky. 1919 ).

10.Suit in Name of Beneficial Owner.

Holder had legal title and was subject to any defense which defendant might offer if suit was in name of beneficial owner. (decided under prior law) McGowan v. People's Bank, 185 Ky. 20 , 213 S.W. 579, 1919 Ky. LEXIS 231 ( Ky. 1919 ).

11.Parties Defendant.

A holder could sue the maker on a check, despite evidence of a custom among bankers to look first to their immediate indorser and regardless of the solvency of that indorser. (decided under prior law) Choteau Trust & Banking Co. v. Smith, 133 Ky. 418 , 118 S.W. 279, 1909 Ky. LEXIS 186 ( Ky. 1909 ).

Holder had freedom of choice as to which of several parties liable on instrument he would sue. (decided under prior law) Choteau Trust & Banking Co. v. Smith, 133 Ky. 418 , 118 S.W. 279, 1909 Ky. LEXIS 186 ( Ky. 1909 ).

It was not necessary that the holder of a note should prosecute the maker to insolvency in order to hold the indorser. (decided under prior law) Williams v. Paintsville Nat'l Bank, 143 Ky. 781 , 137 S.W. 535, 1911 Ky. LEXIS 516 ( Ky. 1911 ).

Holder of a note could sue indorser and maker jointly. (decided under prior law) Knoxville Banking & Trust Co. v. Mershon, 152 Ky. 169 , 153 S.W. 238, 1913 Ky. LEXIS 637 ( Ky. 1913 ).

Holder could sue indorser without an attempt to collect from the maker. (decided under prior law) Atkinson v. Skidmore, 152 Ky. 413 , 153 S.W. 456, 1913 Ky. LEXIS 663 ( Ky. 1913 ).

In suit by assignee on a note assignable at law, whether negotiable or not, the assignor was not a necessary party. (decided under prior law) Securities Inv. Co. v. Harrod Bros., 225 Ky. 12 , 7 S.W.2d 492, 1928 Ky. LEXIS 692 ( Ky. 1928 ). And see also, as to negotiable notes, (decided under prior law) McGowan v. People's Bank, 185 Ky. 20 , 213 S.W. 579, 1919 Ky. LEXIS 231 ( Ky. 1919 ); Cox v. Riggins, 223 Ky. 510 , 4 S.W.2d 403, 1928 Ky. LEXIS 397 ( Ky. 1928 ).

12.Holder.

Bank was the holder of a mortgage note and could enforce it because the note contained a valid allonge with a properly executed indorsement in blank and the bank had provided sufficient proof that it acquired possession of the note approximately two years prior to the bankruptcy. Rogan v. EquiFirst Corp. (In re Vickers), 2013 Bankr. LEXIS 1596 (Bankr. E.D. Ky. Apr. 15, 2013).

Bank and its president were properly granted summary judgment on a company’s breach of contract action because the company failed to meet its burden to show that a deposit from its former owner was a loan as the former owner never accepted and possessed the company’s promissory notes, the notes themselves did not establish the existence of a contract governing the deposit, and there was considerable evidence that the parties understood that there was no contract between the parties as to the deposit; because the company failed to establish that the deposit was a loan, the transfer of the funds was unauthorized and the bank properly cancelled and returned them. Wholesale Petro. Partners, L.P. v. South Cent. Bank of Daviess County, Inc., 565 Fed. Appx. 361, 2014 FED App. 0336N, 2014 U.S. App. LEXIS 8256 (6th Cir. Ky. 2014 ).

Bank was not liable to prisoners for conversion because it did not make payment with respect to an instrument for a person not entitled to enforce the instrument; a county jail became a nonholder in possession of the instrument and had the rights of a holder when it lawfully confiscated prisoners' checks, and thus, the jail was entitled to enforce the confiscated checks. Cole v. Warren Cnty., 495 S.W.3d 712, 2015 Ky. App. LEXIS 157 (Ky. Ct. App. 2015).

Circuit court properly granted a bank’s motion for summary judgment in its residential foreclosure action because the bank established its entitlement to enforce the lost note where the bank set forth uncontradicted facts in its lost-note affidavit demonstrating that it could not have reasonably obtained possession of the promissory note, that the promissory note was not transferred, assigned, or satisfied, and provided reasonable and adequate protection to the borrowers, and they failed to set forth contradictory facts, beyond mere conjecture that the promissory note was not transferred, assigned, or satisfied. House v. Deutsche Bank Nat'l Trust, 624 S.W.3d 736, 2021 Ky. App. LEXIS 59 (Ky. Ct. App. 2021).

Research References and Practice Aids

Northern Kentucky Law Review.

Article: From Main Street to Wall Street: Mortgage Loan Securitization and New Challenges Facing Foreclosure Plaintiffs in Kentucky, 36 N. Ky. L. Rev. 395 (2009).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint by Seller to Recover Value of Goods Sold to Defendant and Delivered to a Third Person, Form 190.05.

Caldwell’s Kentucky Form Book, 5th Ed., Complaint of Assignee Against Assignor of Notes, Form 191.07.

355.3-302. Holder in due course.

  1. Subject to subsection (3) of this section and KRS 355.3-106 (4), “holder in due course” means the holder of an instrument if:
    1. The instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and
    2. The holder took the instrument:
      1. For value;
      2. In good faith;
      3. Without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series;
      4. Without notice that the instrument contains an unauthorized signature or has been altered;
      5. Without notice of any claim to the instrument described in KRS 355.3-306 ; and
      6. Without notice that any party has a defense or claim in recoupment described in KRS 355.3-305 (1).
  2. Notice of discharge of a party, other than discharge in an insolvency proceeding, is not notice of a defense under subsection (1) of this section, but discharge is effective against a person who became a holder in due course with notice of the discharge. Public filing or recording of a document does not of itself constitute notice of a defense, claim in recoupment, or claim to the instrument.
  3. Except to the extent a transferor or predecessor in interest has rights as a holder in due course, a person does not acquire rights of a holder in due course of an instrument taken:
    1. By legal process or by purchase in an execution, bankruptcy, or creditor’s sale or similar proceeding;
    2. By purchase as part of a bulk transaction not in ordinary course of business of the transferor; or
    3. As the successor in interest to an estate or other organization.
  4. If, under KRS 355.3-303 (1)(a), the promise of performance that is the consideration for an instrument has been partially performed, the holder may assert rights as a holder in due course of the instrument only to the fraction of the amount payable under the instrument equal to the value of the partial performance divided by the value of the promised performance.
  5. If:
    1. The person entitled to enforce an instrument has only a security interest in the instrument; and
    2. The person obliged to pay the instrument has a defense, claim in recoupment, or claim to the instrument that may be asserted against the person who granted the security interest,

      the person entitled to enforce the instrument may assert rights as a holder in due course only to an amount payable under the instrument which, at the time of enforcement of the instrument, does not exceed the amount of the unpaid obligation secured.

  6. To be effective, notice must be received at a time and in a manner that gives a reasonable opportunity to act on it.
  7. This section is subject to any law limiting status as a holder in due course in particular classes of transactions.

History. Enact. Acts 1958, ch. 77, § 3-302, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 28, effective January 1, 1997.

Official Comment

  1. Subsection (a)(1) is a return to the N.I.L. rule that the taker of an irregular or incomplete instrument is not a person the law should protect against defenses of the obligor or claims of prior owners. This reflects a policy choice against extending the holder in due course doctrine to an instrument that is so incomplete or irregular “as to call into question its authenticity.” The term “authenticity” is used to make it clear that the irregularity or incompleteness must indicate that the instrument may not be what it purports to be. Persons who purchase or pay such instruments should do so at their own risk. Under subsection (1) of former Section 3-304, irregularity or incompleteness gave a purchaser notice of a claim or defense. But it was not clear from that provision whether the claim or defense had to be related to the irregularity or incomplete aspect of the instrument. This ambiguity is not present in subsection (a)(1).
  2. Subsection (a)(2) restates subsection (1) of former Section 3-302. Section 3-305(a) makes a distinction between defenses to the obligation to pay an instrument and claims in recoupment by the maker or the drawer that may be asserted to reduce the amount payable on the instrument. Because of this distinction, which was not made in former Article 3, the reference in subsection (a)(2)(vi) is to both a defense and a claim in recoupment. Notice of forgery or alteration is stated separately because forgery and alteration are not technically defenses under subsection (a) of Section 3-305.
  3. Discharge is also separately treated in the first sentence of subsection (b). Except for discharge in an insolvency proceeding, which is specifically stated to be a real defense in Section 3-305(a)(1), discharge is not expressed in Article 3 as a defense and is not included in Section 3-305(a)(2). Discharge is effective against anybody except a person having rights of a holder in due course who took the instrument without notice of the discharge. Notice of discharge does not disqualify a person from becoming a holder in due course. For example, a check certified after it is negotiated by the payee may subsequently be negotiated to a holder. If the holder had notice that the certification occurred after negotiation by the payee, the holder necessarily had notice of the discharge of the payee as indorser. Section 3-415(d). Notice of that discharge does not prevent the holder from becoming a holder in due course, but the discharge is effective against the holder. Section 3-601(b). Notice of a defense under Section 3-305(a)(1) of a maker, drawer or acceptor based on a bankruptcy discharge is different. There is no reason to give holder in due course status to a person with notice of that defense. The second sentence of subsection (b) is from former Section 3-304(5).
  4. Professor Britton in his treatise Bills and Notes 309 (1961) stated: “A substantial number of decisions before the [N.I.L.] indicates that at common law there was nothing in the position of the payee as such which made it impossible for him to be a holder in due course.” The courts were divided, however, about whether the payee of an instrument could be a holder in due course under N.I.L.. Some courts read N.I.L. § 52(4) to mean that a person could be a holder in due course only if the instrument was “negotiated” to that person. N.I.L. § 30 stated that “an instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof.“ Normally, an instrument is “issued” to the payee; it is not transferred to the payee. N.I.L. § 191 defined “issue” as the “first delivery of the instrument * * * to a person who takes it as a holder.” Thus, some courts concluded that the payee never could be a holder in due course. Other courts concluded that there was no evidence that the N.I.L. was intended to change the common law rule that the payee could be a holder in due course. Professor Britton states on p. 318: “The typical situations which raise the [issue] are those where the defense of a maker is interposed because of fraud by a [maker who is] principal debtor * * * against a surety co-maker, or where the defense of fraud by a purchasing remitter is interposed by the drawer of the instrument against the good faith purchasing payee.”

    Former Section 3-302(2) stated: “A payee may be a holder in due course.” This provision was intended to resolve the split of authority under the N.I.L.. It made clear that there was no intent to change the common law rule that allowed a payee to become a holder in due course. See Comment 2 to former Section 3-302. But there was no need to put subsection (2) in former Section 3-302 because the split in authority under the N.I.L. was caused by the particular wording of N.I.L. § 52(4). The troublesome language in that section was not repeated in former Article 3 nor is it repeated in revised Article 3. Former Section 3-302(2) has been omitted in revised Article 3 because it is surplusage and may be misleading. The payee of an instrument can be a holder in due course, but use of the holder-in-due-course doctrine by the payee of an instrument is not the normal situation.

    The primary importance of the concept of holder in due course is with respect to assertion of defenses or claims in recoupment (Section 3-305) and of claims to the instrument (Section 3-306). The holder-in-due-course doctrine assumes the following case as typical. Obligor issues a note or check to Obligee. Obligor is the maker of the note or drawer of the check. Obligee is the payee. Obligor has some defense to Obligor’s obligation to pay the instrument. For example, Obligor issued the instrument for goods that Obligee promised to deliver. Obligee never delivered the goods. The failure of Obligee to deliver the goods is a defense. Section 3-303(b). Although Obligor has a defense against Obligee, if the instrument is negotiated to Holder and the requirements of subsection (a) are met, Holder may enforce the instrument against Obligor free of the defense. Section 3-305(b). In the typical case the holder in due course is not the payee of the instrument. Rather, the holder in due in due course is an immediate or remote transferee of the payee. If Obligor in our example is the only obligor on the check or note, the holder-in-due-course doctrine is irrelevant in determining rights between Obligor and Obligee with respect to the instrument.

    But in a small percentage of cases it is appropriate to allow the payee of an instrument to assert rights as a holder in due course. The cases are like those referred to in the quotation from Professor Britton referred to above, or other cases in which conduct of some third party is the basis of the defense of the issuer of the instrument. The following are examples:

    Case #1. Buyer pays for goods bought from Seller by giving to Seller a cashier’s check bought from Bank. Bank has a defense to its obligation to pay the check because Buyer bought the check from Bank with a check known to be drawn on an account with insufficient funds to cover the check. If Bank issued the check to Buyer as payee and Buyer indorsed it over to Seller, it is clear that Seller can be a holder in due course taking free of the defense if Seller had no notice of the defense. Seller is a transferee of the check. There is no good reason why Seller’s position should be any different if Bank drew the check to the order of Seller as payee. In that case, when Buyer took delivery of the check from Bank, Buyer became the owner of the check even though Buyer was not the holder. Buyer was a remitter. Section 3-103(a)(15). At that point nobody was the holder. When Buyer delivered the check to Seller, ownership of the check was transferred to Seller who also became the holder. This is a negotiation. Section 3-201. The rights of Seller should not be affected by the fact that in one case the negotiation to Seller was by a holder and in the other case the negotiation was by a remitter. Moreover, it should be irrelevant whether Bank delivered the check to Buyer and Buyer delivered it to Seller or whether Bank delivered it directly to Seller. In either case Seller can be a holder in due course that takes free of Bank’s defense.

    Case #2. X fraudulently induces Y to join X in a spurious venture to purchase a business. The purchase is to be financed by a bank loan for part of the price. Bank lends money to X and Y by deposit in a joint account of X and Y who sign a note payable to Bank for the amount of the loan. X then withdraws the money from the joint account and absconds. Bank acted in good faith and without notice of the fraud of X against Y. Bank is payee of the note executed by Y, but its right to enforce the note against Y should not be affected by the fact that Y was induced to execute the note by the fraud of X. Bank can be a holder in due course that takes free of the defense of Y. Case #2 is similar to Case #1. In each case the payee of the instrument has given value to the the person committing the fraud in exchange for the obligation of the person against whom the fraud was committed. In each case the payee was not party to the fraud and had no notice of it.

    Suppose in Case #2 that the note does not meet the requirements of Section 3-104(a) and thus is not a negotiable instrument covered by Article 3. In that case, Bank cannot be a holder in due course but the result should be the same. Bank’s rights are determined by general principles of contract law. Restatement Second, Contracts § 164(2) governs the case. If Y is induced to enter into a contract with Bank by a fraudulent misrepresentation by X, the contract is voidable by Y unless Bank “in good faith and without reason to know of the misrepresentation either gives value or relies materially on the transaction.” Comment e to § 164(2) states:

    “This is the same principle that protects an innocent person who purchases goods or commercial paper in good faith, without notice and for value from one who obtained them from the original owner by misrepresentation. See Uniform Commercial Code § 2-403(a), 3-305. In the cases that fall within [§ 164(2)], however, the innocent person deals directly with the recipient of the misrepresentation, which is made by one not a party to the contract.”

    The same result follows in Case #2 if Y had been induced to sign the note as an accommodation party (Section 3-419). If Y signs as co-maker of a note for the benefit of X, Y is a surety with respect to the obligation of X to pay the note but is liable as maker of the note to pay Bank. Section 3-419(b). If Bank is a holder in due course, the fraud of X cannot be asserted against Bank under Section 3-305(b). But the result is the same without resort to holder-in-due-course doctrine. If the note is not a negotiable instrument governed by Article 3, general rules of suretyship apply. Restatement, Security § 119 states that the surety (Y) cannot assert a defense against the creditor (Bank) based on the fraud of the principal (X) if the creditor “without knowledge of the fraud * * * extended credit to the principal on the security of the surety’s promise * * *.” The underlying principle of § 119 is the same as that of § 164(2) of Restatement Second, Contracts.

    Case #3. Corporation draws a check payable to Bank. The check is given to an officer of Corporation who is instructed to deliver it to Bank in payment of a debt owed by Corporation to Bank. Instead, the officer, intending to defraud Corporation, delivers the check to Bank in payment of the officer’s personal debt, or the check is delivered to Bank for deposit to the officer’s personal account. If Bank obtains payment of the check, Bank has received funds of Corporation which have been used for the personal benefit of the officer. Corporation in this case will assert a claim to the proceeds of the check against Bank. If Bank was a holder in due course of the check it took the check free of the Corporation’s claim. Section 3-306. The issue in this case is whether Bank had notice of the claim when it took the check. If Bank knew that the officer was a fiduciary with respect to the check, the issue is governed by Section 3-307.

    Case #4. Employer, who owed money to X, signed a blank check and delivered it to Secretary with instructions to complete the check by typing in X’s name and the amount owed to X. Secretary fraudulently completed the check by typing in the name of Y, a creditor to whom the Secretary owed money. Secretary then delivered the check to Y in payment of Secretary’s debt. Y obtained payment of the check. This case is similar to Case #3. Since Secretary was authorized to complete the check, Employer is bound by Secretary’s act in making the check payable to Y. The drawee bank properly paid the check. Y received funds of Employer which were used for the personal benefit of Secretary. Employer asserts a claim to these funds against Y. If Y is a holder in due course, Y takes free of the claim. Whether Y is a holder in due course depends upon whether Y had notice of Employer’s claim.

  5. Subsection (c) is based on former Section 3-302(3). Like former Section 3-302(3), subsection (c) is intended to state existing case law. It covers a few situations in which the purchaser takes an instrument under unusual circumstances. The purchaser is treated as a successor in interest to the prior holder and can acquire no better rights. But if the prior holder was a holder in due course, the purchaser obtains rights of a holder in due course.

    Subsection (c) applies to a purchaser in an execution sale or sale in bankruptcy. It applies equally to an attaching creditor or any other person who acquires the instrument by legal process or to a representative, such as an executor, administrator, receiver, or assignee for the benefit of creditors, who takes the instrument as part of an estate. Subsection (c) applies to bulk purchases lying outside of the ordinary course of business of the seller. For example, it applies to the purchase by one bank of a substantial part of the paper held by another bank which is threatened with insolvency and seeking to liquidate its assets. Subsection (c) would also apply when a new partnership takes over for value all of the assets of an old one after a new member has entered the firm, or to a reorganized or consolidated corporation taking over the assets of a predecessor.

    In the absence of controlling state law to the contrary, subsection (c) applies to a sale by a state bank commissioner of the assets of an insolvent bank. However, subsection (c) may be preempted by federal law if the Federal Deposit Insurance Corporation takes over an insolvent bank. Under the governing federal law, the FDIC and similar financial institution insurers are given holder in due course status and that status is also acquired by their assignees under the shelter doctrine.

  6. Subsection (d) and (e) clarify two matters not specifically addressed by former Article 3:

    Case #5. Payee negotiates a $1,000 note to Holder who agrees to pay $900 for it. After paying $500, Holder learns that Payee defrauded Maker in the transaction giving rise to the note. Under subsection (d) Holder may assert rights as a holder in due course to the extent of $555.55 ($500 ÷ $900 = .555 × $1,000 = $555.55). This formula rewards Holder with a ratable portion of the bargained for profit.

    Case #6. Payee negotiates a note of Maker for $1,000 to Holder as security for payment of Payee’s debt to Holder of $600. Maker has a defense which is good against Payee but of which Holder has no notice. Subsection (e) applies. Holder may assert rights as a holder in due course only to the extent of $600. Payee does not get the benefit of the holder-in-due-course status of Holder. With respect to $400 of the note, Maker may assert any rights that Maker has against Payee. A different result follows if the payee of a note negotiated it to a person who took it as a holder in due course and that person pledged the note as security for a debt. Because the defense cannot be asserted against the pledgor, the pledgee can assert rights as a holder in due course for the full amount of the note for the benefit of both the pledgor and the pledgee.

  7. There is a large body of state statutory and case law restricting the use of the holder in due course doctrine in consumer transactions as well as some business transactions that raise similar issues. Subsection (g) subordinates Article 3 to that law and any other similar law that may evolve in the future. Section 3-106(d) also relates to statutory or administrative law intended to restrict use of the holder-in-due-course doctrine. See Comment 3 to Section 3-106.
  8. The status as a holder in due course resembles the status of protected holder under Article 29 of the Convention on International Bills of Exchange and International Promissory Notes. The requirements for being a protected holder under Article 29 generally track those of Section 3-302.

NOTES TO DECISIONS

1.Holder in Due Course.

For one to become a holder in due course, the paper had to be transferred to him before maturity, in good faith, for value and without notice of any infirmity in the instrument or defect in the title of the person negotiating it. (decided under prior law) Williamson v. Payne, 300 Ky. 161 , 188 S.W.2d 96, 1945 Ky. LEXIS 507 ( Ky. 1945 ).

Where the Commissioner of Banking (now Commissioner of Financial Institutions) sold some of the assets of the bank to another bank and transferred the remainder of the assets in bulk to F.D.I.C., such a transaction did not possess the characteristics of a sale for value, in good faith and without notice of defense and, accordingly, the F.D.I.C. was not a holder in due course, but stood in the shoes of the bank and was subject to the same defenses. (decided under prior law) Henkin, Inc. v. Berea Bank & Trust Co., 566 S.W.2d 420, 1978 Ky. App. LEXIS 520 (Ky. Ct. App. 1978).

The Federal Deposit Insurance Corporation was not a holder in due course of the two notes, where the loans had been turned over to it as receiver for collection. (decided under prior law) Federal Deposit Ins. Corp. v. Gamaliel Farm Supply, Inc., 726 S.W.2d 709, 1987 Ky. App. LEXIS 440 (Ky. Ct. App. 1987).

Bank was a holder, not a holder in due course, of the forged instruments and took the checks subject to all claims against them because a special situation exists where a payee is a bank that accepts a check from one that is not the maker and that person requests that the bank credit his (the forger’s) personal account with the proceeds, since the bank is required to hold the proceeds of the instrument subject to the order of the maker and not the presenter (the forger). (decided under prior law) Federal Land Bank v. Hardin-Mapes Coal Corp., 817 S.W.2d 225, 1991 Ky. LEXIS 138 ( Ky. 1991 ).

2.Taking the Instrument.

Where cashier of payee-bank indorsed note and placed it in envelope with indorsee’s name thereon but indorsee knew nothing of such fact until after maturity, indorsee was not holder in due course. (decided under prior law) Hughes v. West, 217 Ky. 40 , 288 S.W. 1011, 1926 Ky. LEXIS 4 ( Ky. 1926 ).

One who was indorsee of note given him in part payment for a house and who continued to hold the note (which had then matured) as rental payment after the purchase contract had been canceled was still a holder in due course, there being no new taking. (decided under prior law) Spicer v. Reynolds, 226 Ky. 820 , 11 S.W.2d 948, 1928 Ky. LEXIS 178 ( Ky. 1928 ).

3.Value.

Mere possession of negotiable bonds before maturity without more was not sufficient to prove one a holder for value, but evidence sustained finding plaintiff and person from whom plaintiff inherited were holders in due course. (decided under prior law) Rich v. Pappas, 229 F.2d 308, 1956 U.S. App. LEXIS 4386 (6th Cir. Ky. 1956 ).

The amount of the consideration was not important or decisive provided there was consideration in some amount; nor was it necessary that the consideration be in the form of money. The performance of services or the exchange of property would suffice. (decided under prior law) Rich v. Pappas, 229 F.2d 308, 1956 U.S. App. LEXIS 4386 (6th Cir. Ky. 1956 ).

That holder did not take the stand and that he purchased the notes at a 25 per cent discount did not warrant jury inferring that he was not a holder in due course. (decided under prior law) Pratt v. Rounds, 160 Ky. 358 , 169 S.W. 848, 1914 Ky. LEXIS 465 ( Ky. 1914 ).

Where a maker was, by misrepresentation of value of the consideration given, induced to sign a document knowing it to be a negotiable instrument, such evidence was not a defense against a holder in due course. (decided under prior law) Worden v. Kennedy, 246 Ky. 716 , 56 S.W.2d 329, 1933 Ky. LEXIS 12 ( Ky. 1933 ).

4.Good Faith.

Where holder bought note which bore indication that it had been detached from another paper, he nevertheless had purchased in good faith. (decided under prior law) Robertson v. Commercial Sec. Co., 152 Ky. 336 , 153 S.W. 450, 1913 Ky. LEXIS 660 ( Ky. 1913 ).

Note purchased one day prior to the due date of the first instalment was evidence of purchase in good faith. (decided under prior law) Harrison v. Ford, 158 Ky. 467 , 165 S.W. 663, 1914 Ky. LEXIS 645 ( Ky. 1914 ).

Rights of a purchaser of a negotiable paper were not to be defeated upon suspicion. (decided under prior law) Pratt v. Rounds, 160 Ky. 358 , 169 S.W. 848, 1914 Ky. LEXIS 465 ( Ky. 1914 ); Montenegro-Riehm Music Co. v. Illinois Trust & Sav. Bank, 164 Ky. 608 , 176 S.W. 32, 1915 Ky. LEXIS 430 ( Ky. 1915 ).

That cashier of plaintiff bank knew that note in suit had been given for stock sold and that he received fee for suggesting name of purchaser was not sufficient to prove that the bank’s taking was not in good faith. (decided under prior law) Farmers' Bank of Lynnville v. First Nat'l Bank, 164 Ky. 548 , 175 S.W. 1019, 1915 Ky. LEXIS 410 ( Ky. 1915 ).

Proof that plaintiff purchased the notes for value and before maturity did not establish good faith. (decided under prior law) Commercial Sec. Co. v. Archer, 179 Ky. 842 , 201 S.W. 479, 1918 Ky. LEXIS 300 ( Ky. 1918 ).

Failure of a purchaser to act as an “ordinarily prudent person under the same circumstances” was not proof of bad faith. (decided under prior law) Citizens' State Bank v. Johnson County, 182 Ky. 531 , 207 S.W. 8, 1918 Ky. LEXIS 419 ( Ky. 1918 ).

Where marks, apparently indicating cancellation, appeared on an instrument, but were not reasonably discoverable in the usual course of business, instrument was regular on its face. (decided under prior law) Citizens' State Bank v. Johnson County, 182 Ky. 531 , 207 S.W. 8, 1918 Ky. LEXIS 419 ( Ky. 1918 ).

That plaintiff-holder was father of payee was insufficient to prove lack of good faith. (decided under prior law) Young v. Jewell, 206 Ky. 380 , 267 S.W. 164, 1924 Ky. LEXIS 332 ( Ky. 1924 ).

Where a company knew that certain of its bonds had been stolen from their owner and it purchased such bonds without seeing them or asking the seller to specifically identify them, and the company’s agent who handled the purchase was also the one who was engaged in a search for the bonds, such company could not be said to have purchased in good faith. (decided under prior law) Kentucky Rock Asphalt Co. v. Mazza's Adm'r, 264 Ky. 158 , 94 S.W.2d 316, 1936 Ky. LEXIS 283 ( Ky. 1936 ).

Where there was no conflict in the evidence as to good faith, it was the duty of the court to apply the law to such undisputed facts. (decided under prior law) Kentucky Rock Asphalt Co. v. Mazza's Adm'r, 264 Ky. 158 , 94 S.W.2d 316, 1936 Ky. LEXIS 283 ( Ky. 1936 ).

Where former investment company employee purchased treasurer’s check made payable to fictitious person with check drawn against a corporation account, check was payable to bearer and negotiable and the investment company accepting it in payment of funds embezzled by the employee was a holder in due course, since it did not have actual knowledge of any infirmity or defect and “bad faith” was not shown. (decided under prior law) Louisville Credit Men's Asso. v. Motors Inv. Co., 394 S.W.2d 760, 1965 Ky. LEXIS 206 ( Ky. 1965 ).

5.Notice Note Overdue.

Where note was made payable only two days after date for the express purpose, on the part of a third party, of having it transferred to a holder before maturity but to then become immediately collectible, such holder, nevertheless, took before it was overdue and in good faith. (decided under prior law) Wilkins v. Usher, 123 Ky. 696 , 97 S.W. 37, 29 Ky. L. Rptr. 1232 , 1906 Ky. LEXIS 200 ( Ky. 1906 ).

Only the defenses available for a nonnegotiable instrument were available for an instrument purchased after it was overdue. (decided under prior law) Austin v. First Nat'l Bank, 150 Ky. 113 , 150 S.W. 8, 1912 Ky. LEXIS 839 ( Ky. 1912 ).

Where note showed on its face that the date of payment had been altered from “May, 1907” to “May, 1908,” and a holder took it in November 1907, he was charged with notice that the instrument was overdue. (decided under prior law) Pensacola State Bank v. Melton, 210 F. 57, 1913 U.S. Dist. LEXIS 1024 (D. Ky. 1913 ).

Where there was conflict in the evidence as to whether holder took the instrument before it was overdue or not, a motion for a directed verdict for the holder should have been overruled. (decided under prior law) Barnard v. Napier, 167 Ky. 824 , 181 S.W. 624, 1916 Ky. LEXIS 483 ( Ky. 1916 ).

Where bank acquired note after it was overdue, it was not a holder in due course, and the note was subject to the defense that it had been paid before its transfer to the bank. (decided under prior law) First Nat'l Bank v. Carpenter, 237 Ky. 708 , 36 S.W.2d 343, 1931 Ky. LEXIS 674 ( Ky. 1931 ).

Where X bank pledged note to Y bank, under contract made before maturity but approved by directors of each bank after maturity, the approval dated back and Y bank took before maturity. (decided under prior law) First Nat'l Bank v. Combs, 237 Ky. 834 , 36 S.W.2d 644, 1931 Ky. LEXIS 703 ( Ky. 1931 ).

6.Notice After Acquisition.

Notice acquired after obtaining an instrument did not prevent the holder being in due course. (decided under prior law) Gibson v. First Nat'l Bank, 196 Ky. 119 , 244 S.W. 290, 1922 Ky. LEXIS 459 ( Ky. 1922 ); Worden v. Kennedy, 246 Ky. 716 , 56 S.W.2d 329, 1933 Ky. LEXIS 12 ( Ky. 1933 ).

7.Negotiation on Due Date.

As maker had all of the day on which an instrument fell due to pay it, it could be negotiated any time on that day and such negotiation would be before maturity and holder would be in due course. (decided under prior law) Paintsville Nat'l Bank v. Robinson, 220 Ky. 418 , 295 S.W. 412, 1927 Ky. LEXIS 543 ( Ky. 1927 ).

8.Omission of Time of Payment.

Where payment clause in note reads “within ten ——,” indicating omission of apparently intended word “months,” it was not complete and regular on its face. (decided under prior law) Remedial Plan, Inc. v. Ott, 199 Ky. 161 , 250 S.W. 825, 1923 Ky. LEXIS 785 ( Ky. 1923 ).

9.Omissions in Promise to Pay Clause.

Where, on a printed note form, the pronoun “I” or “we” was omitted from the “promise to pay” clause, instrument was nevertheless complete and regular on its face. (decided under prior law) Securities Inv. Co. v. Harrod Bros., 225 Ky. 12 , 7 S.W.2d 492, 1928 Ky. LEXIS 692 ( Ky. 1928 ).

10.Alteration of Date.

Where holder had taken an instrument on which date of payment had been obviously altered, he was not a holder in due course. (decided under prior law) Pensacola State Bank v. Melton, 210 F. 57, 1913 U.S. Dist. LEXIS 1024 (D. Ky. 1913 ).

11.Fraud.

An uncontradicted denial of notice of any fraud which may have attached to the issuance of the instrument in suit was sufficient to entitle a purchaser to a directed verdict that he was a holder in due course. (decided under prior law) Traders' Sec. Co. v. J. E. Oslin & Son, 227 Ky. 828 , 14 S.W.2d 149, 1929 Ky. LEXIS 977 ( Ky. 1929 ).

After it was established that a note had been obtained by fraud, then the burden was upon the holder to show that he was a bona fide holder, since, if he was not, the defense available to defendant as against payee was also available as against plaintiff who was not a bona fide holder. (decided under prior law) Stevens v. Bailey, 228 Ky. 436 , 15 S.W.2d 263, 1929 Ky. LEXIS 562 ( Ky. 1929 ).

Where payee-bank acted as collecting agent for indorsee-holder, there was not created such an agency that the payee’s knowledge of fraud in the issuance of a note was imputed to the indorsee. (decided under prior law) Beck v. First Nat'l Bank, 250 Ky. 764 , 63 S.W.2d 937, 1933 Ky. LEXIS 769 ( Ky. 1933 ).

12.Indorsement.

Where X indorsed notes to Y, with the limitation that they were to be used only as collateral for one certain note held by bank, and Y pledged them as collateral for his general indebtedness at the bank, the bank was a holder in due course if it took without notice of such limitation on the authority to pledge. (decided under prior law) American Nat'l Bank v. J. S. Minor & Son, 142 Ky. 792 , 135 S.W. 278, 1911 Ky. LEXIS 287 ( Ky. 1911 ).

Where a note payable to two payees was indorsed by only one, it was not complete and regular on its face. (decided under prior law) Karsner v. Cooper, 195 Ky. 8 , 241 S.W. 346, 1922 Ky. LEXIS 274 ( Ky. 1922 ).

Where buyer entered into agreements with two sellers and gave sellers two promissory notes which were subsequently transferred to third party, one with indorsement and one without indorsement, and said notes were subsequently transferred to bank, such transferee was a holder without indorsement throughout the entire time the notes were in its possession and the notes were payable to order and as such could only be negotiated by indorsement; thus transferee had the right to indorsement when it assigned its rights to bank and such right necessarily passed to bank; however without the indorsement, the requirement of prior negotiation was absent and bank was a mere transferee and not a holder in due course and as a transferee, the bank was subject to buyer’s defenses and claims regarding the notes. (decided under prior law) J.P. Morgan Delaware v. Onyx Arabians II, Ltd., 825 F. Supp. 146, 1993 U.S. Dist. LEXIS 8694 (W.D. Ky. 1993 ).

13.Payee.

Even though certificate of deposit was payable to “himself order . . . . . on return of this certificate properly indorsed” instead of payable to “himself on order,” such certificate was complete and regular on its face. (decided under prior law) Coffey v. Day & Night Nat'l Bank, 21 F.2d 661, 1926 U.S. Dist. LEXIS 1781 (D. Ky. 1926 ), aff'd, 25 F.2d 403, 1928 U.S. App. LEXIS 2973 (6th Cir. Ky. 1928 ).

Payee was not a holder in due course. (decided under prior law) Southern Nat'l Life Realty Corp. v. People's Bank of Bardstown, 178 Ky. 80 , 198 S.W. 543, 1917 Ky. LEXIS 685 ( Ky. 1917 ), modified, 179 Ky. 113 , 200 S.W. 313, 1918 Ky. LEXIS 172 ( Ky. 1918 ); Fidelity & Columbia Trust Co. v. Nordeman, 266 Ky. 106 , 98 S.W.2d 47, 1936 Ky. LEXIS 601 ( Ky. 1936 ).

Payee was holder in due course on grounds of estoppel. (decided under prior law) Thomson v. Peck, 217 Ky. 766 , 290 S.W. 722, 1927 Ky. LEXIS 79 ( Ky. 1927 ); Roberts v. Rider, 255 Ky. 266 , 73 S.W.2d 17, 1934 Ky. LEXIS 210 ( Ky. 1934 ).

Note was subject to the same defenses between payee and maker as if it were not negotiable. (decided under prior law) Gannon v. Bronston, 246 Ky. 612 , 55 S.W.2d 358, 1932 Ky. LEXIS 789 ( Ky. 1932 ).

14.Drawee Bank.

The drawee bank which had paid the check was not a subsequent holder in due course. (decided under prior law) United States v. Citizens Union Nat. Bank, 40 F. Supp. 609, 1941 U.S. Dist. LEXIS 2732 (D. Ky. 1941 ).

15.Assignee as Advancement of Payee’s Estate.

Where note payable 12 months after date was assigned to plaintiff as advancement of payee’s estate on day following its execution, plaintiff was a holder in due course. (decided under prior law) James v. James, 281 Ky. 447 , 136 S.W.2d 536, 1940 Ky. LEXIS 45 ( Ky. 1940 ).

16.Pledgees.

A bank, from which its cashier took funds to discharge his debt to another institution, was not a holder in due course of a note fraudulently pledged by the cashier as collateral for his debt. (decided under prior law) Pensacola State Bank v. Thornberry, 226 F. 611, 1915 U.S. App. LEXIS 2231 (6th Cir. Ky. 1915 ).

One who was a holder in due course by reason of being a pledgee, rather than a purchaser, was a holder in due course only to the extent of the indebtedness which the pledge secured. (decided under prior law) Rich v. Pappas, 229 F.2d 308, 1956 U.S. App. LEXIS 4386 (6th Cir. Ky. 1956 ).

17.Reference in Instrument to Governing Law.

Holder was bound by specific references in the instrument to the laws governing same. (decided under prior law) Pulaski County v. Ben Hur Life Ass'n, 286 Ky. 119 , 149 S.W.2d 738, 1941 Ky. LEXIS 210 ( Ky. 1941 ).

18.Pleadings.

General demurrer to an answer alleging holder’s knowledge of a defect in title admitted that holder was not holder in due course. (decided under prior law) Gibbs v. Metcalf, 201 Ky. 504 , 256 S.W. 1109, 1923 Ky. LEXIS 303 ( Ky. 1923 ).

19.Judicial Sale Purchaser.

Under KRS 426.290 a purchaser of encumbered property at a sheriff’s sale does not acquire title but only acquires a lien; further, a purchaser at a sheriff’s sale is not an innocent purchaser simply because he has purchased at a judicial sale or acquired under legal process. A prevalent misconception is that one purchasing at a judicial sale gets something of a superior title simply because of his position. (decided under prior law) Tabers v. Jackson Purchase Production Credit Asso., 649 S.W.2d 202, 1983 Ky. App. LEXIS 283 (Ky. Ct. App. 1983).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint of Assignee Against Accommodation Indorser of Note, Averring Payor’s Insolvency, Form 191.09.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Commercial Paper, § 191.00.

355.3-303. Value and consideration.

  1. An instrument is issued or transferred for value if:
    1. The instrument is issued or transferred for a promise of performance, to the extent the promise has been performed;
    2. The transferee acquires a security interest or other lien in the instrument other than a lien obtained by judicial proceeding;
    3. The instrument is issued or transferred as payment of, or as security for, an antecedent claim against any person, whether or not the claim is due;
    4. The instrument is issued or transferred in exchange for a negotiable instrument; or
    5. The instrument is issued or transferred in exchange for the incurring of an irrevocable obligation to a third party by the person taking the instrument.
  2. “Consideration” means any consideration sufficient to support a simple contract. The drawer or maker of an instrument has a defense if the instrument is issued without consideration. If an instrument is issued for a promise of performance, the issuer has a defense to the extent performance of the promise is due and the promise has not been performed. If an instrument is issued for value as stated in subsection (1) of this section, the instrument is also issued for consideration.

History. Enact. Acts 1958, ch. 77, § 3-303, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 29, effective January 1, 1997.

Official Comment

  1. Subsection (a) is a restatement of former Section 3-303 and subsection (b) replaces former Section 3-408. The distinction between value and consideration in Article 3 is a very fine one. Whether an instrument is taken for value is relevant to the issue of whether a holder is a holder in due course. If an instrument is not issued for consideration the issuer has a defense to the obligation to pay the instrument. Consideration is defined in subsection (b) as “any consideration sufficient to support a simple contract.” The definition of value in Section 1-201(44), which doesn’t apply to Article 3, includes “any consideration sufficient to support a simple contract.” Thus, outside Article 3, anything that is consideration is also value. A different rule applies in Article 3. Subsection (b) of Section 3-303 states that if an instrument is issued for value it is also issued for consideration.

    Case #1. X owes Y $1,000. The debt is not represented by a note. Later X issues a note to Y for the debt. Under subsection (a)(3) X’s note is issued for value. Under subsection (b) the note is also issued for consideration whether or not, under contract law, Y is deemed to have given consideration for the note.

    Case #2. X issues a check to Y in consideration of Y’s promise to perform services in the future. Although the executory promise is consideration for issuance of the check it is value only to the extent the promise is performed. Subsection (a)(1).

    Case #3. X issues a note to Y in consideration of Y’s promise to perform services. If at the due date of the note Y’s performance is not yet due, Y may enforce the note because it was issued for consideration. But if at the due date of the note, Y’s performance is due and has not been performed, X has a defense. Subsection (b).

  2. Subsection (a), which defines value, has primary importance in cases in which the issue is whether the holder of an instrument is a holder in due course and particularly to cases in which the issuer of the instrument has a defense to the instrument. Suppose Buyer and Seller signed a contract on April 1 for the sale of goods to be delivered on May 1. Payment of 50% of the price of the goods was due upon signing of the contract. On April 1 Buyer delivered to Seller a check in the amount due under the contract. The check was drawn by X to Buyer as payee and was indorsed to Seller. When the check was presented for payment to the drawee on April 2, it was dishonored because X had stopped payment. At that time Seller had not taken any action to perform the contract with Buyer. If X has a defense on the check, the defense can be asserted against Seller who is not a holder in due course because Seller did not give value for the check. Subsection (a)(1). The policy basis for subsection (a)(1) is that the holder who gives an executory promise of performance will not suffer an out-of-pocket loss to the extent the executory promise is unperformed at the time the holder learns of the dishonor of the instrument. When Seller took delivery of the check on April 1, Buyer’s obligation to pay 50% of the price on that date was suspended, but when the check was dishonored on April 2 the obligation revived. Section 3-310(b). If payment for goods is due at or before delivery and the buyer fails to make the payment, the seller is excused from performing the promise to deliver the goods. Section 2-703. Thus, Seller is protected from an out-of-pocket loss even if the check is not enforceable. Holder-in-due-course status is not necessary to protect Seller.
  3. Subsection (a)(2) equates value with the obtaining of a security interest or a nonjudicial lien in the instrument. The term “security interest” covers Article 9 cases in which an instrument is taken as collateral as well as bank collection cases in which a bank acquires a security interest under Section 4-210. The acquisition of a common-law or statutory banker’s lien is also value under subsection (a)(2). An attaching creditor or other person who acquires a lien by judicial proceedings does not give value for the purposes of subsection (a)(2).
  4. Subsection (a)(3) follows former Section 3-303(b) in providing that the holder takes for value if the instrument is taken in payment of or as security for an antecedent claim, even though there is no extension of time or other concession, and whether or not the claim is due. Subsection (a)(3) applies to any claim against any person; there is no requirement that the claim arise out of contract. In particular the provision is intended to apply to an instrument given in payment of or as security for the debt of a third person, even though no concession is made in return.
  5. Subsection (a)(4) and (5) restate former Section 3-303(c). They state generally recognized exceptions to the rule that an executory promise is not value. A negotiable instrument is value because it carries the possibility of negotiation to a holder in due course, after which the party who gives it is obliged to pay. The same reasoning applies to any irrevocable commitment to a third person, such as a letter of credit issued when an instrument is taken.
  6. The term “promise” in paragraph (a)(1) is used in the phrase “promise of performance” and for that reason does not have the specialized meaning given that term in Section 3-103(a)(12). See Section 1-201 (“Change from Former Law”). No inference should be drawn from the decision to use the phrase “promise of performance,” although the phrase does include the word “promise,” which has the specialized definition set forth in Section 3-103. Indeed, that is true even though “undertaking” in used instead of “promise” in Section 3-104(a)(3). See Section 3-104 Comment 1 (explaining the use of the term “undertaking” in Section 3-104 to avoid use of the defined term “promise”).

NOTES TO DECISIONS

1.Lienholder.

Where a note was pledged as security, it was immaterial whether it was pledged at the time the loan was made or subsequent thereto. (decided under prior law) Melton v. Pensacola Bank & Trust Co., 190 F. 126, 1911 U.S. App. LEXIS 4430 (6th Cir. Ky. 1911 ).

Where notes were delivered to holder as collateral on the agreement that should he have to pay a certain obligation he would become sole owner, and he did have to pay the obligation, he was no longer a lienholder but recovered the full face of the note even though it exceeded the original amount which he paid out. (decided under prior law) Jett v. Standafer, 143 Ky. 787 , 137 S.W. 513, 1911 Ky. LEXIS 503 ( Ky. 1911 ).

Where a pledgee sued to enforce payment of a note held as collateral security, he could recover only the amount of his lien when the maker had a valid defense against the pledgor-payee. (decided under prior law) Elk Valley Coal Co. v. Third Nat'l Bank, 157 Ky. 617 , 163 S.W. 766, 1914 Ky. LEXIS 344 ( Ky. 1914 ).

2.Holder Through Lienholder.

Where X claimed title through a holder in due course who held note as collateral security, X could recover only to the amount of the lien of the prior holder when, with X’s knowledge, the note was originally issued in fraud. (decided under prior law) Thomas v. Siddens, 230 Ky. 651 , 20 S.W.2d 482, 1928 Ky. LEXIS 1 ( Ky. 1928 ).

3.Payment of Antecedent Claim.

Where a note was given with the understanding that the payee would satisfy all of a judgment jointly outstanding against maker and payee, such note was taken for value. (decided under prior law) Hermann's Ex'r v. Gregory, 131 Ky. 819 , 115 S.W. 809, 1909 Ky. LEXIS 65 ( Ky. 1909 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Answer Pleading Failure of Consideration, Form 191.13.

355.3-304. Overdue instrument.

  1. An instrument payable on demand becomes overdue at the earliest of the following times:
    1. On the day after the day demand for payment is duly made;
    2. If the instrument is a check, ninety (90) days after its date; or
    3. If the instrument is not a check, when the instrument has been outstanding for a period of time after its date which is unreasonably long under the circumstances of the particular case in light of the nature of the instrument and usage of the trade.
  2. With respect to an instrument payable at a definite time the following rules apply:
    1. If the principal is payable in installments and a due date has not been accelerated, the instrument becomes overdue upon default under the instrument for nonpayment of an installment, and the instrument remains overdue until the default is cured.
    2. If the principal is not payable in installments and the due date has not been accelerated, the instrument becomes overdue on the day after the due date.
    3. If a due date with respect to principal has been accelerated, the instrument becomes overdue on the day after the accelerated due date.
  3. Unless the due date of principal has been accelerated, an instrument does not become overdue if there is default in payment of interest but no default in payment of principal.

History. Enact. Acts 1958, ch. 77, § 3-304, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 30, effective January 1, 1997.

Official Comment

  1. To be a holder in due course, one must take without notice that an instrument is overdue. Section 3-302(a)(2)(iii). Section 3-304 replaces subsection (3) of former Section 3-304. For the sake of clarity it treats demand and time instruments separately. Subsection (a) applies to demand instruments. A check becomes stale after 90 days.

    Under former Section 3-304(3)(c), a holder that took a demand note had notice that it was overdue if it was taken “more than a reasonable length of time after its issue.” In substitution for this test, subsection (a)(iii) requires the trier of fact to look at both the circumstances of the particular case and the nature of the instrument and trade usage. Whether a demand note is stale may vary a great deal depending upon the facts of the particular case.

  2. Subsections (b) and (c) cover time instruments. They follow the distinction made under former Article 3 between defaults in payment of principal and interest. In subsection (b) installment instruments and single payment instruments are treated separately. If an installment is late, the instrument is overdue until the default is cured.

355.3-305. Defenses and claims in recoupment.

  1. Except as stated in subsection (2) of this section, the right to enforce the obligation of a party to pay an instrument is subject to the following:
    1. A defense of the obligor based on:
      1. Infancy of the obligor to the extent it is a defense to a simple contract;
      2. Duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor;
      3. Fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms; or
      4. Discharge of the obligor in insolvency proceedings;
    2. A defense of the obligor stated in another section of this article or a defense of the obligor that would be available if the person entitled to enforce the instrument were enforcing a right to payment under a simple contract; and
    3. A claim in recoupment of the obligor against the original payee of the instrument if the claim arose from the transaction that gave rise to the instrument; but the claim of the obligor may be asserted against a transferee of the instrument only to reduce the amount owing on the instrument at the time the action is brought.
  2. The right of a holder in due course to enforce the obligation of a party to pay the instrument is subject to defenses of the obligor stated in subsection (1)(a) of this section, but is not subject to defenses of the obligor stated in subsection (1)(b) of this section or claims in recoupment stated in subsection (1)(c) of this section against a person other than the holder.
  3. Except as stated in subsection (4) of this section, in an action to enforce the obligation of a party to pay the instrument, the obligor may not assert against the person entitled to enforce the instrument a defense, claim in recoupment, or claim to the instrument (KRS 355.3-306 ) of another person, but the other person’s claim to the instrument may be asserted by the obligor if the other person is joined in the action and personally asserts the claim against the person entitled to enforce the instrument. An obligor is not obliged to pay the instrument if the person seeking enforcement of the instrument does not have rights of a holder in due course and the obligor proves that the instrument is a lost or stolen instrument.
  4. In an action to enforce the obligation of an accommodation party to pay an instrument, the accommodation party may assert against the person entitled to enforce the instrument any defense or claim in recoupment under subsection (1) of this section that the accommodated party could assert against the person entitled to enforce the instrument, except the defenses of discharge in insolvency proceedings, infancy, and lack of legal capacity.

History. Enact. Acts 1958, ch. 77, § 3-305, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 31, effective January 1, 1997.

Official Comment

  1. Subsection (a) states the defenses to the obligation of a party to pay the instrument. Subsection (a)(i) states the “real defenses” that may be asserted against any person entitled to enforce the instrument.

    Subsection (a)(1)(i) allows assertion of the defense of infancy against a holder in due course, even though the effect of the defense is to render the instrument voidable but not void. The policy is one of protection of the infant even at the expense of occasional loss to an innocent purchaser. No attempt is made to state when infancy is available as a defense or the conditions under which it may be asserted. In some jurisdictions it is held that an infant cannot rescind the transaction or set up the defense unless the holder is restored to the position held before the instrument was taken which, in the case of a holder in due course, is normally impossible. In other states an infant who has misrepresented age may be estopped to assert infancy. Such questions are left to other law, as an integral part of the policy of each state as to the protection of infants.

    Subsection (a)(1)(ii) covers mental incompetence, guardianship, ultra vires acts or lack of corporate capacity to do business, or any other incapacity apart from infancy. Such incapacity is largely statutory. Its existence and effect is left to the law of each state. If under the state law the effect is to render the obligation of the instrument entirely null and void, the defense may be asserted against a holder in due course. If the effect is merely to render the obligation voidable at the election of the obligor, the defense is cut off.

    Duress, which is also covered by subsection (a)(1)(ii), is a matter of degree. An instrument signed at the point of a gun is void, even in the hands of a holder in due course. One signed under threat to prosecute the son of the maker for theft may be merely voidable, so that the defense is cut off. Illegality is most frequently a matter of gambling or usury, but may arise in other forms under a variety of statutes. The statutes differ in their provisions and the interpretations given them. They are primarily a matter of local concern and local policy. All such matters are therefore left to the local law. If under that law the effect of the duress or the illegality is to make the obligation entirely null and void, the defense may be asserted against a holder in due course. Otherwise it is cut off.

    Subsection (a)(1)(iii) refers to “real” or “essential” fraud, sometimes called fraud in the essence or fraud in the factum, as effective against a holder in due course. The common illustration is that of the maker who is tricked into signing a note in the belief that it is merely a receipt or some other document. The theory of the defense is that the signature on the instrument is ineffective because the signer did not intend to sign such an instrument at all. Under this provision the defense extends to an instrument signed with knowledge that it is a negotiable instrument, but without knowledge of its essential terms. The test of the defense is that of excusable ignorance of the contents of the writing signed. The party must not only have been in ignorance, but must also have had no reasonable opportunity to obtain knowledge. In determining what is a reasonable opportunity all relevant factors are to be taken into account, including the intelligence, education, business experience, and ability to read or understand English of the signer. Also relevant is the nature of the representations that were made, whether the signer had good reason to rely on the representations or to have confidence in the person making them, the presence or absence of any third person who might read or explain the instrument to the signer, or any other possibility of obtaining independent information, and the apparent necessity, or lack of it, for acting without delay. Unless the misrepresentation meets this test, the defense is cut off by a holder in due course.

    Subsection (a)(1)(iv) states specifically that the defense of discharge in insolvency proceedings is not cut off when the instrument is purchased by a holder in due course. “Insolvency proceedings” is defined in Section 1-201(22) and it includes bankruptcy whether or not the debtor is insolvent. Subsection (2)(e) of former Section 3-305 is omitted. The substance of that provision is stated in Section 3-601(b).

  2. Subsection (a)(2) states other defenses that, pursuant to subsection (b), are cut off by a holder in due course. These defenses comprise those specifically stated in Article 3 and those based on common law contract principles. Article 3 defenses are nonissuance of the instrument, conditional issuance, and issuance for a special purpose (Section 3-105(b)); failure to countersign a traveler’s check (Section 3-106(c)); modification of the obligation by a separate agreement (Section 3-117); payment that violates a restrictive indorsement (Section 3-206(f)); instruments issued without consideration or for which promised performance has not been given (Section 3-303(b)), and breach of warranty when a draft is accepted (Section 3-417(b)). The most prevalent common law defenses are fraud, misrepresentation or mistake in the issuance of the instrument. In most cases the holder in due course will be an immediate or remote transferee of the payee of the instrument. In most cases the holder-in-due-course doctrine is irrelevant if defenses are being asserted against the payee of the instrument, but in a small number of cases the payee of the instrument may be a holder in due course. Those cases are discussed in Comment 4 to Section 3-302.

    Assume Buyer issues a note to Seller in payment of the price of goods that Seller fraudulently promises to deliver but which are never delivered. Seller negotiates the note to Holder who has no notice of the fraud. If Holder is a holder in due course, Holder is not subject to Buyer’s defense of fraud. But in some cases an original party to the instrument is a holder in due course. For example, Buyer fraudulently induces Bank to issue a cashier’s check to the order of Seller. The check is delivered by Bank to Seller, who has no notice of the fraud. Seller can be a holder in due course and can take the check free of Bank’s defense of fraud. This case is discussed as Case #1 in Comment 4 to Section 3-302. Former Section 3-305 stated that a holder in due course takes free of defenses of “any party to the instrument with whom the holder has not dealt.” The meaning of this language was not at all clear and if read literally could have produced the wrong result. In the hypothetical case, it could be argued that Seller “dealt” with Bank because Bank delivered the check to Seller. But it is clear that Seller should take free of Bank’s defense against Buyer regardless of whether Seller took delivery of the check from Buyer or from Bank. The quoted language is not included in Section 3-305. It is not necessary. If Buyer issues an instrument to Seller and Buyer has a defense against Seller, that defense can obviously be asserted. Buyer and Seller are the only people involved. The holder-in-due-course doctrine has no relevance. The doctrine applies only to cases in which more than two parties are involved. Its essence is that the holder in due course does not have to suffer the consequences of a defense of the obligor on the instrument that arose from an occurrence with a third party.

  3. Subsection (a)(3) is concerned with claims in recoupment which can be illustrated by the following example. Buyer issues a note to the order of Seller in exchange for a promise of Seller to deliver specified equipment. If Seller fails to deliver the equipment or delivers equipment that is rightfully rejected, Buyer has a defense to the note because the performance that was the consideration for the note was not rendered. Section 3-303(b). This defense is included in Section 3-305(a)(2). That defense can always be asserted against Seller. This result is the same as that reached under former Section 3-408.

    But suppose Seller delivered the promised equipment and it was accepted by Buyer. The equipment, however, was defective. Buyer retained the equipment and incurred expenses with respect to its repair. In this case, Buyer does not have a defense under Section 3-303(b). Seller delivered the equipment and the equipment was accepted. Under Article 2, Buyer is obliged to pay the price of the equipment which is represented by the note. But Buyer may have a claim against Seller for breach of warranty. If Buyer has a warranty claim, the claim may be asserted against Seller as a counterclaim or as a claim in recoupment to reduce the amount owing on the note. It is not relevant whether Seller is or is not a holder in due course of the note or whether Seller knew or had notice that Buyer had the warranty claim. It is obvious that holder-in-due-course doctrine cannot be used to allow Seller to cut off a warranty claim that Buyer has against Seller. Subsection (b) specifically covers this point by stating that a holder in due course is not subject to a “claim in recoupment * * * against a person other than the holder.”

    Suppose Seller negotiates the note to Holder. If Holder had notice of Buyer’s warranty claim at the time the note was negotiated to Holder, Holder is not a holder in due course (Section 3-302(a)(2)(iv)) and Buyer may assert the claim against Holder (Section 3-305(a)(3)) but only as a claim in recoupment, i.e. to reduce the amount owed on the note. If the warranty claim is $1,000 and the unpaid note is $10,000, Buyer owes $9,000 to Holder. If the warranty claim is more than the unpaid amount of the note, Buyer owes nothing to the Holder, but Buyer cannot recover the unpaid amount of the warranty claim from Holder. If Buyer had already partially paid the note, Buyer is not entitled to recover the amounts paid. The claim can be used only as an offset to amounts owing on the note. If Holder had no notice of Buyer’s claim and otherwise qualifies as a holder in due course, Buyer may not assert the claim against Holder. Section 3-305(b).

    The result under Section 3-305 is consistent with the result reached under former Article 3, but the rules for reaching the result are stated differently. Under former Article 3 Buyer could assert rights against Holder only if Holder was not a holder in due course, and Holder’s status depended upon whether Holder had notice of a defense by Buyer. Courts have held that Holder had that notice if Holder had notice of Buyer’s warranty claim. The rationale under former Article 3 was “failure of consideration.” This rationale does not distinguish between cases in which the seller fails to perform and those in which the buyer accepts the performance of seller but makes a claim against the seller because the performance is faulty. The term “failure of consideration” is subject to varying interpretations and is not used in Article 3. The use of the term “claim in recoupment” in Section 3-305(a)(3) is a more precise statement of the nature of Buyer’s right against Holder. The use of the term does not change the law because the treatment of a defense under subsection (a)(2) and a claim in recoupment under subsection (a)(3) is essentially the same.

    Under former Article 3, case law was divided on the issue of the extent to which an obligor on a note could assert against a transferee who is not a holder in due course a debt or other claim that the obligor had against the original payee of the instrument. Some courts limited claims to those that arose in the transaction that gave rise to the note. This is the approach taken in Section 3-305(a)(3). Other courts allowed the obligor on the note to use any debt or other claim, no matter how unrelated to the note, to offset the amount owed on the note. Under current judicial authority and non-UCC statutory law, there will be many cases in which a transferee of a note arising from a sale transaction will not qualify as a holder in due course. For example, applicable law may require the use of a note to which there cannot be a holder in due course. See Section 3-106(d) and Comment 3 to Section 3-106. It is reasonable to provide that the buyer should not be denied the right to assert claims arising out of the sale transaction. Subsection (a)(3) is based on the belief that it is not reasonable to require the transferee to bear the risk that wholly unrelated claims may also be asserted. The determination of whether a claim arose from the transaction that gave rise to the instrument is determined by law other than this Article and thus may vary as local law varies.

  4. Subsection (c) concerns claims and defenses of a person other than the obligor on the instrument. It applies principally to cases in which an obligation is paid with the instrument of a third person. For example, Buyer buys goods from Seller and negotiates to Seller a cashier’s check issued by Bank in payment of the price. Shortly after delivering the check to Seller, Buyer learns that Seller had defrauded Buyer in the sale transaction. Seller may enforce the check against Bank even though Seller is not a holder in due course. Bank has no defense to its obligation to pay the check and it may not assert defenses, claims in recoupment, or claims to the instrument of Buyer, except to the extent permitted by the “but” clause of the first sentence of subsection (c). Buyer may have a claim to the instrument under Section 3-306 based on a right to rescind the negotiation to Seller because of Seller’s fraud. Section 3-202(b) and Comment 2 to Section 3-201. Bank cannot assert that claim unless Buyer is joined in the action in which Seller is trying to enforce payment of the check. In that case Bank may pay the amount of the check into court and the court will decide whether that amount belongs to Buyer or Seller. The last sentence of subsection (c) allows the issuer of an instrument such as a cashier’s check to refuse payment in the rare case in which the issuer can prove that the instrument is a lost or stolen instrument and the person seeking enforcement does not have rights of a holder in due course.
  5. Subsection (d) applies to instruments signed for accommodation (Section 3-419) and this subsection equates the obligation of the accommodation party to that of the accommodated party. The accommodation party can assert whatever defense or claim the accommodated party had against the person enforcing the instrument. The only exceptions are discharge in bankruptcy, infancy and lack of capacity. The same rule does not apply to an indorsement by a holder of the instrument in negotiating the instrument. The indorser, as transferor, makes a warranty to the indorsee, as transferee, that no defense or claim in recoupment is good against the indorser. Section 3-416(a)(4). Thus, if the indorsee sues the indorser because of dishonor of the instrument, the indorser may not assert the defense or claim in recoupment of the maker or drawer against the indorsee.

    Section 3-305(d) must be read in conjunction with Section 3-605, which provides rules (usually referred to as suretyship defenses) for determining when the obligation of an accommodation party is discharged, in whole or in part, because of some act or omission of a person entitled to enforce the instrument. To the extent a rule stated in Section 3-605 is inconsistent with Section 3-605(d), the Section 3-605 rule governs. For example, Section 3-605(a) provides rules for determining when and to what extent a discharge of the accommodated party under Section 3-604 will discharge the accommodation party. As explained in Comment 2 to Section 3-605, discharge of the accommodated party is normally part of a settlement under which the holder of a note accepts partial payment from an accommodated party who is financially unable to pay the entire amount of the note. If the holder then brings an action against the accommodation party to recover the remaining unpaid amount of the note, the accommodation party cannot use Section 3-305(d) to nullify Section 3-605(b) by asserting the discharge of the accommodated party as a defense. On the other hand, suppose the accommodated party is a buyer of goods who issued the note to the seller who took the note for the buyer’s obligation to pay for the goods. Suppose the buyer has a claim for breach of warranty with respect to the goods against the seller and the warranty claim may be asserted against the holder of the note. The warranty claim is a claim in recoupment. If the holder and the accommodated party reach a settlement under which the holder accepts payment less than the amount of the note in full satisfaction of the note and the warranty claim, the accommodation party could defend an action on the note by the holder by asserting the accord and satisfaction under Section 3-305(d). There is no conflict with Section 3-605(b) because that provision is not intended to apply to settlement of disputed claims.

  6. Subsection (e) is added to clarify the treatment of an instrument that omits the notice currently required by the Federal Trade Commission Rules relating to certain consumer credit sales and consumer purchase money loans (6 C.F.R. Part 433). This subsection adopts the view that the instrument should be treated as in the language required by the FTC Rule were present. It is based on the language describing that rule in Section 3-106(d) and the analogous provision in Section 9-404(d).
  7. Subsection (f) is modeled on Section 9-403(e) and 9-404(c). In ensures that Section 3-305 is interpreted to accommodate relevant consumer protection laws. The absence of such a provision from other sections in Article 3 should not justify an inference about the meaning of those sections.
  8. Articles 28 and 30 of the Convention on International Bills of Exchange and International Promissory Notes includes a similar dichotomy with a narrower group of defenses available against a protected holder under Articles 28(1) and 30 than are available under Article 28(2) against a holder that is not a protected holder..

NOTES TO DECISIONS

1.Enforceability.

Court of Appeals erred in affirming a trial court’s order setting aside a default judgment in favor of a law firm against a former client because the law firm’s counterclaim seeking enforcement of a promissory note was valid and justiciable within the meaning of the state constitution, notwithstanding that it was filed approximately 3-1/2 months prior to the promissory note’s due date, where, by filing his complaint, the client placed the question of enforceability of the note in play. Bingham Greenebaum Doll, LLP v. Lawrence, 567 S.W.3d 127, 2018 Ky. LEXIS 527 ( Ky. 2018 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Answer Alleging Fraud as to the Execution of the Contract, Form 191.15.

Caldwell’s Kentucky Form Book, 5th Ed., Answer Pleading Duress, Form 191.16.

Caldwell’s Kentucky Form Book, 5th Ed., Answer Pleading Illegality of Consideration, Form 191.17.

Caldwell’s Kentucky Form Book, 5th Ed., Answer Showing Defendant’s Disability, Form 191.14.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Commercial Paper, § 191.00.

355.3-306. Claims to an instrument.

A person taking an instrument, other than a person having rights of a holder in due course, is subject to a claim of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds. A person having rights of a holder in due course takes free of the claim to the instrument.

History. Enact. Acts 1958, ch. 77, § 3-306, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 32, effective January 1, 1997.

Official Comment

This section expands on the reference to “claims to” the instrument mentioned in former Sections 3-305 and 3-306. Claims covered by the section include not only claims to ownership but also any other claim of a property or possessory right. It includes the claim to a lien or the claim of a person in rightful possession of an instrument who was wrongfully deprived of possession. Also included is a claim based on Section 3-202(b) for rescission of a negotiation of the instrument by the claimant. Claims to an instrument under Section 3-306 are different from claims in recoupment referred to in Section 3-305(a)(3). The rule of this section is similar to the rule of Article 30(2) of the Convention on International Bills of Exchange and International Promissory Notes.

355.3-307. Notice of breach of fiduciary duty.

  1. In this section:
    1. “Fiduciary” means an agent, trustee, partner, corporate officer or director, or other representative owing a fiduciary duty with respect to an instrument.
    2. “Represented person” means the principal, beneficiary, partnership, corporation, or other person to whom the duty stated in paragraph (a) of this subsection is owed.
    1. If: (2) (a) If:
      1. An instrument is taken from a fiduciary for payment or collection or for value;
      2. The taker has knowledge of the fiduciary status of the fiduciary; and
      3. The represented person makes a claim to the instrument or its proceeds on the basis that the transaction of the fiduciary is a breach of fiduciary duty,

        the rules set out in paragraph (b) of this subsection apply:

      1. Notice of breach of fiduciary duty by the fiduciary is notice of the claim of the represented person. (b) 1. Notice of breach of fiduciary duty by the fiduciary is notice of the claim of the represented person.
      2. In the case of an instrument payable to the represented person or the fiduciary as such, the taker has notice of the breach of fiduciary duty if the instrument is:
        1. Taken in payment of or as security for a debt known by the taker to be the personal debt of the fiduciary;
        2. Taken in a transaction known by the taker to be for the personal benefit of the fiduciary; or
        3. Deposited to an account other than an account of the fiduciary, as such, or an account of the represented person.
      3. If an instrument is issued by the represented person or the fiduciary as such, and made payable to the fiduciary personally, the taker does not have notice of the breach of fiduciary duty unless the taker knows of the breach of fiduciary duty.
      4. If an instrument is issued by the represented person or the fiduciary as such, to the taker as payee, the taker has notice of the breach of fiduciary duty if the instrument is:
        1. Taken in payment of or as security for a debt known by the taker to be the personal debt of the fiduciary;
        2. Taken in a transaction known by the taker to be for the personal benefit of the fiduciary; or
        3. Deposited to an account other than an account of the fiduciary, as such, or an account of the represented person.

History. Enact. Acts 1958, ch. 77, § 3-307, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 33, effective January 1, 1997.

Official Comment

  1. This section states rules for determining when a person who has taken an instrument from a fiduciary has notice of a breach of fiduciary duty that occurs as a result of the transaction with the fiduciary. Former Section 3-304(2) and (4)(e) related to this issue, but those provisions were unclear in their meaning. Section 3-307 is intended to clarify the law by stating rules that comprehensively cover the issue of when the taker of an instrument has notice of breach of a fiduciary duty and thus notice of a claim to the instrument or its proceeds.
  2. Subsection (a) defines the terms “fiduciary” and “represented person” and the introductory paragraph of subsection (b) describes the transaction to which the section applies. The basic scenario is one in which the fiduciary in effect embezzles money of the represented person by applying the proceeds of an instrument that belongs to the represented person to the personal use of the fiduciary. The person dealing with the fiduciary may be a depositary bank that takes the instrument for collection or a bank or other person that pays value for the instrument. The section also covers a transaction in which an instrument is presented for payment to a payor bank that pays the instrument by giving value to the fiduciary. Subsections (b)(2), (3), and (4) state rules for determining when the person dealing with the fiduciary has notice of breach of fiduciary duty. Subsection (b)(1) states that notice of breach of fiduciary duty is notice of the represented person’s claim to the instrument or its proceeds.

    Under Section 3-306, a person taking an instrument is subject to a claim to the instrument or its proceeds, unless the taker has rights of a holder in due course. Under Section 3-302(a)(2)(v), the taker cannot be a holder in due course if the instrument was taken with notice of a claim under Section 3-306. Section 3-307 applies to cases in which a represented person is asserting a claim because a breach of fiduciary duty resulted in a misapplication of the proceeds of an instrument. The claim of the represented person is a claim described in Section 3-306. Section 3-307 states rules for determining when a person taking an instrument has notice of the claim which will prevent assertion of rights as a holder in due course. It also states rules for determining when a payor bank pays an instrument with notice of breach of fiduciary duty.

    Section 3-307(b) applies only if the person dealing with the fiduciary “has knowledge of the fiduciary status of the fiduciary.” Notice which does not amount to knowledge is not enough to cause Section 3-307 to apply. “Knowledge” is defined in Section 1-201(a)(25). In most cases, the “taker” referred to in Section 3-307 will be a bank or other organization. Knowledge of an organization is determined by the rules stated in Section 1-201(27). In many cases, the individual who receives and processes an instrument on behalf of the organization that is the taker of the instrument “for payment or collection or for value” is a clerk who has no knowledge of any fiduciary status of the person from whom the instrument is received. In such cases, Section 3-307 doesn’t apply because, under Section 1-201(27), knowledge of the organization is determined by the knowledge of the “individual conducting that transaction,” i.e. the clerk who receives and processes the instrument. Furthermore, paragraphs (2) and (4) each require that the person acting for the organization have knowledge of facts that indicate a breach of fiduciary duty. In the case of an instrument taken for deposit to an account, the knowledge is found in the fact that the deposit is made to an account other than that of the represented person or a fiduciary account for benefit of that person. In other cases the person acting for the organization must know that the instrument is taken in payment or as security for a personal debt of the fiduciary or for the personal benefit of the fiduciary. For example, if the instrument is being used to buy goods or services, the person acting for the organization must know that the goods or services are for the personal benefit of the fiduciary. The requirement that the taker have knowledge rather than notice is meant to limit Section 3-307 to relatively uncommon cases in which the person who deals with the fiduciary knows all the relevant facts: the fiduciary status and that the proceeds of the instrument are being used for the personal debt or benefit of the fiduciary or are being paid to an account that is not an account of the represented person or of the fiduciary, as such. Mere notice of these facts is not enough to put the taker on notice of the breach of fiduciary duty and does not give rise to any duty of investigation by the taker.

  3. Subsection (b)(2) applies to instruments payable to the represented person or the fiduciary as such. For example, a check payable to Corporation is indorsed in the name of Corporation by Doe as its President. Doe gives the check to Bank as partial repayment of a personal loan that Bank had made to Doe. The check was indorsed either in blank or to Bank. Bank collects the check and applies the proceeds to reduce the amount owed on Doe’s loan. If the person acting for Bank in the transaction knows that Doe is a fiduciary and that the check is being used to pay a personal obligation of Doe, subsection (b)(2) applies. If Corporation has a claim to the proceeds of the check because the use of the check by Doe was a breach of fiduciary duty, Bank has notice of the claim and did not take the check as a holder in due course. The same result follows if Doe had indorsed the check to himself before giving it to Bank. Subsection (b)(2) follows Uniform Fiduciaries Act § 4 in providing that if the instrument is payable to the fiduciary, as such, or to the represented person, the taker has notice of a claim if the instrument is negotiated for the fiduciary’s personal debt. If fiduciary funds are deposited to a personal account of the fiduciary or to an account that is not an account of the represented person or of the fiduciary, as such, there is a split of authority concerning whether the bank is on notice of a breach of fiduciary duty. Subsection (b)(2)(iii) states that the bank is given notice of breach of fiduciary duty because of the deposit. The Uniform Fiduciaries Act § 9 states that the bank is not on notice unless it has knowledge of facts that makes its receipt of the deposit an act of bad faith.

    The rationale of subsection (b)(2) is that it is not normal for an instrument payable to the represented person or the fiduciary, as such, to be used for the personal benefit of the fiduciary. It is likely that such use reflects an unlawful use of the proceeds of the instrument. If the fiduciary is entitled to compensation from the represented person for services rendered or for expenses incurred by the fiduciary the normal mode of payment is by a check drawn on the fiduciary account to the order of the fiduciary.

  4. Subsection (b)(3) is based on Uniform Fiduciaries Act § 6 and applies when the instrument is drawn by the represented person or the fiduciary as such to the fiduciary personally. The term “personally” is used as it is used in the Uniform Fiduciaries Act to mean that the instrument is payable to the payee as an individual and not as a fiduciary. For example, Doe as President of Corporation writes a check on Corporation’s account to the order of Doe personally. The check is then indorsed over to Bank as in Comment 3. In this case there is no notice of breach of fiduciary duty because there is nothing unusual about the transaction. Corporation may have owed Doe money for salary, reimbursement for expenses incurred for the benefit of Corporation, or for any other reason. If Doe is authorized to write checks on behalf of Corporation to pay debts of Corporation, the check is a normal way of paying a debt owed to Doe. Bank may assume that Doe may use the instrument for his personal benefit.
  5. Subsection (b)(4) can be illustrated by a hypothetical case. Corporation draws a check payable to an organization. X, an officer or employee of Corporation, delivers the check to a person acting for the organization. The person signing the check on behalf of Corporation is X or another person. If the person acting for the organization in the transaction knows that X is a fiduciary, the organization is on notice of a claim by Corporation if it takes the instrument under the same circumstances stated in subsection (b)(2). If the organization is a bank and the check is taken in repayment of a personal loan of the bank to X, the case is like the case discussed in Comment 3. It is unusual for Corporation, the represented person, to pay a personal debt of Doe by issuing a check to the bank. It is more likely that the use of the check by Doe reflects an unlawful use of the proceeds of the check. The same analysis applies if the check is made payable to an organization in payment of goods or services. If the person acting for the organization knew of the fiduciary status of X and that the goods or services were for X’s personal benefit, the organization is on notice of a claim by Corporation to the proceeds of the check. See the discussion in the last paragraph of Comment 2.

355.3-308. Proof of signatures and status as holder in due course.

  1. In an action with respect to an instrument, the authenticity of, and authority to make, each signature on the instrument is admitted unless specifically denied in the pleadings. If the validity of a signature is denied in the pleadings, the burden of establishing validity is on the person claiming validity, but the signature is presumed to be authentic and authorized unless the action is to enforce the liability of the purported signer and the signer is dead or incompetent at the time of trial of the issue of validity of the signature. If an action to enforce the instrument is brought against a person as the undisclosed principal of a person who signed the instrument as a party to the instrument, the plaintiff has the burden of establishing that the defendant is liable on the instrument as a represented person under KRS 355.3-402 (1).
  2. If the validity of signatures is admitted or proved and there is compliance with subsection (1) of this section, a plaintiff producing the instrument is entitled to payment if the plaintiff proves entitlement to enforce the instrument under KRS 355.3-301 , unless the defendant proves a defense or claim in recoupment. If a defense or claim in recoupment is proved, the right to payment of the plaintiff is subject to the defense or claim, except to the extent the plaintiff proves that the plaintiff has rights of a holder in due course which are not subject to the defense or claim.

History. Enact. Acts 1996, ch. 130, § 34, effective January 1, 1997.

Official Comment

  1. Section 3-308 is a modification of former Section 3-307. The first two sentences of subsection (a) are a restatement of former Section 3-307(1). The purpose of the requirement of a specific denial in the pleadings is to give the plaintiff notice of the defendant’s claim of forgery or lack of authority as to the particular signature, and to afford the plaintiff an opportunity to investigate and obtain evidence. If local rules of pleading permit, the denial may be on information and belief, or it may be a denial of knowledge or information sufficient to form a belief. It need not be under oath unless the local statutes or rules require verification. In the absence of such specific denial the signature stands admitted, and is not in issue. Nothing in this section is intended, however, to prevent amendment of the pleading in a proper case.

    The question of the burden of establishing the signature arises only when it has been put in issue by specific denial. “Burden of establishing” is defined in Section 1-201. The burden is on the party claiming under the signature, but the signature is presumed to be authentic and authorized except as stated in the second sentence of subsection (a). “Presumed” is defined in Section 1-201 and means that until some evidence is introduced which would support a finding that the signature is forged or unauthorized, the plaintiff is not required to prove that it is valid. The presumption rests upon the fact that in ordinary experience forged or unauthorized signatures are very uncommon, and normally any evidence is within the control of, or more accessible to, the defendant. The defendant is therefore required to make some sufficient showing of the grounds for the denial before the plaintiff is required to introduce evidence. The defendant’s evidence need not be sufficient to require a directed verdict, but it must be enough to support the denial by permitting a finding in the defendant’s favor. Until introduction of such evidence the presumption requires a finding for the plaintiff. Once such evidence is introduced the burden of establishing the signature by a preponderance of the total evidence is on the plaintiff. The presumption does not arise if the action is to enforce the obligation of a purported signer who has died or become incompetent before the evidence is required, and so is disabled from obtaining or introducing it. “Action” is defined in Section 1-201 and includes a claim asserted against the estate of a deceased or an incompetent.

    The last sentence of subsection (a) is a new provision that is necessary to take into account Section 3-402(a) that allows an undisclosed principal to be liable on an instrument signed by an authorized representative. In that case the person enforcing the instrument must prove that the undisclosed principal is liable.

  2. Subsection (b) restates former Section 3-307(2) and (3). Once signatures are proved or admitted a holder, by mere production of the instrument, proves “entitlement to enforce the instrument” because under Section 3-301 a holder is a person entitled to enforce the instrument. Any other person in possession of an instrument may recover only if that person has the rights of a holder. Section 3-301. That person must prove a transfer giving that person such rights under Section 3-203(b) or that such rights were obtained by subrogation or succession.

    If a plaintiff producing the instrument proves entitlement to enforce the instrument, either as a holder or a person with rights of a holder, the plaintiff is entitled to recovery unless the defendant proves a defense or claim in recoupment. Until proof of a defense or claim in recoupment is made, the issue as to whether the plaintiff has rights of a holder in due course does not arise. In the absence of a defense or claim in recoupment, any person entitled to enforce the instrument is entitled to recover. If a defense or claim in recoupment is proved, the plaintiff may seek to cut off the defense or claim in recoupment by proving that the plaintiff is a holder in due course or that the plaintiff has rights of a holder in due course under Section 3-203(b) or by subrogation or succession. All elements of Section 3-302(a) must be proved.

    Nothing in this section is intended to say that the plaintiff must necessarily prove rights as a holder in due course. The plaintiff may elect to introduce no further evidence, in which case a verdict may be directed for the plaintiff or the defendant, or the issue of the defense or claim in recoupment may be left to the trier of fact, according to the weight and sufficiency of the defendant’s evidence. The plaintiff may elect to rebut the defense or claim in recoupment by proof to the contrary, in which case a verdict may be directed for either party or the issue may be for the trier of fact. Subsection (b) means only that if the plaintiff claims the rights of a holder in due course against the defense or claim in recoupment, the plaintiff has the burden of proof on that issue.

NOTES TO DECISIONS

1.Sufficiency.

Chapter 7 trustee could not avoid a bank’s interest pursuant to 11 U.S.C.S. § 544, despite an illegible signature on mortgage note indorsement, because KRS 355.3-204 did not require signer to be identified. Indorsement contained a signature and unambiguous language showing an intent to negotiate; that was all that was required under § 355.3-204 (1). Rogan v. EquiFirst Corp. (In re Vickers), 2013 Bankr. LEXIS 1596 (Bankr. E.D. Ky. Apr. 15, 2013).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Failing, at Time and Place Agreed on, to Deliver Goods to be Paid for on Delivery, Form 190.07.

355.3-309. Enforcement of lost, destroyed, or stolen instrument.

  1. A person not in possession of an instrument is entitled to enforce the instrument if:
    1. The person seeking to enforce the instrument:
      1. Was entitled to enforce the instrument when loss of possession occurred; or
      2. Has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred;
    2. The loss of possession was not the result of a transfer by the person or a lawful seizure; and
    3. The person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.
  2. A person seeking enforcement of an instrument under subsection (1) of this section must prove the terms of the instrument and the person’s right to enforce the instrument. If that proof is made, KRS 355.3-308 applies to the case as if the person seeking enforcement had produced the instrument. The court may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument. Adequate protection may be provided by any reasonable means.

History. Enact. Acts 1996, ch. 130, § 35, effective January 1, 1997; 2006, ch. 242, § 37, effective July 12, 2006.

Official Comment

  1. Section 3-309 is a modification of former Section 3-804. The rights stated are those of “a person entitled to enforce the instrument” at the time of loss rather than those of an “owner” as in former Section 3-804. Under subsection (b), judgment to enforce the instrument cannot be given unless the court finds that the defendant will be adequately protected against a claim to the instrument by a holder that may appear at some later time. The court is given discretion in determining how adequate protection is to be assured. Former Section 3-804 allowed the court to “require security indemnifying the defendant against loss.” Under Section 3-309 adequate protection is a flexible concept. For example, there is substantial risk that a holder in due course may make a demand for payment if the instrument was payable to bearer when it was lost or stolen. On the other hand if the instrument was payable to the person who lost the instrument and that person did not indorse the instrument, no other person could be a holder of the instrument. In some cases there is risk of loss only if there is doubt about whether the facts alleged by the person who lost the instrument are true. Thus, the type of adequate protection that is reasonable in the circumstances may depend on the degree of certainty about the facts in the case.
  2. Subsection (a) is intended to reject the result in Dennis Joslin Co. v. Robinson Broadcasting Corp., 977 F. Supp. 491 (D.D.C. 1997). A transferee of a lost instrument need prove only that its transferor was entitled to enforce, not that the transferee was in possession at the time the instrument was lost. The protections of subsection (a) should also be available when instruments are lost during transit, because whatever the precise status of ownership at the point of loss, either the sender or the receiver ordinarily would have been entitled to enforce the instrument during the course of transit. The amendments to subsection (a) are not intended to alter in any way the rules that apply to the preservation of checks in connection with truncation or any other expedited method of check collection or processing.
  3. A security interest may attach to the right of person not in possession of an instrument to enforce the instrument. Although the secured party may not be the owner of the instrument, the secured party may nevertheless be entitled to exercise its debtor’s rights to enforce the instrument by resorting to its collection rights under the circumstances described in Section 9-607. This section does not address whether the person required to pay the instrument owes any duty to a secured party that is not itself the owner of the instrument.

NOTES TO DECISIONS

—1.—Entitlement to enforce instrument.

Circuit court properly granted a bank’s motion for summary judgment in its residential foreclosure action because the bank established its entitlement to enforce the lost note where the bank set forth uncontradicted facts in its lost-note affidavit demonstrating that it could not have reasonably obtained possession of the promissory note, that the promissory note was not transferred, assigned, or satisfied, and provided reasonable and adequate protection to the borrowers, and they failed to set forth contradictory facts, beyond mere conjecture that the promissory note was not transferred, assigned, or satisfied. House v. Deutsche Bank Nat'l Trust, 624 S.W.3d 736, 2021 Ky. App. LEXIS 59 (Ky. Ct. App. 2021).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint by Payee Against Payor Where Instrument Lost, Form 190.02.

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Failing, at Time and Place Agreed on, to Deliver Goods to be Paid for on Delivery, Form 190.07.

355.3-310. Effect of instrument on obligation for which taken.

  1. Unless otherwise agreed, if a certified check, cashier’s check, or teller’s check is taken for an obligation, the obligation is discharged to the same extent discharge would result if an amount of money equal to the amount of the instrument were taken in payment of the obligation. Discharge of the obligation does not affect any liability that the obligor may have as an indorser of the instrument.
  2. Unless otherwise agreed and except as provided in subsection (1) of this section, if a note or an uncertified check is taken for an obligation, the obligation is suspended to the same extent the obligation would be discharged if an amount of money equal to the amount of the instrument were taken, and the following rules apply:
    1. In the case of an uncertified check, suspension of the obligation continues until dishonor of the check or until it is paid or certified. Payment or certification of the check results in discharge of the obligation to the extent of the amount of the check.
    2. In the case of a note, suspension of the obligation continues until dishonor of the note or until it is paid. Payment of the note results in discharge of the obligation to the extent of the payment.
    3. Except as provided in paragraph (d) of this subsection, if the check or note is dishonored and the obligee of the obligation for which the instrument was taken is the person entitled to enforce the instrument, the obligee may enforce either the instrument or the obligation. In the case of an instrument of a third person which is negotiated to the obligee by the obligor, discharge of the obligor on the instrument also discharges the obligation.
    4. If the person entitled to enforce the instrument taken for an obligation is a person other than the obligee, the obligee may not enforce the obligation to the extent the obligation is suspended. If the obligee is the person entitled to enforce the instrument but no longer has possession of it because it was lost, stolen, or destroyed, the obligation may not be enforced to the extent of the amount payable on the instrument, and to that extent the obligee’s rights against the obligor are limited to enforcement of the instrument.
  3. If an instrument other than one described in subsection (1) or (2) of this section is taken for an obligation, the effect is:
    1. That stated in subsection (1) of this section if the instrument is one (1) on which a bank is liable as maker or acceptor; or
    2. That stated in subsection (2) of this section in any other case.

History. Enact. Acts 1996, ch. 130, § 36, effective January 1, 1997.

Official Comment

  1. Section 3-310 is a modification of former Section 3-802. As a practical matter, application of former Section 3-802 was limited to cases in which a check or a note was given for an obligation. Subsections (a) and (b) of Section 3-310 are therefore stated in terms of checks and notes in the interests of clarity. Subsection (c) covers the rare cases in which some other instrument is given to pay an obligation.
  2. Subsection (a) deals with the case in which a certified check, cashier’s check or teller’s check is given in payment of an obligation. In that case the obligation is discharged unless there is an agreement to the contrary. Subsection (a) drops the exception in former Section 3-802 for cases in which there is a right of recourse on the instrument against the obligor. Under former Section 3-802(1)(a) the obligation was not discharged if there was a right of recourse on the instrument against the obligor. Subsection (a) changes this result. The underlying obligation is discharged, but any right of recourse on the instrument is preserved.
  3. Subsection (b) concerns cases in which an uncertified check or a note is taken for an obligation. The typical case is that in which a buyer pays for goods or services by giving the seller the buyer’s personal check, or in which the buyer signs a note for the purchase price. Subsection (b) also applies to the uncommon cases in which a check or note of a third person is given in payment of the obligation. Subsection (b) preserves the rule under former Section 3-802(1)(b) that the buyer’s obligation to pay the price is suspended, but subsection (b) spells out the effect more precisely. If the check or note is dishonored, the seller may sue on either the dishonored instrument or the contract of sale if the seller has possession of the instrument and is the person entitled to enforce it. If the right to enforce the instrument is held by somebody other than the seller, the seller can’t enforce the right to payment of the price under the sales contract because that right is represented by the instrument which is enforceable by somebody else. Thus, if the seller sold the note or the check to a holder and has not reacquired it after dishonor, the only right that survives is the right to enforce the instrument. What this means is that even though the suspension of the obligation may end upon dishonor under paragraph (b)(1), the obligation is not revived in the circumstances described in paragraph (b)(4).

    The last sentence of subsection (b)(3) applies to cases in which an instrument of another person is indorsed over to the obligee in payment of the obligation. For example, Buyer delivers an uncertified personal check of X payable to the order of Buyer to Seller in payment of the price of goods. Buyer indorses the check over to Seller. Buyer is liable on the check as indorser. If Seller neglects to present the check for payment or to deposit it for collection within 30 days of the indorsement, Buyer’s liability as indorser is discharged. Section 3-415(e). Under the last sentence of Section 3-310(b)(3) Buyer is also discharged on the obligation to pay for the goods.

  4. There was uncertainty concerning the applicability of former Section 3-802 to the case in which the check given for the obligation was stolen from the payee, the payee’s signature was forged, and the forger obtained payment. The last sentence of subsection (b)(4) addresses this issue. If the payor bank pays a holder, the drawer is discharged on the underlying obligation because the check was paid. Subsection (b)(1). If the payor bank pays a person not entitled to enforce the instrument, as in the hypothetical case, the suspension of the underlying obligation continues because the check has not been paid. Section 3-602(a). The payee’s cause of action is against the depositary bank or payor bank in conversion under Section 3-420 or against the drawer under Section 3-309. In the latter case, the drawer’s obligation under Section 3-414(b) is triggered by dishonor which occurs because the check is unpaid. Presentment for payment to the drawee is excused under Section 3-504(a)(1) and, under Section 3-502(e), dishonor occurs without presentment if the check is not paid. The payee cannot merely ignore the instrument and sue the drawer on the underlying contract. This would impose on the drawer the risk that the check when stolen was indorsed in blank or to bearer.

    A similar analysis applies with respect to lost instruments that have not been paid. If a creditor takes a check of the debtor in payment of an obligation, the obligation is suspended under the introductory paragraph of subsection (b). If the creditor then loses the check, what are the creditor’s rights? The creditor can request the debtor to issue a new check and in many cases, the debtor will issue a replacement check after stopping payment on the lost check. In that case both the debtor and creditor are protected. But the debtor is not obliged to issue a new check. If the debtor refuses to issue a replacement check, the last sentence of subsection (b)(4) applies. The creditor may not enforce the obligation of debtor for which the check was taken. The creditor may assert only rights on the check. The creditor can proceed under Section 3-309 to enforce the obligation of the debtor, as drawer, to pay the check.

  5. Subsection (c) deals with rare cases in which other instruments are taken for obligations. If a bank is the obligor on the instrument, subsection (a) applies and the obligation is discharged. In any other case subsection (b) applies.

355.3-311. Accord and satisfaction by use of instrument.

  1. If a person against whom a claim is asserted proves that:
    1. That person in good faith tendered an instrument to the claimant as full satisfaction of the claim;
    2. The amount of the claim was unliquidated or subject to a bona fide dispute; and
    3. The claimant obtained payment of the instrument,

      the following subsections apply.

  2. Unless subsection (3) of this section applies, the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.
  3. Subject to subsection (4) of this section, a claim is not discharged under subsection (2) of this section if either of the following applies:
    1. The claimant, if an organization, proves that:
      1. Within a reasonable time before the tender, the claimant sent a conspicuous statement to the person against whom the claim is asserted that communications concerning disputed debts, including an instrument tendered as full satisfaction of a debt, are to be sent to a designated person, office, or place; and
      2. The instrument or accompanying communication was not received by that designated person, office, or place.
    2. The claimant, whether or not an organization, proves that within ninety (90) days after payment of the instrument, the claimant tendered repayment of the amount of the instrument to the person against whom the claim is asserted. This paragraph does not apply if the claimant is an organization that sent a statement complying with paragraph (a)1. of this subsection.
  4. A claim is discharged if the person against whom the claim is asserted proves that within a reasonable time before collection of the instrument was initiated, the claimant, or an agent of the claimant having direct responsibility with respect to the disputed obligation, knew that the instrument was tendered in full satisfaction of the claim.

History. Enact. Acts 1996, ch. 130, § 37, effective January 1, 1997.

Official Comment

  1. This section deals with an informal method of dispute resolution carried out by use of a negotiable instrument. In the typical case there is a dispute concerning the amount that is owed on a claim.

    Case #1. The claim is for the price of goods or services sold to a consumer who asserts that he or she is not obliged to pay the full price for which the consumer was billed because of a defect or breach of warranty with respect to the goods or services.

    Case #2. A claim is made on an insurance policy. The insurance company alleges that it is not liable under the policy for the amount of the claim.

    In either case the person against whom the claim is asserted may attempt an accord and satisfaction of the disputed claim by tendering a check to the claimant for some amount less than the full amount claimed by the claimant. A statement will be included on the check or in a communication accompanying the check to the effect that the check is offered as full payment or full satisfaction of the claim. Frequently, there is also a statement to the effect that obtaining payment of the check is an agreement by the claimant to a settlement of the dispute for the amount tendered. Before enactment of revised Article 3, the case law was in conflict over the question of whether obtaining payment of the check had the effect of an agreement to the settlement proposed by the debtor. This issue was governed by a common law rule, but some courts hold that the common law was modified by former Section 1-207 which they interpreted as applying to full settlement checks.

  2. Comment d. to Restatement of Contracts, Section 281 discusses the full satisfaction check and the applicable common law rule. In a case like Case #1, the buyer can propose a settlement of the disputed bill by a clear notation on the check indicating that the check is tendered as full satisfaction of the bill. Under the common law rule the seller, by obtaining payment of the check accepts the offer of compromise by the buyer. The result is the same if the seller adds a notation to the check indicating that the check is accepted under protest or in only partial satisfaction of the claim. Under the common law rule the seller can refuse the check or can accept it subject to the condition stated by the buyer, but the seller can’t accept the check and refuse to be bound by the condition. The rule applies only to an unliquidated claim or a claim disputed in good faith by the buyer. The dispute in the courts was whether Section 1-207 changed the common law rule. The Restatement states that section “need not be read as changing this well-established rule.”
  3. As part of the revision of Article 3, Section 1-207 has been amended to add subsection (2) stating that Section 1-207 “does not apply to an accord and satisfaction.” Because of that amendment and revised Article 3, Section 3-311 governs full satisfaction checks. Section 3-311 follows the common law rule with some minor variations to reflect modern business conditions. In cases covered by Section 3-311 there will often be an individual on one side of the dispute and a business organization on the other. This section is not designed to favor either the individual or the business organization. In Case #1 the person seeking the accord and satisfaction is an individual. In Case #2 the person seeking the accord and satisfaction is an insurance company. Section 3-311 is based on a belief that the common law rule produces a fair result and that informal dispute resolution by full satisfaction checks should be encouraged.
  4. Subsection (a) states three requirements for application of Section 3-311. “Good faith” in subsection (a)(i) is defined in Section 3-103(a)(6) as not only honesty in fact, but the observance of reasonable commercial standards of fair dealing. The meaning of “fair dealing” will depend upon the facts in the particular case. For example, suppose an insurer tenders a check in settlement of a claim for personal injury in an accident clearly covered by the insurance policy. The claimant is necessitous and the amount of the check is very small in relationship to the extent of the injury and the amount recoverable under the policy. If the trier of fact determines that the insurer was taking unfair advantage of the claimant, an accord and satisfaction would not result from payment of the check because of the absence of good faith by the insurer in making the tender. Another example of lack of good faith is found in the practice of some business debtors in routinely printing full satisfaction language on their check stocks so that all or a large part of the debts of the debtor are paid by checks bearing the full satisfaction language, whether or not there is any dispute with the creditor. Under such a practice the claimant cannot be sure whether a tender in full satisfaction is or is not being made. Use of a check on which full satisfaction language was affixed routinely pursuant to such a business practice may prevent an accord and satisfaction on the ground that the check was not tendered in good faith under subsection (a)(i).

    Section 3-311 does not apply to cases in which the debt is a liquidated amount and not subject to a bona fide dispute. Subsection (a)(ii). Other law applies to cases in which a debtor is seeking discharge of such a debt by paying less than the amount owed. For the purpose of subsection (a)(iii) obtaining acceptance of a check is considered to be obtaining payment of the check.

    The person seeking the accord and satisfaction must prove that the requirements of subsection (a) are met. If that person also proves that the statement required by subsection (b) was given, the claim is discharged unless subsection (c) applies. Normally the statement required by subsection (b) is written on the check. Thus, the canceled check can be used to prove the statement as well as the fact that the claimant obtained payment of the check. Subsection (b) requires a “conspicuous” statement that the instrument was tendered in full satisfaction of the claim. “Conspicuous” is defined in Section 1-201(10). The statement is conspicuous if “it is so written that a reasonable person against whom it is to operate ought to have noticed it.” If the claimant can reasonably be expected to examine the check, almost any statement on the check should be noticed and is therefore conspicuous. In cases in which the claimant is an individual the claimant will receive the check and will normally indorse it. Since the statement concerning tender in full satisfaction normally will appear above the space provided for the claimant’s indorsement of the check, the claimant “ought to have noticed” the statement.

  5. Subsection (c)(1) is a limitation on subsection (b) in cases in which the claimant is an organization. It is designed to protect the claimant against inadvertent accord and satisfaction. If the claimant is an organization payment of the check might be obtained without notice to the personnel of the organization concerned with the disputed claim. Some business organizations have claims against very large numbers of customers. Examples are department stores, public utilities and the like. These claims are normally paid by checks sent by customers to a designated office at which clerks employed by the claimant or a bank acting for the claimant process the checks and record the amounts paid. If the processing office is not designed to deal with communications extraneous to recording the amount of the check and the account number of the customer, payment of a full satisfaction check can easily be obtained without knowledge by the claimant of the existence of the full satisfaction statement. This is particularly true if the statement is written on the reverse side of the check in the area in which indorsements are usually written. Normally, the clerks of the claimant have no reason to look at the reverse side of checks. Indorsement by the claimant normally is done by mechanical means or there may be no indorsement at all. Section 4-205(a). Subsection (c)(1) allows the claimant to protect itself by advising customers by a conspicuous statement that communications regarding disputed debts must be sent to a particular person, office, or place. The statement must be given to the customer within a reasonable time before the tender is made. This requirement is designed to assure that the customer has reasonable notice that the full satisfaction check must be sent to a particular place. The reasonable time requirement could be satisfied by a notice on the billing statement sent to the customer. If the full satisfaction check is sent to the designated destination and the check is paid, the claim is discharged. If the claimant proves that the check was not received at the designated destination the claim is not discharged unless subsection (d) applies.
  6. Subsection (c)(2) is also designed to prevent inadvertent accord and satisfaction. It can be used by a claimant other than an organization or by a claimant as an alternative to subsection (c)(i). Some organizations may be reluctant to use subsection (c)(1) because it may result in confusion of customers that causes checks to be routinely sent to the special designated person, office, or place. Thus, much of the benefit of rapid processing of checks may be lost. An organization that chooses not to send a notice complying with subsection (c)(1)(i) may prevent an inadvertent accord and satisfaction by complying with subsection (c)(2). If the claimant discovers that it has obtained payment of a full satisfaction check, it may prevent an accord and satisfaction if, within 90 days of the payment of the check, the claimant tenders repayment of the amount of the check to the person against whom the claim is asserted.
  7. Subsection (c) is subject to subsection (d). If a person against whom a claim is asserted proves that the claimant obtained payment of a check known to have been tendered in full satisfaction of the claim by “the claimant or an agent of the claimant having direct responsibility with respect to the disputed obligation,” the claim is discharged even if (i) the check was not sent to the person, office, or place required by a notice complying with subsection (c)(1), or (ii) the claimant tendered repayment of the amount of the check in compliance with subsection (c)(2).

    A claimant knows that a check was tendered in full satisfaction of a claim when the claimant “has actual knowledge” of that fact. Section 1-201(25). Under Section 1-201(27), if the claimant is an organization, it has knowledge that a check was tendered in full satisfaction of the claim when that fact is

    “brought to the attention of the individual conducting that transaction, and in any event when it would have been brought to his attention if the organization had exercised due diligence. An organization exercises due diligence if it maintains reasonable routines for communicating significant information to the person conducting the transaction and there is reasonable compliance with the routines. Due diligence does not require an individual acting for the organization to communicate information unless such communication is part of his regular duties or unless he has reason to know of the transaction and that the transaction would be materially affected by the information.”

    With respect to an attempted accord and satisfaction the “individual conducting that transaction” is an employee or other agent of the organization having direct responsibility with respect to the dispute. For example, if the check and communication are received by a collection agency acting for the claimant to collect the disputed claim, obtaining payment of the check will result in an accord and satisfaction even if the claimant gave notice, pursuant to subsection (c)(1), that full satisfaction checks be sent to some other office. Similarly, if a customer asserting a claim for breach of warranty with respect to defective goods purchased in a retail outlet of a large chain store delivers the full satisfaction check to the manager of the retail outlet at which the goods were purchased, obtaining payment of the check will also result in an accord and satisfaction. On the other hand, if the check is mailed to the chief executive officer of the chain store subsection (d) would probably not be satisfied. The chief executive officer of a large corporation may have general responsibility for operations of the company, but does not normally have direct responsibility for resolving a small disputed bill to a customer. A check for a relatively small amount mailed to a high executive officer of a large organization is not likely to receive the executive’s personal attention. Rather, the check would normally be routinely sent to the appropriate office for deposit and credit to the customer’s account. If the check does receive the personal attention of the high executive officer and the officer is aware of the full-satisfaction language, collection of the check will result in an accord and satisfaction because subsection (d) applies. In this case the officer has assumed direct responsibility with respect to the disputed transaction.

    If a full satisfaction check is sent to a lock box or other office processing checks sent to the claimant, it is irrelevant whether the clerk processing the check did or did not see the statement that the check was tendered as full satisfaction of the claim. Knowledge of the clerk is not imputed to the organization because the clerk has no responsibility with respect to an accord and satisfaction. Moreover, there is no failure of “due diligence” under Section 1-201(27) if the claimant does not require its clerks to look for full satisfaction statements on checks or accompanying communications. Nor is there any duty of the claimant to assign that duty to its clerks. Section 3-311(c) is intended to allow a claimant to avoid an inadvertent accord and satisfaction by complying with either subsection (c)(1) or (2) without burdening the check-processing operation with extraneous and wasteful additional duties.

  8. In some cases the disputed claim may have been assigned to a finance company or bank as part of a financing arrangement with respect to accounts receivable. If the account debtor was notified of the assignment, the claimant is the assignee of the account receivable and the “agent of the claimant” in subsection (d) refers to an agent of the assignee.

NOTES TO DECISIONS

1.Endorsement Under Protest.

Where an owner’s check contained a conspicuous statement that it was tendered as full satisfaction of a paver’s claim pursuant to KRS 355.3-311 (2), (4), when the check was cashed, the claim was discharged despite a notation of protest pursuant to KRS 355.1-207 ; therefore, the trial court’s grant of summary judgment to the owner was proper. Morgan v. Crawford, 106 S.W.3d 480, 2003 Ky. App. LEXIS 103 (Ky. Ct. App. 2003).

2.Good Faith.

A tender made in good faith to settle a dispute should not be denied legal status as an accord and satisfaction simply because earlier in the contractual proceedings the tendering party may not have acted in good faith. Ross Bros. Constr. Co. v. MarkWest Hydrocarbon, Inc., 196 Fed. Appx. 412, 2006 FED App. 0762N, 2006 U.S. App. LEXIS 25776 (6th Cir. Ky. 2006 ).

3.Conspicuous Statement.

Because the check and accompanying letter both contained a “conspicuous statement” required by KRS 355.3-311 (2) and, in addition, the party that cashed the check knew that the instrument was tendered in full satisfaction of the claim, as required by KRS 355.3-311 (4), the check was full payment. Ross Bros. Constr. Co. v. MarkWest Hydrocarbon, Inc., 196 Fed. Appx. 412, 2006 FED App. 0762N, 2006 U.S. App. LEXIS 25776 (6th Cir. Ky. 2006 ).

In an airplane foreclosure case, an accord and satisfaction under this statute was not shown because notations on a check fell far short of the requisite conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim. Whatever the intent was in tendering the $3,390 check, the airplane owner failed to explicitly and conspicuously communicate that intent. Airrich, LLC v. Fortener Aviation, Inc., 489 S.W.3d 254, 2016 Ky. App. LEXIS 61 (Ky. Ct. App. 2016).

4.Accord and Satisfaction.

Trial court properly granted summary judgment to appellee upon finding that there was an accord and satisfaction of the parties’ dispute pursuant to KRS 355.3-311 (1), as appellant’s rejection of the check as full satisfaction of the promissory note was insufficient without repayment under KRS 355.3-311 (3). Estes v. McKinney, 354 S.W.3d 144, 2011 Ky. App. LEXIS 177 (Ky. Ct. App. 2011).

Medical provider was not attempting an accord and satisfaction by use of an instrument—a check—as was contemplated by statute. The accord and satisfaction had occurred previously by negotiation and settlement as memorialized in a release. Estate of Adams v. Trover, 547 S.W.3d 545, 2018 Ky. App. LEXIS 97 (Ky. Ct. App. 2018).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Answer Pleading Accord and Satisfaction, Claim Unliquidated or Disputed, Paid by Check, Form 211.02.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Accord and Satisfaction, § 211.00.

355.3-312. Lost, destroyed, or stolen cashier’s check, teller’s check, or certified check.

  1. In this section:
    1. “Check” means a cashier’s check, teller’s check, or certified check;
    2. “Claimant” means a person who claims the right to receive the amount of a cashier’s check, teller’s check, or certified check that was lost, destroyed, or stolen;
    3. “Declaration of loss” means a statement, made in a record under penalty of perjury, to the effect that:
      1. The declarer lost possession of a check;
      2. The declarer is the drawer or payee of the check, in the case of a certified check, or the remitter or payee of the check, in the case of a cashier’s check or teller’s check;
      3. The loss of possession was not the result of a transfer by the declarer or a lawful seizure; and
      4. The declarer cannot reasonably obtain possession of the check because the check was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process; and
    4. “Obligated bank” means the issuer of a cashier’s check or teller’s check or the acceptor of a certified check;
    1. A claimant may assert a claim to the amount of a check by a communication to the obligated bank describing the check with reasonable certainty and requesting payment of the amount of the check, if: (2) (a) A claimant may assert a claim to the amount of a check by a communication to the obligated bank describing the check with reasonable certainty and requesting payment of the amount of the check, if:
      1. The claimant is the drawer or payee of a certified check or the remitter or payee of a cashier’s check or teller’s check;
      2. The communication contains or is accompanied by a declaration of loss of the claimant with respect to the check;
      3. The communication is received at a time and in a manner affording the bank a reasonable time to act on it before the check is paid; and
      4. The claimant provides reasonable identification if requested by the obligated bank. Delivery of a declaration of loss is a warranty of the truth of the statements made in the declaration.
    2. If a claim is asserted in compliance with this subsection, the following rules apply:
      1. The claim becomes enforceable at the later of:
        1. The time the claim is asserted, or
        2. The ninetieth day following the date of the check, in the case of a cashier’s check or teller’s check, or the ninetieth day following the date of the acceptance, in the case of a certified check;
      2. Until the claim becomes enforceable, it has no legal effect and the obligated bank may pay the check or, in the case of a teller’s check, may permit the drawee to pay the check. Payment to a person entitled to enforce the check discharges all liability of the obligated bank with respect to the check.
      3. If the claim becomes enforceable before the check is presented for payment, the obligated bank is not obliged to pay the check.
      4. When the claim becomes enforceable, the obligated bank becomes obliged to pay the amount of the check to the claimant if payment of the check has not been made to a person entitled to enforce the check. Subject to KRS 355.4-302 (1)(a), payment to the claimant discharges all liability of the obligated bank with respect to the check.
  2. If the obligated bank pays the amount of a check to a claimant under subsection (2)(b)4. of this section and the check is presented for payment by a person having rights of a holder in due course, the claimant is obliged to:
    1. Refund the payment to the obligated bank if the check is paid; or
    2. Pay the amount of the check to the person having rights of a holder in due course if the check is dishonored.
  3. If a claimant has the right to assert a claim under subsection (2) of this section and is also a person entitled to enforce a cashier’s check, teller’s check, or certified check which is lost, destroyed, or stolen, the claimant may assert rights with respect to the check either under this section or KRS 355.3-309 .

History. Enact. Acts 1996, ch. 130, § 38, effective January 1, 1997; 2006, ch. 242, § 38, effective July 12, 2006.

Official Comment

  1. This section applies to cases in which a cashier’s check, teller’s check, or certified check is lost, destroyed, or stolen. In one typical case a customer of a bank closes his or her account and takes a cashier’s check or teller’s check of the bank as payment of the amount of the account. The customer may be moving to a new area and the check is to be used to open a bank account in that area. In such a case the check will normally be payable to the customer. In another typical case a cashier’s check or teller’s check is bought from a bank for the purpose of paying some obligation of the buyer of the check. In such a case the check may be made payable to the customer and then negotiated to the creditor by endorsement. But often, the payee of the check is the creditor. In the latter case the customer is a remitter. The section covers loss of the check by either the remitter or the payee. The section also covers loss of a certified check by either the drawer or payee.

    Under Section 3-309 a person seeking to enforce a lost, destroyed, or stolen cashier’s check or teller’s check may be required by the court to give adequate protection to the issuing bank against loss that might occur by reason of the claim by another person to enforce the check. This might require the posting of an expensive bond for the amount of the check. Moreover, Section 3-309 applies only to a person entitled to enforce the check. It does not apply to a remitter of a cashier’s check or teller’s check or to the drawer of a certified check. Section 3-312 applies to both. The purpose of Section 3-312 is to offer a person who loses such a check a means of getting refund of the amount of the check within a reasonable period of time without the expense of posting a bond and with full protection of the obligated bank.

  2. A claim to the amount of a lost, destroyed, or stolen cashier’s check, teller’s check, or certified check may be made under subsection (b) if the following requirements of that subsection are met. First, a claim may be asserted only by the drawer or payee of a certified check or the remitter or payee of a cashier’s check or teller’s check. An endorsee of a check is not covered because the endorsee is not an original party to the check or a remitter. Limitation to an original party or remitter gives the obligated bank the ability to determine, at the time it becomes obligated on the check, the identity of the person or persons who can assert a claim with respect to the check. The bank is not faced with having to determine the rights of some person who was not a party to the check at that time or with whom the bank had not dealt. If a cashier’s check is issued to the order of the person who purchased it from the bank and that person endorses it over to a third person who loses the check, the third person may assert rights to enforce the check under Section 3-309 but has no rights under Section 3-312.

    Second, the claim must be asserted by a communication to the obligated bank describing the check with reasonable certainty and requesting payment of the amount of the check. “Obligated bank” is defined in subsection (a)(4). Third, the communication must be received in time to allow the obligated bank to act on the claim before the check is paid, and the claimant must provide reasonable identification if requested. Subsections (b)(iii) and (iv). Fourth, the communication must contain or be accompanied by a declaration of loss described in subsection (b). This declaration is an affidavit or other writing made under penalty of perjury alleging the loss, destruction, or theft of the check and stating that the declarer is a person entitled to assert a claim, i.e. the drawer or payee of a certified check or the remitter or payee of a cashier’s check or teller’s check.

    A claimant who delivers a declaration of loss makes a warranty of the truth of the statements made in the declaration. The warranty is made to the obligated bank and anybody who has a right to enforce the check. If the declaration of loss falsely alleges loss of a cashier’s check that did not in fact occur, a holder of the check who was unable to obtain payment because subsection (b)(3) and (4) caused the obligated bank to dishonor the check would have a cause of action against the declarer for breach of warranty.

    The obligated bank may not impose additional requirements on a claim under subsection (b). For example, the obligated bank may not require the posting of a bond or other form of security. Section 3-312(b) states the procedure for asserting claims covered by the section. Thus, procedures that may be stated in other law for stating claims to property do not apply and are displaced within the meaning of Section 1-103.

  3. A claim asserted under subsection (b) does not have any legal effect, however, until the date it becomes enforceable, which cannot be earlier than 90 days after the date of a cashier’s check or teller’s check or 90 days after the date of acceptance of a certified check. Thus, if a lost check is presented for payment within the 90-day period, the bank may pay a person entitled to enforce the check without regard to the claim and is discharged of all liability with respect to the check. This ensures the continued utility of cashier’s checks, teller’s checks, and certified checks as cash equivalents. Virtually all such checks are presented for payment within 90 days.

    If the claim become enforceable and payment has not been made to a person entitled to enforce the check, the bank becomes obligated to pay the amount of the check to the claimant. Subsection (b)(4). When the bank becomes obligated to pay the amount of the check to the claimant, the bank is relieved of its obligation to pay the check. Subsection (b)(3). Thus, any person entitled to enforce the check, including even a holder in due course, loses the right to enforce the check after a claim under subsection (b) becomes enforceable.

    If the obligated bank pays the claimant under subsection (b)(4), the bank is discharged of all liability with respect to the check. The only exception is the unlikely case in which the obligated bank subsequently incurs liability under Section 4-302(a)(1) with respect to the check. For example, Obligated Bank is the issuer of a cashier’s check and, after a claim becomes enforceable, it pays the claimant under subsection (b)(4). Later the check is presented to Obligated Bank for payment over the counter. Under subsection (b)(3), Obligated Bank is not obliged to pay the check and may dishonor the check by returning it to the person who presented it for payment. But the normal rules of check collection are not affected by Section 3-312. If Obligated Bank retains the check beyond midnight of the day of presentment without settling for it, it becomes accountable for the amount of the check under Section 4-302(a)(1) even though it had no obligation to pay the check.

    An obligated bank that pays the amount of a check to a claimant under subsection (b)(4) is discharged of all liability on the check so long as the assertion of the claim meets the requirements of subsection (b) discussed in Comment 2. This is important in cases of fraudulent declarations of loss. For example, if the claimant falsely alleges a loss that in fact did not occur, the bank, subject to Section 1-203, may rely on the declaration of loss. On the other hand, a claim may be asserted only by a person described in subsection (b)(i). Thus, the bank is discharged under subsection (a)(4) only if it pays such a person. Although it is highly unlikely, it is possible that more than one person could assert a claim under subsection (b) to the amount of a check. Such a case could occur if one of the claimants makes a false declaration of loss. The obligated bank is not required to determine whether a claimant who complies with subsection (b) is acting wrongfully. The bank may utilize procedures outside this Article, such as interpleader, under which the conflicting claims may be adjudicated.

    Although it is unlikely that a lost check would be presented for payment after the claimant was paid by the bank under subsection (b)(4), it is possible for it to happen. Suppose the declaration of loss by the claimant fraudulently alleged a loss that in fact did not occur. If the claimant negotiated the check, presentment for payment would occur shortly after negotiation in almost all cases. Thus, a fraudulent declaration of loss is not likely to occur unless the check is negotiated after the 90-day period has already expired or shortly before expiration. In such a case the holder of the check, who may not have noticed the date of the check, is not entitled to payment from the obligated bank if the check is presented for payment after the claim becomes enforceable. Subsection (b)(3). The remedy of the holder who is denied payment in that case is an action against the claimant under subsection (c) if the holder is a holder in due course, or for breach of warranty under subsection (b). The holder would also have common law remedies against the claimant under the law of restitution or fraud.

  4. The following cases illustrate the operation of Section 3-312:

    Case #1. Obligated Bank (OB) certified a check drawn by its customer, Drawer (D), payable to Payee (P). Two days after the check was certified, D lost the check and then asserted a claim pursuant to subsection (b). The check had not been presented for payment when D’s claim became enforceable 90 days after the check was certified. Under subsection (b)(4), at the time D’s claim became enforceable OB became obliged to pay D the amount of the check. If the check is later presented for payment, OB may refuse to pay the check and has no obligation to anyone to pay the check. Any obligation owed by D to P, for which the check was intended as payment, is unaffected because the check was never delivered to P.

    Case #2. Obligated Bank (OB) issued a teller’s check to Remitter (R) payable to Payee (P). R delivered the check to P in payment of an obligation. P lost the check and then asserted a claim pursuant to subsection (b). To carry out P’s order, OB issued an order pursuant to Section 4-403(a) to the drawee of the teller’s check to stop payment of the check effective on the 90th day after the date of the teller’s check. The check was not presented for payment. On the 90th day after the date of the teller’s check P’s claim becomes enforceable and OB becomes obliged to pay P the amount of the check. As in Case #1, OB has no further liability with respect to the check to anyone. When R delivered the check to P, R’s underlying obligation to P was discharged under Section 3-310. Thus, R suffered no loss. Since P received the amount of the check, P also suffered no loss except with respect to the delay in receiving the amount of the check.

    Case #3. Obligated Bank (OB) issued a cashier’s check to its customer, Payee (P). Two days after issue, the check was stolen from P who then asserted a claim pursuant to subsection (b). Ten days after issue, the check was deposited by X in an account in Depositary Bank (DB). X had found the check and forged the endorsement of P. DB promptly presented the check to OB and obtained payment on behalf of X. On the 90th day after the date of the check P’s claim becomes enforceable and P is entitled to receive the amount of the check from OB. Subsection (b)(4). Although the check was presented for payment before P’s claim became enforceable, OB is not discharged. Because of the forged endorsement X was not a holder and neither was OB. Thus, neither is a person entitled to enforce the check (Section 3-301) and OB is not discharged under Section 3-602(a). Thus, under subsection (b)(4), because OB did not pay a person entitled to enforce the check, OB must pay P. OB’s remedy is against DB for breach of warranty under Section 4-208(a)(1). As an alternative to the remedy under Section 3-312, P could recover from DB for conversion under Section 3-420(a).

    Case #4. Obligated Bank (OB) issued a cashier’s check to its customer, Payee (P). P made an unrestricted blank endorsement of the check and mailed the check to P’s bank for deposit to P’s account. The check was never received by P’s bank. When P discovered the loss, P asserted a claim pursuant to subsection (b). X found the check and deposited it in X’s account in Depositary Bank (DB) after endorsing the check. DB presented the check for payment before the end of the 90-day period after its date. OB paid the check. Because of the unrestricted blank endorsement by P, X became a holder of the check. DB also became a holder. Since the check was paid before P’s claim became enforceable and payment was made to a person entitled to enforce the check, OB is discharged of all liability with respect to the check. Subsection (b)(2). Thus, P is not entitled to payment from OB. Subsection (b)(4) doesn’t apply.

    Case #5. Obligated Bank (OB) issued a cashier’s check to its customer, Payee (P). P made an unrestricted blank endorsement of the check and mailed the check to P’s bank for deposit to P’s account. The check was never received by P’s bank. When P discovered the loss, P asserted a claim pursuant to subsection (b). At the end of the 90-day period after the date of the check, OB paid the amount of the check to P under subsection (b)(4). X then found the check and deposited it to X’s account in Depositary Bank (DB). DB presented the check to OB for payment. OB is not obliged to pay the check. Subsection (b)(4). If OB dishonors the check, DB’s remedy is to charge back X’s account. Section 4-214(a). Although P, as an endorser, would normally have liability to DB under Section 3-415(a) because the check was dishonored, P is released from that liability under Section 3-415(e) because collection of the check was initiated more than 30 days after the endorsement. DB has a remedy only against X. A depositary bank that takes a cashier’s check that cannot be presented for payment before expiration of the 90-day period after its date is on notice that the check might not be paid because of the possibility of a claim asserted under subsection (b) which would excuse the issuer of the check form paying the check. Thus, the depositary bank cannot safely release funds with respect to the check until it has assurance that the check has been paid. DB cannot be a holder in due course of the check because it took the check when the check was overdue. Section 3-304(a)(2). Thus, DB has no action against P under subsection (c).

    Case #6. Obligated Bank (OB) issued a cashier’s check payable to bearer and delivered it to its customer, Remitter (R). R held the check for 90 days and then wrongfully asserted a claim to the amount of the check under subsection (b). The declaration of loss fraudulently stated that the check was lost. R received payment from OB under subsection (b)(4). R then negotiated the check to X for value. X presented the check to OB for payment. Although OB, under subsection (b)(2), was not obliged to pay the check, OB paid X by mistake. OB’s teller did not notice that the check was more than 90 days old and was not aware that OB was not obliged to pay the check. If X took the check in good faith, OB may not recover from X. Section 3-418(c). OB’s remedy is to recover from R for fraud or for breach of warranty in making a false declaration of loss. Subsection (b).

Part 4. Liability of Parties

355.3-401. Signature.

  1. A person is not liable on an instrument unless:
    1. The person signed the instrument; or
    2. The person is represented by an agent or representative who signed the instrument and the signature is binding on the represented person under KRS 355.3-402 .
  2. A signature may be made:
    1. Manually or by means of a device or machine; and
    2. By the use of any name, including a trade or assumed name, or by a word, mark, or symbol executed or adopted by a person with present intention to authenticate a writing.

History. Enact. Acts 1958, ch. 77, § 3-401, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 39, effective January 1, 1997.

Official Comment

  1. Obligation on an instrument depends on a signature that is binding on the obligor. The signature may be made by the obligor personally or by an agent authorized to act for the obligor. Signature by agents is covered by Section 3-402. It is not necessary that the name of the obligor appear on the instrument, so long as there is a signature that binds the obligor. Signature includes an indorsement.
  2. A signature may be handwritten, typed, printed or made in any other manner. It need not be subscribed, and may appear in the body of the instrument, as in the case of “I, John Doe, promise to pay * * *” without any other signature. It may be made by mark, or even by thumbprint. It may be made in any name, including any trade name or assumed name, however false and fictitious, which is adopted for the purpose. Parol evidence is admissible to identify the signer, and when the signer is identified the signature is effective. Indorsement in a name other than that of the indorser is governed by Section 3-204(d).

    This section is not intended to affect any other law requiring a signature by mark to be witnessed, or any signature to be otherwise authenticated, or requiring any form of proof.

NOTES TO DECISIONS

1.Note Executed by Spouse.

A complaint which alleged no theory of personal liability against a spouse for a promissory note executed by her husband and did not specifically allege that the wife was a partner of the jointly owned business at the time the note was executed was insufficient as a matter of law and could not support a default judgment. (decided under prior law) Cordier v. Lincoln County Nat'l Bank, 702 S.W.2d 428, 1986 Ky. LEXIS 226 ( Ky. 1986 ).

2.Forgery of Maker’s Signature.

The forgery of the maker’s signature on check is wholly inoperative as the signature of the maker. (decided under prior law) Federal Land Bank v. Hardin-Mapes Coal Corp., 817 S.W.2d 225, 1991 Ky. LEXIS 138 ( Ky. 1991 ).

3.Use of Trade Name by Maker.

Maker in signing could use trade name. (decided under prior law) National Deposit Bank v. Ohio Oil Co., 250 Ky. 288 , 62 S.W.2d 1048, 1933 Ky. LEXIS 686 ( Ky. 1933 ).

4.Indorsement.

Where indorsement was “Atlas Construction Company, by Aaron Klein partner,” it was sufficient to transfer title whether the indorser was corporation or partnership, or the signature was an assumed trade name. (decided under prior law) Fried v. Holloran, 272 Ky. 323 , 114 S.W.2d 121, 1938 Ky. LEXIS 120 ( Ky. 1938 ).

355.3-402. Signature by representative.

  1. If a person acting, or purporting to act, as a representative signs an instrument by signing either the name of the represented person or the name of the signer, the represented person is bound by the signature to the same extent the represented person would be bound if the signature were on a simple contract. If the represented person is bound, the signature of the representative is the “authorized signature of the represented person” and the represented person is liable on the instrument, whether or not identified in the instrument.
  2. If a representative signs the name of the representative to an instrument and the signature is an authorized signature of the represented person, the following rules apply:
    1. If the form of the signature shows unambiguously that the signature is made on behalf of the represented person who is identified in the instrument, the representative is not liable on the instrument.
    2. Subject to subsection (3) of this section, if:
      1. The form of the signature does not show unambiguously that the signature is made in a representative capacity or;
      2. The represented person is not identified in the instrument,

        the representative is liable on the instrument to a holder in due course that took the instrument without notice that the representative was not intended to be liable on the instrument. With respect to any other person, the representative is liable on the instrument unless the representative proves that the original parties did not intend the representative to be liable on the instrument.

  3. If a representative signs the name of the representative as drawer of a check without indication of the representative status and the check is payable from an account of the represented person who is identified on the check, the signer is not liable on the check if the signature is an authorized signature of the represented person.

History. Enact. Acts 1958, ch. 77, § 3-402, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 40, effective January 1, 1997.

Official Comment

  1. Subsection (a) states when the represented person is bound on an instrument if the instrument is signed by a representative. If under the law of agency the represented person would be bound by the act of the representative in signing either the name of the represented person or that of the representative, the signature is the authorized signature of the represented person. Former Section 3-401(1) stated that “no person is liable on an instrument unless his signature appears thereon.” This was interpreted as meaning that an undisclosed principal is not liable on an instrument. This interpretation provided an exception to ordinary agency law that binds an undisclosed principal on a simple contract.

    It is questionable whether this exception was justified by the language of former Article 3 and there is no apparent policy justification for it. The exception is rejected by subsection (a) which returns to ordinary rules of agency. If P, the principal, authorized A, the agent, to borrow money on P’s behalf and A signed A’s name to a note without disclosing that the signature was on behalf of P, A is liable on the instrument. But if the person entitled to enforce the note can also prove that P authorized A to sign on P’s behalf, why shouldn’t P also be liable on the instrument? To recognize the liability of P takes nothing away from the utility of negotiable instruments. Furthermore, imposing liability on P has the merit of making it impossible to have an instrument on which nobody is liable even though it was authorized by P. That result could occur under former Section 3-401(1) if an authorized agent signed “as agent” but the note did not identify the principal. If the dispute was between the agent and the payee of the note, the agent could escape liability on the note by proving that the agent and the payee did not intend that the agent be liable on the note when the note was issued. Former Section 3-403(2)(b). Under the prevailing interpretation of former Section 3-401(1), the principal was not liable on the note under former Section 3-401(1) because the principal’s name did not appear on the note. Thus, nobody was liable on the note even though all parties knew that the note was signed by the agent on behalf of the principal. Under Section 3-402(a) the principal would be liable on the note.

  2. Subsection (b) concerns the question of when an agent who signs an instrument on behalf of a principal is bound on the instrument. The approach followed by former Section 3-403 was to specify the form of signature that imposed or avoided liability. This approach was unsatisfactory. There are many ways in which there can be ambiguity about a signature. It is better to state a general rule. Subsection (b)(1) states that if the form of the signature unambiguously shows that it is made on behalf of an identified represented person (for example, “P, by A, Treasurer”) the agent is not liable. This is a workable standard for a court to apply. Subsection (b)(2) partly changes former Section 3-403(2). Subsection (b)(2) relates to cases in which the agent signs on behalf of a principal but the form of the signature does not fall within subsection (b)(1). The following cases are illustrative. In each case John Doe is the authorized agent of Richard Roe and John Doe signs a note on behalf of Richard Roe. In each case the intention of the original parties to the instrument is that Roe is to be liable on the instrument but Doe is not to be liable.

    Case #1. Doe signs “John Doe” without indicating in the note that Doe is signing as agent. The note does not identify Richard Roe as the represented person.

    Case #2. Doe signs “John Doe, Agent” but the note does not identify Richard Roe as the represented person.

    Case #3. The name “Richard Roe” is written on the note and immediately below that name Doe signs “John Doe” without indicating that Doe signed as agent.

    In each case Doe is liable on the instrument to a holder in due course without notice that Doe was not intended to be liable. In none of the cases does Doe’s signature unambiguously show that Doe was signing as agent for an identified principal. A holder in due course should be able to resolve any ambiguity against Doe.

    But the situation is different if a holder in due course is not involved. In each case Roe is liable on the note. Subsection (a). If the original parties to the note did not intend that Doe also be liable, imposing liability on Doe is a windfall to the person enforcing the note. Under subsection (b)(2) Doe is prima facie liable because his signature appears on the note and the form of the signature does not unambiguously refute personal liability. But Doe can escape liability by proving that the original parties did not intend that he be liable on the note. This is a change from former Section 3-403(2)(a).

    A number of cases under former Article 3 involved situations in which an agent signed the agent’s name to a note, without qualification and without naming the person represented, intending to bind the principal but not the agent. The agent attempted to prove that the other party had the same intention. Some of these cases involved mistake, and in some there was evidence that the agent may have been deceived into signing in that manner. In some of the cases the court refused to allow proof of the intention of the parties and imposed liability on the agent based on former Section 3-403(2)(a) even though both parties to the instrument may have intended that the agent not be liable. Subsection (b)(2) changes the result of those cases, and is consistent with Section 3-117 which allows oral or written agreements to modify or nullify apparent obligations on the instrument.

    Former Section 3-403 spoke of the represented person being “named” in the instrument. Section 3-402 speaks of the represented person being “identified” in the instrument. This change in terminology is intended to reject decisions under former Section 3-403(2) requiring that the instrument state the legal name of the represented person.

  3. Subsection (c) is directed at the check cases. It states that if the check identifies the represented person the agent who signs on the signature line does not have to indicate agency status. Virtually all checks used today are in personalized form which identify the person on whose account the check is drawn. In this case, nobody is deceived into thinking that the person signing the check is meant to be liable. This subsection is meant to overrule cases decided under former Article 3 such as Griffin v. Ellinger, 538 S.W.2d 97 (Texas 1976).

NOTES TO DECISIONS

1.Agent’s Name as Trade Name.

Where agent had been set up to handle branch of principal’s business and such agent signed checks using his own name, principal had adopted such as a trade name. (decided under prior law) National Deposit Bank v. Ohio Oil Co., 250 Ky. 288 , 62 S.W.2d 1048, 1933 Ky. LEXIS 686 ( Ky. 1933 ).

2.Signature by Procuration.

Signature on note “A by B, Attorney in fact” was a signature by procuration. (decided under prior law) Clinton v. Hibb's Ex'x, 202 Ky. 304 , 259 S.W. 356, 1924 Ky. LEXIS 703 ( Ky. 1924 ).

3.Written Authority.

Jury should have been instructed that unless they believed from the evidence that agent had been instructed in writing to sign negotiable note they should find for the defendant. (decided under prior law) Finley v. Smith, 165 Ky. 445 , 177 S.W. 262, 1915 Ky. LEXIS 552 ( Ky. 1915 ) ( Ky. 1915 ).

Where bank sent a telegram agreeing to honor certain check, telegraph operator was not agent of bank such as had to be authorized in writing. (decided under prior law) Selma Sav. Bank v. Webster County Bank, 182 Ky. 604 , 206 S.W. 870, 1918 Ky. LEXIS 411 ( Ky. 1918 ).

Where an agent signed a principal’s name to a note as surety, the agency had to be authorized in writing. (decided under prior law) Clinton v. Hibb's Ex'x, 202 Ky. 304 , 259 S.W. 356, 1924 Ky. LEXIS 703 ( Ky. 1924 ).

Indorsement on check containing name of payee and another followed by descriptive word “agent” should have put indorsee on notice that indorser was assuming to act as agent, which required written authority. (decided under prior law) Kentucky Title Sav. Bank & Trust Co. v. Dunavan, 205 Ky. 801 , 266 S.W. 667, 1924 Ky. LEXIS 245 ( Ky. 1924 ).

Although a person whose name appeared on a negotiable instrument could defend in a civil action, unless estopped, on the ground that his name was placed thereon without written authority, want of such written authority would not render the agent guilty of forgery if he was in fact authorized, or honestly believed that he was authorized, to make the signatures. (decided under prior law) Shelton v. Commonwealth, 229 Ky. 60 , 16 S.W.2d 498, 1929 Ky. LEXIS 678 ( Ky. 1929 ).

Letter introducing agent and stating she could indorse trade acceptances was sufficient written authority. (decided under prior law) Melton Electric Co. v. Central Credit Corp., 234 Ky. 469 , 28 S.W.2d 507, 1930 Ky. LEXIS 213 ( Ky. 1930 ).

The parol ratification of negotiable instrument by one whose name was signed without written authority was not binding, the reason being that to permit parol ratification would have in effect nullified the statute. (decided under prior law) Dalton v. Shelton, 267 Ky. 40 , 101 S.W.2d 208, 1937 Ky. LEXIS 281 ( Ky. 1937 ).

4.Oral Authority.

Where principal’s name was singed to a note with only oral authority, the payee-holder of the note was entitled to file a claim against the principal’s estate when such principal made an assignment for benefit of creditors. (decided under prior law) Langford v. State Bank & Trust Co., 251 Ky. 633 , 65 S.W.2d 730, 1933 Ky. LEXIS 928 ( Ky. 1933 ).

5.Descriptive Words.

Where, in a suit between original parties, the signature “X, Trustee” appeared on a note given in payment for merchandise bought by a church, such description of X was presumed to be merely descriptio personae. (decided under prior law) G. C. Riordan & Co. v. Thornsbury, 178 Ky. 324 , 198 S.W. 920, 1917 Ky. LEXIS 728 ( Ky. 1917 ).

Where words “Proprietor Gibson Billiard Parlor” appeared below signature, they were descriptio personae and did not indicate intention to sign as agent. (decided under prior law) Sandmann v. Getty, 254 Ky. 496 , 71 S.W.2d 954, 1934 Ky. LEXIS 87 ( Ky. 1934 ).

Where maker’s signature was followed by word “trustee” without further explanation, he was personally liable. (decided under prior law) Browning v. Park Hill Realty Co., 263 Ky. 636 , 93 S.W.2d 358, 1936 Ky. LEXIS 231 ( Ky. 1936 ).

Where on a note, the corporate signature was followed by personal signatures with such terms as “Pres.,” “Sec.,” “Mgr.,” such terms were treated as descriptio personae and did not indicate that such parties did not intend to sign as makers. (decided under prior law) Blackburn v. Beverly, 272 Ky. 346 , 114 S.W.2d 98, 1938 Ky. LEXIS 115 ( Ky. 1938 ).

6.Failure to Disclose Principal.

Where S indorsed a note with the words “accepted and payable by S as syndicate manager and without personal liability,” he did not disclose his principal and was personally liable on such indorsement. (decided under prior law) James v. Stokes, 203 Ky. 127 , 261 S.W. 868, 1924 Ky. LEXIS 850 ( Ky. 1924 ).

7.Unauthorized Acts of Agent.

Where agent was, in writing, authorized to sell a note at ten (10) percent discount and he sold it at 18 percent discount, the transferee acquired no right in such instrument. (decided under prior law) Harding v. Kentucky River Hardwood Co., 205 Ky. 1 , 265 S.W. 429, 1924 Ky. LEXIS 29 ( Ky. 1 924 ).

Where principal retained consideration from discounted note, it was precluded from setting up want of authority in agent to indorse. (decided under prior law) Baskett v. Ohio Valley Banking & Trust Co., 214 Ky. 36 , 214 Ky. 41 , 281 S.W. 1022, 1926 Ky. LEXIS 252 ( Ky. 1926 ).

Where directors authorized corporate president and secretary to borrow money and, on the note, their signature was accompanied by one reading “X, Mgr.,” X, although revealing his principal, was personally bound on the note, since he was not authorized to participate in the borrowing. (decided under prior law) Farmers' Bank & Trust Co. v. Farmers' Supply Co., 244 Ky. 420 , 51 S.W.2d 246, 1932 Ky. LEXIS 438 ( Ky. 1932 ).

8.Representative Capacity.

Where the note was signed “X and Company” and below “X, Pres.,” it disclosed the principal and indicated that X was signing in a representative capacity. (decided under prior law) H. E. Hughes & Co. v. Washington Finance Corp., 218 Ky. 729 , 292 S.W. 335, 1927 Ky. LEXIS 251 ( Ky. 1927 ).

Where husband and wife, co-owners of a card and gift shop, had personally borrowed $23,000 from plaintiff bank by February 2, 1973, but had paid it off by June 8; and where the husband and wife had incorporated their business on May 23, after which they signed certain notes to the bank in their capacity as corporate officers, pursuant to a corporation resolution which notes had an unpaid balance of over $18,000 when the corporation became insolvent, the corporation, and not its agents, was liable, pursuant to subsection (3) of this section, on its notes. (decided under prior law) White v. Winchester Land Development Corp., 584 S.W.2d 56, 1979 Ky. App. LEXIS 434 (Ky. Ct. App. 1979), overruled in part, Inter-Tel Techs., Inc. v. Linn Station Props., LLC, 360 S.W.3d 152, 2012 Ky. LEXIS 2 ( Ky. 2012 ).

Where two individual debtors signed their names twice to a corporate note without stating that such signing was as representatives of the corporation, the individuals were personally liable on the note in that there was no indication that they signed in a representative capacity, furthermore, notwithstanding the individuals’ statements that they assumed they were incurring no personal liability, there was no evidence that there was any understanding between the parties that only the corporation would be liable. (decided under prior law) Richardson v. First Nat'l Bank, 660 S.W.2d 678, 1983 Ky. App. LEXIS 368 (Ky. Ct. App. 1983).

Any interest of a Chapter 7 Trustee in debtors’ property under 11 U.S.C.S. § 544 was inferior to a creditor’s properly perfect secured interest. The first allonge was a valid indorsement of the original payee because there was no requirement under KRS 355.3-204 (1) that the indorsements be dated and there was unrefuted evidence that the mortgage manager was authorized to execute and bind the original payee to the first allonge under KRS 355.3-402 (1); the note was then negotiated by valid second allonge to the creditor, who, as holder, was entitled to enforce it under KRS 355.3-301 . Rogan v. Branch Banking & Trust Co. (In re Asberry), 2013 Bankr. LEXIS 788 (Bankr. E.D. Ky. Mar. 1, 2013).

9.Liability of Agent.

Where the evidence of the agent’s authority failed to satisfy corporate bylaws, the agent was personally liable. (decided under prior law) Blackburn v. Beverly, 272 Ky. 346 , 114 S.W.2d 98, 1938 Ky. LEXIS 115 ( Ky. 1938 ).

10.Estoppel by Receipt of Benefits.

The requirement that the signature of any party to a negotiable instrument by an agent “must” be authorized in writing could not be nullified by parol authorization or ratification of such signature but, where husband affixed wife’s name on checks without her knowledge, consent, or authorization, she could not recover from the bank the amount of checks paid from her personal account to the extent that she received the full benefit of the payments made. (decided under prior law) Sullivan v. Farmers Bank & Trust Co., 145 F. Supp. 702, 1956 U.S. Dist. LEXIS 2663 (D. Ky. 1956 ).

11.Parol Evidence.

Where, in suit between original parties, the signature “X, Trustee” appeared on note, parol evidence was admissible that parties intended not to bind X personally. (decided under prior law) G. C. Riordan & Co. v. Thornsbury, 178 Ky. 324 , 198 S.W. 920, 1917 Ky. LEXIS 728 ( Ky. 1917 ).

The bare signature of an agent obligates only the agent, and parol evidence is inadmissible under subsection (2)(a) of this section to disestablish his or her obligation. (decided under prior law) Enzweiler v. Peoples Deposit Bank, 742 S.W.2d 569, 1987 Ky. App. LEXIS 607 (Ky. Ct. App. 1987).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Answer Pleading Unauthorized Signature, Form 191.24.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Principal and Agent, § 200.00.

355.3-403. Unauthorized signature.

  1. Unless otherwise provided in this article or Article 4 of this chapter, an unauthorized signature is ineffective except as the signature of the unauthorized signer in favor of a person who in good faith pays the instrument or takes it for value. An unauthorized signature may be ratified for all purposes of this article.
  2. If the signature of more than one (1) person is required to constitute the authorized signature of an organization, the signature of the organization is unauthorized if one of the required signatures is lacking.
  3. The civil or criminal liability of a person who makes an unauthorized signature is not affected by any provision of this article which makes the unauthorized signature effective for the purposes of this article.

History. Enact. Acts 1958, ch. 77, § 3-403, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 41, effective January 1, 1997.

Official Comment

  1. “Unauthorized” signature is defined in Section 1-201(43) as one that includes a forgery as well as a signature made by one exceeding actual or apparent authority. Former Section 3-404(1) stated that an unauthorized signature was inoperative as the signature of the person whose name was signed unless that person “is precluded from denying it.” Under former Section 3-406 if negligence by the person whose name was signed contributed to an unauthorized signature, that person “is precluded from asserting the * * * lack of authority.” Both of these sections were applied to cases in which a forged signature appeared on an instrument and the person asserting rights on the instrument alleged that the negligence of the purported signer contributed to the forgery. Since the standards for liability between the two sections differ, the overlap between the sections caused confusion. Section 3-403(a) deals with the problem by removing the preclusion language that appeared in former Section 3-404.
  2. The except clause of the first sentence of subsection (a) states the generally accepted rule that the unauthorized signature, while it is wholly inoperative as that of the person whose name is signed, is effective to impose liability upon the signer or to transfer any rights that the signer may have in the instrument. The signer’s liability is not in damages for breach of warranty of authority, but is full liability on the instrument in the capacity in which the signer signed. It is, however, limited to parties who take or pay the instrument in good faith; and one who knows that the signature is unauthorized cannot recover from the signer on the instrument.
  3. The last sentence of subsection (a) allows an unauthorized signature to be ratified. Ratification is a retroactive adoption of the unauthorized signature by the person whose name is signed and may be found from conduct as well as from express statements. For example, it may be found from the retention of benefits received in the transaction with knowledge of the unauthorized signature. Although the forger is not an agent, ratification is governed by the rules and principles applicable to ratification of unauthorized acts of an agent.

    Ratification is effective for all purposes of this Article. The unauthorized signature becomes valid so far as its effect as a signature is concerned. Although the ratification may relieve the signer of liability on the instrument, it does not of itself relieve the signer of liability to the person whose name is signed. It does not in any way affect the criminal law. No policy of the criminal law prevents a person whose name is forged to assume liability to others on the instrument by ratifying the forgery, but the ratification cannot affect the rights of the state. While the ratification may be taken into account with other relevant facts in determining punishment, it does not relieve the signer of criminal liability.

  4. Subsection (b) clarifies the meaning of “unauthorized” in cases in which an instrument contains less than all of the signatures that are required as authority to pay a check. Judicial authority was split on the issue whether the one-year notice period under former Section 4-406(4) (now Section 4-406(f)) barred a customer’s suit against a payor bank that paid a check containing less than all of the signatures required by the customer to authorize payment of the check. Some cases took the view that if a customer required that a check contain the signatures of both A and B to authorize payment and only A signed, there was no unauthorized signature within the meaning of that term in former Section 4-406(4) because A’s signature was neither unauthorized nor forged. The other cases correctly pointed out that it was the customer’s signature at issue and not that of A; hence, the customer’s signature was unauthorized if all signatures required to authorize payment of the check were not on the check. Subsection (b) follows the latter line of cases. The same analysis applies if A forged the signature of B. Because the forgery is not effective as a signature of B, the required signature of B is lacking.

    Subsection (b) refers to “the authorized signature of an organization.” The definition of “organization” in Section 1-201(28) is very broad. It covers not only commercial entities but also “two or more persons having a joint or common interest.” Hence subsection (b) would apply when a husband and wife are both required to sign an instrument.

NOTES TO DECISIONS

1.Lack of Authority.

Where unauthorized signature was unnecessary to establish title of party suing, such lack of authorization was irrelevant. (decided under prior law) Jett v. Standafer, 143 Ky. 787 , 137 S.W. 513, 1911 Ky. LEXIS 503 ( Ky. 1911 ).

Where X’s name was placed on a note as maker without his knowledge, he was not liable thereon. (decided under prior law) Embry v. Long, 256 Ky. 266 , 75 S.W.2d 1036, 1934 Ky. LEXIS 372 ( Ky. 1934 ).

Authorization had to satisfy corporate bylaws. (decided under prior law) Blackburn v. Beverly, 272 Ky. 346 , 114 S.W.2d 98, 1938 Ky. LEXIS 115 ( Ky. 1938 ).

2.Forgery.

Retracing the signature of county clerk on county bonds was not forgery. (decided under prior law) Citizens' State Bank v. Johnson County, 182 Ky. 531 , 207 S.W. 8, 1918 Ky. LEXIS 419 ( Ky. 1918 ).

Where there was a conflict in the evidence, the question of whether a signature was forged or not was for the jury. (decided under prior law) Murray v. Bank of Jamestown, 207 Ky. 514 , 269 S.W. 520, 1925 Ky. LEXIS 124 ( Ky. 1925 ).

To be a negotiable instrument, the instrument must be in writing, signed by the maker or drawer, and a forged check, not having been so signed, is not a negotiable instrument. (decided under prior law) Louisa Nat'l Bank v. Kentucky Nat'l Bank, 239 Ky. 302 , 39 S.W.2d 497, 1931 Ky. LEXIS 776 ( Ky. 1931 ).

Where X, claiming forgery, introduced testimony of person whose signature was allegedly forged and Y, denying forgery, only introduced note in evidence, a directed verdict for X was proper. (decided under prior law) Federal Fidelity Co. v. Royal Mortg. & Finance Co., 252 Ky. 716 , 68 S.W.2d 25, 1934 Ky. LEXIS 844 ( Ky. 1934 ).

3.Ratification.

Where cashier transferred note of his bank without authority, appropriation of the consideration paid for the note by the bank was a ratification of the cashier’s act. (decided under prior law) Ohio Valley Banking & Trust Co. v. Great Southern Fire Ins. Co., 176 Ky. 694 , 197 S.W. 399, 1917 Ky. LEXIS 105 ( Ky. 1917 ).

Where agent took note for stock in violation of authority to sell for cash only and indorsed note to bank, receipt by principal of bank’s certificate of deposit and issuance of stock to bank were not ratification of act sufficient to preclude principal from setting up lack of authority. (decided under prior law) Inter-Southern Life Ins. Co. v. First Nat'l Bank, 178 Ky. 95 , 198 S.W. 563, 1917 Ky. LEXIS 692 ( Ky. 1917 ).

Where reply alleged that surety, whose signature was affixed without authority, once orally agreed to recognize note and that maker was solvent when surety so agreed, it failed to allege necessary element of prejudice to plaintiff by not stating maker was now insolvent, and was subject to demurrer. (decided under prior law) Dalton v. Shelton, 267 Ky. 40 , 101 S.W.2d 208, 1937 Ky. LEXIS 281 ( Ky. 1937 ).

4.Precluded from Denying Unauthorized Signature.

Where a person whose name had been signed to a note by another without authority in writing to do so agreed in writing not to contest the validity of the note and thereby induced one to accept the note, he was estopped to deny that he signed it. (decided under prior law) Union Cent. Life Ins. Co. v. Johnson's Adm'x, 76 S.W. 335, 25 Ky. L. Rptr. 682 (1903).

“Precluded” was synonymous with “estopped.” (decided under prior law) Baskett v. Ohio Valley Banking & Trust Co., 214 Ky. 36 , 214 Ky. 41 , 281 S.W. 1022, 1926 Ky. LEXIS 252 ( Ky. 1926 ); Citizens' Union Nat'l Bank v. Terrell, 244 Ky. 16 , 50 S.W.2d 60, 1932 Ky. LEXIS 388 ( Ky. 1932 ); Embry v. Long, 256 Ky. 266 , 75 S.W.2d 1036, 1934 Ky. LEXIS 372 ( Ky. 1934 ); Day & Night Nat'l Bank v. Polley, 257 Ky. 36 , 77 S.W.2d 351, 1934 Ky. LEXIS 506 ( Ky. 1934 ); United States v. Citizens Union Nat. Bank, 40 F. Supp. 609, 1941 U.S. Dist. LEXIS 2732 (D. Ky. 1941 ).

Where maker signed renewal note knowing it would be used to replace previous note which had been indorsed and discounted, such maker was precluded (estopped) from setting up want of written authority of payee’s agent to indorse. (decided under prior law) Baskett v. Ohio Valley Banking & Trust Co., 214 Ky. 36 , 214 Ky. 41 , 281 S.W. 1022, 1926 Ky. LEXIS 252 ( Ky. 1926 ).

Where check was payable to X and another person with the same name obtained and indorsed it, such signature was forged but facts estopped drawer from claiming indorsement a forgery. (decided under prior law) Citizens' Union Nat'l Bank v. Terrell, 244 Ky. 16 , 50 S.W.2d 60, 1932 Ky. LEXIS 388 ( Ky. 1932 ).

Where principal carried special bank account for agent, had issued to agent pad of checks on which was printed “Agent’s Disbursing Account” and had not objected to many previous similar transactions, principal was precluded from setting up want of authority. (decided under prior law) National Deposit Bank v. Ohio Oil Co., 250 Ky. 288 , 62 S.W.2d 1048, 1933 Ky. LEXIS 686 ( Ky. 1933 ).

Where X was on the committee which certified that the assets of bank were collectible, there was sufficient evidence to take to the jury the question of X’s being precluded from setting up forgery of his name on a note included in assets so examined, when bank sued on such note. (decided under prior law) Day & Night Nat'l Bank v. Polley, 257 Ky. 36 , 77 S.W.2d 351, 1934 Ky. LEXIS 506 ( Ky. 1934 ).

Where United States issued a check as loan on a service certificate after being notified proper party had not received such certificate, and issuing was duplicate therefor, it was precluded from setting up forged indorsement on check as against bank which cashed such check. (decided under prior law) United States v. Citizens Union Nat. Bank, 40 F. Supp. 609, 1941 U.S. Dist. LEXIS 2732 (D. Ky. 1941 ).

5.Not Precluded from Denying Unauthorized Signature.

Where payee of note was not prejudiced or induced to change his position thereby, X, whose name was signed to note by another, was not precluded from setting up want of authority when payee sued for payment. (decided under prior law) Embry v. Long, 256 Ky. 266 , 75 S.W.2d 1036, 1934 Ky. LEXIS 372 ( Ky. 1934 ).

Where X knew Y had bought property in X’s name, X in three similar transactions having signed the purchase money notes, he was not precluded from setting up want of authority for his signature to a note made without his knowledge. (decided under prior law) Embry v. Long, 256 Ky. 266 , 75 S.W.2d 1036, 1934 Ky. LEXIS 372 ( Ky. 1934 ).

Where indorsee alleged forgery of his signature, fact that he was director of holder-bank did not alone preclude him from setting up such defense. (decided under prior law) Day & Night Nat'l Bank v. Polley, 257 Ky. 36 , 77 S.W.2d 351, 1934 Ky. LEXIS 506 ( Ky. 1934 ).

6.Good Faith.

Definition of good faith in subdivision (19) of KRS 355.1-201 does not include negligence; thus, the bank’s negligence in not ascertaining the guarantor’s lack of authority was not bad faith. (decided under prior law) Enzweiler v. Peoples Deposit Bank, 742 S.W.2d 569, 1987 Ky. App. LEXIS 607 (Ky. Ct. App. 1987).

7.Payment in Good Faith.

Where one of two parties must suffer loss by forgery of check, the loss had to be borne by the person whose conduct made the loss possible and, where commonwealth drew check payable to employee and sent it to him without any street address on the letter and post office delivered it to another person with the same name who forged an indorsement on the check and cashed it at a bank, the employee entitled to the check could recover from the commonwealth and, as between the bank and the commonwealth, the commonwealth had to suffer the loss. (decided under prior law) Keck v. Browne, 314 Ky. 151 , 234 S.W.2d 183, 1950 Ky. LEXIS 1016 ( Ky. 1950 ).

8.Notice of Unauthorized Act.

Where X loaned money on Y’s note, which loan was less than the limit of indebtedness permitted by Y’s articles of incorporation but, together with other indebtedness, exceeded such limitation, X had no notice of want of authority to obtain such loan. (decided under prior law) Citizens' Bank v. Bank of Waddy, 126 Ky. 169 , 103 S.W. 249, 31 Ky. L. Rptr. 365 , 1907 Ky. LEXIS 32 (Ky. Ct. App. 1907).

9.Liability of Unauthorized Signer.

Where person, signing as maker, disclosed principal but lacked authority, he was personally liable. (decided under prior law) Sandmann v. Getty, 254 Ky. 496 , 71 S.W.2d 954, 1934 Ky. LEXIS 87 ( Ky. 1934 ).

Where an agent signed a note without authority, he was personally liable even though he disclosed his principal. (decided under prior law) Blackburn v. Beverly, 272 Ky. 346 , 114 S.W.2d 98, 1938 Ky. LEXIS 115 ( Ky. 1938 ).

The president of the bank who signed the note as guarantor and had no authority to obligate the bank to pay the same was personally liable for guaranty of the note. (decided under prior law) Enzweiler v. Peoples Deposit Bank, 742 S.W.2d 569, 1987 Ky. App. LEXIS 607 (Ky. Ct. App. 1987).

355.3-404. Impostors — Fictitious payees.

  1. If an impostor, by use of the mails or otherwise, induces the issuer of an instrument to issue the instrument to the impostor, or to a person acting in concert with the impostor, by impersonating the payee of the instrument or a person authorized to act for the payee, an indorsement of the instrument by any person in the name of the payee is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.
    1. If: (2) (a) If:
      1. A person whose intent determines to whom an instrument is payable (KRS 355.3-110 (1) or (2)) does not intend the person identified as payee to have any interest in the instrument; or
      2. The person identified as payee of an instrument is a fictitious person, the rules set out in paragraph (b) of this subsection apply until the instrument is negotiated by special indorsement.
      1. Any person in possession of the instrument is its holder. (b) 1. Any person in possession of the instrument is its holder.
      2. An indorsement by any person in the name of the payee stated in the instrument is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.
  2. Under subsection (1) or (2) of this section, an indorsement is made in the name of a payee if:
    1. It is made in a name substantially similar to that of the payee; or
    2. The instrument, whether or not indorsed, is deposited in a depositary bank to an account in a name substantially similar to that of the payee.
  3. With respect to an instrument to which subsection (1) or (2) of this section applies, if a person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from payment of the instrument, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.

History. Enact. Acts 1958, ch. 77, § 3-404, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 42, effective January 1, 1997.

Official Comment

  1. Under former Article 3, the impostor cases were governed by former Section 3-405(1)(a) and the fictitious payee cases were governed by Section 3-405(1)(b). Section 3-404 replaces former Section 3-405(1)(a) and (b) and modifies the previous law in some respects. Former Section 3-405 was read by some courts to require that the endorsement be in the exact name of the named payee. Revised Article 3 rejects this result. Section 3-404(c) requires only that the endorsement be made in a name “substantially similar” to that of the payee. Subsection (c) also recognizes the fact that checks may be deposited without endorsement. Section 4-205(a).

    Subsection (a) changes the former law in a case in which the impostor is impersonating an agent. Under former Section 3-405(1)(a), if Impostor impersonated Smith and induced the drawer to draw a check to the order of Smith, Impostor could negotiate the check. If Impostor impersonated Smith, the president of Smith Corporation, and the check was payable to the order of Smith Corporation, the section did not apply. See the last paragraph of Comment 2 to former Section 3-405. In revised Article 3, Section 3-404(a) gives Impostor the power to negotiate the check in both cases.

  2. Subsection (b) is based in part on former Section 3-405(1)(b) and in part on N.I.L. § 9(3). It covers cases in which an instrument is payable to a fictitious or nonexisting person and to cases in which the payee is a real person but the drawer or maker does not intend the payee to have any interest in the instrument. Subsection (b) applies to any instrument, but its primary importance is with respect to checks of corporations and other organizations. It also applies to forged check cases. The following cases illustrate subsection (b):

    Case #1. Treasurer is authorized to draw checks in behalf of Corporation. Treasurer fraudulently draws a check of Corporation payable to Supplier Co., a non-existent company. Subsection (b) applies because Supplier Co. is a fictitious person and because Treasurer did not intend Supplier Co. to have any interest in the check. Under subsection (b)(1) Treasurer, as the person in possession of the check, becomes the holder of the check. Treasurer endorses the check in the name “Supplier Co.” and deposits it in Depositary Bank. Under subsection (b)(2) and (c)(i), the endorsement is effective to make Depositary Bank the holder and therefore a person entitled to enforce the instrument. Section 3-301.

    Case #2. Same facts as Case #1 except that Supplier Co. is an actual company that does business with Corporation. If Treasurer intended to steal the check when the check was drawn, the result in Case #2 is the same as the result in Case #1. Subsection (b) applies because Treasurer did not intend Supplier Co. to have any interest in the check. It does not make any difference whether Supplier Co. was or was not a creditor of Corporation when the check was drawn. If Treasurer did not decide to steal the check until after the check was drawn, the case is covered by Section 3-405 rather than Section 3-404(b), but the result is the same. See Case #6 in Comment 3 to Section 3-405.

    Case #3. Checks of Corporation must be signed by two officers. President and Treasurer both sign a check of Corporation payable to Supplier Co., a company that does business with Corporation from time to time but to which Corporation does not owe any money. Treasurer knows that no money is owed to Supplier Co. and does not intend that Supplier Co. have any interest in the check. President believes that money is owed to Supplier Co. Treasurer obtains possession of the check after it is signed. Subsection (b) applies because Treasurer is “a person whose intent determines to whom an instrument is payable” and Treasurer does not intend Supplier Co. to have any interest in the check. Treasurer becomes the holder of the check and may negotiate it by endorsing it in the name “Supplier Co.”

    Case #4. Checks of Corporation are signed by a check-writing machine. Names of payees of checks produced by the machine are determined by information entered into the computer that operates the machine. Thief, a person who is not an employee or other agent of Corporation, obtains access to the computer and causes the check-writing machine to produce a check payable to Supplier Co., a non-existent company. Subsection (b)(2) applies. Thief then obtains possession of the check. At that point Thief becomes the holder of the check because Thief is the person in possession of the instrument. Subsection (b)(1). Under Section 3-301 Thief, as holder, is the “person entitled to enforce the instrument” even though Thief does not have title to the check and is in wrongful possession of it. Thief endorses the check in the name “Supplier Co.” and deposits it in an account in Depositary Bank which Thief opened in the name “Supplier Co.” Depositary Bank takes the check in good faith and credits the “Supplier Co.” account. Under subsection (b)(2) and (c)(1), the endorsement is effective. Depositary Bank becomes the holder and the person entitled to enforce the check. The check is presented to the drawee bank for payment and payment is made. Thief then withdraws the credit to the account. Although the check was issued without authority given by Corporation, the drawee bank is entitled to pay the check and charge Corporation’s account if there was an agreement with Corporation allowing the bank to debit Corporation’s account for payment of checks produced by the check-writing machine whether or not authorized. The endorsement is also effective if Supplier Co. is a real person. In that case subsection (b)(1) applies. Under Section 3-110(b) Thief is the person whose intent determines to whom the check is payable, and Thief did not intend Supplier Co. to have any interest in the check. When the drawee bank pays the check, there is no breach of warranty under Section 3-417(a)(1) or 4-208(a)(1) because Depositary Bank was a person entitled to enforce the check when it was forwarded for payment.

    Case #5. Thief, who is not an employee or agent of Corporation, steals check forms of Corporation. John Doe is president of Corporation and is authorized to sign checks on behalf of Corporation as drawer. Thief draws a check in the name of Corporation as drawer by forging the signature of Doe. Thief makes the check payable to the order of Supplier Co. with the intention of stealing it. Whether Supplier Co. is a fictitious person or a real person, Thief becomes the holder of the check and the person entitled to enforce it. The analysis is the same as that in Case #4. Thief deposits the check in an account in Depositary Bank which Thief opened in the name “Supplier Co.” Thief either endorses the check in a name other than “Supplier Co.” or does not endorse the check at all. Under Section 4-205(a) a depositary bank may become holder of a check deposited to the account of a customer if the customer was a holder, whether or not the customer endorses. Subsection (c)(2) treats deposit to an account in a name substantially similar to that of the payee as the equivalent of endorsement in the name of the payee. Thus, the deposit is an effective endorsement of the check. Depositary Bank becomes the holder of the check and the person entitled to enforce the check. If the check is paid by the drawee bank, there is no breach of warranty under Section 3-417(a)(1) or 4-208(a)(1) because Depositary Bank was a person entitled to enforce the check when it was forwarded for payment and, unless Depositary Bank knew about the forgery of Doe’s signature, there is no breach of warranty under Section 3-417(a)(3) or 4-208(a)(3). Because the check was a forged check the drawee bank is not entitled to charge Corporation’s account unless Section 3-406 or Section 4-406 applies.

  3. In cases governed by subsection (a) the dispute will normally be between the drawer of the check that was obtained by the impostor and the drawee bank that paid it. The drawer is precluded from obtaining recredit of the drawer’s account by arguing that the check was paid on a forged endorsement so long as the drawee bank acted in good faith in paying the check. Cases governed by subsection (b) are illustrated by Cases #1 through #5 in Comment 2. In Cases #1, #2, and #3 there is no forgery of the check, thus the drawer of the check takes the loss if there is no lack of good faith by the banks involved. Cases #4 and #5 are forged check cases. Depositary Bank is entitled to retain the proceeds of the check if it didn’t know about the forgery. Under Section 3-418 the drawee bank is not entitled to recover form Depositary Bank on the basis of payment by mistake because Depositary Bank took the check in good faith and gave value for the check when the credit given for the check was withdrawn. And there is no breach of warranty under Section 3-417(a)(1) or (3) or 4-208(a)(1) or (3). Unless Section 3-406 applies the loss is taken by the drawee bank if a forged check is paid, and that is the result in Case #5. In Case #4 the loss is taken by Corporation, the drawer, because an agreement between Corporation and the drawee bank allowed the bank to debit Corporation’s account despite the unauthorized use of the check-writing machine.

    If a check payable to an impostor, fictitious payee, or payee not intended to have an interest in the check is paid, the effect of subsections (a) and (b) is to place the loss on the drawer of the check rather than on the drawee or the depositary bank that took the check for collection. Cases governed by subsection (a) always involve fraud, and fraud is almost always involved in cases governed by subsection (b). The drawer is in the best position to avoid the fraud and thus should take the loss. This is true in Case #1, Case #2, and Case #3. But in some cases the person taking the check might have detected the fraud and thus have prevented the loss by the exercise of ordinary care. In those cases, if that person failed to exercise ordinary care, it is reasonable that that person bear loss to the extent the failure contributed to the loss. Subsection (d) is intended to reach that result. It allows the person who suffers loss as a result of payment of the check to recover from the person who failed to exercise ordinary care. In Case #1, Case #2, and Case #3, the person suffering the loss is Corporation, the drawer of the check. In each case the most likely defendant is the depositary bank that took the check and failed to exercise ordinary care. In those cases, the drawer has a cause of action against the offending bank to recover a portion of the loss. The amount of loss to be allocated to each party is left to the trier of fact. Ordinary care is defined in Section 3-103(a)(9). An example of the type of conduct by a depositary bank that could give rise to recovery under subsection (d) is discussed in Comment 4 to Section 3-405. That Comment addresses the last sentence of Section 3-405(b) which is similar to Section 3-404(d).

    In Case #1, Case #2, and Case #3, there was no forgery of the drawer’s signature. But cases involving checks payable to a fictitious payee or a payee not intended to have an interest in the check are often forged check cases as well. Examples are Case #4 and Case #5. Normally, the loss in forged check cases is on the drawee bank that paid the check. Case #5 is an example. In Case #4 the risk with respect to the forgery is shifted to the drawer because of the agreement between the drawer and the drawee bank. The doctrine that prevents a drawee bank from recovering payment with respect to a forged check if the payment was made to a person who took the check for value and in good faith is incorporated into Section 3-418 and Sections 3-417(a)(3) and 4-208(a)(3). This doctrine is based on the assumption that the depositary bank normally has no way of detecting the forgery because the drawer is not that bank’s customer. On the other hand, the drawee bank, at least in some cases, may be able to detect the forgery by comparing the signature on the check with the specimen signature that the drawee has on file. But in some forged check cases the depositary bank is in a position to detect the fraud. Those cases typically involve a check payable to a fictitious payee or a payee not intended to have an interest in the check. Subsection (d) applies to those cases. If the depositary bank failed to exercise ordinary care and the failure substantially contributed to the loss, the drawer in Case #4 or the drawee bank in Case #5 has a cause of action against the depositary bank under subsection (d). Comment 4 to Section 3-405 can be used as a guide to the type of conduct that could give rise to recovery under Section 3-404(d).

NOTES TO DECISIONS

1.Fictitious Payees.

Where person with authority to draw corporate checks drew check in name of payee who had no interest in the check and who was not intended to be a party to the transaction, the check was drawn in the name of a fictitious payee and authorized the bank to pay check to bearer. (decided under prior law) Mueller & Martin v. Liberty Ins. Bank, 187 Ky. 44 , 218 S.W. 465, 1920 Ky. LEXIS 77 ( Ky. 1920 ).

Where an agent fraudulently procured his principal to draw checks to fictitious persons and the indorsee had no knowledge of such fictitious character, the drawee bank lost, in a suit by the drawer, when it paid them on the forged indorsement. (decided under prior law) Commonwealth use of Coleman v. Farmers Deposit Bank, 264 Ky. 839 , 95 S.W.2d 793, 1936 Ky. LEXIS 413 ( Ky. 1936 ).

2.Unfaithful Employee.

Where small claims clerk, who was authorized to sign and issue drafts without prior approval of employer insurer, forged indorsement of payee, who had no claim and was not intended to have any interest in the draft, and procured payment from collecting bank which knew of clerk’s authority and did not require clerk to personally indorse the instrument, the insurer and not the collecting bank was required to bear the loss. (decided under prior law) General Acci. Fire & Life Assurance Corp. v. Citizens Fidelity Bank & Trust Co., 519 S.W.2d 817, 1975 Ky. LEXIS 177 ( Ky. 1975 ).

3.When Payee Not Impostor.

An endorsement by any person of a named payee is effective if someone has induced the maker to issue the instrument to him in the name of the payee, and if the maker of a check draws it payable to a creditor and the payee represents to the paying bank that he is the creditor and thus receives the proceeds of the check, then the payee is not an impostor in relation to the drawer and the paying bank may not charge that sum against the drawer’s account. (decided under prior law) Owensboro Nat'l Bank v. Crisp, 608 S.W.2d 51, 1980 Ky. LEXIS 264 ( Ky. 1980 ).

Where repairman was given a check for $12.50 for work actually performed, altered check so that it read $6,212.50, endorsed and presented check and was paid the altered amount, the repairman was not an “impostor” under this section and the paying bank could not charge that sum against the drawer’s account. (decided under prior law) Owensboro Nat'l Bank v. Crisp, 608 S.W.2d 51, 1980 Ky. LEXIS 264 ( Ky. 1980 ).

355.3-405. Employer’s responsibility for fraudulent indorsement by employee.

  1. In this section:
    1. “Employee” includes an independent contractor and employee of an independent contractor retained by the employer;
    2. “Fraudulent indorsement” means:
      1. In the case of an instrument payable to the employer, a forged indorsement purporting to be that of the employer; or
      2. In the case of an instrument with respect to which the employer is the issuer, a forged indorsement purporting to be that of the person identified as payee;
    3. “Responsibility” with respect to instruments means authority:
      1. To sign or indorse instruments on behalf of the employer;
      2. To process instruments received by the employer for bookkeeping purposes, for deposit to an account, or for other disposition;
      3. To prepare or process instruments for issue in the name of the employer;
      4. To supply information determining the names or addresses of payees of instruments to be issued in the name of the employer;
      5. To control the disposition of instruments to be issued in the name of the employer; or
      6. To act otherwise with respect to instruments in a responsible capacity.

        “Responsibility” does not include authority that merely allows an employee to have access to instruments or blank or incomplete instrument forms that are being stored or transported or are part of incoming or outgoing mail, or similar access.

  2. For the purpose of determining the rights and liabilities of a person who, in good faith, pays an instrument or takes it for value or for collection, if an employer entrusted an employee with responsibility with respect to the instrument and the employee or a person acting in concert with the employee makes a fraudulent indorsement of the instrument, the indorsement is effective as the indorsement of the person to whom the instrument is payable if it is made in the name of that person. If the person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from the fraud, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.
  3. Under subsection (2) of this section, an indorsement is made in the name of the person to whom an instrument is payable if:
    1. It is made in a name substantially similar to the name of that person; or
    2. The instrument, whether or not indorsed, is deposited in a depositary bank to an account in a name substantially similar to the name of that person.

History. Enact. Acts 1958, ch. 77, § 3-405, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 43, effective January 1, 1997.

Official Comment

  1. Section 3-405 is addressed to fraudulent indorsements made by an employee with respect to instruments with respect to which the employer has given responsibility to the employee. It covers two categories of fraudulent indorsements: indorsements made in the name of the employer to instruments payable to the employer and indorsements made in the name of payees of instruments issued by the employer. This section applies to instruments generally but normally the instrument will be a check. Section 3-405 adopts the principle that the risk of loss for fraudulent indorsements by employees who are entrusted with responsibility with respect to checks should fall on the employer rather than the bank that takes the check or pays it, if the bank was not negligent in the transaction. Section 3-405 is based on the belief that the employer is in a far better position to avoid the loss by care in choosing employees, in supervising them, and in adopting other measures to prevent forged indorsements on instruments payable to the employer or fraud in the issuance of instruments in the name of the employer. If the bank failed to exercise ordinary care, subsection (b) allows the employer to shift loss to the bank to the extent the bank’s failure to exercise ordinary care contributed to the loss. “Ordinary care” is defined in Section 3-103(a)(7). The provision applies regardless of whether the employer is negligent.

    The first category of cases governed by Section 3-405 are those involving indorsements made in the name of payees of instruments issued by the employer. In this category, Section 3-405 includes cases that were covered by former Section 3-405(1)(c). The scope of Section 3-405 in revised Article 3 is, however, somewhat wider. It covers some cases not covered by former Section 3-405(1)(c) in which the entrusted employee makes a forged indorsement to a check drawn by the employer. An example is Case #6 in Comment 3. Moreover, a larger group of employees is included in revised Section 3-405. The key provision is the definition of “responsibility” in subsection (a)(i) which identifies the kind of responsibility delegated to an employee which will cause the employer to take responsibility for the fraudulent acts of that employee. An employer can insure this risk by employee fidelity bonds.

    The second category of cases governed by Section 3-405 — fraudulent indorsements of the name of the employer to instruments payable to the employer — were covered in former Article 3 by Section 3-406. Under former Section 3-406, the employer took the loss only if negligence of the employer could be proved. Under revised Article 3, Section 3-406 need not be used with respect to forgeries of the employer’s indorsement. Section 3-405 imposes the loss on the employer without proof of negligence.

  2. With respect to cases governed by former Section 3-405(1)(c), Section 3-405 is more favorable to employers in one respect. The bank was entitled to the preclusion provided by former Section 3-405(1)(c) if it took the check in good faith. The fact that the bank acted negligently did not shift the loss to the bank so long as the bank acted in good faith. Under revised section 3-405 the loss may be recovered from the bank to the extent the failure of the bank to exercise ordinary care contributed to the loss.
  3. Section 3-404(b) and Section 3-405 both apply to cases of employee fraud. Section 3-404(b) is not limited to cases of employee fraud, but most of the cases to which it applies will be cases of employee fraud. The following cases illustrate the application of Section 3-405. In each case it is assumed that the bank that took the check acted in good faith and was not negligent.

    Case #1. Janitor, an employee of Employer, steals a check for a very large amount payable to Employer after finding it on a desk in one of Employer’s offices. Janitor forges Employer’s indorsement on the check and obtains payment. Since Janitor was not entrusted with “responsibility” with respect to the check, Section 3-405 does not apply. Section 3-406 might apply to this case. The issue would be whether Employer was negligent in safeguarding the check. If not, Employer could assert that the indorsement was forged and bring an action for conversion against the depositary or payor bank under Section 3-420.

    Case #2. X is Treasurer of Corporation and is authorized to write checks on behalf of Corporation by signing X’s name as Treasurer. X draws a check in the name of Corporation and signs X’s name as Treasurer. The check is made payable to X. X then indorses the check and obtains payment. Assume that Corporation did not owe any money to X and did not authorize X to write the check. Although the writing of the check was not authorized, Corporation is bound as drawer of the check because X had authority to sign checks on behalf of Corporation. This result follows from agency law and Section 3-402(a). Section 3-405 does not apply in this case because there is no forged indorsement. X was payee of the check so the indorsement is valid. Section 3-110(a).

    Case #3. The duties of Employee, a bookkeeper, include posting the amounts of checks payable to Employer to the accounts of the drawers of the checks. Employee steals a check payable to Employer which was entrusted to Employee and forges Employer’s indorsement. The check is deposited by employee to an account in Depositary Bank which Employee opened in the same name as Employer, and the check is honored by the drawee bank. The indorsement is effective as Employer’s indorsement because Employee’s duties include processing checks for bookkeeping purposes. Thus, Employee is entrusted with “responsibility” with respect to the check. Neither Depositary Bank nor the drawee bank is liable to Employer for conversion of the check. The same result follows if Employee deposited the check in the account in Depositary Bank without indorsement. Section 4-205(a). Under subsection (c) deposit in a depositary bank in an account in a name substantially similar to that of Employer is the equivalent of an indorsement in the name of Employer.

    Case #4. Employee’s duties include stamping Employer’s unrestricted blank indorsement on checks received by Employer and depositing them in Employer’s bank account. After stamping Employer’s unrestricted blank indorsement on a check, Employee steals the check and deposits it in Employee’s personal bank account. Section 3-405 doesn’t apply because there is no forged indorsement. Employee is authorized by Employer to indorse Employer’s checks. The fraud by Employee is not the indorsement but rather the theft of the indorsed check. Whether Employer has a cause of action against the bank in which the check was deposited is determined by whether the bank had notice of the breach of fiduciary duty by Employee. The issue is determined under Section 3-307.

    Case #5. The computer that controls Employer’s check-writing machine was programmed to cause a check to be issued to Supplier Co. to which money was owed by Employer. The address of Supplier Co. was included in the information in the computer. Employee is an accounts payable clerk whose duties include entering information into the computer. Employee fraudulently changed the address of Supplier Co. in the computer data bank to an address of Employee. The check was subsequently produced by the check-writing machine and mailed to the address that Employee had entered into the computer. Employee obtained possession of the check, indorsed it in the name of Supplier Co., and deposited it to an account in Depositary Bank which Employee opened in the name “Supplier Co.” The check was honored by the drawee bank. The indorsement is effective under Section 3-405(b) because Employee’s duties allowed Employee to supply information determining the address of the payee of the check. An employee that is entrusted with duties that enable the employee to determine the address to which a check is to be sent controls the disposition of the check and facilitates forgery of the indorsement. The employer is held responsible. The drawee may debit the account of Employer for the amount of the check. There is no breach of warranty by Depositary Bank under Section 3-417(a)(1) or 4-208(a)(1).

    Case #6. Treasurer is authorized to draw checks in behalf of Corporation. Treasurer draws a check of Corporation payable to Supplier Co., a company that sold goods to Corporation. The check was issued to pay the price of these goods. At the time the check was signed Treasurer had no intention of stealing the check. Later, Treasurer stole the check, indorsed it in the name “Supplier Co.” and obtained payment by depositing it to an account in Depositary Bank which Treasurer opened in the name “Supplier Co.”. The indorsement is effective under Section 3-405(b). Section 3-404(b) does not apply to this case.

    Case #7. Checks of Corporation are signed by Treasurer in behalf of Corporation as drawer. Clerk’s duties include the preparation of checks for issue by Corporation. Clerk prepares a check payable to the order of Supplier Co. for Treasurer’s signature. Clerk fraudulently informs Treasurer that the check is needed to pay a debt owed to Supplier Co., a company that does business with Corporation. No money is owed to Supplier Co. and Clerk intends to steal the check. Treasurer signs it and returns it to Clerk for mailing. Clerk does not indorse the check but deposits it to an account in Depositary Bank which Clerk opened in the name “Supplier Co.”. The check is honored by the drawee bank. Section 3-404(b)(i) does not apply to this case because Clerk, under Section 3-110(a), is not the person whose intent determines to whom the check is payable. But Section 3-405 does apply and it treats the deposit by Clerk as an effective indorsement by Clerk because Clerk was entrusted with responsibility with respect to the check. If Supplier Co. is a fictitious person Section 3-404(b)(2) applies. But the result is the same. Clerk’s deposit is treated as an effective indorsement of the check whether Supplier Co. is a fictitious or a real person or whether money was or was not owing to Supplier Co. The drawee bank may debit the account of Corporation for the amount of the check and there is no breach of warranty by Depositary Bank under Section 3-417.

  4. The last sentence of subsection (b) is similar to subsection (d) of Section 3-404 which is discussed in Comment 3 to Section 3-404. In Case #5, Case #6, or Case #7 the depositary bank may have failed to exercise ordinary care when it allowed the employee to open an account in the name “Supplier Co.,” to deposit checks payable to “Supplier Co.” in that account, or to withdraw funds from that account that were proceeds of checks payable to Supplier Co. Failure to exercise ordinary care is to be determined in the context of all the facts relating to the bank’s conduct with respect to the bank’s collection of the check. If the trier of fact finds that there was such a failure and that the failure substantially contributed to loss, it could find the depositary bank liable to the extent the failure contributed to the loss. The last sentence of subsection (b) can be illustrated by an example. Suppose in Case #5 that the check is not payable to an obscure “Supplier Co.” but rather to a well-known national corporation. In addition, the check is for a very large amount of money. Before depositing the check, Employee opens an account in Depositary Bank in the name of the corporation and states to the person conducting the transaction for the bank that Employee is manager of a new office being opened by the corporation. Depositary Bank opens the account without requiring Employee to produce any resolutions of the corporation’s board of directors or other evidence of authorization of Employee to act for the corporation. A few days later, the check is deposited, the account is credited, and the check is presented for payment. After Depositary Bank receives payment, it allows Employee to withdraw the credit by a wire transfer to an account in a bank in a foreign country. The trier of fact could find that Depositary Bank did not exercise ordinary care and that the failure to exercise ordinary care contributed to the loss suffered by Employer. The trier of fact could allow recovery by Employer from Depositary Bank for all or part of the loss suffered by Employer.

355.3-406. Negligence contributing to forged signature or alteration of instrument.

  1. A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection.
  2. Under subsection (1) of this section, if the person asserting the preclusion fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss, the loss is allocated between the person precluded and the person asserting the preclusion according to the extent to which the failure of each to exercise ordinary care contributed to the loss.
  3. Under subsection (1) of this section, the burden of proving failure to exercise ordinary care is on the person asserting the preclusion. Under subsection (2) of this section, the burden of proving failure to exercise ordinary care is on the person precluded.

History. Enact. Acts 1958, ch. 77, § 3-406, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 44, effective January 1, 1997.

Official Comment

  1. Section 3-406(a) is based on former Section 3-406. With respect to alteration, Section 3-406 adopts the doctrine of Young v. Grote, 4 Bing. 253 (1827), which held that a drawer who so negligently draws an instrument as to facilitate its material alteration is liable to a drawee who pays the altered instrument in good faith. Under Section 3-406 the doctrine is expanded to apply not only to drafts but to all instruments. It includes in the protected class any “person who, in good faith, pays the instrument or takes it for value or for collection.” Section 3-406 rejects decisions holding that the maker of a note owes no duty of care to the holder because at the time the instrument is issued there is no contract between them. By issuing the instrument and “setting it afloat upon a sea of strangers” the maker or drawer voluntarily enters into a relation with later holders which justifies imposition of a duty of care. In this respect an instrument so negligently drawn as to facilitate alteration does not differ in principle from an instrument containing blanks which may be filled. Under Section 3-407 a person paying an altered instrument or taking it for value, in good faith and without notice of the alteration may enforce rights with respect to the instrument according to its original terms. If negligence of the obligor substantially contributes to an alteration, this section gives the holder or the payor the alternative right to treat the altered instrument as though it had been issued in the altered form.

    No attempt is made to define particular conduct that will constitute “failure to exercise ordinary care [that] substantially contributes to an alteration.” Rather, “ordinary care” is defined in Section 3-103(a)(9) in general terms. The question is left to the court or the jury for decision in the light of the circumstances in the particular case including reasonable commercial standards that may apply.

    Section 3-406 does not make the negligent party liable in tort for damages resulting from the alteration. If the negligent party is estopped from asserting the alteration the person taking the instrument is fully protected because the taker can treat the instrument as having been issued in the altered form.

  2. Section 3-406 applies equally to a failure to exercise ordinary care that substantially contributes to the making of a forged signature on an instrument. Section 3-406 refers to “forged signature” rather than “unauthorized signature” that appeared in former Section 3-406 because it more accurately describes the scope of the provision. Unauthorized signature is a broader concept that includes not only forgery but also the signature of an agent which does not bind the principal under the law of agency. The agency cases are resolved independently under agency law. Section 3-406 is not necessary in those cases.

    The “substantially contributes” test of former Section 3-406 is continued in this section in preference to a “direct and proximate cause” test. The “substantially contributes” test is meant to be less stringent than a “direct and proximate cause” test. Under the less stringent test the preclusion should be easier to establish. Conduct “substantially contributes” to a material alteration or forged signature if it is a contributing cause of the alteration or signature and a substantial factor in bringing it about. The analysis of “substantially contributes” in former Section 3-406 by the court in Thompson Maple Products v. Citizens National Bank of Corry, 234 A.2d 32 (Pa.Super.Ct.1967), states what is intended by the use of the same words in revised Section 3-406(b). Since Section 3-404(d) and Section 3-405(b) also use the words “substantially contributes” the analysis of these words also applies to those provisions.

  3. The following cases illustrate the kind of conduct that can be the basis of a preclusion under Section 3-406(a):

    Case #1. Employer signs checks drawn on Employer’s account by use of a rubber stamp of Employer’s signature. Employer keeps the rubber stamp along with Employer’s personalized blank check forms in an unlocked desk drawer. An unauthorized person fraudulently uses the check forms to write checks on Employer’s account. The checks are signed by use of the rubber stamp. If Employer demands that Employer’s account in the drawee bank be recredited because the forged check was not properly payable, the drawee bank may defend by asserting that Employer is precluded from asserting the forgery. The trier of fact could find that Employer failed to exercise ordinary care to safeguard the rubber stamp and the check forms and that the failure substantially contributed to the forgery of Employer’s signature by the unauthorized use of the rubber stamp.

    Case #2. An insurance company draws a check to the order of Sarah Smith in payment of a claim of a policyholder, Sarah Smith, who lives in Alabama. The insurance company also has a policyholder with the same name who lives in Illinois. By mistake, the insurance company mails the check to the Illinois Sarah Smith who indorses the check and obtains payment. Because the payee of the check is the Alabama Sarah Smith, the indorsement by the Illinois Sarah Smith is a forged indorsement. Section 3-110(a). The trier of fact could find that the insurance company failed to exercise ordinary care when it mailed the check to the wrong person and that the failure substantially contributed to the making of the forged indorsement. In that event the insurance company could be precluded from asserting the forged indorsement against the drawee bank that honored the check.

    Case #3. A company writes a check for $10. The figure “10” and the word “ten” are typewritten in the appropriate spaces on the check form. A large blank space is left after the figure and the word. The payee of the check, using a typewriter with a typeface similar to that used on the check, writes the word “thousand” after the word “ten” and a comma and three zeros after the figure “10”. The drawee bank in good faith pays $10,000 when the check is presented for payment and debits the account of the drawer in that amount. The trier of fact could find that the drawer failed to exercise ordinary care in writing the check and that the failure substantially contributed to the alteration. In that case the drawer is precluded from asserting the alteration against the drawee if the check was paid in good faith.

  4. Subsection (b) differs from former Section 3-406 in that it adopts a concept of comparative negligence. If the person precluded under subsection (a) proves that the person asserting the preclusion failed to exercise ordinary care and that failure substantially contributed to the loss, the loss may be allocated between the two parties on a comparative negligence basis. In the case of a forged indorsement the litigation is usually between the payee of the check and the depositary bank that took the check for collection. An example is a case like Case #1 of Comment 3 to Section 3-405. If the trier of fact finds that Employer failed to exercise ordinary care in safeguarding the check and that the failure substantially contributed to the making of the forged indorsement, subsection (a) of Section 3-406 applies. If Employer brings an action for conversion against the depositary bank that took the checks from the forger, the depositary bank could assert the preclusion under subsection (a). But suppose the forger opened an account in the depositary bank in a name identical to that of the Employer, the payee of the check, and then deposited the check in the account. Subsection (b) may apply. There may be an issue whether the depositary bank should have been alerted to possible fraud when a new account was opened for a corporation shortly before a very large check payable to a payee with the same name is deposited. Circumstances surrounding the opening of the account may have suggested that the corporation to which the check was payable may not be the same as the corporation for which the account was opened. If the trier of fact finds that collecting the check under these circumstances was a failure to exercise ordinary care, it could allocate the loss between the depositary bank and Employer, the payee.

NOTES TO DECISIONS

1.Negligence of Maker.

Where maker had negligently left blank spaces which were filled in without his authority, the holder could enforce payment. (decided under prior law) Aetna Casualty & Surety Co. v. Phoenix Nat'l Bank & Trust Co., 285 U.S. 209, 52 S. Ct. 329, 76 L. Ed. 709, 1932 U.S. LEXIS 784 (U.S. 1932).

Where maker, using printed from, permitted line indicated for place of payment to be blank and holder filled in place of payment, note could be enforced against maker according to terms as so completed. (decided under prior law) Diamond Distilleries Co. v. Gott, 137 Ky. 585 , 126 S.W. 131, 1910 Ky. LEXIS 603 ( Ky. 1910 ).

Where drawer of check payable to X mailed it to another person with same name but at a different address and such wrong person indorsed it, the maker was liable to bank which paid on such check. (decided under prior law) Citizens' Union Nat'l Bank v. Terrell, 244 Ky. 16 , 50 S.W.2d 60, 1932 Ky. LEXIS 388 ( Ky. 1932 ).

When a bank was found liable for depositing a forged check, the bank’s negligence claim under KRS 355.3-406 (1) was not considered because the bank (1) did not properly present the issue to the trial court in pleadings and (2) did not seek such a finding pursuant to CR 52.02, so CR 52.04 barred reversal or remand on that issue. Am. Founders Bank, Inc. v. Moden Invs., LLC, 432 S.W.3d 715, 2014 Ky. App. LEXIS 73 (Ky. Ct. App. 2014).

2.Bank’s Negligence.

Regardless of good faith or lack of negligence, if bank cashed a check without a genuine indorsement, the loss fell on it unless the drawer invited and made possible the forgery. (decided under prior law) United States v. Citizens Union Nat. Bank, 40 F. Supp. 609, 1941 U.S. Dist. LEXIS 2732 (D. Ky. 1941 ).

Even where maker negligently drew checks so that alteration was easy, such negligence was no bar to recovery from bank which paid altered amount. (decided under prior law) Commercial Bank of Grayson v. Arden & Fraley, 177 Ky. 520 , 177 Ky. 620 , 197 S.W. 951, 1917 Ky. LEXIS 615 ( Ky. 1917 ) ( Ky. 1917 ).

Where maker sued to recover from bank which had paid altered checks, he was entitled only to altered amount minus amount of original tenor. (decided under prior law) Commercial Bank of Grayson v. Arden & Fraley, 177 Ky. 520 , 177 Ky. 620 , 197 S.W. 951, 1917 Ky. LEXIS 615 ( Ky. 1917 ) ( Ky. 1917 ).

Bank was bound to know customer’s signature and was negligent in failing to instantly discover forgery. (decided under prior law) Louisa Nat'l Bank v. Kentucky Nat'l Bank, 239 Ky. 302 , 39 S.W.2d 497, 1931 Ky. LEXIS 776 ( Ky. 1931 ).

Even though the drawer of the check may have been negligent in substantially contributing to a material alteration or to the making of an unauthorized signature, the bank may still be responsible if it does not act in good faith and in accordance with the reasonable commercial standards of the banking industry. (decided under prior law) Owensboro Nat'l Bank v. Crisp, 608 S.W.2d 51, 1980 Ky. LEXIS 264 ( Ky. 1980 ).

While the Uniform Commercial Code as adopted in Kentucky does not expressly state that a collecting or payor bank is liable for negligently paying on an instrument, this former section and KRS 355.1-103 , 355.3-419 (3) and 355.4-103 (1) indirectly indicate that this is so. (decided under prior law) Bullitt County Bank v. Publishers Printing Co., 684 S.W.2d 289, 1984 Ky. App. LEXIS 568 (Ky. Ct. App. 1984).

3.Comparative Negligence as Factual Issue.

The issue of whether the negligence of the drawer of a check is overcome by the negligence of the bank in cashing the check by not observing the reasonable commercial standards of the banking industry is a question of fact which is properly submitted to the jury under this section. (decided under prior law) Owensboro Nat'l Bank v. Crisp, 608 S.W.2d 51, 1980 Ky. LEXIS 264 ( Ky. 1980 ).

4.Partnerships.

Where managing member of partnership without authority executed note for accommodation of another, silent partner could not object to its being paid by partnership funds. (decided under prior law) Power Grocery Co. v. Hinton, 187 Ky. 171 , 218 S.W. 1013, 1920 Ky. LEXIS 95 ( Ky. 1920 ).

5.Failure to Require Identification.

Where nondrawee bank cashed check for an unknown payee without requiring identification, it was sufficiently negligent to allow drawee bank, which paid check, to recover amount thereof. (decided under prior law) Louisa Nat'l Bank v. Kentucky Nat'l Bank, 239 Ky. 302 , 39 S.W.2d 497, 1931 Ky. LEXIS 776 ( Ky. 1931 ).

6.Evidence.

Bank was not entitled to directed verdict under this section where there was conflicting evidence as to whether the cashier of the bank exercised reasonable commercial standards in cashing the altered check. (decided under prior law) Owensboro Nat'l Bank v. Crisp, 608 S.W.2d 51, 1980 Ky. LEXIS 264 ( Ky. 1980 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Answer Pleading Fraudulent Filling Out of a Blank Note, Form 191.21.

Kentucky Instructions To Juries (Civil), 5th Ed., Banks, §§ 35.01, 35.02.

355.3-407. Alteration.

  1. “Alteration” means:
    1. An unauthorized change in an instrument that purports to modify in any respect the obligation of a party; or
    2. An unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party.
  2. Except as provided in subsection (3) of this section, an alteration fraudulently made discharges a party whose obligation is affected by the alteration unless that party assents or is precluded from asserting the alteration. No other alteration discharges a party, and the instrument may be enforced according to its original terms.
  3. A payor bank or drawee paying a fraudulently altered instrument or a person taking it for value, in good faith and without notice of the alteration, may enforce rights with respect to the instrument:
    1. According to its original terms; or
    2. In the case of an incomplete instrument altered by unauthorized completion, according to its terms as completed.

History. Enact. Acts 1958, ch. 77, § 3-407, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 45, effective January 1, 1997.

Official Comment

  1. This provision restates former Section 3-407. Former Section 3-407 defined a “material” alteration as any alteration that changes the contract of the parties in any respect. Revised Section 3-407 refers to such a change as an alteration. As under subsection (2) of former Section 3-407, discharge because of alteration occurs only in the case of an alteration fraudulently made. There is no discharge if a blank is filled in the honest belief that it is authorized or if a change is made with a benevolent motive such as a desire to give the obligor the benefit of a lower interest rate. Changes favorable to the obligor are unlikely to be made with any fraudulent intent, but if such an intent is found the alteration may operate as a discharge.

    Discharge is a personal defense of the party whose obligation is modified and anyone whose obligation is not affected is not discharged. But if an alteration discharges a party there is also discharge of any party having a right of recourse against the discharged party because the obligation of the party with the right of recourse is affected by the alteration. Assent to the alteration given before or after it is made will prevent the party from asserting the discharge. The phrase “or is precluded from asserting the alteration” in subsection (b) recognizes the possibility of an estoppel or other ground barring the defense which does not rest on assent.

  2. Under subsection (c) a person paying a fraudulently altered instrument or taking it for value, in good faith and without notice of the alteration, is not affected by a discharge under subsection (b). The person paying or taking the instrument may assert rights with respect to the instrument according to its original terms or, in the case of an incomplete instrument that is altered by unauthorized completion, according to its terms as completed. If blanks are filled or an incomplete instrument is otherwise completed, subsection (c) places the loss upon the party who left the instrument incomplete by permitting enforcement in its completed form. This result is intended even though the instrument was stolen from the issuer and completed after the theft.

NOTES TO DECISIONS

1.Consent to Alteration.

Where notes were attached to a contract at the time of signing and contract contained a stipulation for their detachment, maker had consented to the alteration occasioned by such detachment. (decided under prior law) Robertson v. Commercial Sec. Co., 152 Ky. 336 , 153 S.W. 450, 1913 Ky. LEXIS 660 ( Ky. 1913 ). See Pratt v. Rounds, 160 Ky. 358 , 169 S.W. 848, 1914 Ky. LEXIS 465 ( Ky. 1914 ).

A completed negotiable instrument which had been materially altered was voided as to any party who did not assent to the alteration, though maker’s negligence made alteration possible, since the proximate cause of the loss was conduct of person altering the instrument rather than maker’s negligence. (decided under prior law) Citizens Bank of Morehead v. Nickell, 277 Ky. 424 , 126 S.W.2d 820, 1939 Ky. LEXIS 663 ( Ky. 1939 ).

Even though hospital authorities filled in blanks on note after debtor had signed it and even if the alteration was both material and fraudulent, debtor assented to the note after it was allegedly altered by voluntarily making payments thereunder. (decided under prior law) Stahl v. St. Elizabeth Med. Ctr., 948 S.W.2d 419, 1997 Ky. App. LEXIS 37 (Ky. Ct. App. 1997).

2.Addition of Descriptive Word to Name of Payee.

Addition of “Pt.” for “president” to payee’s name was material alteration. (decided under prior law) Tyler v. First Nat'l Bank, 150 Ky. 515 , 150 S.W. 665, 1912 Ky. LEXIS 935 ( Ky. 1912 ).

3.Securing Additional Signature.

Securing signature of an accommodation maker without the consent of the original maker was not a material alteration. (decided under prior law) Caudill v. First Nat'l Bank, 211 Ky. 126 , 277 S.W. 310, 1925 Ky. LEXIS 825 ( Ky. 1925 ).

4.Addition of Joint Maker.

Where intermediate holder’s agent signed as joint maker without original maker’s consent, note was enforced according to original tenor, i.e., full amount against original maker. (decided under prior law) Baskett v. Ohio Valley Banking & Trust Co., 214 Ky. 36 , 214 Ky. 41 , 281 S.W. 1022, 1926 Ky. LEXIS 252 ( Ky. 1926 ).

5.Forgery.

Forgery was false making or material alteration, with fraudulent intent to defraud, of any writing which, if genuine, apparently could have been of legal efficacy or the foundation of a legal liability. (decided under prior law) Louisa Nat'l Bank v. Kentucky Nat'l Bank, 239 Ky. 302 , 39 S.W.2d 497, 1931 Ky. LEXIS 776 ( Ky. 1931 ).

6.Incomplete Instrument.

Where maker, using printed form, left line indicated as place of payment blank and holder filled it in, such was not a material alteration. (decided under prior law) Diamond Distilleries Co. v. Gott, 137 Ky. 585 , 126 S.W. 131, 1910 Ky. LEXIS 603 ( Ky. 1910 ).

7.Erasure of Signature.

Erasure of original maker’s signature so that accommodating party appeared to have signed as maker was a material alteration. (decided under prior law) Correll v. People's Bank of Science Hill, 223 Ky. 115 , 3 S.W.2d 170, 1928 Ky. LEXIS 284 ( Ky. 1928 ).

8.Changing Singular Pronoun to Plural.

Changing a note signed by two (2) makers from “I promise to pay” to “we promise to pay” was not a material alteration. (decided under prior law) Stanley v. Davis, 107 S.W. 773, 32 Ky. L. Rptr. 1135 (1908).

9.Amount Payable.

Changing the amount for which a check was payable was a material alteration. (decided under prior law) Commercial Bank of Grayson v. Arden & Fraley, 177 Ky. 520 , 177 Ky. 620 , 197 S.W. 951, 1917 Ky. LEXIS 615 ( Ky. 1917 ) ( Ky. 1917 ); Bernhard v. Commercial Sec. Co., 185 Ky. 357 , 215 S.W. 84, 1919 Ky. LEXIS 299 ( Ky. 1919 ); Maryland Casualty Co. v. Dickerson, 213 Ky. 305 , 280 S.W. 1106, 1926 Ky. LEXIS 503 ( Ky. 1926 ).

Where it was sought to recover from a bank which had cashed a check, the amount of which had been raised, six (6) months’ delay in discovering the alteration was not bar where it was not shown that delay had caused any damage. (decided under prior law) Maryland Casualty Co. v. Dickerson, 213 Ky. 305 , 280 S.W. 1106, 1926 Ky. LEXIS 503 ( Ky. 1926 ).

10.Name of Payee.

Where, in using a bank’s personal note form, the name of the bank was stricken out as payee and another substituted, there was a material alteration. (decided under prior law) Newport Coal Co. v. Ziegler, 255 Ky. 429 , 74 S.W.2d 561, 1934 Ky. LEXIS 253 ( Ky. 1934 ).

11.Time of Payment.

Changing the time of payment from “1904” to “1908” was a material alteration. (decided under prior law) Pensacola State Bank v. Melton, 210 F. 57, 1913 U.S. Dist. LEXIS 1024 (D. Ky. 1913 ).

Where a note read, in part, payable in instalments “viz. the 30 day of January,” and the word “January” had been stricken out and “February” written above, there was a material alteration. (decided under prior law) Kimberley v. Penix, 230 Ky. 91 , 18 S.W.2d 858, 1929 Ky. LEXIS 6 ( Ky. 1929 ).

Where the note sued on showed, on its face, that “January” had been stricken out and “February” written in the time of payment clause, it was error to strike defendant’s pleadings which alleged material alteration. (decided under prior law) Kimberley v. Penix, 230 Ky. 91 , 18 S.W.2d 858, 1929 Ky. LEXIS 6 ( Ky. 1929 ).

12.Place of Payment.

Where a state bank reincorporated as a national bank and changed its name in accordance therewith but continued to have the same officers and place of business, changing the place of payment of a note from the old name to the new was not a material alteration. (decided under prior law) Melton v. Pensacola Bank & Trust Co., 190 F. 126, 1911 U.S. App. LEXIS 4430 (6th Cir. Ky. 1911 ).

Change in place of payment from one state to another was material alteration. (decided under prior law) Mitchell v. Reed's Ex'r, 106 S.W. 833, 32 Ky. L. Rptr. 683 (1908).

13.Interest.

Where X signed a blank note form on which there was no blank for rate of interest and no discussion of interest being charged, it was a material alteration for the payee to insert a provision for interest. (decided under prior law) White v. Shepherd, 140 Ky. 349 , 131 S.W. 17, 1910 Ky. LEXIS 248 ( Ky. 1910 ).

14.Retracing Signature.

Retracing of the name of the county clerk on the coupons to bonds was not placed by law upon a par with forgery, since the person doing the retracing was not attempting to give validity to a thing which never had any but rather to preserve that which did not have validity, and it did not constitute a material alteration. (decided under prior law) Citizens' State Bank v. Johnson County, 182 Ky. 531 , 207 S.W. 8, 1918 Ky. LEXIS 419 ( Ky. 1918 ).

15.Change of Serial Numbers.

The numbers placed upon county bonds and coupons formed no part of their obligatory terms but were only for purposes of convenience or designation and an alteration of them, although fraudulent, would necessarily be an immaterial one. (decided under prior law) Citizens' State Bank v. Johnson County, 182 Ky. 531 , 207 S.W. 8, 1918 Ky. LEXIS 419 ( Ky. 1918 ).

16.In Hands of Holder in Due Course.

The fraudulent detachment of a note from an accompanying contract, which rendered it nonnegotiable, vitiated the contract, even in the hands of an innocent purchaser. (decided under prior law) Harrison v. Union Store Co., 179 Ky. 672 , 201 S.W. 31, 1918 Ky. LEXIS 273 ( Ky. 1918 ).

Where the maker had so negligently executed an instrument as to make it easy for a subsequent holder to alter it, he could not use such alteration as a defense against a holder for value. (decided under prior law) Harrison v. Union Store Co., 179 Ky. 672 , 201 S.W. 31, 1918 Ky. LEXIS 273 ( Ky. 1918 ).

17.In Hands of Holder Not In Due Course.

Where note was in hands of one not a holder in due course, a material alteration released makers. (decided under prior law) Mitchell v. Reed's Ex'r, 106 S.W. 833, 32 Ky. L. Rptr. 683 (1908).

Where a holder not in due course took an instrument which, after maturity, had been materially altered without the consent of the maker, he could not recover thereon. (decided under prior law) Pensacola State Bank v. Melton, 210 F. 57, 1913 U.S. Dist. LEXIS 1024 (D. Ky. 1913 ).

18.Detachment from Another Paper.

Where one signed a purchase contract the last of which was a promissory note with a perforated line immediately above it, there was no material alteration when payee subsequently detached and sold the note. (decided under prior law) Robertson v. Commercial Sec. Co., 152 Ky. 336 , 153 S.W. 450, 1913 Ky. LEXIS 660 ( Ky. 1913 ).

Where an instrument showed that it had been detached from another paper, such mutilation was presumed to have taken place after delivery of the instrument, and the burden of proof was on the holder to explain such mutilation in a suit against the maker. (decided under prior law) Harrison v. Pearcy & Coleman, 174 Ky. 485 , 192 S.W. 513, 1917 Ky. LEXIS 203 ( Ky. 1917 ).

Where an instrument showed that it had been detached from another paper, the court handled such “mutilation” as though it were a material alteration. (decided under prior law) Harrison v. Pearcy & Coleman, 174 Ky. 485 , 192 S.W. 513, 1917 Ky. LEXIS 203 ( Ky. 1917 ).

Fraudulent detachment of an instrument from a contract, which rendered it nonnegotiable, was treated as a material alteration. (decided under prior law) Harrison v. Union Store Co., 179 Ky. 672 , 201 S.W. 31, 1918 Ky. LEXIS 273 ( Ky. 1918 ).

19.Pleadings.

Where, in suit upon a note, the defense of material alteration was alleged, plaintiff was allowed to amend his suit and recover on the original obligation for which note had been given, even though the note might have been held invalid because of the alteration had the original petition gone to trial. (decided under prior law) Ramsey v. Utica Deposit Bank, 156 Ky. 263 , 160 S.W. 943, 1913 Ky. LEXIS 407 ( Ky. 1913 ).

20.Burden of Proof.

The burden of proving material alteration was on the party who alleged it. (decided under prior law) Brown's Adm'r v. Wilson, 222 Ky. 454 , 1 S.W.2d 767, 1927 Ky. LEXIS 948 ( Ky. 1927 ).

Where the defense was material alteration, the burden of proof was on the defendant. (decided under prior law) Correll v. People's Bank of Science Hill, 223 Ky. 115 , 3 S.W.2d 170, 1928 Ky. LEXIS 284 ( Ky. 1928 ); Darraugh v. Denny, 196 Ky. 614 , 245 S.W. 152, 1922 Ky. LEXIS 562 ( Ky. 1922 ); Denny v. Darraugh, 212 Ky. 655 , 279 S.W. 1069, 1925 Ky. LEXIS 1132 ( Ky. 1925 ).

21.Questions for Jury.

Whether a note had been altered or not was for the jury. (decided under prior law) Tyler v. First Nat'l Bank, 150 Ky. 515 , 150 S.W. 665, 1912 Ky. LEXIS 935 ( Ky. 1912 ); Newport Coal Co. v. Ziegler, 255 Ky. 429 , 74 S.W.2d 561, 1934 Ky. LEXIS 253 ( Ky. 1934 ).

Where there was a conflict as to whether an alteration was made before or after note came into hands of holder suing, such was a question for the jury. (decided under prior law) Correll v. People's Bank of Science Hill, 223 Ky. 115 , 3 S.W.2d 170, 1928 Ky. LEXIS 284 ( Ky. 1928 ).

22.Discharge From Liability.

Discharge occurs under former KRS 355.3-407 (2)(a) (prior to 1996 repeal and reenactment) only where the alteration is both fraudulent and material and where the party whose contract was changed does not assent or is not precluded from asserting the defense. (decided under prior law) Stahl v. St. Elizabeth Med. Ctr., 948 S.W.2d 419, 1997 Ky. App. LEXIS 37 (Ky. Ct. App. 1997).

In the case of a truly fraudulent and material alteration, the obligor is discharged from liability on both the instrument and the underlying obligation to the extent provided for in this section. (decided under prior law) Stahl v. St. Elizabeth Med. Ctr., 948 S.W.2d 419, 1997 Ky. App. LEXIS 37 (Ky. Ct. App. 1997).

23.Injury or Damages.

Even if note was fraudulently altered by hospital after debtor signed it, debtor suffered no injury or damages necessary to support his fraud claim since he was legally obligated to pay hospital for services rendered and payment of sums that he was legally obligated for does not constitute the pecuniary loss necessary to sustain a fraud claim. (decided under prior law) Stahl v. St. Elizabeth Med. Ctr., 948 S.W.2d 419, 1997 Ky. App. LEXIS 37 (Ky. Ct. App. 1997).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Answer Pleading Alteration of Note, Form 191.19.

355.3-408. Drawee not liable on unaccepted draft.

A check or other draft does not of itself operate as an assignment of funds in the hands of the drawee available for its payment, and the drawee is not liable on the instrument until the drawee accepts it.

History. Enact. Acts 1958, ch. 77, § 3-408, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 46, effective January 1, 1997.

Official Comment

  1. This section is a restatement of former Section 3-409(1). Subsection (2) of former Section 3-409 is deleted as misleading and superfluous. Comment 3 says of subsection (2): “It is intended to make it clear that this section does not in any way affect any liability which may arise apart from the instrument.” In reality subsection (2) did not make anything clear and was a source of confusion. If all it meant was that a bank that has not certified a check may engage in other conduct that might make it liable to a holder, it stated the obvious and was superfluous. Section 1-103 is adequate to cover those cases.
  2. Liability with respect to drafts may arise under other law. For example, Section 4-302 imposes liability on a payor bank for late return of an item.

355.3-409. Acceptance of draft — Certified check.

  1. “Acceptance” means the drawee’s signed agreement to pay a draft as presented. It must be written on the draft and may consist of the drawee’s signature alone. Acceptance may be made at any time and becomes effective when notification pursuant to instructions is given or the accepted draft is delivered for the purpose of giving rights on the acceptance to any person.
  2. A draft may be accepted although it has not been signed by the drawer, is otherwise incomplete, is overdue, or has been dishonored.
  3. If a draft is payable at a fixed period after sight and the acceptor fails to date the acceptance, the holder may complete the acceptance by supplying a date in good faith.
  4. “Certified check” means a check accepted by the bank on which it is drawn. Acceptance may be made as stated in subsection (1) of this section or by a writing on the check which indicates that the check is certified. The drawee of a check has no obligation to certify the check, and refusal to certify is not dishonor of the check.

History. Enact. Acts 1958, ch. 77, § 3-409, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 47, effective January 1, 1997.

Official Comment

  1. The first three subsections of Section 3-409 are a restatement of former Section 3-410. Subsection (d) adds a definition of certified check which is a type of accepted draft.
  2. Subsection (a) states the generally recognized rule that the mere signature of the drawee on the instrument is a sufficient acceptance. Customarily the signature is written vertically across the face of the instrument, but since the drawee has no reason to sign for any other purpose a signature in any other place, even on the back of the instrument, is sufficient. It need not be accompanied by such words as “Accepted,” “Certified,” or “Good.” It must not, however, bear any words indicating an intent to refuse to honor the draft. The last sentence of subsection (a) states the generally recognized rule that an acceptance written on the draft takes effect when the drawee notifies the holder or gives notice according to instructions.
  3. The purpose of subsection (c) is to provide a definite date of payment if none appears on the instrument. An undated acceptance of a draft payable “thirty days after sight” is incomplete. Unless the acceptor writes in a different date the holder is authorized to complete the acceptance according to the terms of the draft by supplying a date of acceptance. Any date supplied by the holder is effective if made in good faith.
  4. The last sentence of subsection (d) states the generally recognized rule that in the absence of agreement a bank is under no obligation to certify a check. A check is a demand instrument calling for payment rather than acceptance. The bank may be liable for breach of any agreement with the drawer, the holder, or any other person by which it undertakes to certify. Its liability is not on the instrument, since the drawee is not so liable until acceptance. Section 3-408. Any liability is for breach of the separate agreement.

NOTES TO DECISIONS

1.Acceptance by Telegram.

Sending a telegram was sufficient acceptance in favor of the person to whom it was addressed. (decided under prior law) Selma Sav. Bank v. Webster County Bank, 182 Ky. 604 , 206 S.W. 870, 1918 Ky. LEXIS 411 ( Ky. 1918 ).

Sending of a telegram was acceptance in writing. (decided under prior law) Selma Sav. Bank v. Webster County Bank, 182 Ky. 604 , 206 S.W. 870, 1918 Ky. LEXIS 411 ( Ky. 1918 ).

Where, in reply to potential purchaser’s question, drawee bank telegraphed “Will pay check,” it was bound thereby. (decided under prior law) Roberts v. Drovers' Nat'l Bank, 199 Ky. 439 , 251 S.W. 198, 1923 Ky. LEXIS 852 ( Ky. 1923 ).

2.Delivery of Check.

Unless the giving and receipt of a check are specifically understood to be for and as payment and discharge in and of itself of the account, the mere giving of a check does not operate as payment and discharge of the debt until the check is paid or accepted by the bank at which it is payable. (decided under prior law) Breckinridge County v. Gannaway, 243 Ky. 49 , 47 S.W.2d 934, 1932 Ky. LEXIS 32 ( Ky. 1932 ).

3.Certification of Check.

Certification of a check was equivalent to acceptance. (decided under prior law) Ewing v. Citizens' Nat'l Bank, 162 Ky. 551 , 172 S.W. 955, 1915 Ky. LEXIS 111 ( Ky. 1915 ).

4.Payment of Check.

Payment of check did not include acceptance, as acceptance had to be in writing. (decided under prior law) Louisa Nat'l Bank v. Kentucky Nat'l Bank, 239 Ky. 302 , 39 S.W.2d 497, 1931 Ky. LEXIS 776 ( Ky. 1931 ).

5.Evidence of Debt.

Even though action could not be maintained against a drawee on a bill of exchange because it had not been accepted, such bill could be introduced as evidence of drawee’s promise to withhold certain funds, owed to drawer, for payee’s benefit. (decided under prior law) Fairbanks, Morse & Co. v. Tafel, 159 Ky. 602 , 167 S.W. 887, 1914 Ky. LEXIS 844 ( Ky. 1914 ).

6.Issuance of Bank Statement.

Issuance by drawee bank of a statement, listing deposits by drawer, was not acceptance of checks subsequently drawn against those deposits. (decided under prior law) First Nat'l Bank v. Hargis Commercial Bank & Trust Co., 170 Ky. 690 , 186 S.W. 471, 1916 Ky. LEXIS 99 ( Ky. 1916 ).

7.No Presentment for Acceptance.

Where there had been no presentation for acceptance, a drawee was not liable as an acceptor, but court reached contrary result on ground of conversion. (decided under prior law) Kentucky Title Sav. Bank & Trust Co. v. Dunavan, 205 Ky. 801 , 266 S.W. 667, 1924 Ky. LEXIS 245 ( Ky. 1924 ).

8.Retention for Twenty-four Hours After Presentment.

When presentment was made for payment, retention for more than 24 hours did not constitute acceptance. (decided under prior law) Kentucky Title Sav. Bank & Trust Co. v. Dunavan, 205 Ky. 801 , 266 S.W. 667, 1924 Ky. LEXIS 245 ( Ky. 1924 ).

9.Payment and Discharge.

Where a drawee bank first paid a check, crediting and debiting the holder’s and drawer’s accounts respectively, then, wishing to apply the drawer’s funds on deposit to a note it held, recalled the credit, the fact that there was no written notation on the check signed by the drawee was immaterial as this was a question of payment and discharge, not of acceptance. (decided under prior law) Bank of Commerce v. Reis, 253 Ky. 648 , 69 S.W.2d 754, 1934 Ky. LEXIS 682 ( Ky. 1934 ).

355.3-410. Acceptance varying draft.

  1. If the terms of a drawee’s acceptance vary from the terms of the draft as presented, the holder may refuse the acceptance and treat the draft as dishonored. In that case, the drawee may cancel the acceptance.
  2. The terms of a draft are not varied by an acceptance to pay at a particular bank or place in the United States, unless the acceptance states that the draft is to be paid only at that bank or place.
  3. If the holder assents to an acceptance varying the terms of a draft, the obligation of each drawer and indorser that does not expressly assent to the acceptance is discharged.

History. Enact. Acts 1958, ch. 77, § 3-410, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 48, effective January 1, 1997.

Official Comment

  1. This section is a restatement of former Section 3-412. It applies to conditional acceptances, acceptances for part of the amount, acceptances to pay at a different time from that required by the draft, or to the acceptance of less than all of the drawees. It applies to any other engagement changing the essential terms of the draft. If the drawee makes a varied acceptance the holder may either reject it or assent to it. The holder may reject by insisting on acceptance of the draft as presented. Refusal by the drawee to accept the draft as presented is dishonor. In that event the drawee is not bound by the varied acceptance and is entitled to have it canceled.

    If the holder assents to the varied acceptance, the drawee’s obligation as acceptor is according to the terms of the varied acceptance. Under subsection (c) the effect of the holder’s assent is to discharge any drawer or indorser who does not also assent. The assent of the drawer or indorser must be affirmatively expressed. Mere failure to object within a reasonable time is not assent which will prevent the discharge.

  2. Under subsection (b) an acceptance does not vary from the terms of the draft if it provides for payment at any particular bank or place in the United States unless the acceptance states that the draft is to be paid only at such bank or place. Section 3-501(b)(1) states that if an instrument is payable at a bank in the United States presentment must be made at the place of payment (Section 3-111) which in this case is at the designated bank.

355.3-411. Refusal to pay cashier’s checks, teller’s checks, and certified checks.

  1. In this section, “obligated bank” means the acceptor of a certified check or the issuer of a cashier’s check or teller’s check bought from the issuer.
  2. If the obligated bank wrongfully:
    1. Refuses to pay a cashier’s check or certified check;
    2. Stops payment of a teller’s check; or
    3. Refuses to pay a dishonored teller’s check,

      the person asserting the right to enforce the check is entitled to compensation for expenses and loss of interest resulting from the nonpayment and may recover consequential damages if the obligated bank refuses to pay after receiving notice of particular circumstances giving rise to the damages.

  3. Expenses or consequential damages under subsection (2) of this section are not recoverable if the refusal of the obligated bank to pay occurs because:
    1. The bank suspends payments;
    2. The obligated bank asserts a claim or defense of the bank that it has reasonable grounds to believe is available against the person entitled to enforce the instrument;
    3. The obligated bank has a reasonable doubt whether the person demanding payment is the person entitled to enforce the instrument; or
    4. Payment is prohibited by law.

History. Enact. Acts 1958, ch. 77, § 3-411, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 49, effective January 1, 1997.

Official Comment

  1. In some cases a creditor may require that the debt be paid by an obligation of a bank. The debtor may comply by obtaining certification of the debtor’s check, but more frequently the debtor buys from a bank a cashier’s check or teller’s check payable to the creditor. The check is taken by the creditor as a cash equivalent on the assumption that the bank will pay the check. Sometimes, the debtor wants to retract payment by inducing the obligated bank not to pay. The typical case involves a dispute between the parties to the transaction in which the check is given in payment. In the case of a certified check or cashier’s check, the bank can safely pay the holder of the check despite notice that there may be an adverse claim to the check (Section 3-602). It is also clear that the bank that sells a teller’s check has no duty to order the bank on which it is drawn not to pay it. A debtor using any of these types of checks has no right to stop payment. Nevertheless, some banks will refuse payment as an accommodation to a customer. Section 3-411 is designed to discourage this practice.
  2. The term “obligated bank” refers to the issuer of the cashier’s check or teller’s check and the acceptor of the certified check. If the obligated bank wrongfully refuses to pay, it is liable to pay for expenses and loss of interest resulting from the refusal to pay. There is no express provision for attorney’s fees, but attorney’s fees are not meant to be necessarily excluded. They could be granted because they fit within the language “expenses * * * resulting from the nonpayment.” In addition the bank may be liable to pay consequential damages if it has notice of the particular circumstances giving rise to the damages.
  3. Subsection (c) provides that expenses or consequential damages are not recoverable if the refusal to pay is because of the reasons stated. The purpose is to limit that recovery to cases in which the bank refuses to pay even though its obligation to pay is clear and it is able to pay. Subsection (b) applies only if the refusal to honor the check is wrongful. If the bank is not obliged to pay there is no recovery. The bank may assert any claim or defense that it has, but normally the bank would not have a claim or defense. In the usual case it is a remitter that is asserting a claim to the check on the basis of a rescission of negotiation to the payee under Section 3-202. See Comment 2 to Section 3-201. The bank can assert that claim if there is compliance with Section 3-305(c), but the bank is not protected from damages under subsection (b) if the claim of the remitter is not upheld. In that case, the bank is insulated from damages only if payment is enjoined under Section 3-602(b)(1). Subsection (c)(3) refers to cases in which the bank may have a reasonable doubt about the identity of the person demanding payment. For example, a cashier’s check is payable to “Supplier Co.” The person in possession of the check presents it for payment over the counter and claims to be an officer of Supplier Co. The bank may refuse payment until it has been given adequate proof that the presentment in fact is being made for Supplier Co., the person entitled to enforce the check.

355.3-412. Obligation of issuer of note or cashier’s check.

The issuer of a note or cashier’s check or other draft drawn on the drawer is obliged to pay the instrument:

  1. According to its terms at the time it was issued or, if not issued, at the time it first came into possession of a holder; or
  2. If the issuer signed an incomplete instrument, according to its terms when completed, to the extent stated in KRS 355.3-115 and 355.3-407 .

The obligation is owed to a person entitled to enforce the instrument or to an indorser who paid the instrument under KRS 355.3-415 .

History. Enact. Acts 1958, ch. 77, § 3-412, effective July 1, 1960; 1964, ch. 130, § 5, effective July 1, 1964; repealed and reenact., Acts 1996, ch. 130, § 50, effective January 1, 1997.

Official Comment

  1. The obligations of the maker, acceptor, drawer, and indorser are stated in four separate sections. Section 3-412 states the obligation of the maker of a note and is consistent with former Section 3-413(1). Section 3-412 also applies to the issuer of a cashier’s check or other draft drawn on the drawer. Under former Section 3-118(a), since a cashier’s check or other draft drawn on the drawer was “effective as a note,” the drawer was liable under former Section 3-413(1) as a maker. Under Sections 3-103(a)(vi) and 3-104(f) a cashier’s check or other draft drawn on the drawer is treated as a draft to reflect common commercial usage, but the liability of the drawer is stated by Section 3-412 as being the same as that of the maker of a note rather than that of the drawer of a draft. Thus, Section 3-412 does not in substance change former law.
  2. Under Section 3-105(b) nonissuance of either a complete or incomplete instrument is a defense by a maker or drawer against a person that is not a holder in due course.
  3. The obligation of the maker may be modified in the case of alteration if, under Section 3-406, the maker is precluded from asserting the alteration.
  4. The rule of this section is similar to the rule in Article 39 of the Convention on International Bills of Exchange and International Promissory Notes.

355.3-413. Obligation of acceptor.

  1. The acceptor of a draft is obliged to pay the draft:
    1. According to its terms at the time it was accepted, even though the acceptance states that the draft is payable “as originally drawn” or equivalent terms;
    2. If the acceptance varies the terms of the draft, according to the terms of the draft as varied; or
    3. If the acceptance is of a draft that is an incomplete instrument, according to its terms when completed, to the extent stated in KRS 355.3-115 and 355.3-407 ; The obligation is owed to a person entitled to enforce the draft or to the drawer or an indorser who paid the draft under KRS 355.3-414 or 355.3-415 .
    1. If the certification of a check or other acceptance of a draft states the amount certified or accepted, the obligation of the acceptor is that amount. (2) (a) If the certification of a check or other acceptance of a draft states the amount certified or accepted, the obligation of the acceptor is that amount.
    2. If:
      1. The certification or acceptance does not state an amount;
      2. The amount of the instrument is subsequently raised; and
      3. The instrument is then negotiated to a holder in due course,

the obligation of the acceptor is the amount of the instrument at the time it was taken by the holder in due course.

History. Enact. Acts 1958, ch. 77, § 3-413, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 51, effective January 1, 1997.

Official Comment

Subsection (a) is consistent with former Section 3-413(1). Subsection (b) has primary importance with respect to certified checks. It protects the holder in due course of a certified check that was altered after certification and before negotiation to the holder in due course. A bank can avoid liability for the altered amount by stating on the check the amount the bank agrees to pay. The subsection applies to other accepted drafts as well. The rule of this section is similar to the rule in Article 41 of the Convention on International Bills of Exchange and International Promissory Notes. Articles 42 and 43 of the Convention include more detailed rules that in many respects do not have parallels in this Article.

355.3-414. Obligation of drawer.

  1. This section does not apply to cashier’s checks or other drafts drawn on the drawer.
  2. If an unaccepted draft is dishonored, the drawer is obliged to pay the draft:
    1. According to its terms at the time it was issued or, if not issued, at the time it first came into possession of a holder; or
    2. If the drawer signed an incomplete instrument, according to its terms when completed, to the extent stated in KRS 355.3-115 and 355.3-407 . The obligation is owed to a person entitled to enforce the draft or to an indorser who paid the draft under KRS 355.3-415 .
  3. If a draft is accepted by a bank, the drawer is discharged, regardless of when or by whom acceptance was obtained.
  4. If a draft is accepted and the acceptor is not a bank, the obligation of the drawer to pay the draft if the draft is dishonored by the acceptor is the same as the obligation of an indorser under KRS 355.3-415 (1) and (3).
  5. If a draft states that it is drawn “without recourse” or otherwise disclaims liability of the drawer to pay the draft, the drawer is not liable under subsection (2) of this section to pay the draft if the draft is not a check. A disclaimer of the liability stated in subsection (2) of this section is not effective if the draft is a check.
  6. If:
    1. A check is not presented for payment or given to a depositary bank for collection within thirty (30) days after its date;
    2. The drawee suspends payments after expiration of the thirty (30) day period without paying the check; and
    3. Because of the suspension of payments, the drawer is deprived of funds maintained with the drawee to cover payment of the check,

the drawer to the extent deprived of funds may discharge its obligation to pay the check by assigning to the person entitled to enforce the check the rights of the drawer against the drawee with respect to the funds.

History. Enact. Acts 1958, ch. 77, § 3-414, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 52, effective January 1, 1997.

Official Comment

  1. Subsection (a) excludes cashier’s checks because the obligation of the issuer of a cashier’s check is stated in Section 3-412.
  2. Subsection (b) states the obligation of the drawer on an unaccepted draft. It replaces former Section 3-413(2). The requirement under former Article 3 of notice of dishonor or protest has been eliminated. Under revised Article 3, notice of dishonor is necessary only with respect to indorser’s liability. The liability of the drawer of an unaccepted draft is treated as a primary liability. Under former Section 3-102(1)(d) the term “secondary party” was used to refer to a drawer or indorser. The quoted term is not used in revised Article 3. The effect of a draft drawn without recourse is stated in subsection (e).
  3. Under subsection (c) the drawer is discharged of liability on a draft accepted by a bank regardless of when acceptance was obtained. This changes former Section 3-411(1) which provided that the drawer is discharged only if the holder obtains acceptance. Holders that have a bank obligation do not normally rely on the drawer to guarantee the bank’s solvency. A holder can obtain protection against the insolvency of a bank acceptor by a specific guaranty of payment by the drawer or by obtaining an indorsement by the drawer. Section 3-205(d).
  4. Subsection (d) states the liability of the drawer if a draft is accepted by a drawee other than a bank and the acceptor dishonors. The drawer of an unaccepted draft is the only party liable on the instrument. The drawee has no liability on the draft. Section 3-408. When the draft is accepted, the obligations change. The drawee, as acceptor, becomes primarily liable and the drawer’s liability is that of a person secondarily liable as a guarantor of payment. The drawer’s liability is identical to that of an indorser, and subsection (d) states the drawer’s liability that way. The drawer is liable to pay the person entitled to enforce the draft or any indorser that pays pursuant to Section 3-415. The drawer in this case is discharged if notice of dishonor is required by Section 3-503 and is not given in compliance with that section. A drawer that pays has a right of recourse against the acceptor. Section 3-413(a).
  5. Subsection (e) does not permit the drawer of a check to avoid liability under subsection (b) by drawing the check without recourse. There is no legitimate purpose served by issuing a check on which nobody is liable. Drawing without recourse is effective to disclaim liability of the drawer if the draft is not a check. Suppose, in a documentary sale, Seller draws a draft on Buyer for the price of goods shipped to Buyer. The draft is payable upon delivery to the drawee of an order bill of lading covering the goods. Seller delivers the draft with the bill of lading to Finance Company that is named as payee of the draft. If Seller draws without recourse Finance Company takes the risk that Buyer will dishonor. If Buyer dishonors, Finance Company has no recourse against Seller but it can obtain reimbursement by selling the goods which it controls through the bill of lading.
  6. Subsection (f) is derived from former Section 3-502(1)(b). It is designed to protect the drawer of a check against loss resulting from suspension of payments by the drawee bank when the holder of the check delays collection of the check. For example, X writes a check payable to Y for $1,000. The check is covered by funds in X’s account in the drawee bank. Y delays initiation of collection of the check for more than 30 days after the date of the check. The drawee bank suspends payments after the 30-day period and before the check is presented for payment. If the $1,000 of funds in X’s account have not been withdrawn, X has a claim for those funds against the drawee bank and, if subsection (e) were not in effect, X would be liable to Y on the check because the check was dishonored. Section 3-502(e). If the suspension of payments by the drawee bank will result in payment to X of less than the full amount of the $1,000 in the account or if there is a significant delay in payment to X, X will suffer a loss which would not have been suffered if Y had promptly initiated collection of the check. In most cases, X will not suffer any loss because of the existence of federal bank deposit insurance that covers accounts up to $100,000. Thus, subsection (e) has relatively little importance. There might be some cases, however, in which the account is not fully insured because it exceeds $100,000 or because the account doesn’t qualify for deposit insurance. Subsection (f) retains the phrase “deprived of funds maintained with the drawee” appearing in former Section 3-502(1)(b). The quoted phrase applies if the suspension of payments by the drawee prevents the drawer from receiving the benefit of funds which would have paid the check if the holder had been timely in initiating collection. Thus, any significant delay in obtaining full payment of the funds is a deprivation of funds. The drawer can discharge drawer’s liability by assigning rights against the drawee with respect to the funds to the holder.
  7. The obligation of the drawer under this section is similar to the obligation of the drawer in Article 38 of the Convention on International Bills of Exchange and International Promissory Notes.

355.3-415. Obligation of indorser.

  1. Subject to subsections (2), (3), (4), and (5) of this section and to KRS 355.3-419 (4), if an instrument is dishonored, an indorser is obliged to pay the amount due on the instrument:
    1. According to the terms of the instrument at the time it was indorsed; or
    2. If the indorser indorsed an incomplete instrument, according to its terms when completed, to the extent stated in KRS 355.3-115 and 355.3-407 . The obligation of the indorser is owed to a person entitled to enforce the instrument or to a subsequent indorser who paid the instrument under this section.
  2. If an indorsement states that it is made “without recourse” or otherwise disclaims liability of the indorser, the indorser is not liable under subsection (1) of this section to pay the instrument.
  3. If notice of dishonor of an instrument is required by KRS 355.3-503 and notice of dishonor complying with that section is not given to an indorser, the liability of the indorser under subsection (1) of this section is discharged.
  4. If a draft is accepted by a bank after an indorsement is made, the liability of the indorser under subsection (1) of this section is discharged.
  5. If an indorser of a check is liable under subsection (1) of this section and the check is not presented for payment, or given to a depositary bank for collection, within thirty (30) days after the day the indorsement was made, the liability of the indorser under subsection (1) of this section is discharged.

History. Enact. Acts 1958, ch. 77, § 3-415, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 53, effective January 1, 1997.

Official Comment

  1. Subsections (a) and (b) restate the substance of former Section 3-414(1). Subsection (2) of former Section 3-414 has been dropped because it is superfluous. Although notice of dishonor is not mentioned in subsection (a), it must be given in some cases to charge an indorser. It is covered in subsection (c). Regulation CC § 229.35(b) provides that a bank handling a check for collection or return is liable to a bank that subsequently handles the check to the extent the latter bank does not receive payment for the check. This liability applies whether or not the bank incurring the liability indorsed the check.
  2. Section 3-503 states when notice of dishonor is required and how it must be given. If required notice of dishonor is not given in compliance with Section 3-503, subsection (c) of Section 3-415 states that the effect is to discharge the indorser’s obligation.
  3. Subsection (d) is similar in effect to Section 3-414(c) if the draft is accepted by a bank after the indorsement is made. See Comment 3 to Section 3-414. If a draft is accepted by a bank before the indorsement is made, the indorser incurs the obligation stated in subsection (a).
  4. Subsection (e) modifies former Sections 3-503(2)(b) and 3-502(1)(a) by stating a 30-day rather than a seven-day period, and stating it as an absolute rather than a presumptive period.
  5. As stated in subsection (a), the obligation of an endorser to pay the amount due on the instrument is generally owed not only to a person entitled to enforce the instrument but also to a subsequent endorser who paid the instrument. But if the prior endorser and the subsequent endorser are both anomalous endorsers, this rule does not apply. In that case, Section 3-116 applies. Under Section 3-116(a), the anomalous endorsers are jointly and severally liable and if either pays the instrument the endorser who pays has a right of contribution against the other. Section 3-116(b). The right to contribution in Section 3-116(b) is subject to “agreement of the affected parties.” Suppose the subsequent endorser can prove an agreement with the prior endorser under which the prior endorser agreed to treat the subsequent endorser as a guarantor of the obligation of the prior endorser. Rights of the two endorsers between themselves would be governed by the agreement. Under suretyship law, the subsequent endorser under such an agreement is referred to as sub-surety. Under the agreement, if the subsequent endorser pays the instrument there is a right to reimbursement from the prior endorser; if the prior endorser pays the instrument, there is no right of recourse against the subsequent endorser. See PEB Commentary No. 11, dated February 10, 1994.
  6. The rule of this section is similar to the rule of Article 44 of the Convention on International Bills of Exchange and International Promissory Notes.

355.3-416. Transfer warranties.

  1. A person who transfers an instrument for consideration warrants to the transferee and, if the transfer is by indorsement, to any subsequent transferee that:
    1. The warrantor is a person entitled to enforce the instrument;
    2. All signatures on the instrument are authentic and authorized;
    3. The instrument has not been altered;
    4. The instrument is not subject to a defense or claim in recoupment of any party which can be asserted against the warrantor;
    5. The warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer; and
    6. With respect to a remotely created item, that the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn.
  2. A person to whom the warranties under subsection (1) of this section are made and who took the instrument in good faith may recover from the warrantor as damages for breach of warranty an amount equal to the loss suffered as a result of the breach, but not more than the amount of the instrument plus expenses and loss of interest incurred as a result of the breach.
  3. The warranties stated in subsection (1) of this section cannot be disclaimed with respect to checks. Unless notice of a claim for breach of warranty is given to the warrantor within thirty (30) days after the claimant has reason to know of the breach and the identity of the warrantor, the liability of the warrantor under subsection (2) of this section is discharged to the extent of any loss caused by the delay in giving notice of the claim.
  4. A claim for relief for breach of warranty under this section accrues when the claimant has reason to know of the breach.

History. Enact. Acts 1958, ch. 77, § 3-416, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 54, effective January 1, 1997; 2006, ch. 242, § 39, effective July 12, 2006.

Official Comment

  1. Subsection (a) is taken from subsection (2) of former Section 3-417. Subsections (3) and (4) of former Section 3-417 are deleted. Warranties under subsection (a) in favor of the immediate transferee apply to all persons who transfer an instrument for consideration whether or not the transfer is accompanied by indorsement. Any consideration sufficient to support a simple contract will support those warranties. If there is an indorsement the warranty runs with the instrument and the remote holder may sue the indorser-warrantor directly and thus avoid a multiplicity of suits.
  2. Since the purpose of transfer (Section 3-203(a)) is to give the transferee the right to enforce the instrument, subsection (a)(1) is a warranty that the transferor is a person entitled to enforce the instrument (Section 3-301). Under Section 3-203(b) transfer gives the transferee any right of the transferor to enforce the instrument. Subsection (a)(1) is in effect a warranty that there are no unauthorized or missing indorsements that prevent the transferor from making the transferee a person entitled to enforce the instrument.
  3. The rationale of subsection (a)(4) is that the transferee does not undertake to buy an instrument that is not enforceable in whole or in part, unless there is a contrary agreement. Even if the transferee takes as a holder in due course who takes free of the defense or claim in recoupment, the warranty gives the transferee the option of proceeding against the transferor rather than litigating with the obligor on the instrument the issue of the holder-in-due-course status of the transferee. Subsection (3) of former Section 3-417 which limits this warranty is deleted. The rationale is that while the purpose of a “no recourse” indorsement is to avoid a guaranty of payment, the indorsement does not clearly indicate an intent to disclaim warranties.
  4. Under subsection (a)(5) the transferor does not warrant against difficulties of collection, impairment of the credit of the obligor or even insolvency. The transferee is expected to determine such questions before taking the obligation. If insolvency proceedings as defined in Section 1-201(22) have been instituted against the party who is expected to pay and the transferor knows it, the concealment of that fact amounts to a fraud upon the transferee, and the warranty against knowledge of such proceedings is provided accordingly.
  5. Transfer warranties may be disclaimed with respect to any instrument except a check. Between the immediate parties disclaimer may be made by agreement. In the case of an indorser, disclaimer of transferor’s liability, to be effective, must appear in the indorsement with words such as “without warranties” or some other specific reference to warranties. But in the case of a check, subsection (c) of Section 3-416 provides that transfer warranties cannot be disclaimed at all. In the check collection process the banking system relies on these warranties.
  6. Subsection (b) states the measure of damages for breach of warranty. There is no express provision for attorney’s fees, but attorney’s fees are not meant to be necessarily excluded. They could be granted because they fit within the phrase “expenses * * * incurred as a result of the breach.” The intention is to leave to other state law the issue as to when attorney’s fees are recoverable.

    8. Subsection (a)(6) is based on a number of nonuniform amendments designed to address concerns about certain kinds of check fraud. The provision implements a limited rejection of Price v. Neal, 97 Eng. Rep. 871 (K.B. 1762), so that in certain circumstances (those involving remotely-created consumer items) the payor bank can use a warranty claim to absolve itself of responsibility for honoring an unauthorized item. The provision rests on the premise that monitoring by the depository banks can control this type of fraud more effectively than any practices readily available to payor banks. The provision expressly includes both the case in which the consumer does not authorize the item at all and also the case in which the consumer authorizes the item but in an amount different from the amount in which the item is drawn. Similar provisions appear in Sections 3-417, 4-207, and 4-208.

    The provision supplements applicable federal law, which requires telemarketers who submit instruments for payment to obtain the customer’s “express verifiable authorization,” which may be either in writing or tape recorded and must be made available on request to the customer’s bank. Federal Trade Commission’s Telemarketing Sales Rule, 16 C.F.R. § 310.3(a)(3), implementing the Telemarketing and Consumer Fraud and Abuse Prevention Act, 15 U.S.C. §§ 6101-6108. Some states also have consumer-protection laws governing authorization of instruments in telemarketing transactions. See e.g. , 9 Vt. Stat. Ann. § 2464.

    9. Article 45 of the Convention on International Bills of Exchange and International Promissory Notes includes warranties that are similar (except for the warranty in subsection (a)(6)).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint by Indorsee of Check Against Drawer, Form 191.11.

355.3-417. Presentment warranties.

    1. If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, (1) (a) If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft,
      1. The person obtaining payment or acceptance, at the time of presentment; and
      2. A previous transferor of the draft, at the time of transfer,

        warrant to the drawee making payment or accepting the draft in good faith the conditions set out in paragraph (b) of this subsection.

      1. The warrantor is, or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft; (b) 1. The warrantor is, or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft;
      2. The draft has not been altered;
      3. The warrantor has no knowledge that the signature of the drawer of the draft is unauthorized; and
      4. With respect to any remotely created item, that the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn.
  1. A drawee making payment may recover from any warrantor damages for breach of warranty equal to the amount paid by the drawee less the amount the drawee received or is entitled to receive from the drawer because of the payment. In addition, the drawee is entitled to compensation for expenses and loss of interest resulting from the breach. The right of the drawee to recover damages under this subsection is not affected by any failure of the drawee to exercise ordinary care in making payment. If the drawee accepts the draft, breach of warranty is a defense to the obligation of the acceptor. If the acceptor makes payment with respect to the draft, the acceptor is entitled to recover from any warrantor for breach of warranty the amounts stated in this subsection.
  2. If a drawee asserts a claim for breach of warranty under subsection (1) of this section based on an unauthorized indorsement of the draft or an alteration of the draft, the warrantor may defend by proving that the indorsement is effective under KRS 355.3-404 or 355.3-405 or the drawer is precluded under KRS 355.3-406 or 355.4-406 from asserting against the drawee the unauthorized indorsement or alteration.
    1. If: (4) (a) If:
        1. A dishonored draft is presented for payment to the drawer or an indorser; or 1. a. A dishonored draft is presented for payment to the drawer or an indorser; or
        2. Any other instrument is presented for payment to a party obliged to pay the instrument; and
      1. Payment is received,

        the rules set out in paragraph (b) of this subsection apply.

      1. The person obtaining payment and a prior transferor of the instrument warrant to the person making payment in good faith that the warrantor is, or was, at the time the warrantor transferred the instrument, a person entitled to enforce the instrument or authorized to obtain payment on behalf of a person entitled to enforce the instrument. (b) 1. The person obtaining payment and a prior transferor of the instrument warrant to the person making payment in good faith that the warrantor is, or was, at the time the warrantor transferred the instrument, a person entitled to enforce the instrument or authorized to obtain payment on behalf of a person entitled to enforce the instrument.
      2. The person making payment may recover from any warrantor for breach of warranty an amount equal to the amount paid plus expenses and loss of interest resulting from the breach.
  3. The warranties stated in subsections (1) and (4) of this section cannot be disclaimed with respect to checks. Unless notice of a claim for breach of warranty is given to the warrantor within thirty (30) days after the claimant has reason to know of the breach and the identity of the warrantor, the liability of the warrantor under subsection (2) or (4) of this section is discharged to the extent of any loss caused by the delay in giving notice of the claim.
  4. A claim for relief for breach of warranty under this section accrues when the claimant has reason to know of the breach.

History. Enact. Acts 1958, ch. 77, § 3-417, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 55, effective January 1, 1997; 2006, ch. 242, § 40, effective July 12, 2006.

Official Comment

  1. This section replaces subsection (1) of former Section 3-417. The former provision was difficult to understand because it purported to state in one subsection all warranties given to any person paying any instrument. The result was a provision replete with exceptions that could not be readily understood except after close scrutiny of the language. In revised Section 3-417, presentment warranties made to drawees of uncertified checks and other unaccepted drafts are stated in subsection (a). All other presentment warranties are stated in subsection (d).
  2. Subsection (a) states three warranties. Subsection (a)(1) in effect is a warranty that there are no unauthorized or missing indorsements. “Person entitled to enforce” is defined in Section 3-301. Subsection (a)(2) is a warranty that there is no alteration. Subsection (a)(3) is a warranty of no knowledge that there is a forged drawer’s signature. Subsection (a) states that the warranties are made to the drawee and subsections (b) and (c) identify the drawee as the person entitled to recover for breach of warranty. There is no warranty made to the drawer under subsection (a) when presentment is made to the drawee. Warranty to the drawer is governed by subsection (d) and that applies only when presentment for payment is made to the drawer with respect to a dishonored draft. In Sun ‘N Sand, Inc. v. United California Bank, 582 P.2d 920 (Cal.1978), the court held that under former Section 3-417(1) a warranty was made to the drawer of a check when the check was presented to the drawee for payment. The result in that case is rejected.
  3. Subsection (a)(1) retains the rule that the drawee does not admit the authenticity of indorsements and subsection (a)(3) retains the rule of Price v. Neal, 3 Burr. 1354 (1762), that the drawee takes the risk that the drawer’s signature is unauthorized unless the person presenting the draft has knowledge that the drawer’s signature is unauthorized. Under subsection (a)(3) the warranty of no knowledge that the drawer’s signature is unauthorized is also given by prior transferors of the draft.
  4. Subsection (d) applies to presentment for payment in all cases not covered by subsection (a). It applies to presentment of notes and accepted drafts to any party obliged to pay the instrument, including an indorser, and to presentment of dishonored drafts if made to the drawer or an indorser. In cases covered by subsection (d), there is only one warranty and it is the same as that stated in subsection (a)(1). There are no warranties comparable to subsections (a)(2) and (a)(3) because they are appropriate only in the case of presentment to the drawee of an unaccepted draft. With respect to presentment of an accepted draft to the acceptor, there is no warranty with respect to alteration or knowledge that the signature of the drawer is unauthorized. Those warranties were made to the drawee when the draft was presented for acceptance (Section 3-417(a)(2) and (3)) and breach of that warranty is a defense to the obligation of the drawee as acceptor to pay the draft. If the drawee pays the accepted draft the drawee may recover the payment from any warrantor who was in breach of warranty when the draft was accepted. Section 3-417(b). Thus, there is no necessity for these warranties to be repeated when the accepted draft is presented for payment. Former Section 3-417(1)(b)(3) and (c)(3) are not included in revised Section 3-417 because they are unnecessary. Former Section 3-417(1)(c)(iv) is not included because it is also unnecessary. The acceptor should know what the terms of the draft were at the time acceptance was made.

    If presentment is made to the drawer or maker, there is no necessity for a warranty concerning the signature of that person or with respect to alteration. If presentment is made to an indorser, the indorser had itself warranted authenticity of signatures and that the instrument was not altered. Section 3-416(a)(2) and (3).

  5. The measure of damages for breach of warranty under subsection (a) is stated in subsection (b). There is no express provision for attorney’s fees, but attorney’s fees are not meant to be necessarily excluded. They could be granted because they fit within the language “expenses * * * resulting from the breach.” Subsection (b) provides that the right of the drawee to recover for breach of warranty is not affected by a failure of the drawee to exercise ordinary care in paying the draft. This provision follows the result reached under former Article 3 in Hartford Accident & Indemnity Co. v. First Pennsylvania Bank, 859 F.2d 295 (3d Cir.1988).
  6. Subsection (c) applies to checks and other unaccepted drafts. It gives to the warrantor the benefit of rights that the drawee has against the drawer under Section 3-404, 3-405, 3-406, or 4-406. If the drawer’s conduct contributed to a loss from forgery or alteration, the drawee should not be allowed to shift the loss from the drawer to the warrantor.
  7. The first sentence of subsection (e) recognizes that checks are normally paid by automated means and that payor banks rely on warranties in making payment. Thus, it is not appropriate to allow disclaimer of warranties appearing on checks that normally will not be examined by the payor bank. The second sentence requires a breach of warranty claim to be asserted within 30 days after the drawee learns of the breach and the identity of the warrantor.
  8. Since the traditional term “cause of action” may have been replaced in some states by “claim for relief” or some equivalent term, the words “cause of action” in subsection (f) have been bracketed to indicate that the words may be replaced by an appropriate substitute to conform to local practice.
  9. For discussion of subsection (a)(4), see Comment 8 to Section 3-416.

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint by Indorsee of Check Against Drawer, Form 191.11.

355.3-418. Payment or acceptance by mistake.

  1. Except as provided in subsection (3) of this section, if the drawee of a draft pays or accepts the draft and the drawee acted on the mistaken belief that:
    1. Payment of the draft had not been stopped pursuant to KRS 355.4-403 ; or
    2. The signature of the drawer of the draft was authorized, the drawee may recover the amount of the draft from the person to whom or for whose benefit payment was made or, in the case of acceptance, may revoke the acceptance. Rights of the drawee under this subsection are not affected by failure of the drawee to exercise ordinary care in paying or accepting the draft.
  2. Except as provided in subsection (3) of this section, if an instrument has been paid or accepted by mistake and the case is not covered by subsection (1) of this section, the person paying or accepting may, to the extent permitted by the law governing mistake and restitution:
    1. Recover the payment from the person to whom or for whose benefit payment was made; or
    2. In the case of acceptance, may revoke the acceptance.
  3. The remedies provided by subsection (1) or (2) of this section may not be asserted against a person who took the instrument in good faith and for value or who in good faith changed position in reliance on the payment or acceptance. This subsection does not limit remedies provided by KRS 355.3-417 or 355.4-407 .
  4. Notwithstanding KRS 355.4-215 , if an instrument is paid or accepted by mistake and the payor or acceptor recovers payment or revokes acceptance under subsection (1) or (2) of this section, the instrument is deemed not to have been paid or accepted and is treated as dishonored, and the person from whom payment is recovered has rights as a person entitled to enforce the dishonored instrument.

History. Enact. Acts 1958, ch. 77, § 3-418, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 56, effective January 1, 1997.

Official Comment

  1. This section covers payment or acceptance by mistake and replaces former Section 3-418. Under former Article 3, the remedy of a drawee that paid or accepted a draft by mistake was based on the law of mistake and restitution, but that remedy was not specifically stated. It was provided by Section 1-103. Former Section 3-418 was simply a limitation on the unstated remedy under the law of mistake and restitution. Under revised Article 3, Section 3-418 specifically states the right of restitution in subsections (a) and (b). Subsection (a) allows restitution in the two most common cases in which the problem is presented: payment or acceptance of forged checks and checks on which the drawer has stopped payment. If the drawee acted under a mistaken belief that the check was not forged or had not been stopped, the drawee is entitled to recover the funds paid or to revoke the acceptance whether or not the drawee acted negligently. But in each case, by virtue of subsection (c), the drawee loses the remedy if the person receiving payment or acceptance was a person who took the check in good faith and for value or who in good faith changed position in reliance on the payment or acceptance. Subsection (a) and (c) are consistent with former Section 3-418 and the rule of Price v. Neal. The result in the two cases covered by subsection (a) is that the drawee in most cases will not have a remedy against the person paid because there is usually a person who took the check in good faith and for value or who in good faith changed position in reliance on the payment or acceptance.
  2. If a check has been paid by mistake and the payee receiving payment did not give value for the check or did not change position in reliance on the payment, the drawee bank is entitled to recover the amount of the check under subsection (a) regardless of how the check was paid. The drawee bank normally pays a check by a credit to an account of the collecting bank that presents the check for payment. The payee of the check normally receives the payment by a credit to the payee’s account in the depositary bank. But in some cases the payee of the check may have received payment directly from the drawee bank by presenting the check for payment over the counter. In those cases the payee is entitled to receive cash, but the payee may prefer another form of payment such as a cashier’s check or teller’s check issued by the drawee bank. Suppose Seller contracted to sell goods to Buyer. The contract provided for immediate payment by Buyer and delivery of the goods 20 days after payment. Buyer paid by mailing a check for $10,000 drawn on Bank payable to Seller. The next day Buyer gave a stop payment order to Bank with respect to the check Buyer had mailed to Seller. A few days later Seller presented Buyer’s check to Bank for payment over the counter and requested a cashier’s check as payment. Bank issued and delivered a cashier’s check for $10,000 payable to Seller. The teller failed to discover Buyer’s stop order. The next day Bank discovered the mistake and immediately advised Seller of the facts. Seller refused to return the cashier’s check and did not deliver any goods to Buyer.

    Under Section 4-215, Buyer’s check was paid by Bank at the time it delivered its cashier’s check to Seller. See Comment 3 to Section 4-215. Bank is obliged to pay the cashier’s check and has no defense to that obligation. The cashier’s check was issued for consideration because it was issued in payment of Buyer’s check. Although Bank has no defense on its cashier’s check it may have a right to recover $10,000, the amount of Buyer’s check, from Seller under Section 3-418(a). Bank paid Buyer’s check by mistake. Seller did not give value for Buyer’s check because the promise to deliver goods to Buyer was never performed. Section 3-303(a)(i). And, on these facts, Seller did not change position in reliance on the payment of Buyer’s check. Thus, the first sentence of Section 3-418(c) does not apply and Seller is obliged to return $10,000 to Bank. Bank is obliged to pay the cashier’s check but it has a counterclaim against Seller based on its rights under Section 3-418(a). This claim can be asserted against Seller, but it cannot be asserted against some other person with rights of a holder in due course of the cashier’s check. A person without rights of a holder in due course of the cashier’s check would take subject to Bank’s claim against Seller because it is a claim in recoupment. Section 3-305(a)(3).

    If Bank recovers from Seller under Section 3-418(a), the payment of Buyer’s check is treated as unpaid and dishonored. Section 3-418(d). One consequence is that Seller may enforce Buyer’s obligation as drawer to pay the check. Section 3-414. Another consequence is that Seller’s rights against Buyer on the contract of sale are also preserved. Under Section 3-310(b) Buyer’s obligation to pay for the goods was suspended when Seller took Buyer’s check and remains suspended until the check is either dishonored or paid. Under Section 3-310(b)(1) the obligation is discharged when the check is paid. Since Section 3-418(d) treats Buyer’s check as unpaid and dishonored, Buyer’s obligation is not discharged and suspension of the obligation terminates. Under Section 3-310(b)(3), Seller may enforce either the contract of sale or the check subject to defenses and claims of Buyer.

    If Seller had released the goods to Buyer before learning about the stop order, Bank would have no recovery against Seller under Section 3-418(a) because Seller in that case gave value for Buyer’s check. Section 3-418(c). In this case Bank’s sole remedy is under Section 4-407 by subrogation.

  3. Subsection (b) covers cases of payment or acceptance by mistake that are not covered by subsection (a). It directs courts to deal with those cases under the law governing mistake and restitution. Perhaps the most important class of cases that falls under subsection (b), because it is not covered by subsection (a), is that of payment by the drawee bank of a check with respect to which the bank has no duty to the drawer to pay either because the drawer has no account with the bank or because available funds in the drawer’s account are not sufficient to cover the amount of the check. With respect to such a case, under Restatement of Restitution § 29, if the bank paid because of a mistaken belief that there were available funds in the drawer’s account sufficient to cover the amount of the check, the bank is entitled to restitution. But § 29 is subject to Restatement of Restitution § 33 which denies restitution if the holder of the check receiving payment paid value in good faith for the check and had no reason to know that the check was paid by mistake when payment was received.

    The result in some cases is clear. For example, suppose Father gives Daughter a check for $10,000 as a birthday gift. The check is drawn on Bank in which both Father and Daughter have accounts. Daughter deposits the check in her account in Bank. An employee of Bank, acting under the belief that there were available funds in Father’s account to cover the check, caused Daughter’s account to be credited for $10,000. In fact, Father’s account was overdrawn and Father did not have overdraft privileges. Since Daughter received the check gratuitously there is clear unjust enrichment if she is allowed to keep the $10,000 and Bank is unable to obtain reimbursement from Father. Thus, Bank should be permitted to reverse the credit to Daughter’s account. But this case is not typical. In most cases the remedy of restitution will not be available because the person receiving payment of the check will have given value for it in good faith.

    In some cases, however, it may not be clear whether a drawee bank should have a right of restitution. For example, a check- kiting scheme may involve a large number of checks drawn on a number of different banks in which the drawer’s credit balances are based on uncollected funds represented by fraudulently drawn checks. No attempt is made in Section 3-418 to state rules for determining the conflicting claims of the various banks that may be victimized by such a scheme. Rather, such cases are better resolved on the basis of general principles of law and the particular facts presented in the litigation.

  4. The right of the drawee to recover a payment or to revoke an acceptance under Section 3-418 is not affected by the rules under Article 4 that determine when an item is paid. Even though a payor bank may have paid an item under Section 4-215, it may have a right to recover the payment under Section 3-418. National Savings & Trust Co. v. Park Corp., 722 F.2d 1303 (6th Cir.1983), cert. denied, 466 U.S. 939 (1984), correctly states the law on the issue under former Article 3. Revised Article 3 does not change the previous law.

355.3-419. Instruments signed for accommodation.

  1. If an instrument is issued for value given for the benefit of a party to the instrument (“accommodated party”) and another party to the instrument (“accommodation party”) signs the instrument for the purpose of incurring liability on the instrument without being a direct beneficiary of the value given for the instrument, the instrument is signed by the accommodation party “for accommodation.”
  2. An accommodation party may sign the instrument as maker, drawer, acceptor, or indorser and, subject to subsection (4) of this section, is obliged to pay the instrument in the capacity in which the accommodation party signs. The obligation of an accommodation party may be enforced notwithstanding any statute of frauds and whether or not the accommodation party receives consideration for the accommodation.
  3. A person signing an instrument is presumed to be an accommodation party and there is notice that the instrument is signed for accommodation if the signature is an anomalous indorsement or is accompanied by words indicating that the signer is acting as surety or guarantor with respect to the obligation of another party to the instrument. Except as provided in KRS 355.3-605 , the obligation of an accommodation party to pay the instrument is not affected by the fact that the person enforcing the obligation had notice when the instrument was taken by that person that the accommodation party signed the instrument for accommodation.
  4. If the signature of a party to an instrument is accompanied by words indicating unambiguously that the party is guaranteeing collection rather than payment of the obligation of another party to the instrument, the signer is obliged to pay the amount due on the instrument to a person entitled to enforce the instrument only if:
    1. Execution of judgment against the other party has been returned unsatisfied;
    2. The other party is insolvent or in an insolvency proceeding;
    3. The other party cannot be served with process; or
    4. It is otherwise apparent that payment cannot be obtained from the other party.
  5. If the signature of a party to an instrument is accompanied by words indicating that the party guarantees payment or the signer signs the instrument as an accommodation party in some other manner that does not unambiguously indicate an intention to guarantee collection rather than payment, the signer is obliged to pay the amount due on the instrument to a person entitled to enforce the instrument in the same circumstances as the accommodated party would be obliged, without prior resort to the accommodated party by the person entitled to enforce the instrument.
  6. An accommodation party who pays the instrument is entitled to reimbursement from the accommodated party and is entitled to enforce the instrument against the accommodated party. In proper circumstances, an accommodation party may obtain relief that requires the accommodated party to perform its obligations on the instrument. An accommodated party that pays the instrument has no right of recourse against, and is not entitled to contribution from, an accommodation party.

History. Enact. Acts 1958, ch. 77, § 3-419, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 57, effective January 1, 1997; 2006, ch. 242, § 41, effective July 12, 2006.

Official Comment

  1. Section 3-419 replaces former Sections 3-415 and 3-416. An accommodation party is a person who signs an instrument to benefit the accommodated party either by signing at the time value is obtained by the accommodated party or later, and who is not a direct beneficiary of the value obtained. An accommodation party will usually be a co-maker or anomalous indorser. Subsection (a) distinguishes between direct and indirect benefit. For example, if X cosigns a note of Corporation that is given for a loan to Corporation, X is an accommodation party if no part of the loan was paid to X or for X’s direct benefit. This is true even though X may receive indirect benefit from the loan because X is employed by Corporation or is a stockholder of Corporation, or even if X is the sole stockholder so long as Corporation and X are recognized as separate entities.
  2. It does not matter whether an accommodation party signs gratuitously either at the time the instrument is issued or after the instrument is in the possession of a holder. Subsection (b) of Section 3-419 takes the view stated in Comment 3 to former Section 3-415 that there need be no consideration running to the accommodation party: “The obligation of the accommodation party is supported by any consideration for which the instrument is taken before it is due. Subsection (b) is intended to change occasional decisions holding that there is no sufficient consideration where an accommodation party signs a note after it is in the hands of a holder who has given value. The [accommodation] party is liable to the holder in such a case even though there is no extension of time or other concession.”
  3. As stated in Comment 1, whether a person is an accommodation party is a question of fact. But it is almost always the case that a co-maker who signs with words of guaranty after the signature is an accommodation party. The same is true of an anomalous indorser. In either case a person taking the instrument is put on notice of the accommodation status of the co-maker or indorser. This is relevant to Section 3-605(h). But, under subsection (c), signing with words of guaranty or as an anomalous indorser also creates a presumption that the signer is an accommodation party. A party challenging accommodation party status would have to rebut this presumption by producing evidence that the signer was in fact a direct beneficiary of the value given for the instrument.

    An accommodation party is always a surety. A surety who is not a party to the instrument, however, is not an accommodation party. For example, if M issues a note payable to the order of P, and S signs a separate contract in which S agrees to pay P the amount on the instrument if it is dishonored, S is a surety but is not an accommodation party. In such a case, S’s rights and duties are determined under general law of suretyship. In unusual cases two parties to an instrument may have a surety relationship that is not governed by Article 3 because the requirements of Section 3-419(a) are not met. In those cases the general law of suretyship applies to the relationship. See PEB Commentary No. 11, dated Feburary 10, 1994.

  4. Subsection (b) states that an accommodation party is liable on the instrument in the capacity in which the party signed the instrument. In most cases that capacity will be either that of a maker or indorser of a note. But subsection (d) provides a limitation on subsection (b). If the signature of the accommodation party is accompanied by words indicating unambiguously that the party is guaranteeing collection rather than payment of the instrument, liability is limited to that stated in subsection (d), which is based on former Section 3-416(2).

    Former Article 3 was confusing because the obligation of a guarantor was covered both in Section 3-415 and in Section 3-416. The latter section suggested that a signature accompanied by words of guaranty created an obligation distinct from that of an accommodation party. Revised Article 3 eliminates that confusion by stating in Section 3-419 the obligation of a person who uses words of guaranty. Portions of former Section 3-416 are preserved. Former Section 3-416(2) is reflected in Section 3-419(d) and former Section 3-416(4) is reflected in Section 3-419(c).

  5. Subsection (f) like former Section 3-415(5), provides that an accommodation party that pays the instrument is entitled to enforce the instrument against the accommodated party. Since the accommodation party that pays the instrument is entitled to enforce the instrument against the accommodated party, the accommodation party also obtains rights to any security interest or other collateral that secures payment of the instrument. Subsection (f) also provides that an accommodation party that pays the instrument is entitled to reimbursement from the accommodated party. See PEB Commentary No. 11, dated February 10, 1994.
  6. In occasional cases, the accommodation party might pay the instrument even though the accommodated party had a defense to its obligation that was available to the accommodation party under Section 3-305(d). In such cases, the accommodation party’s right to reimbursement may conflict with the accommodated party’s right to raise its defense. For example, suppose the accommodation party pays the instrument without being aware of the defense. In that case the accommodation party should be entitled to reimbursement. Suppose the accommodation party paid the instrument with knowledge of the defense. In that case, to the extent of the defense, reimbursement ordinarily would not be justified, but under some circumstances reimbursement may be justified depending on the facts of the case. The resolution of this conflict is left to the general law of suretyship. Section 1-103. See PEB Commentary No. 11, dated February 10, 1994.
  7. Section 3-419, along with Section 3-116(a) and (b), Section 3-305(d) and Section 3-605, provides rules governing the rights of accommodation parties. In addition, except to the extent that it is displaced by provisions of this Article, the general law of suretyship also applies to the rights of accommodation parties. Section 1-103. See PEB Commentary No. 11, dated February 10, 1994.

355.3-420. Conversion of instrument.

  1. The law applicable to conversion of personal property applies to instruments. An instrument is also converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment. An action for conversion of an instrument may not be brought by:
    1. The issuer or acceptor of the instrument; or
    2. A payee or indorsee who did not receive delivery of the instrument either directly or through delivery to an agent or a co-payee.
  2. In an action under subsection (1) of this section, the measure of liability is presumed to be the amount payable on the instrument, but recovery may not exceed the amount of the plaintiff’s interest in the instrument.
  3. A representative, other than a depositary bank, who has in good faith dealt with an instrument or its proceeds on behalf of one who was not the person entitled to enforce the instrument is not liable in conversion to that person beyond the amount of any proceeds that it has not paid out.

History. Enact. Acts 1996, ch. 130, § 58, effective January 1, 1997.

Official Comment

  1. Section 3-420 is a modification of former Section 3-419. The first sentence of Section 3-420(a) states a general rule that the law of conversion applicable to personal property also applies to instruments. Paragraphs (a) and (b) of former Section 3-419(1) are deleted as inappropriate in cases of noncash items that may be delivered for acceptance or payment in collection letters that contain varying instructions as to what to do in the event of nonpayment on the day of delivery. It is better to allow such cases to be governed by the general law of conversion that would address the issue of when, under the circumstances prevailing, the presenter’s right to possession has been denied. The second sentence of Section 3-420(a) states that an instrument is converted if it is taken by transfer other than a negotiation from a person not entitled to enforce the instrument or taken for collection or payment from a person not entitled to enforce the instrument or receive payment. This covers cases in which a depositary or payor bank takes an instrument bearing a forged indorsement. It also covers cases in which an instrument is payable to two persons and the two persons are not alternative payees, e.g., a check payable to John and Jane Doe. Under Section 3-110(d) the check can be negotiated or enforced only by both persons acting jointly. Thus, neither payee acting without the consent of the other, is a person entitled to enforce the instrument. If John indorses the check and Jane does not, the indorsement is not effective to allow negotiation of the check. If Depositary Bank takes the check for deposit to John’s account, Depositary Bank is liable to Jane for conversion of the check if she did not consent to the transaction. John, acting alone, is not the person entitled to enforce the check because John is not the holder of the check. Section 3-110(d) and Comment 4 to Section 3-110. Depositary Bank does not get any greater rights under Section 4-205(1). If it acted for John as its customer, it did not become holder of the check under that provision because John, its customer, was not a holder.

    Under former Article 3, the cases were divided on the issue of whether the drawer of a check with a forged indorsement can assert rights against a depositary bank that took the check. The last sentence of Section 3-420(a) resolves the conflict by following the rule stated in Stone & Webster Engineering Corp. v. First National Bank & Trust Co., 184 N.E.2d 358 (Mass.1962). There is no reason why a drawer should have an action in conversion. The check represents an obligation of the drawer rather than property of the drawer. The drawer has an adequate remedy against the payor bank for recredit of the drawer’s account for unauthorized payment of the check.

    There was also a split of authority under former Article 3 on the issue of whether a payee who never received the instrument is a proper plaintiff in a conversion action. The typical case was one in which a check was stolen from the drawer or in which the check was mailed to an address different from that of the payee and was stolen after it arrived at that address. The thief forged the indorsement of the payee and obtained payment by depositing the check to an account in a depositary bank. The issue was whether the payee could bring an action in conversion against the depositary bank or the drawee bank. In revised Article 3, under the last sentence of Section 3-420(a), the payee has no conversion action because the check was never delivered to the payee. Until delivery, the payee does not have any interest in the check. The payee never became the holder of the check nor a person entitled to enforce the check. Section 3-301. Nor is the payee injured by the fraud. Normally the drawer of a check intends to pay an obligation owed to the payee. But if the check is never delivered to the payee, the obligation owed to the payee is not affected. If the check falls into the hands of a thief who obtains payment after forging the signature of the payee as an indorsement, the obligation owed to the payee continues to exist after the thief receives payment. Since the payee’s right to enforce the underlying obligation is unaffected by the fraud of the thief, there is no reason to give any additional remedy to the payee. The drawer of the check has no conversion remedy, but the drawee is not entitled to charge the drawer’s account when the drawee wrongfully honored the check. The remedy of the drawee is against the depositary bank for breach of warranty under Section 3-417(a)(1) or 4-208(a)(1). The loss will fall on the person who gave value to the thief for the check.

    The situation is different if the check is delivered to the payee. If the check is taken for an obligation owed to the payee, the last sentence of Section 3-310(b)(4) provides that the obligation may not be enforced to the extent of the amount of the check. The payee’s rights are restricted to enforcement of the payee’s rights in the instrument. In this event the payee is injured by the theft and has a cause of action for conversion.

    The payee receives delivery when the check comes into the payee’s possession, as for example when it is put into the payee’s mailbox. Delivery to an agent is delivery to the payee. If a check is payable to more than one payee, delivery to one of the payees is deemed to be delivery to all of the payees. Occasionally, the person asserting a conversion cause of action is an indorsee rather than the original payee. If the check is stolen before the check can be delivered to the indorsee and the indorsee’s indorsement is forged, the analysis is similar. For example, a check is payable to the order of A. A indorses it to B and puts it into an envelope addressed to B. The envelope is never delivered to B. Rather, Thief steals the envelope, forges B’s indorsement to the check and obtains payment. Because the check was never delivered to B, the indorsee, B has no cause of action for conversion, but A does have such an action. A is the owner of the check. B never obtained rights in the check. If A intended to negotiate the check to B in payment of an obligation, that obligation was not affected by the conduct of Thief. B can enforce that obligation. Thief stole A’s property not B’s.

  2. Subsection (2) of former Section 3-419 is amended because it is not clear why the former law distinguished between the liability of the drawee and that of other converters. Why should there be a conclusive presumption that the liability is face amount if a drawee refuses to pay or return an instrument or makes payment on a forged indorsement, while the liability of a maker who does the same thing is only presumed to be the face amount? Moreover, it was not clear under former Section 3-419(2) what face amount meant. If a note for $10,000 is payable in a year at 10% interest, it is common to refer to $10,000 as the face amount, but if the note is converted the loss to the owner also includes the loss of interest. In revised Article 3, Section 3-420(b), by referring to “amount payable on the instrument,” allows the full amount due under the instrument to be recovered.

    The “but” clause in subsection (b) addresses the problem of conversion actions in multiple payee checks. Section 3-110(d) states that an instrument cannot be enforced unless all payees join in the action. But an action for conversion might be brought by a payee having no interest or a limited interest in the proceeds of the check. This clause prevents such a plaintiff from receiving a windfall. An example is a check payable to a building contractor and a supplier of building material. The check is not payable to the payees alternatively. Section 3-110(d). The check is delivered to the contractor by the owner of the building. Suppose the contractor forges supplier’s signature as an indorsement of the check and receives the entire proceeds of the check. The supplier should not, without qualification, be able to recover the entire amount of the check from the bank that converted the check. Depending upon the contract between the contractor and the supplier, the amount of the check may be due entirely to the contractor, in which case there should be no recovery, entirely to the supplier, in which case recovery should be for the entire amount, or part may be due to one and the rest to the other, in which case recovery should be limited to the amount due to the supplier.

  3. Subsection (3) of former Section 3-419 drew criticism from the courts, that saw no reason why a depositary bank should have the defense stated in the subsection. See Knesz v. Central Jersey Bank & Trust Co., 477 A.2d 806 (N.J.1984). The depositary bank is ultimately liable in the case of a forged indorsement check because of its warranty to the payor bank under Section 4-208(a)(1) and it is usually the most convenient defendant in cases involving multiple checks drawn on different banks. There is no basis for requiring the owner of the check to bring multiple actions against the various payor banks and to require those banks to assert warranty rights against the depositary bank. In revised Article 3, the defense provided by Section 3-420(c) is limited to collecting banks other than the depositary bank. If suit is brought against both the payor bank and the depositary bank, the owner, of course, is entitled to but one recovery.

NOTES TO DECISIONS

1.Forged Indorsement.

Allegation that collecting bank had acted in good faith and in accordance with reasonable commercial standards was no defense to insurer’s claim for indemnity against bank which, over widow’s forged indorsement, cashed draft given to widow’s attorney in settlement of widow’s claim against insurer. (decided under prior law) First Nat'l Bank v. Progressive Casualty Ins. Co., 517 S.W.2d 226, 1974 Ky. LEXIS 19 ( Ky. 1974 ).

Where a check is made payable to a person as agent for another, and the agent indorses in that capacity, there is no forgery under subsection (1)(c) of former KRS 355.3-419 , even if the agent turns out to have been legally unauthorized, where apparent authority existed by virtue of a recorded power of attorney. (decided under prior law) Parton v. Robinson, 574 S.W.2d 679, 1978 Ky. App. LEXIS 628 (Ky. Ct. App. 1978).

2.— Suit for Payment on.

It is necessary for physical delivery of a check to the payee before it would have the capacity to sue a collecting bank for payment on a forged indorsement. (decided under prior law) Winn v. First Bank of Irvington, 581 S.W.2d 21, 1978 Ky. App. LEXIS 677 (Ky. Ct. App. 1978).

3.Negligent Payment on Instrument.

While the Uniform Commercial Code as adopted in Kentucky does not expressly state that a collecting or payor bank is liable for negligently paying on an instrument, subsection (3) of former KRS 355.3-419 , KRS 355.1-103 , and former KRS 355.3-406 and 355.4-103 (1) indirectly indicate that this is so. (decided under prior law) Bullitt County Bank v. Publishers Printing Co., 684 S.W.2d 289, 1984 Ky. App. LEXIS 568 (Ky. Ct. App. 1984).

4.Payment to One Not Specified.

Where a check is drawn to the order of a bank to which the drawer is not indebted, the bank is authorized to pay the proceeds only to persons specified by the drawer; it takes the risk in treating such a check as payable to bearer and is placed on inquiry as to the authority of the drawer’s agent to receive payment. (decided under prior law) Bullitt County Bank v. Publishers Printing Co., 684 S.W.2d 289, 1984 Ky. App. LEXIS 568 (Ky. Ct. App. 1984).

5.Payment Without Required Indorsement.

Bank’s negotiation of an insurer’s reimbursement check that named a mobile home owner and a holder of a security interest in the mobile home as non-alternative co-payees, despite receiving the check with only the owner’s indorsement, was a violation of KRS 355.3-110 (4) and entitled the security interest holder to summary judgment on an action sounding in conversion under KRS 355.3-420 . Tri-County Nat'l Bank v. Greenpoint Credit, LLC, 190 S.W.3d 360, 2006 Ky. App. LEXIS 104 (Ky. Ct. App. 2006).

Secured creditor was entitled to partial summary judgment on its claim against defendant bank as the secured creditor clearly had a cause of action for conversion under Ky. Rev. Stat. Ann. § 355.3-420 due to the bank’s wrongful action in negotiating checks made out to the creditor and debtor, but paying the proceeds solely to debtor. Nutrien AG Sols., Inc. v. Duvall (In re Duvall), 2021 Bankr. LEXIS 1779 (Bankr. W.D. Ky. July 1, 2021).

6.Liability.

A bank pursuant to KRS 355.3-420 could not maintain a claim for conversion of an instrument against its auditors. Pursuant to that statute, the bank was liable for the conversion losses that allegedly occurred since it was the bank that allowed the developer, the bank’s largest loan customer, to cash checks not payable to him. Peoples Bank of N. Ky., Inc. v. Crowe Chizek & Co. LLC, 277 S.W.3d 255, 2008 Ky. App. LEXIS 176 (Ky. Ct. App. 2008).

When a bank was found liable for depositing a forged check, the bank’s negligence claim under KRS 355.3-406 (1) was not considered because the bank (1) did not properly present the issue to the trial court in pleadings and (2) did not seek such a finding pursuant to CR 52.02, so CR 52.04 barred reversal or remand on that issue. Am. Founders Bank, Inc. v. Moden Invs., LLC, 432 S.W.3d 715, 2014 Ky. App. LEXIS 73 (Ky. Ct. App. 2014).

When a bank was found liable for depositing a forged check, the bank was not entitled to a set-off based on a third party’s alleged agreement to pay funds because letters allegedly evidencing receipt of the funds were not judicial admissions, since they were not formal statements made during a judicial proceeding. Am. Founders Bank, Inc. v. Moden Invs., LLC, 432 S.W.3d 715, 2014 Ky. App. LEXIS 73 (Ky. Ct. App. 2014).

When a bank was found liable for depositing a forged check, the bank was not entitled to a set-off based on a third party's allegedly evidencing receipt of the funds were not formal statements made during a judicial admission, since they were not formal statements made during a judicial proceeding. Am. Founders Bank, Inc. v. Moden Invs., LLC, 432 S.W.3d 715, 2014 Ky. App. LEXIS 73 (Ky. Ct. App. 2014).

Bank was not liable to prisoners for conversion because it did not make payment with respect to an instrument for a person not entitled to enforce the instrument; a county jail became a nonholder in possession of the instrument and had the rights of a holder when it lawfully confiscated prisoners' checks, and thus, the jail was entitled to enforce the confiscated checks. Cole v. Warren Cnty., 495 S.W.3d 712, 2015 Ky. App. LEXIS 157 (Ky. Ct. App. 2015).

Part 5. Dishonor

355.3-501. Presentment.

  1. “Presentment” means a demand made by or on behalf of a person entitled to enforce an instrument:
    1. To pay the instrument made to the drawee or a party obliged to pay the instrument or, in the case of a note or accepted draft payable at a bank, to the bank; or
    2. To accept a draft made to the drawee.
  2. The following rules are subject to Article 4 of this chapter, agreement of the parties, and clearing-house rules and the like:
    1. Presentment may be made at the place of payment of the instrument and must be made at the place of payment if the instrument is payable at a bank in the United States; may be made by any commercially reasonable means, including an oral, written, or electronic communication; is effective when the demand for payment or acceptance is received by the person to whom presentment is made; and is effective if made to any one of two (2) or more makers, acceptors, drawees, or other payors.
    2. Upon demand of the person to whom presentment is made, the person making presentment must:
      1. Exhibit the instrument;
      2. Give reasonable identification and, if presentment is made on behalf of another person, reasonable evidence of authority to do so; and
      3. Sign a receipt on the instrument for any payment made or surrender the instrument if full payment is made.
    3. Without dishonoring the instrument, the party to whom presentment is made may:
      1. Return the instrument for lack of a necessary indorsement; or
      2. Refuse payment or acceptance for failure of the presentment to comply with the terms of the instrument, an agreement of the parties, or other applicable law or rule.
    4. The party to whom presentment is made may treat presentment as occurring on the next business day after the day of presentment if the party to whom presentment is made has established a cutoff hour not earlier than 2 p.m. for the receipt and processing of instruments presented for payment or acceptance and presentment is made after the cutoff hour.

History. Enact. Acts 1958, ch. 77, § 3-501, effective July 1, 1960; 1986, ch. 118, § 6, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 59, effective January 1, 1997.

Official Comment

Subsection (a) defines presentment. Subsection (b)(1) states the place and manner of presentment. Electronic presentment is authorized. The communication of the demand for payment or acceptance is effective when received. Subsection (b)(2) restates former Section 3-505. Subsection (b)(2)(i) allows the person to whom presentment is made to require exhibition of the instrument, unless the parties have agreed otherwise as in an electronic presentment agreement. Former Section 3-507(3) is the antecedent of subsection (b)(3)(i). Since a payor must decide whether to pay or accept on the day of presentment, subsection (b)(4) allows the payor to set a cut-off hour for receipt of instruments presented.

NOTES TO DECISIONS

1.Presentment for Payment.

Where note was payable at a bank, failure to present it for payment there released the indorser. Dean v. Reed, 204 Ky. 275 , 263 S.W. 714, 1924 Ky. LEXIS 412 ( Ky. 1924 ) (decided under prior law).

As a creditor’s depositing of a Chapter 7 debtor’s prepetition checks (which were returned marked “account closed”), without more, was not harassment, but was a “presentment” of “negotiable instruments” under KRS 355.3-104 and 355.3-501 , its acts fell within the exception to the automatic stay set forth in 11 USCS § 362(b)(11). In re Noffsinger, 316 B.R. 283, 2004 Bankr. LEXIS 1700 (Bankr. W.D. Ky. 2004 ).

Where corporate directors signed a series of notes variously as indorsers and makers to raise money for the corporation and, upon its bankruptcy, the payee allowed renewal notes to be made to give them time to raise the necessary money to pay off, such renewal notes were made for the accommodation of all parties to it so that one of the directors who appeared as indorsee could not claim that he was entitled to presentment for payment. Greenwade v. First Nat'l Bank, 240 Ky. 60 , 41 S.W.2d 369, 1931 Ky. LEXIS 341 ( Ky. 1931 ) (decided under prior law).

Payee had duty to present for payment, even though indorser signed after maturity. Moriarty v. Howard, 258 Ky. 629 , 80 S.W.2d 526, 1935 Ky. LEXIS 178 ( Ky. 1935 ) (decided under prior law).

When a seller under a contract for the sale of cattle accepted a check in payment, he had, at that moment, no claim against the buyer on the check itself since the buyer was a “secondary party” and was not liable until the check was presented for payment and notice of dishonor given. Blake v. Woodford Bank & Trust Co., 555 S.W.2d 589, 1977 Ky. App. LEXIS 790 (Ky. Ct. App. 1977) (decided under prior law).

2.Notice of Dishonor.

Officer of bank who signed paper executed to bank was entitled to notice of dishonor. First Nat'l Bank v. Bickel, 154 Ky. 11 , 156 S.W. 856, 1913 Ky. LEXIS 2 ( Ky. 1913 ) (decided under prior law).

An indorser was entitled to notice of dishonor of all of a series of notes treated as due under an acceleration clause and suit was not notice of dishonor. Farmers' Bank & Trust Co. v. Dent, 206 Ky. 405 , 267 S.W. 202, 1924 Ky. LEXIS 352 ( Ky. 1924 ) (decided under prior law).

It was not necessary that notice of dishonor be given to a drawer where he had countermanded payment. Hazard Bank & Trust Co. v. Morgan, 211 Ky. 134 , 277 S.W. 307, 1925 Ky. LEXIS 828 ( Ky. 1925 ) (decided under prior law).

Guaranty agreement providing “if the above note is not paid by the makers and indorsers, I bind myself to retire it in full, together with all interest which may be due thereon,” and stating that agreement covered renewals in full or in part, was absolute and not conditional, and it was not necessary to give notice to guarantor when note or renewals became due, or to first proceed against makers and indorsers, nor was liability of guarantor discharged by renewal without his consent. Taylor v. Payne, 276 Ky. 79 , 122 S.W.2d 964, 1938 Ky. LEXIS 515 ( Ky. 1938 ) (decided under prior law).

Where a note was payable at a bank, formal presentment was not necessary but notice of dishonor was required. Lyons v. Hager's Adm'r, 278 Ky. 99 , 128 S.W.2d 196, 1939 Ky. LEXIS 378 ( Ky. 1939 ) (decided under prior law).

3.— Accommodation Maker.

Where an accommodating party was made payee and indorsed the note, he had to be given notice of dishonor or else was discharged. Mechanics' & Farmers' Sav. Bank v. Katterjohn, 137 Ky. 427 , 125 S.W. 1071, 1910 Ky. LEXIS 586 ( Ky. 1910 ) (decided under prior law).

Notice of dishonor need not be given an accommodation maker. First State Bank v. Williams, 164 Ky. 143 , 175 S.W. 10, 1915 Ky. LEXIS 337 ( Ky. 1915 ) (decided under prior law).

An accommodation maker was discharged by failure to give notice of dishonor. Hay v. Roberts, 196 Ky. 831 , 245 S.W. 881, 1922 Ky. LEXIS 601 ( Ky. 1922 ) (decided under prior law).

4.— Indorser.

Where one became payee of note and indorsed it to enable maker to negotiate and obtain credit on it, such party was an accommodating indorser and entitled to notice. Mechanics' & Farmers' Sav. Bank v. Katterjohn, 137 Ky. 427 , 125 S.W. 1071, 1910 Ky. LEXIS 586 ( Ky. 1910 ) (decided under prior law).

Where one indorser had been given notice, it was his duty to give notice to such others as he might wish to hold liable and not the duty of the holder. Williams v. Paintsville Nat'l Bank, 143 Ky. 781 , 137 S.W. 535, 1911 Ky. LEXIS 516 ( Ky. 1911 ) (decided under prior law).

That indorser sought to be held liable was vice-president of holder bank did not dispense with necessity of giving him notice of dishonor. First Nat'l Bank v. Bickel, 154 Ky. 11 , 156 S.W. 856, 1913 Ky. LEXIS 2 ( Ky. 1913 ) (decided under prior law).

Every indorser must be given notice of dishonor. Baker v. Valentine, 216 Ky. 801 , 288 S.W. 771, 1926 Ky. LEXIS 1026 ( Ky. 1926 ) (decided under prior law).

An indorser was discharged for failure to give him notice of dishonor. Conn v. Atkinson, 227 Ky. 594 , 13 S.W.2d 759, 1929 Ky. LEXIS 920 ( Ky. 1929 ) (decided under prior law).

Insolvency of maker alone, even if known to indorser, did not excuse presentment for payment and indorser was discharged from liability by failure of holder to give notice of dishonor. Liberty Bank & Trust Co. v. Hand, 269 Ky. 342 , 107 S.W.2d 285, 1937 Ky. LEXIS 612 ( Ky. 1937 ) (decided under prior law).

5.Protest.

Notice of protest made out and mailed by a notary, properly stamped and addressed, was sufficient. Greenwade v. First Nat'l Bank, 240 Ky. 60 , 41 S.W.2d 369, 1931 Ky. LEXIS 341 ( Ky. 1931 ) (decided under prior law).

Notice of protest deposited in the mails on the date of maturity was sufficient. Greenwade v. First Nat'l Bank, 240 Ky. 60 , 41 S.W.2d 369, 1931 Ky. LEXIS 341 ( Ky. 1931 ) (decided under prior law).

6.Contribution Among Sureties.

Where one surety who had paid a note sued another for contribution, it was no defense that demand was never made on second. Fritts v. Kirchdorfer, 136 Ky. 643 , 124 S.W. 882, 1910 Ky. LEXIS 525 ( Ky. 1910 ) (decided under prior law).

7.Pleadings.

Petition had to show precise day on which demand was made in order to show that it was a day on which defendant was chargeable. Hoyland v. National Bank of Middlesborough, 137 Ky. 682 , 126 S.W. 356, 1910 Ky. LEXIS 612 ( Ky. 1910 ) (decided under prior law).

Presentment, or facts excusing, had to be alleged. Hoyland v. National Bank of Middlesborough, 137 Ky. 682 , 126 S.W. 356, 1910 Ky. LEXIS 612 ( Ky. 1910 ) (decided under prior law).

Alleging facts showing presentment was sufficient, although presentment was not specifically alleged. Doherty v. First Nat'l Bank, 170 Ky. 810 , 186 S.W. 937, 1916 Ky. LEXIS 142 ( Ky. 1916 ) (decided under prior law).

Where it was sought to hold indorser liable, the petition had to not only allege that notice of dishonor was given but that it was given within the legally prescribed time. Powers v. Hardesty, 250 Ky. 522 , 63 S.W.2d 616, 1933 Ky. LEXIS 736 ( Ky. 1933 ). See Preece v. Burns' Adm'r, 258 Ky. 839 , 81 S.W.2d 881, 1935 Ky. LEXIS 250 ( Ky. 1935 ) (decided under prior law).

In action against indorsers, petition had to allege notice of dishonor waiver or nonrequirement or the petition was fatally defective. Preece v. Burns' Adm'r, 258 Ky. 839 , 81 S.W.2d 881, 1935 Ky. LEXIS 250 ( Ky. 1935 ) (decided under prior law).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Failing, at Time and Place Agreed on, to Deliver Goods to be Paid for on Delivery, Form 190.07.

Caldwell’s Kentucky Form Book, 5th Ed., Complaint of Payee Against Drawer on Drawee Bank’s Refusal to Make Payment, Form 190.04.

355.3-502. Dishonor.

  1. Dishonor of a note is governed by the following rules:
    1. If the note is payable on demand, the note is dishonored if presentment is duly made to the maker and the note is not paid on the day of presentment.
    2. If the note is not payable on demand and is payable at or through a bank or the terms of the note require presentment, the note is dishonored if presentment is duly made and the note is not paid on the day it becomes payable or the day of presentment, whichever is later.
    3. If the note is not payable on demand and paragraph (b) of this subsection does not apply, the note is dishonored if it is not paid on the day it becomes payable.
  2. Dishonor of an unaccepted draft other than a documentary draft is governed by the following rules:
    1. If a check is duly presented for payment to the payor bank otherwise than for immediate payment over the counter, the check is dishonored if the payor bank makes timely return of the check or sends timely notice of dishonor or nonpayment under KRS 355.4-301 or 355.4-302 , or becomes accountable for the amount of the check under KRS 355.4-302 .
    2. If a draft is payable on demand and paragraph (a) of this subsection does not apply, the draft is dishonored if presentment for payment is duly made to the drawee and the draft is not paid on the day of presentment.
    3. If a draft is payable on a date stated in the draft, the draft is dishonored if:
      1. Presentment for payment is duly made to the drawee and payment is not made on the day the draft becomes payable or the day of presentment, whichever is later; or
      2. Presentment for acceptance is duly made before the day the draft becomes payable and the draft is not accepted on the day of presentment.
    4. If a draft is payable on elapse of a period of time after sight or acceptance, the draft is dishonored if presentment for acceptance is duly made and the draft is not accepted on the day of presentment.
  3. Dishonor of an unaccepted documentary draft occurs according to the rules stated in subsections (2)(b), (c), and (d) of this section, except that payment or acceptance may be delayed without dishonor until no later than the close of the third business day of the drawee following the day on which payment or acceptance is required by those paragraphs.
  4. Dishonor of an accepted draft is governed by the following rules:
    1. If the draft is payable on demand, the draft is dishonored if presentment for payment is duly made to the acceptor and the draft is not paid on the day of presentment.
    2. If the draft is not payable on demand, the draft is dishonored if presentment for payment is duly made to the acceptor and payment is not made on the day it becomes payable or the day of presentment, whichever is later.
  5. In any case in which presentment is otherwise required for dishonor under this section and presentment is excused under KRS 355.3-504 , dishonor occurs without presentment if the instrument is not duly accepted or paid.
  6. If a draft is dishonored because timely acceptance of the draft was not made and the person entitled to demand acceptance consents to a late acceptance, from the time of acceptance the draft is treated as never having been dishonored.

History. Enact. Acts 1958, ch. 77, § 3-502, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 60, effective January 1, 1997.

Official Comment

  1. Section 3-415 provides that an indorser is obliged to pay an instrument if the instrument is dishonored and is discharged if the indorser is entitled to notice of dishonor and notice is not given. Under Section 3-414, the drawer is obliged to pay an unaccepted draft if it is dishonored. The drawer, however, is not entitled to notice of dishonor except to the extent required in a case governed by Section 3-414(d). Part 5 tells when an instrument is dishonored (Section 3-502) and what it means to give notice of dishonor (Section 3-503). Often dishonor does not occur until presentment (Section 3-501), and frequently presentment and notice of dishonor are excused (Section 3-504).
  2. In the great majority of cases presentment and notice of dishonor are waived with respect to notes. In most cases a formal demand for payment to the maker of the note is not contemplated. Rather, the maker is expected to send payment to the holder of the note on the date or dates on which payment is due. If payment is not made when due, the holder usually makes a demand for payment, but in the normal case in which presentment is waived, demand is irrelevant and the holder can proceed against indorsers when payment is not received. Under former Article 3, in the small minority of cases in which presentment and dishonor were not waived with respect to notes, the indorser was discharged from liability (former Section 3-502(1)(a)) unless the holder made presentment to the maker on the exact day the note was due (former Section 3-503(1)(c)) and gave notice of dishonor to the indorser before midnight of the third business day after dishonor (former Section 3-508(2)). These provisions are omitted from Revised Article 3 as inconsistent with practice which seldom involves face-to-face dealings.
  3. Subsection (a) applies to notes. Subsection (a)(1) applies to notes payable on demand. Dishonor requires presentment, and dishonor occurs if payment is not made on the day of presentment. There is no change from previous Article 3. Subsection (a)(ii) applies to notes payable at a definite time if the note is payable at or through a bank or, by its terms, presentment is required. Dishonor requires presentment, and dishonor occurs if payment is not made on the due date or the day of presentment if presentment is made after the due date. Subsection (a)(iii) applies to all other notes. If the note is not paid on its due date it is dishonored. This allows holders to collect notes in ways that make sense commercially without having to be concerned about a formal presentment on a given day.
  4. Subsection (b) applies to unaccepted drafts other than documentary drafts. Subsection (b)(1) applies to checks. Except for checks presented for immediate payment over the counter, which are covered by subsection (b)(2), dishonor occurs according to rules stated in Article 4. Those rules contemplate four separate situations that warrant discussion. The first two situations arise in the normal course of affairs, in which the drawee bank makes settlement for the amount of the check to the presenting bank. In the first situation, the drawee bank under Section 4-301 recovers this settlement if it returns the check by its midnight deadline (Section 4-104). In that case the check is not paid and dishonor occurs under Section 3-502(b)(1). The second situation arises if the drawee bank has made such a settlement and does not return the check or give notice of dishonor or nonpayment within the midnight deadline. In that case, the settlement becomes final payment of the check under Section 4-215. Because the drawee bank already has paid such an item, it cannot be “accountable” for the item under the terms of Section 4-302(a)(1). Thus, no dishonor occurs regardless of whether the drawee bank retains the check indefinitely or for some reason returns the check after its midnight deadline.

    The third and fourth situations arise less commonly, in cases in which the drawee bank does not settle for the check when it is received. Under Section 4-302 if the drawee bank is not also the depositary bank and retains the check without settling for it beyond midnight of the day it is presented for payment, the bank at that point becomes “accountable” for the amount of the check, i.e., it is obliged to pay the amount of the check. If the drawee bank is also the depositary bank, the bank becomes accountable for the amount of the check if the bank does not pay the check or return it or send notice of dishonor by its midnight deadline. Hence, if the drawee bank is also the depositary bank and does not either settle for the check when it is received (a settlement that would ripen into final payment if the drawee bank failed to take action to recover the settlement by its midnight deadline) or return the check or an appropriate notice by its midnight deadline, the drawee bank will become accountable for the amount of the check under Section 4-302. Thus, in all cases in which the drawee bank becomes accountable under Section 4-302, the check has not been paid (either by a settlement that became unrecoverable or otherwise) and thus, under Section 3-502(b)(1), the check is dishonored.

    The fact that a bank that is accountable for the amount of the check under Section 4-302 is obliged to pay the check does not mean that the check has been paid. Indeed, because each of the paragraphs of Section 4-302(b) is limited by its terms to situations in which a bank has not paid the item, a drawee bank will be accountable under Section 4-302 only in situations in which it has not previously paid the check. Section 3-502(b)(1) reflects the view that a person presenting a check is entitled to payment, not just the ability to hold the drawee accountable under Section 4-302. If that payment is not made in a timely manner, the check is dishonored.

    Regulation CC Section 229.36(d) provides that settlement between banks for the forward collection of checks is final. The relationship of that section to Articles 3 and 4 is discussed in the Commentary to that section.ment that became unrecoverable or otherwise) and thus, under Section 3-502(b)(1), the check is dishonored.

    Subsection (b)(2) applies to demand drafts other than those governed by subsection (b)(1). It covers checks presented for immediate payment over the counter and demand drafts other than checks. Dishonor occurs if presentment for payment is made and payment is not made on the day of presentment.

    Subsection (b)(3) and (4) applies to time drafts. An unaccepted time draft differs from a time note. The maker of a note knows that the note has been issued, but the drawee of a draft may not know that a draft has been drawn on it. Thus, with respect to drafts, presentment for payment or acceptance is required. Subsection (b)(3) applies to drafts payable on a date stated in the draft. Dishonor occurs if presentment for payment is made and payment is not made on the day the draft becomes payable or the day of presentment if presentment is made after the due date. The holder of an unaccepted draft payable on a stated date has the option of presenting the draft for acceptance before the day the draft becomes payable to establish whether the drawee is willing to assume liability by accepting. Under subsection (b)(3)(ii) dishonor occurs when the draft is presented and not accepted. Subsection (b)(4) applies to unaccepted drafts payable on elapse of a period of time after sight or acceptance. If the draft is payable 30 days after sight, the draft must be presented for acceptance to start the running of the 30-day period. Dishonor occurs if it is not accepted. The rules in subsection (b)(3) and (4) follow former Section 3-501(1)(a).

  5. Subsection (c) gives drawees an extended period to pay documentary drafts because of the time that may be needed to examine the documents. The period prescribed is that given by Section 5-112 in cases in which a letter of credit is involved.
  6. Subsection (d) governs accepted drafts. If the acceptor’s obligation is to pay on demand the rule, stated in subsection (d)(1), is the same as for that of a demand note stated in subsection (a)(1). If the acceptor’s obligation is to pay at a definite time the rule, stated in subsection (d)(2), is the same as that of a time note payable at a bank stated in subsection (b)(2).
  7. Subsection (e) is a limitation on subsection (a)(1) and (2), subsection (b), subsection (c), and subsection (d). Each of those provisions states dishonor as occurring after presentment. If presentment is excused under Section 3-504, dishonor occurs under those provisions without presentment if the instrument is not duly accepted or paid.
  8. Under subsection (b)(3)(ii) and (4) if a draft is presented for acceptance and the draft is not accepted on the day of presentment, there is dishonor. But after dishonor, the holder may consent to late acceptance. In that case, under subsection (f), the late acceptance cures the dishonor. The draft is treated as never having been dishonored. If the draft is subsequently presented for payment and payment is refused dishonor occurs at that time.

355.3-503. Notice of dishonor.

  1. The obligation of an indorser stated in KRS 355.3-415 (1) and the obligation of a drawer stated in KRS 355.3-414 (4) may not be enforced unless:
    1. The indorser or drawer is given notice of dishonor of the instrument complying with this section; or
    2. Notice of dishonor is excused under KRS 355.3-504 (2).
  2. Notice of dishonor may be given by any person; may be given by any commercially reasonable means, including an oral, written, or electronic communication; and is sufficient if it reasonably identifies the instrument and indicates that the instrument has been dishonored or has not been paid or accepted. Return of an instrument given to a bank for collection is sufficient notice of dishonor.
  3. Subject to KRS 355.3-504 (3), with respect to an instrument taken for collection by a collecting bank, notice of dishonor must be given:
    1. By the bank before midnight of the next banking day following the banking day on which the bank receives notice of dishonor of the instrument; or
    2. By any other person within thirty (30) days following the day on which the person receives notice of dishonor.

With respect to any other instrument, notice of dishonor must be given within thirty (30) days following the day on which dishonor occurs.

History. Enact. Acts 1958, ch. 77, § 3-503, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 61, effective January 1, 1997.

Official Comment

  1. Subsection (a) is consistent with former Section 3-501(2)(a), but notice of dishonor is no longer relevant to the liability of a drawer except for the case of a draft accepted by an acceptor other than a bank. Comments 2 and 4 to Section 3-414. There is no reason why drawers should be discharged on instruments they draw until payment or acceptance. They are entitled to have the instrument presented to the drawee and dishonored (Section 3-414(b)) before they are liable to pay, but no notice of dishonor need be made to them as a condition of liability. Subsection (b), which states how notice of dishonor is given, is based on former Section 3-508(3).
  2. Subsection (c) replaces former Section 3-508(2). It differs from that section in that it provides a 30-day period for a person other than a collecting bank to give notice of dishonor rather than the three-day period allowed in former Article 3. Delay in giving notice of dishonor may be excused under Section 3-504(c).

355.3-504. Excused presentment and notice of dishonor.

  1. Presentment for payment or acceptance of an instrument is excused if:
    1. The person entitled to present the instrument cannot with reasonable diligence make presentment;
    2. The maker or acceptor has repudiated an obligation to pay the instrument or is dead or in insolvency proceedings;
    3. By the terms of the instrument presentment is not necessary to enforce the obligation of indorsers or the drawer;
    4. The drawer or indorser whose obligation is being enforced has waived presentment or otherwise has no reason to expect or right to require that the instrument be paid or accepted; or
    5. The drawer instructed the drawee not to pay or accept the draft or the drawee was not obligated to the drawer to pay the draft.
  2. Notice of dishonor is excused if:
    1. By the terms of the instrument notice of dishonor is not necessary to enforce the obligation of a party to pay the instrument; or
    2. The party whose obligation is being enforced waived notice of dishonor.

      A waiver of presentment is also a waiver of notice of dishonor.

  3. Delay in giving notice of dishonor is excused if the delay was caused by circumstances beyond the control of the person giving the notice and the person giving the notice exercised reasonable diligence after the cause of the delay ceased to operate.

History. Enact. Acts 1958, ch. 77, § 3-504, effective July 1, 1960; 1964, ch. 130, § 6, effective July 1, 1964; repealed and reenact., Acts 1996, ch. 130, § 62, effective January 1, 1997.

Official Comment

Section 3-504 is largely a restatement of former Section 3-511. Subsection (4) of former Section 3-511 is replaced by Section 3-502(f).

NOTES TO DECISIONS

1.In General.

Fact that bank had previously accepted a promisor’s late payments on a loan did not constitute a waiver of its right to accelerate the loan when the promisor again defaulted on a payment, and in any event, under former KRS 355.1-205 (4) (now KRS 355.1-303 ), if the course of dealing between the parties and the express terms of their agreement could not reasonably be construed as consistent with each other, the express terms of the agreement controlled. Catron v. Citizens Union Bank, 229 S.W.3d 54, 2006 Ky. App. LEXIS 273 (Ky. Ct. App. 2006).

355.3-505. Evidence of dishonor.

  1. The following are admissible as evidence and create a presumption of dishonor and of any notice of dishonor stated:
    1. A document regular in form as provided in subsection (2) of this section which purports to be a protest;
    2. A purported stamp or writing of the drawee, payor bank, or presenting bank on or accompanying the instrument stating that acceptance or payment has been refused unless reasons for the refusal are stated and the reasons are not consistent with dishonor;
    3. A book or record of the drawee, payor bank, or collecting bank, kept in the usual course of business which shows dishonor, even if there is no evidence of who made the entry.
  2. A protest is a certificate of dishonor made by a United States consul or vice consul, or a notary public or other person authorized to administer oaths by the law of the place where dishonor occurs. It may be made upon information satisfactory to that person. The protest must identify the instrument and certify either that presentment has been made or, if not made, the reason why it was not made, and that the instrument has been dishonored by nonacceptance or nonpayment. The protest may also certify that notice of dishonor has been given to some or all parties.

History. Enact. Acts 1958, ch. 77, § 3-505, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 63, effective January 1, 1997.

Official Comment

Protest is no longer mandatory and must be requested by the holder. Even if requested, protest is not a condition to the liability of indorsers or drawers. Protest is a service provided by the banking system to establish that dishonor has occurred. Like other services provided by the banking system, it will be available if market incentives, interbank agreements, or governmental regulations require it, but liabilities of parties no longer rest on it. Protest may be a requirement for liability on international drafts governed by foreign law which this Article cannot affect.

355.3-506. Time allowed for acceptance or payment. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 3-506, effective July 1, 1960) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.3-507. Dishonor — Holder’s rights of recourse — Term allowing representment. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 3-507, effective July 1, 1960) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.3-508. Notice of dishonor. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 3-508, effective July 1, 1960) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.3-509. Protest — Noting for protest. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 3-509, effective July 1, 1960) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.3-510. Evidence of dishonor and notice of dishonor. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 3-510, effective July 1, 1960) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.3-511. Waived or excused presentment, protest or notice of dishonor or delay therein. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 3-511, effective July 1, 1960) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

Part 6. Discharge and Payment

355.3-601. Discharge and effect of dishonor.

  1. The obligation of a party to pay the instrument is discharged as stated in this article or by an act or agreement with the party which would discharge an obligation to pay money under a simple contract.
  2. Discharge of the obligation of a party is not effective against a person acquiring rights of a holder in due course of the instrument without notice of the discharge.

History. Enact. Acts 1958, ch. 77, § 3-601, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 64, effective January 1, 1997.

Official Comment

Subsection (a) replaces subsections (1) and (2) of former Section 3-601. Subsection (b) restates former Section 3-602. Notice of discharge is not treated as notice of a defense that prevents holder in due course status. Section 3-302(b). Discharge is effective against a holder in due course only if the holder had notice of the discharge when holder in due course status was acquired. For example, if an instrument bearing a canceled indorsement is taken by a holder, the holder has notice that the indorser has been discharged. Thus, the discharge is effective against the holder even if the holder is a holder in due course.

NOTES TO DECISIONS

1.Payment.

Where customer of forwarding bank drew bill of exchange, payable to order of that bank, bank forwarded it with bill of lading attached and drawee of bill of lading paid drawee of bill of exchange, collecting bank was not liable to forwarding bank. (decided under prior law) Commercial Nat'l Bank v. First Nat'l Bank, 158 Ky. 392 , 165 S.W. 398, 1914 Ky. LEXIS 621 ( Ky. 1914 ).

Where, on employing an attorney, client paid fee in advance upon condition that attorney give note which was to be canceled at termination of litigation, the subsequent rendering of such services was payment of the note. (decided under prior law) Bennett v. Miller, 159 Ky. 105 , 166 S.W. 805, 1914 Ky. LEXIS 757 ( Ky. 1914 ).

Where a note sued on had been marked “paid,” the burden was on the plaintiff to prove that this mark was an error and in reality the obligation was still owing. This presumption took precedence over the one that a note still in the hands of the obligee was unpaid. (decided under prior law) Young v. Bank of Sweetwater, 187 Ky. 71 , 218 S.W. 463, 1920 Ky. LEXIS 82 ( Ky. 1920 ).

Where X, cashier of a bank, was made payee of notes signed by Y to be used by X to hire an attorney, the notes were not paid by an agreement that X as cashier would give Y credit to the amount of the note on an obligation of Y to the bank, as Y would have notice of X’s inability to use bank funds to pay his own debt. (decided under prior law) Grooms v. National Bank of Kentucky, 218 Ky. 846 , 292 S.W. 513, 1927 Ky. LEXIS 269 ( Ky. 1927 ).

Delivery of check was not payment until such check was paid by the drawee bank, in the absence of an agreement to the contrary. (decided under prior law) Marshall's Adm'r v. Corinth Bank & Trust Co., 226 Ky. 361 , 10 S.W.2d 1076, 1928 Ky. LEXIS 81 ( Ky. 1928 ).

Where draft, drawn by drawer on itself, bore notation that it could “be collected through” certain listed banks where drawer had accounts, payment by any such bank was final discharge. (decided under prior law) First Nat'l Bank & Trust Co. v. First Nat'l Bank, 260 Ky. 581 , 86 S.W.2d 325, 1935 Ky. LEXIS 525 ( Ky. 1935 ).

Where, at time of suit, note was in hands of maker, it was presumed to have been paid. (decided under prior law) Davis v. Carico, 267 Ky. 334 , 102 S.W.2d 8, 1937 Ky. LEXIS 308 ( Ky. 1937 ).

Credits indorsed on note by payee were admissions against interest and were prima facie evidence of payment to that extent. (decided under prior law) Pritchard v. Wilford, 270 Ky. 455 , 109 S.W.2d 1184, 1937 Ky. LEXIS 95 ( Ky. 1937 ).

Where action of both parties had been tainted with illegality, such parties should have been left in a dilemma which they themselves had devised. In an action on notes, where defendant pleaded the notes had been marked paid and delivered to him for the valuable consideration of taking the sole blame for violations of the office of price administration regulations, there could be no recovery. (decided under prior law) Miller v. Miller, 296 S.W.2d 684, 1956 Ky. LEXIS 214 ( Ky. 1956 ).

2.— Time Extension.

An invalid agreement by creditor to extend time without surety’s consent did not discharge such surety. (decided under prior law) Corydon Deposit Bank v. McClure, 140 Ky. 149 , 130 S.W. 971, 1910 Ky. LEXIS 184 ( Ky. 1910 ).

Accommodation joint maker was primarily liable and hence not released when creditor extended time of payment without his consent. (decided under prior law) First State Bank v. Williams, 164 Ky. 143 , 175 S.W. 10, 1915 Ky. LEXIS 337 ( Ky. 1915 ).

Party who consented to extension was not prejudiced thereby and, hence, not discharged. (decided under prior law) Wagers v. Black, 212 Ky. 361 , 279 S.W. 342, 1926 Ky. LEXIS 145 ( Ky. 1926 ).

Merely taking notes to cover accrued interest was not a binding agreement to extend time of payment. (decided under prior law) Stokes v. Framers' & Merchants' Bank, 241 Ky. 699 , 44 S.W.2d 837, 1931 Ky. LEXIS 151 ( Ky. 1931 ).

3.— Pro Rata Agreement.

Where a corporate principal became insolvent and entered into an arrangement with its creditors, including the payee of a note, whereby the creditor accepted a pro rata share of the proceeds from liquidation of bankrupt estate and discharged such payee, the accommodation makers on such note were not discharged from liability thereby, at least where a fair amount was raised from the assets and makers were not prejudiced. (decided under prior law) Howard v. Southern Nat'l Bank, 204 Ky. 71 , 263 S.W. 719, 1924 Ky. LEXIS 416 ( Ky. 1924 ).

4.— Discount.

Where payee and maker of note agreed that former would discount and sell note to latter at a certain price on a certain day, such agreement was valid and payee could recover only discounted price agreed on when maker had tendered such amount on specified day. (decided under prior law) Bell v. Pitman, 143 Ky. 521 , 136 S.W. 1026, 1911 Ky. LEXIS 463 ( Ky. 1911 ).

5.— Sale of Security.

Two notes, which carried a lien on the land, were given in payment for land and payee indorsed them to X. X failed to present the first one and payee-indorser was discharged. When payee paid second, he became owner so that he shared pro rata with X in proceeds from sale of the land under the lien. (decided under prior law) Dean v. Reed, 204 Ky. 275 , 263 S.W. 714, 1924 Ky. LEXIS 412 ( Ky. 1924 ).

Where Y went surety on one of series of notes and holder did nothing to release Y, Y could share in proceeds from sale of land under the lien only after holder had been fully satisfied. (decided under prior law) Cargile v. Briscoe, 205 Ky. 394 , 265 S.W. 929, 1924 Ky. LEXIS 124 ( Ky. 1924 ).

6.— Insufficient Funds.

Where indorsee surrendered note to maker at maturity and took check, which was dishonored at presentment, the payee was not discharged, there being no agreement but only an indulgence. (decided under prior law) Fannon v. Ball, 202 Ky. 222 , 259 S.W. 73, 1924 Ky. LEXIS 689 ( Ky. 1924 ).

7.Receipt by Joint Obligee.

Any joint obligee had a right to collect a note, and receipt by him was a complete discharge of the obligor. (decided under prior law) Ethington v. Rigg, 173 Ky. 355 , 191 S.W. 98, 1917 Ky. LEXIS 463 ( Ky. 1917 ).

8.Release.

Where a prior party (a surety) was released because she was a married woman within law providing that no part of the estate of a married woman should be subject to payment or satisfaction for the debt or default of another, subsequent parties, secondarily liable, were not discharged. The release of prior parties contemplated had to be by the voluntary act of the creditor and not by operation of law. (decided under prior law) Howard v. First Nat'l Bank, 270 Ky. 586 , 110 S.W.2d 293, 1937 Ky. LEXIS 124 ( Ky. 1937 ).

9.— Joint Indorsees.

Only such joint indorsees as received notice were held in a suit to collect on the instrument, but the release thereby of the others did not release those to whom notice was given. (decided under prior law) Williams v. Paintsville Nat'l Bank, 143 Ky. 781 , 137 S.W. 535, 1911 Ky. LEXIS 516 ( Ky. 1911 ).

10.Acceptance of Stranger as Payer.

Acceptance of a stranger to a note as payer was sufficient consideration to release the original maker. (decided under prior law) People's Sav. Bank v. Wright, 183 Ky. 362 , 209 S.W. 342, 1919 Ky. LEXIS 488 ( Ky. 1919 ).

11.Surrender of Collateral Security.

The equitable defense that the payee had released a part of the pledged collateral was sustainable proportionately. The surety was discharged from liability pro tanto in the proportion the value of the collateral surrendered bore to the entire value of all the original collateral. (decided under prior law) State Nat'l Bank v. Thompson, 277 Ky. 527 , 126 S.W.2d 412, 1938 Ky. LEXIS 569 ( Ky. 1939 ).

12.Lien.

Where members of executive committee of corporation signed corporation’s note, they could plead the defense that holder of the note released lien which was to be available to them on paying the note. (decided under prior law) Rommel Bros. v. Clark, 255 Ky. 554 , 74 S.W.2d 933, 1934 Ky. LEXIS 266 ( Ky. 1934 ).

13.Sale of Pledge.

Where defendant executed mortgage as additional security for note of corporation to plaintiff, which was also secured by pledge of chattels, defendant was not discharged by action of plaintiff and corporation in selling chattels and applying proceeds on note, since he was not injured. (decided under prior law) Hunter v. Liberty Nat'l Bank & Trust Co., 277 Ky. 538 , 126 S.W.2d 807, 1939 Ky. LEXIS 658 ( Ky. 1939 ).

14.Novation.

Where maker and surety on original note executed a new note to indorsee bank, making the indorsee bank payee, and took up the old note, there was a novation and the original payee-indorser was relieved of all liability on the note on account of its indorsement. (decided under prior law) J. I. Case Threshing Mach. Co. v. Dulworth, 216 Ky. 637 , 287 S.W. 994, 1926 Ky. LEXIS 953 ( Ky. 1926 ).

An agreement to convey a farm and a third mortgage on a garage and its performance, insofar as payee of note would accept performance, and readiness to perform the rest of the agreement was a novation of a note and effected a discharge of the note. (decided under prior law) Frazer v. Burnley, 229 Ky. 426 , 17 S.W.2d 212, 1929 Ky. LEXIS 749 ( Ky. 1929 ).

Acts of indorsee of note, in accepting new note from maker and later filing it as her sole claim in bankruptcy proceedings of maker, were sufficient to establish a novation, discharging accommodation indorser of original note. (decided under prior law) Stevie v. Stevie, 278 Ky. 489 , 128 S.W.2d 946, 1939 Ky. LEXIS 451 ( Ky. 1939 ).

15.Renewal.

Where payee transferred note, the execution of a renewal note to the transferee or indorsee was a novation extinguishing the original debt and releasing the payee as indorser. (decided under prior law) Fletcher American Co. v. Culbertson, 215 Ky. 695 , 286 S.W. 984, 1926 Ky. LEXIS 775 ( Ky. 1926 ).

A personal representative had no power to renew a note signed by the decedent. Attempted renewal and cancellation of original note did not discharge original indebtedness or release pledged collateral, where there was no intention to accomplish a novation or to release the estate. (decided under prior law) State Nat'l Bank v. Thompson, 277 Ky. 527 , 126 S.W.2d 412, 1938 Ky. LEXIS 569 ( Ky. 1939 ).

Where original note embraced all renewals, surety was not discharged by renewal without his knowledge or consent. (decided under prior law) State Nat'l Bank v. Thompson, 277 Ky. 527 , 126 S.W.2d 412, 1938 Ky. LEXIS 569 ( Ky. 1939 ).

16.Reacquisition.

Where a partnership note came into possession of one of the partners, the debt was extinguished. Such partner’s right to contribution against other partners was immaterial. Further passage of the note by such partner could not revive the note. (decided under prior law) Deavenport v. Green River Deposit Bank, 138 Ky. 352 , 128 S.W. 88, 1910 Ky. LEXIS 80 ( Ky. 1910 ).

Purchase money notes, having been fully paid by makers and delivered to them and having served their purpose as collateral, could not create a lien against the land upon subsequent transfer as they had been discharged by return to principal debtors, the makers. (decided under prior law) City Nat'l Bank v. Exchange Bank of Mayfield, 254 Ky. 579 , 72 S.W.2d 1, 1934 Ky. LEXIS 117 ( Ky. 1934 ).

An obligation was extinguished and could not be revived when an instrument was reacquired by maker by assignment or indorsement. (decided under prior law) Denniston's Adm'r v. Jackson, 304 Ky. 261 , 200 S.W.2d 477, 1947 Ky. LEXIS 625 ( Ky. 1947 ).

17.Presentment.

Where two notes, which carried a lien on the land, were given in payment for land and payee indorsed them to X, payee-indorser was discharged on one of the notes when X failed to present it for payment. (decided under prior law) Dean v. Reed, 204 Ky. 275 , 263 S.W. 714, 1924 Ky. LEXIS 412 ( Ky. 1924 ).

18.Collection.
19.— Leniency.

A party secondarily liable was not discharged by mere leniency on the part of the creditor in the collection of the note, nor by a promise to extend the time of payment. (decided under prior law) Marshall v. Hollingsworth, 166 Ky. 190 , 179 S.W. 34, 1915 Ky. LEXIS 662 ( Ky. 1915 ).

20.— Delay.

Where holder merely refrained from suing because of maker’s representations that note would eventually be paid in full, there was no such agreement as would release parties secondarily liable. (decided under prior law) Bradford v. Union Trust Co., 242 Ky. 709 , 47 S.W.2d 536, 1932 Ky. LEXIS 350 ( Ky. 1932 ); Daviess County Bank & Trust Co. v. Wright, 129 Ky. 21 , 110 S.W. 361, 33 Ky. L. Rptr. 457 , 1908 Ky. LEXIS 137 ( Ky. 1908 ).

21.Fraudulent and Material Alteration.

In the case of a truly fraudulent and material alteration, the obligor is discharged from liability on both the instrument and the underlying obligation to the extent provided for in KRS 305.3-407 (prior to its repeal and reenactment in 1996). (decided under prior law) Stahl v. St. Elizabeth Med. Ctr., 948 S.W.2d 419, 1997 Ky. App. LEXIS 37 (Ky. Ct. App. 1997).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Answer Pleading Novation, Form 191.27.

355.3-602. Payment.

  1. Subject to subsection (5) of this section, an instrument is paid to the extent payment is made by or on behalf of a party obliged to pay the instrument and to a person entitled to enforce the instrument.
  2. Subject to subsection (5) of this section, a note is paid to the extent payment is made by or on behalf of a party obliged to pay the note to a person that formerly was entitled to enforce the note only if at the time of the payment the party obliged to pay has not received adequate notification that the note has been transferred and that payment is to be made to the transferee. A notification is adequate only if it is signed by the transferor or the transferee; reasonably identifies the transferred note; and provides an address at which payments subsequently are to be made. Upon request, a transferee shall seasonably furnish reasonable proof that the note has been transferred. Unless the transferee complies with the request, a payment to the person that formerly was entitled to enforce the note is effective for purposes of subsection (3) of this section even if the party obliged to pay the note has received a notification under this subsection.
  3. Subject to subsection (5) of this section, to the extent of a payment under subsections (1) and (2) of this section, the obligation of the party obliged to pay the instrument is discharged even though payment is made with knowledge of a claim to the instrument under KRS 355.3-306 by another person.
  4. Subject to subsection (5) of this section, a transferee, or any party that has acquired rights in the instrument directly or indirectly from a transferee, including any such party that has rights as a holder in due course, is deemed to have notice of any payment that is made under subsection (2) of this section after the date that the note is transferred to the transferee but before the party obliged to pay the note receives adequate notification of the transfer.
  5. The obligation of a party to pay the instrument is not discharged under subsections (1) to (4) of this section if:
    1. A claim to the instrument under KRS 355.3-306 is enforceable against the party receiving payment; and
      1. Payment is made with knowledge by the payor that payment is prohibited by injunction or similar process of a court of competent jurisdiction; or
      2. In the case of an instrument other than a cashier’s check, teller’s check, or certified check, the party making payment accepted, from the person having a claim to the instrument, indemnity against loss resulting from refusal to pay the person entitled to enforce the instrument; or
    2. The person making payment knows that the instrument is a stolen instrument and pays a person it knows is in wrongful possession of the instrument.
  6. As used in the section, “signed,” with respect to a record that is not a writing, includes the attachment to or logical association with the record of an electronic symbol, sound, or process with the present intent to adopt or accept the record.

History. Enact. Acts 1958, ch. 77, § 3-602, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 65, effective January 1, 1997; 2006, ch. 242, § 42, effective July 12, 2006.

Official Comment

  1. This section replaces former Section 3-603(1). The phrase “claim to the instrument” in subsection (a) means, by reference to Section 3-306, a claim of ownership or possession and not a claim in recoupment. Subsection (b)(i)(2) is added to conform to Section 3-411. Section 3-411 is intended to discourage an obligated bank from refusing payment of a cashier’s check, certified check, or dishonored teller’s check at the request of a claimant to the check who provided the bank with indemnity against loss. See Comment 1 to Section 3-411. An obligated bank that refuses payment under those circumstances not only remains liable on the check but may also be liable to the holder of the check for consequential damages. Section 3-602(b)(1)(ii) and Section 3-411, read together, change the rule of former Section 3-603(1) with respect to the obligation of the obligated bank on the check. Payment to the holder of a cashier’s check, teller’s check, or certified check discharges the obligation of the obligated bank on the check to both the holder and the claimant even though indemnity has been given by the person asserting the claim. If the obligated bank pays the check in violation of an agreement with the claimant in connection with the indemnity agreement, any liability that the bank may have for violation of the agreement is not governed by Article 3, but is left to other law. This section continues the rule that the obligor is not discharged on the instrument if payment is made in violation of an injunction against payment. See Section 3-411(c)(iv).
  2. Subsection (a) covers payments made in a traditional manner, to the person entitled to enforce the instrument. Subsection (b), which provides an alternative method of payment, deals with the situation in which a person entitled to enforce the instrument transfers the instrument without giving notice to parties obligated to pay the instrument. If that happens and one of those parties subsequently makes a payment to the transferor, the payment is effective even though it is not made to the person entitled to enforce the instrument. Unlike the earlier version of Section 3-602, this rule is consistent with Section 9-406(a), Restatement of Mortgages § 5.5, and Restatement of Contracts § 338(1).
  3. In determining the party to whom a payment is made for purposes of this section, courts should look to traditional rules of agency. Thus, if the original payee of a note transfers ownership of the note to a third party but continues to service the obligation, the law of agency might treat payments made to the original payee as payments made to the third party.
  4. Subsection (d) assures that the discharge provided by subsection (c) is effective against the transferee and those whose rights derive from the transferee. By deeming those persons to have notice of any payment made under subsection (b), subsection (d) gives those persons “notice of the discharge” within the meaning of Section 3-302(b). Accordingly, the discharge is effective against those persons, even if any of them has the rights of a holder in due coarse. Compare Section 3-601(b). The deemed notice provided by subsection (d) does not, however, prevent a person from becoming or acquiring the rights of a holder in due coarse. See Section 3-302(b). Thus, such a person does not become subject to other defenses described in Section 3-305(a)(2), claims in recoupment described in Section 3-305(a)(3), or claims to the instrument under Section 3-306. A transferee can prevent payment to the transferor from discharging the obligation on the note by assuring that each person who is obligated on the note receives adequate notification pursuant to subsection (b) prior to making a payment.

NOTES TO DECISIONS

1.Check.

Where a bank wrongfully refused to pay a check, even though the holder had a cause of action against the drawer, none was created in the holder as against the bank, either on the check or in damages. (decided under prior law) First Nat'l Bank v. Hargis Commercial Bank & Trust Co., 170 Ky. 690 , 186 S.W. 471, 1916 Ky. LEXIS 99 ( Ky. 1916 ).

Where holder of check deposited it in drawee bank and was credited with amount thereof, bank could not later revoke the credit upon discovering the drawer had insufficient funds. Act of crediting was payment, as if actual cash had been handed holder which he returned for deposit. (decided under prior law) First Nat'l Bank v. Mammoth Blue Gem Coal Co., 194 Ky. 580 , 240 S.W. 78, 1922 Ky. LEXIS 211 ( Ky. 1922 ).

Where a partner’s check for the firm’s note, secured by a lien on lumber, was not paid, the debt remained and was evidenced by the unpaid check, just as previously evidenced by the note; also, holder of note retained lien given by that instrument. (decided under prior law) Marshall's Adm'r v. Corinth Bank & Trust Co., 226 Ky. 361 , 10 S.W.2d 1076, 1928 Ky. LEXIS 81 ( Ky. 1928 ).

Where drawee bank had sent collecting bank its check to satisfy a check drawn on it and debited drawer’s account, the check had been paid and drawee was liable for the amount thereof. (decided under prior law) Bank of Commerce v. Reis, 253 Ky. 648 , 69 S.W.2d 754, 1934 Ky. LEXIS 682 ( Ky. 1934 ).

2.Note.

Where bank demanded payment of its note and cashier thereof personally loaned money to pay the bank, such facts did not constitute a mere renewal of the bank’s note, in the absence of bad faith by bank and cashier, and bank’s note was paid. (decided under prior law) Smith v. Smith, 165 Ky. 810 , 178 S.W. 1058, 1915 Ky. LEXIS 595 ( Ky. 1915 ).

Where X, cashier of a bank, was made payee of note signed by Y to be used by X to hire an attorney, the note was not paid by an agreement that X, as cashier, would give Y credit to the amount of the note on an obligation of Y to the bank, as Y would have notice of X’s inability to use bank funds to pay his own debt. (decided under prior law) Grooms v. National Bank of Kentucky, 218 Ky. 846 , 292 S.W. 513, 1927 Ky. LEXIS 269 ( Ky. 1927 ).

3.— Possession.

Possession by a holder of a valid note raised a rebuttable presumption that such note had not been paid. (decided under prior law) Luigart's Adm'x v. Luigart's Adm'r, 199 Ky. 98 , 250 S.W. 796, 1923 Ky. LEXIS 769 ( Ky. 1923 ); Downing v. Whitlow, 211 Ky. 294 , 277 S.W. 262, 1925 Ky. LEXIS 869 ( Ky. 1925 ).

Possession by the payee of a valid note raised a rebuttable presumption that such note had not been paid. (decided under prior law) Luigart's Adm'x v. Luigart's Adm'r, 199 Ky. 98 , 250 S.W. 796, 1923 Ky. LEXIS 769 ( Ky. 1923 ); Downing v. Whitlow, 211 Ky. 294 , 277 S.W. 262, 1925 Ky. LEXIS 869 ( Ky. 1925 ).

Where, at time of suit, note was in hands of maker, it was presumed to have been paid. (decided under prior law) Davis v. Carico, 267 Ky. 334 , 102 S.W.2d 8, 1937 Ky. LEXIS 308 ( Ky. 1937 ).

There was a presumption that a note found in the possession of the maker had been paid. (decided under prior law) Byington v. Baughman, 282 Ky. 130 , 137 S.W.2d 1101, 1940 Ky. LEXIS 135 ( Ky. 1940 ).

4.Draft.

Where a draft, drawn by drawer on itself, bearing the notation that it could “be collected through” any of the listed banks was received, charged, marked paid and mailed to the drawer by one such bank, it had been paid. (decided under prior law) First Nat'l Bank & Trust Co. v. First Nat'l Bank, 260 Ky. 581 , 86 S.W.2d 325, 1935 Ky. LEXIS 525 ( Ky. 1935 ).

5.Purchase Money Notes.

Purchase money notes, having been fully paid by makers and delivered to them and having served their purpose as collateral, did not create a lien against the land on subsequent transfer as they had been discharged by payment. (decided under prior law) City Nat'l Bank v. Exchange Bank of Mayfield, 254 Ky. 579 , 72 S.W.2d 1, 1934 Ky. LEXIS 117 ( Ky. 1934 ).

6.Payment.
7.— Demanding Notes.

Where maker paid notes which payee subsequently sold to an innocent purchaser, the maker could not be required to pay again even though he failed to take up the notes when he paid them. (decided under prior law) Bank of Willard v. Pennsylvania & Kentucky Fire Brick Co., 175 Ky. 192 , 194 S.W. 110, 1917 Ky. LEXIS 302 ( Ky. 1917 ) ( Ky. 1917 ).

8.— Original Payee After Negotiation.

Payment to the original payee after he had negotiated the note by indorsement did not discharge the obligation. (decided under prior law) Fogarty v. Neal, 201 Ky. 85 , 255 S.W. 1049, 1923 Ky. LEXIS 237 ( Ky. 1923 ).

9.— Services.

Where, on employing an attorney, client paid fee in advance upon condition that attorney give note which was to be canceled at termination of litigation, the subsequent rendering of such services was payment of the note. (decided under prior law) Bennett v. Miller, 159 Ky. 105 , 166 S.W. 805, 1914 Ky. LEXIS 757 ( Ky. 1914 ).

10.— Wrong Party.

Where maker established that note was paid to one who had it in his possession with indorsement of payee thereon, the debt was extinguished. (decided under prior law) Taylor's Adm'r v. Scott, 218 Ky. 302 , 291 S.W. 393, 1927 Ky. LEXIS 161 ( Ky. 1927 ).

11.— Authorized Agent.

Payment to an authorized agent was sufficient. (decided under prior law) Diamond Distilleries Co. v. Gott, 137 Ky. 585 , 126 S.W. 131, 1910 Ky. LEXIS 603 ( Ky. 1910 ).

12.— Discharge of Co-Maker.

The payment made by the borrower to the lender shortly before the borrower filed for bankruptcy protection did not operate to discharge the promissory note co-maker’s obligation under the relevant promissory notes because the payment was later set aside in the bankruptcy proceedings as a preference payment that meant the payment was void, which meant the payment did not operate to discharge the obligation, and that was true whether the promissory note co-maker was a co-maker or guarantor on the relevant notes. Wagner v. Giles, 209 S.W.3d 489, 2006 Ky. App. LEXIS 344 (Ky. Ct. App. 2006).

13.Credits Indorsed on Note.

Credits indorsed on note by payee were admissions against interest and were prima facie evidence of payment to that extent. (decided under prior law) Pritchard v. Wilford, 270 Ky. 455 , 109 S.W.2d 1184, 1937 Ky. LEXIS 95 ( Ky. 1937 ).

14.Duty of Drawee.

A drawee bank was bound to pay holder of a check duly indorsed and was under no duty to inquire as to nature of transfer or amount of consideration holder paid. (decided under prior law) Lincoln Court Realty Co. v. First Nat'l Bank, 187 Ky. 288 , 219 S.W. 158, 1920 Ky. LEXIS 114 ( Ky. 1920 ).

15.Procedure.

The burden was on the defendant to prove payment. (decided under prior law) Paine v. Levy, 142 Ky. 619 , 134 S.W. 1160, 1911 Ky. LEXIS 272 ( Ky. 1911 ); Forsythe v. Lexington Banking & Trust Co., 121 S.W. 962 ( Ky. 1909 ); Chester v. Day, 127 S.W. 794, 1910 Ky. LEXIS 753 ( Ky. 1910 ); Ditto v. Hopkins, 164 Ky. 412 , 175 S.W. 658, 1915 Ky. LEXIS 387 ( Ky. 1915 ); Taylor v. Taylor, 175 Ky. 510 , 194 S.W. 551, 1917 Ky. LEXIS 345 ( Ky. 1917 ); Heltsley v. Hawkins, 187 Ky. 313 , 219 S.W. 157, 1920 Ky. LEXIS 120 ( Ky. 1920 ); Taylor v. Willis, 209 Ky. 696 , 273 S.W. 464, 1925 Ky. LEXIS 581 ( Ky. 1925 ).

Where the evidence was conflicting, the question of payment was for the jury. (decided under prior law) Sumrall's Ex'rs v. James, 221 Ky. 498 , 299 S.W. 207, 1927 Ky. LEXIS 781 ( Ky. 1927 ); Cobb v. Farmers & Merchants Bank, 267 Ky. 744 , 103 S.W.2d 264, 1937 Ky. LEXIS 382 ( Ky. 1937 ).

16.Rights of Transferee.

Where, on the basis of being tendered a forged note, the defendant paid two of the plaintiff’s outstanding notes and received the collateral held by the lenders for those two notes, the defendant was treated as a transferee of the notes held by the original lenders. (decided under prior law) Citizens Fidelity Bank & Trust Co. v. Stark, 431 S.W.2d 722, 1968 Ky. LEXIS 374 ( Ky. 1968 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Answer Pleading Payment Before Indorsement, Form 191.23.

355.3-603. Tender of payment.

  1. If tender of payment of an obligation to pay an instrument is made to a person entitled to enforce the instrument, the effect of tender is governed by principles of law applicable to tender of payment under a simple contract.
  2. If tender of payment of an obligation to pay an instrument is made to a person entitled to enforce the instrument and the tender is refused, there is discharge, to the extent of the amount of the tender, of the obligation of an indorser or accommodation party having a right of recourse with respect to the obligation to which the tender relates.
  3. If tender of payment of an amount due on an instrument is made to a person entitled to enforce the instrument, the obligation of the obligor to pay interest after the due date on the amount tendered is discharged. If presentment is required with respect to an instrument and the obligor is able and ready to pay on the due date at every place of payment stated in the instrument, the obligor is deemed to have made tender of payment on the due date to the person entitled to enforce the instrument.

History. Enact. Acts 1958, ch. 77, § 3-603, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 66, effective January 1, 1997.

Official Comment

Section 3-603 replaces former Section 3-604. Subsection (a) generally incorporates the law of tender of payment applicable to simple contracts. Subsections (b) and (c) state particular rules. Subsection (b) replaces former Section 3-604(2). Under subsection (b) refusal of a tender of payment discharges any indorser or accommodation party having a right of recourse against the party making the tender. Subsection (c) replaces former Section 3-604(1) and (3).

NOTES TO DECISIONS

1.Cancellation Without Surrender.

Cancellation without surrender does not affect the title to the instrument. (decided under prior law) Citizens Fidelity Bank & Trust Co. v. Stark, 431 S.W.2d 722, 1968 Ky. LEXIS 374 ( Ky. 1968 ).

2.Ineffective Cancellation.

Where the deceased left a writing that a mortgage was to be canceled if he predeceased the debtor and a balance remained due, but the deceased retained custody of the writing, it was not irrevocable and, since there was no contract to release supported by consideration, the release failed. (decided under prior law) Greene v. Cotton, 457 S.W.2d 493, 1970 Ky. LEXIS 209 ( Ky. 1970 ).

Under this section, an intent to discharge a party is not the equivalent of a clerk’s personally stamping a note “cancelled” or “paid” when, in fact, it had not been paid; in effect, a clerical error does not have the legal effect of canceling an existing debt or discharging an instrument. Thus, even though the creditor bank sent a letter by mistake to the debtors stating that the note had been paid in full, the debtors were still liable for the deficiency since the bank lacked the requisite intent to cancel the instrument. (decided under prior law) Richardson v. First Nat'l Bank, 660 S.W.2d 678, 1983 Ky. App. LEXIS 368 (Ky. Ct. App. 1983).

3.Renunciation.

“Renunciation” did not cover release or discharge for consideration which could be oral and without surrendering instrument but meant a gratuitous abandonment of rights under the instrument and had to be in writing unless the instrument was surrendered. (decided under prior law) Gannon v. Bronston, 246 Ky. 612 , 55 S.W.2d 358, 1932 Ky. LEXIS 789 ( Ky. 1932 ).

A renunciation that required no consideration could take two forms: (1) by written declaration to that effect without consideration; and (2) by surrender of the note to the obligor of the instrument, likewise without consideration. (decided under prior law) Miller v. Miller, 296 S.W.2d 684, 1956 Ky. LEXIS 214 ( Ky. 1956 ).

A gratuitous renunciation or promissory note requires both intention and compliance with this section. (decided under prior law) American Fidelity Bank & Trust Co. v. Hinkle, 747 S.W.2d 620, 1988 Ky. App. LEXIS 57 (Ky. Ct. App. 1988).

4.— Evidence.

When there is asserted a discharge without valuable consideration, there must be evidence from which a fact finder could find intent by the parties that the obligor be released, and, there must be a cancellation of the note on its face, or a separate writing evidencing discharge, or a surrender of it, in conformity with this section. (decided under prior law) American Fidelity Bank & Trust Co. v. Hinkle, 747 S.W.2d 620, 1988 Ky. App. LEXIS 57 (Ky. Ct. App. 1988).

355.3-604. Discharge by cancellation or renunciation.

  1. A person entitled to enforce an instrument, with or without consideration, may discharge the obligation of a party to pay the instrument:
    1. By an intentional voluntary act, such as surrender of the instrument to the party, destruction, mutilation, or cancellation of the instrument, cancellation or striking out of the party’s signature, or the addition of words to the instrument indicating discharge; or
    2. By agreeing not to sue or otherwise renouncing rights against the party by a signed record.
  2. Cancellation or striking out of an indorsement pursuant to subsection (1) of this section does not affect the status and rights of a party derived from the indorsement.
  3. In this section, “signed,” with respect to a record that is not in writing, includes the attachment to or logical association with the record of an electronic symbol, sound, or process with the present intent to adopt or accept the record.

History. Enact. Acts 1958, ch. 77, § 3-604, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 67, effective January 1, 1997; 2006, ch. 242, § 43, effective July 12, 2006.

Official Comment

Section 3-604 replaces former Section 3-605.

NOTES TO DECISIONS

1.In General.

Summary judgment for a borrower in a bank’s suit to recover on a note was proper where the borrower provided the note and mortgage stamped “paid in full” as well as the deed of release, which established a discharge under KRS 355.3-604 (1). The bank failed to establish its claim that this discharge was involuntary and unintentional. First Fed. Sav. Bank v. McCubbins, 217 S.W.3d 201, 2006 Ky. LEXIS 294 ( Ky. 2006 ).

355.3-605. Discharge of secondary obligors.

  1. If a person entitled to enforce an instrument releases the obligation of a principal obligor in whole or in part, and another party to the instrument is a secondary obligor with respect to the obligation of that principal obligor, the following rules apply:
    1. Any obligations of the principal obligor to the secondary obligor with respect to any previous payment by the secondary obligor are not affected. Unless the terms of the release preserve the secondary obligor’s recourse, the principal obligor is discharged, to the extent of the release, from any other duties to the secondary obligor under this article;
    2. Unless the terms of the release provide that the person entitled to enforce the instrument retains the right to enforce the instrument against the secondary obligor, the secondary obligor is discharged to the same extent as the principal obligor from any unperformed portion of its obligation on the instrument. If the instrument is a check and the obligation of the secondary obligor is based on an indorsement of the check, the secondary obligor is discharged without regard to the language or circumstances of the discharge or other release; and
    3. If the secondary obligor is not discharged under paragraph (b) of this subsection, the secondary obligor is discharged to the extent of the value of the consideration for the release, and to the extent that the release would otherwise cause the secondary obligor a loss.
  2. If a person entitled to enforce an instrument grants a principal obligor an extension of the time at which one (1) or more payments are due on the instrument and another party to the instrument is a secondary obligor with respect to the obligation of that principal obligor, the following rules apply:
    1. Any obligations of the principal obligor to the secondary obligor with respect to any previous payment by the secondary obligor are not affected. Unless the terms of the extension preserve the secondary obligor’s recourse, the extension correspondingly extends the time for performance of any other duties owed to the secondary obligor by the principal obligor under this article;
    2. The secondary obligor is discharged to the extent that the extension would otherwise cause the secondary obligor a loss; and
    3. To the extent that the secondary obligor is not discharged under paragraph (b) of this subsection, the secondary obligor may perform its obligations to a person entitled to enforce the instrument as if the time for payment had not been extended or, unless the terms of the extension provide that the person entitled to enforce the instrument retains the right to enforce the instrument against the secondary obligor as if the time for payment had not been extended, treat the time for performance of its obligations as having been extended correspondingly.
  3. If a person entitled to enforce an instrument agrees, with or without consideration, to a modification of the obligation of a principal obligor other than a complete or partial release or an extension of the due date and another party to the instrument is a secondary obligor with respect to the obligation of that principal obligor, the following rules apply:
    1. Any obligations of the principal obligor to the secondary obligor with respect to any previous payment by the secondary obligor are not affected. The modification correspondingly modifies any other duties owed to the secondary obligor by the principal obligor under this article;
    2. The secondary obligor is discharged from any unperformed portion of its obligation to the extent that the modification would otherwise cause the secondary obligor a loss; and
    3. To the extent that the secondary obligor is not discharged under paragraph (b) of this subsection, the secondary obligor may satisfy its obligation on the instrument as if the modification had not occurred, or treat its obligation on the instrument as having been modified correspondingly.
  4. If the obligation of a principal obligor is secured by an interest in collateral, another party to the instrument is a secondary obligor with respect to that obligation, and a person entitled to enforce the instrument impairs the value of the interest in collateral, the obligation of the secondary obligor is discharged to the extent of the impairment. The value of an interest in collateral is impaired to the extent the value of the interest is reduced to an amount less than the amount of the recourse of the secondary obligor, or the reduction in value of the interest causes an increase in the amount by which the amount of the recourse exceeds the value of the interest. For purposes of this subsection, impairing the value of an interest in collateral includes failure to obtain or maintain perfection or recordation of the interest in collateral, release of collateral without substitution of collateral of equal value or equivalent reduction of the underlying obligation, failure to perform a duty to preserve the value of collateral owed, under Article 9 of this chapter or other law, to a debtor or other person secondarily liable, and failure to comply with applicable law in disposing of or otherwise enforcing the interest in collateral.
  5. A secondary obligor is not discharged under subsections (1)(c), (2), (3), or (4) of this section unless the person entitled to enforce the instrument knows that the person is a secondary obligor or has notice under KRS 355.3-419 (3) that the instrument was signed for accommodation.
  6. A secondary obligor is not discharged under this section if the secondary obligor consents to the event or conduct that is the basis of the discharge, or the instrument or a separate agreement of the party provides for waiver of discharge under this section specifically or by general language indicating that parties waive defenses based on suretyship or impairment of collateral. Unless the circumstances indicate otherwise, consent by the principal obligor to an act that would lead to a discharge under this section constitutes consent to that act by the secondary obligor if the secondary obligor controls the principal obligor or deals with the person entitled to enforce the instrument on behalf of the principal obligor.
  7. A release or extension preserves a secondary obligor’s recourse if the terms of the release or extension provide that:
    1. The person entitled to enforce the instrument retains the right to enforce the instrument against the secondary obligor; and
    2. The recourse of the secondary obligor continues as if the release or extension had not been granted.
  8. Except as otherwise provided in subsection (9) of this section, a secondary obligor asserting discharge under this section has the burden of persuasion both with respect to the occurrence of the acts alleged to harm the secondary obligor and loss or prejudice caused by those acts.
  9. If the secondary obligor demonstrates prejudice caused by an impairment of its recourse, and the circumstances of the case indicate that the amount of a loss is not reasonably susceptible of calculation or requires proof of facts that are not ascertainable, it is presumed that the act impairing recourse caused a loss or impairment equal to the liability of the secondary obligor on the instrument. In that event, the burden of persuasion as to any lesser amount of the loss is on the person entitled to enforce the instrument.

History. Enact. Acts 1958, ch. 77, § 3-605, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 68, effective January 1, 1997; repealed and reenact., Acts 2006, ch. 242, § 44, effective July 12, 2006.

Official Comment

  1. This section contains rules that are applicable when a secondary obligor (as defined in Section 3-103(a)(17)) is a party to an instrument. These rules essentially parallel modern interpretations of the law of suretyship and guaranty that apply when a secondary obligor is not a party to an instrument. See generally Restatement of the Law, Third, Suretyship and Guaranty (1996). Of course, the rules in this section do not resolve all possible issues concerning the rights and duties of the parties. In the event that a situation is presented that is not resolved by this section (or the other related sections of this Article), the resolution may be provided by the general law of suretyship because, pursuant to Section 1-103, that law is applicable unless displaced by provisions of this Act.
  2. Like the law of suretyship and guaranty, Section 3-605 provides secondary obligors with defenses that are not available to other parties to instruments. The general operation of Section 3-605, and its relationship to the law of suretyship and guaranty, can be illustrated by an example. Bank agrees to lend $ 10,000 to Borrower, but only if Backer also is liable for repayment of the loan. The parties could consummate that transaction in three different ways. First, if Borrower and Backer incurred those obligations with contracts not govemed by this Article (such as a note that is not an instrument for purposes of this Article), the general law of suretyship and guaranty would be applicable. Under modern nomenclature, Bank is the “obligee,” Borrower is the “principal obligor,” and Backer is the “secondary obligor.” See Restatement of Suretyship and Guaranty § 1. Then assume that Bank and Borrower agree to a modification of their rights and obligations after the note is signed. For example, they might agree that Borrower may repay the loan at some date after the due date, or that Borrower may discharge its repayment obligation by paying Bank $ 3,000 rather than $ 10,000. Alternatively, suppose that Bank releases collateral that Borrower has given to secure the loan. Under the law of suretyship and guaranty, the secondary obligor may be discharged under certain circumstances if these modifications of the obligations between Bank (the obligee) and Borrower (the principal obligor) are made without the consent of Backer (the secondary obligor). The rights that the secondary obligor has to a discharge of its liability in such cases commonly are referred to as suretyship defenses. The extent of the discharge depends upon the particular circumstances. See Restatement of Suretyship and Guaranty §§ 37, 39-44.

    A second possibility is that the parties might decide to evidence the loan by a negotiable instrument. In that scenario, Borrower signs a note under which Borrower is obliged to pay $ 10,000 to the order of Bank on a due date stated in the note. Backer becomes liable for the repayment obligation by signing the note as a co-maker or indorser. In either case the note is signed for accommodation, Backer is an accommodation party, and Borrower is the accommodated party. See Section 3-419 (describing the obligations of accommodation parties). For purposes of Section 3-605, Backer is also a “secondary obligor” and Borrower is a “principal obligor,” as those terms are defined in Section 3-103. Because Backer is a party to the instrument, its rights to a discharge based on any modification of obligations between Bank and Borrower are governed by Section 3-605 rather than by the general law of suretyship and guaranty. Within Section 3-605, subsection (a) describes the consequences of a release of Borrower, subsection (b) describes the consequences of an extension of time, and subsection (c) describes the consequences of other modifications.

    The third possibility is that Borrower would use an instrument governed by this Article to evidence its repayment obligation, but Backer’s obligation would be created in some way other than by becoming party to that instrument. In that case, Backer’s rights are determined by suretyship and guaranty law rather than by this Article. See Comment 3 to Section 3-419.

    A person also can acquire secondary liability without having been a secondary obligor at the time that the principal obligation was created. For example, a transferee of real or personal property that assumes the obligation of the transferor as maker of a note secured by the property becomes by operation of law a principal obligor, with the transferor becoming a secondary obligor. Restatement of Suretyship and Guaranty § 2(e); Restatement of Mortgages § 5.1. Article 3 does not determine the effect of the release of the transferee in that case because the assuming transferee is not a “party” to the instrument as defined in Section 3-103(a)(10). Section 3-605(a) does not apply then because the holder has not discharged the obligation of a “principal obligor,” a term defined in Section 3-103(a)(11). Thus, the resolution of that question is governed by the law of suretyship. See Restatement of Suretyship and Guaranty § 39.

  3. Section 3-605 is not, however, limited to the conventional situation of the accommodation party discussed in Comment 2. It also applies in four other situations. First, it applies to indorsers of notes who are not accommodation parties. Unless an indorser signs without recourse, the indorser’s liability under Section 3-415(a) is functionally similar to that of a guarantor of payment. For example, if Bank in the second hypothetical discussed in Comment 2 indorsed the note and transferred it to Second Bank, Bank is liable to Second Bank in the event of dishonor of the note by Borrower. Section 3-415(a). Because of that secondary liability as indorser, Bank qualifies as a “secondary obligor” under Section 3-103(a)(17) and has the same rights under Section 3-605 as an accommodation party.

    Second, a similar analysis applies to the drawer of a draft that is accepted by a party that is not a bank. Under Section 3-414(d), that drawer has liability on the same terms as an indorser under Section 3-415(a). Thus, the drawer in that case is a “secondary obligor” under Section 3-103(a)(17) and has rights under Section 3-605 to that extent.

    Third, a similar principle justifies application of Section 3-605 to persons who indorse a check. Assume that Drawer draws a check to the order of Payee. Payee then indorses the check and transfers it to Transferee. If Transferee presents the check and it is dishonored, Transferee may recover from Drawer under Section 3-414 or Payee under Section 3-415. Because of that secondary liability as an indorser, Payee is a secondary obligor under Section 3-103(a)(17). Drawer is a “principal obligor” under Section 3-103(a)(11). As noted in Comment 4, below, however, Section 3-605(a)(3) will discharge indorsers of checks in some cases in which other secondary obligors will not be discharged by this section.

    Fourth, this section also deals with the rights of co-makers of instruments, even when those co-makers do not qualify as accommodation parties. The co-makers’ rights of contribution under Section 3-116 make each co-maker a secondary obligor to the extent of that right of contribution.

  4. Subsection (a) is based on Restatement of Suretyship and Guaranty § 39. It addresses the effects of a release of the principal obligor by the person entitled to enforce the instrument. Paragraph (a)(1) governs the effect of that release on the principal obligor’s duties to the secondary obligor; paragraphs (a)(2) and (a)(3) govern the effect of that release on the secondary obligor’s duties to the person entitled to enforce the instrument.

    With respect to the duties of the principal obligor, the release of course cannot affect obligations of the principal obligor with respect to payments that the secondary obligor already has made. But with respect to future payments by the secondary obligor, paragraph (a)(1) (based on Restatement of Suretyship and Guaranty § 39(a)) provides that the principal obligor is discharged, to the extent of the release, from any other duties to the secondary obligor. That rule is appropriate because otherwise the discharge granted to the principal obligor would be illusory: it would have obtained a release from a person entitled to enforce that instrument, but it would be directly liable for the same sum to the secondary obligor if the secondary obligor later complied with its secondary obligation to pay the instrument. This discharge does not occur, though, if the terms of the release effect a “preservation of recourse” as described in subsection (g). See Comment 10, below.

    The discharge under paragraph (a)(1) of the principal obligor’s duties to the secondary obligor is broad, applying to all duties under this article. This includes not only the principal obligor’s liability as a party to an instrument (as a maker, drawer or indorser under Sections 3-412 through 3-415) but also obligations under Sections 3-116 and 3-419.

    Paragraph (a)(2) is based closely on Restatement of Suretyship and Guaranty § 39(b). It articulates a default rule that the release of a principal obligor also discharges the secondary obligor, to the extent of the release granted to the principal obligor, from any unperformed portion of its obligation on the instrument. The discharge of the secondary obligor under paragraph (a)(2) is phrased more narrowly than the discharge of the principal obligor is phrased under paragraph (a)(1) because, unlike principal obligors, the only obligations of secondary obligors in Article 3 are “on the instrument” as makers or indorsers.

    The parties can opt out of that rule by including a contrary statement in the terms of the release. The provision does not contemplate that any “magic words” are necessary. Thus, discharge of the secondary obligor under paragraph (a)(2) is avoided not only if the terms of the release track the statutory language (e.g., the person entitled to enforce the instrument “retains the right to enforce the instrument” against the secondary obligor), or if the terms of the release effect a preservation of recourse under subsection (g), but also if the terms of the release include a simple statement that the parties intend to “release the principal obligor but not the secondary obligor” or that the person entitled to enforce the instrument “reserves its rights” against the secondary obligor. At the same time, because paragraph (a)(2) refers to the “terms of the release,” extrinsic circumstances cannot be used to establish that the parties intended the secondary obligor to remain obligated. If a release of the principal obligor includes such a provision, the secondary obligor is, nonetheless, discharged to the extent of the consideration that is paid for the release; that consideration is treated as a payment in partial satisfaction of the instrument.

    Notwithstanding language in the release that prevents discharge of the secondary obligor under paragraph (a)(2), paragraph (a)(3) discharges the secondary obligor from its obligation to a person entitled to enforce the instrument to the extent that the release otherwise would cause the secondary obligor a loss. The rationale for that provision is that a release of the principal obligor changes the economic risk for which the secondary obligor contracted. This risk may be increased in two ways. First, by releasing the principal obligor, the person entitled to enforce the instrument has eliminated the likelihood of future payments by the principal obligor that would lessen the obligation of the secondary obligor. Second, unless the release effects a preservation of the secondary obligor’s recourse, the release eliminates the secondary obligor’s claims against the principal obligor with respect to any future payment by the secondary obligor. The discharge provided by this paragraph prevents that increased risk from causing the secondary obligor a loss. Moreover, permitting releases to be negotiated between the principal obligor and the person entitled to enforce the instrument without regard to the consequences to the secondary obligor would create an undue risk of opportunistic behavior by the obligee and principal obligor. That concern is lessened, and the discharge is not provided by paragraph (a)(3), if the secondary obligor has consented to the release or is deemed to have consented to it under subsection (f) (which presumes consent by a secondary obligor to actions taken by a principal obligor if the secondary obligor controls the principal obligor or deals with the person entitled to enforce the instrument on behalf of the principal obligor). See Comment 9, below.

    Subsection (a) (and Restatement Section 39(b), the concepts of which it follows quite closely) is designed to facilitate negotiated workouts between a creditor and a principal obligor, so long as they are not at the expense of a secondary obligor who has not consented to the arrangement (either specifically or by waiving its rights to discharge under this section). Thus, for example, the provision facilitates an arrangement in which the principal obligor pays some portion of a guaranteed obligation, the person entitled to enforce the instrument grants a release to the principal obligor in exchange for that payment, and the person entitled to enforce the instrument pursues the secondary obligor for the remainder of the obligation. Under paragraph (a)(2), the person entitled to enforce the instrument may pursue the secondary obligor despite the release of the principal obligor so long as the terms of the release provide for this result. Under paragraph (a)(3), though, the secondary obligor will be protected against any loss it might suffer by reason of that release (if the secondary obligor has not waived discharge under subsection (f)). It should be noted that the obligee may be able to minimize the risk of such loss (and, thus, of the secondary obligor’s discharge) by giving the secondary obligor prompt notice of the release even though such notice is not required.

    The foregoing principles are illustrated by the following cases:

    Case 1 . D borrows $ 1000 from C. The repayment obligation is evidenced by a note issued by D, payable to the order of C. S is an accommodation indorser of the note. As the due date of the note approaches, it becomes obvious that D cannot pay the full amount of the note and may soon be facing bankruptcy. C, in order to collect as much as possible from D and lessen the need to seek recovery from S, agrees to release D from its obligation under the note in exchange for $ 100 in cash. The agreement to release D is silent as to the effect of the release on S. Pursuant to Section 3-605(a)(2), the release of D discharges S from its obligations to C on the note.

    Case 2. Same facts as Case 1, except that the terms of the release provide that C retains its rights to enforce the instrument against S. D is discharged from its obligations to S pursuant to Section 3-605(a)(1), but S is not discharged from its obligations to C pursuant to Section 3-605(a)(2). However, if S could have recovered from D any sum it paid to C (had D not been discharged from its obligation to S), S has been harmed by the release and is discharged pursuant to Section 3-605(a)(3) to the extent of that harm.

    Case 3 . Same facts as Case 1, except that the terms of the release provide that C retains its rights to enforce the instrument against S and that S retains its recourse against D. Under subsection (g), the release effects a preservation of recourse. Thus, S is not discharged from its obligations to C pursuant to Section 3-605(a)(2) and D is not discharged from its obligations to S pursuant to Section 3-605(a)(1). Because S’s claims against D are preserved, S will not suffer the kind of loss described in Case 2. If no other loss is suffered by S as a result of the release, S is not discharged pursuant to this section.

    Case 4 . Same facts as Case 3, except that D had made arrangements to work at a second job in order to earn the money to fulfill its obligations on the note. When C released D, however, D canceled the plans for the second job. While S still retains its recourse against D, S may be discharged from its obligation under the instrument to the extent that D’s decision to forgo the second job causes S a loss because forgoing the job renders D unable to fulfill its obligations to S under Section 3-419.

    Subsection (a) reflects a change from former Section 3-605(b), which provided categorically that the release of a principal obligor by the person entitled to enforce the instrument did not discharge a secondary obligor’s obligation on the instrument and assumed that the release also did not discharge the principal obligor’s obligations to the secondary obligor under Section 3-419. The rule under subsection (a) is much closer to the policy of the Restatement of Suretyship and Guaranty than was former Section 3-605(b). The change, however, is likely to affect only a narrow category of cases. First, as discussed above, Section 3-605 applies only to transactions in which the payment obligation is represented by a negotiable instrument, and, within that set of transactions, only to those transactions in which the secondary obligation is incurred by indorsement or cosigning, not to transactions that involve a separate document of guaranty. See Comment 2, above. Second, as provided in subsection (f), secondary obligors cannot obtain a discharge under subsection (a) in any transaction in which they have consented to the challenged conduct. Thus, subsection (a) will not apply to any transaction that includes a provision waiving suretyship defenses (a provision that is almost universally included in commercial loan documentation) or to any transaction in which the creditor obtains the consent of the secondary obligor at the time of the release.

    The principal way in which subsection (a) goes beyond the policy of Restatement § 39 is with respect to the liability of indorsers of checks. Specifically, the last sentence of paragraph (a)(2) provides that a release of a principal obligor grants a complete discharge to the indorser of a check, without requiring the indorser to prove harm. In that particular context, it seems likely that continuing responsibility for the indorser often would be so inconsistent with the expectations of the parties as to create a windfall for the creditor and an unfair surprise for the indorser. Thus, the statute implements a simple rule that grants a complete discharge. The creditor, of course, can avoid that rule by contracting with the secondary obligor for a different result at the time that the creditor grants the release to the principal obligor.

  5. Subsection (b) is based on Restatement of Suretyship and Guaranty § 40 and relates to extensions of the due date of the instrument. An extension of time to pay a note is often beneficial to the secondary obligor because the additional time may enable the principal obligor to obtain the funds to pay the instrument. In some cases, however, the extension may cause loss to the secondary obligor, particularly if deterioration of the financial condition of the principal obligor reduces the amount that the secondary obligor is able to recover on its right of recourse when default occurs. For example, suppose that the instrument is an installment note and the principal debtor is temporarily short of funds to pay a monthly installment. The payee agrees to extend the due date of the installment for a month or two to allow the debtor to pay when funds are available. Paragraph (b)(2) provides that an extension of time results in a discharge of the secondary obligor, but only to the extent that the secondary obligor proves that the extension caused loss. See subsection (h) (discussing the burden of proof under Section 3-605). Thus, if the extension is for a long period, the secondary obligor might be able to prove that during the period of extension the principal obligor became insolvent, reducing the value of the right of recourse of the secondary obligor. In such a case, paragraph (b)(2) discharges the secondary obligor to the extent of that harm. Although not required to notify the secondary obligor of the extension, the payee can minimize the risk of loss by the secondary obligor by giving the secondary obligor prompt notice of the extension; prompt notice can enhance the likelihood that the secondary obligor’s right of recourse can remain valuable, and thus can limit the likelihood that the secondary obligor will suffer a loss because of the extension. See Restatement of Suretyship and Guaranty Section 38 comment b.

    If the secondary obligor is not discharged under paragraph (b)(2) (either because it would not suffer a loss by reason of the extension or because it has waived its right to discharge pursuant to subsection (f)), it is important to understand the effect of the extension on the rights and obligations of the secondary obligor. Consider the following cases:

    Case 5 . A borrows money from Lender and issues a note payable to the order of Lender that is due on April 1, 2002. B signs the note for accommodation at the request of Lender. B signed the note either as co-maker or as an anomalous indorser. In either case Lender subsequently makes an agreement with A extending the due date of A’s obligation to pay the note to July 1, 2002. In either case B did not agree to the extension, and the extension did not address Lender’s rights against B. Under paragraph (b)(1), A’s obligations to B under this article are also extended to July 1, 2002. Under paragraph (b)(3), if B is not discharged, B may treat its obligations to Lender as also extended, or may pay the instrument on the original due date.

    Case 6 . Same facts as Case 5, except that the extension agreement includes a statement that the Lender retains its right to enforce the note against B on its original terms. Under paragraph (b)(3), B is liable on the original due date, but under paragraph (b)(1), A’s obligations to B under Section 3-419 are not due until July 1, 2002.

    Case 7. Same facts as Case 5, except that the extension agreement includes a statement that the Lender retains its right to enforce the note against B on its original terms and B retains its recourse against A as though no extension had been granted. Under paragraph (b)(3), B is liable on the original due date. Under paragraph (b)(1), A’s obligations to B under Section 3-419 are not extended.

    Under section 3-605(b), the results in Case 5 and Case 7 are identical to the results that follow from the law of suretyship and guaranty. See Restatement of Suretyship and Guaranty § 40. The situation in Case 6 is not specifically addressed in the Restatement, but the resolution in this Section is consistent with the concepts of suretyship and guaranty law as reflected in the Restatement. If the secondary obligor is called upon to pay on the due date, it may be difficult to quantify the extent to which the extension has impaired the right of recourse of the secondary obligor at that time. Still, the secondary obligor does have a right to make a claim against the obligee at that time. As a practical matter a suit making such a claim should establish the facts relevant to the extent of the impairment. See Restatement of Suretyship and Guaranty § 37(4).

    As a practical matter, an extension of the due date will normally occur only when the principal obligor is unable to pay on the due date. The interest of the secondary obligor normally is to acquiesce in the willingness of the person entitled to enforce the instrument to wait for payment from the principal obligor rather than to pay right away and rely on an action against the principal obligor that may have little or no value. But in unusual cases the secondary obligor may prefer to pay the holder on the original due date so as to avoid continuing accrual of interest. In such cases, the secondary obligor may do so. See paragraph (b)(3). If the terms of the extension provide that the person entitled to enforce the instrument retains its right to enforce the instrument against the secondary obligor on the original due date, though, those terms are effective and the secondary obligor may not delay payment until the extended due date. Unless the extension agreement effects a preservation of recourse, however, the secondary obligor may not proceed against the principal obligor under Section 3-419 until the extended due date. See paragraph (b)(1). To the extent that delay causes loss to the secondary obligor it is discharged under paragraph (b)(2).

    Even in those cases in which a secondary obligor does not have a duty to pay the instrument on the original due date, it always has the right to pay the instrument on that date, and perhaps minimize its loss by doing so. The secondary obligor is not precluded, however, from asserting its rights to discharge under Section 3-605(b)(2) if it does not exercise that option. The critical issue is whether the extension caused the secondary obligor a loss by increasing the difference between its cost of performing its obligation on the instrument and the amount recoverable from the principal obligor under this Article. The decision by the secondary obligor not to exercise its option to pay on the original due date may, under the circumstances, be a factor to be considered in the determination of that issue, especially if the secondary obligor has been given prompt notice of the extension (as discussed above).

  6. Subsection (c) is based on Restatement of Suretyship and Guaranty § 41. It is a residual provision, which applies to modifications of the obligation of the principal obligor that are not covered by subsections (a) and (b). Under subsection (c)(1), a modification of the obligation of the principal obligor on the instrument (other than a release covered by subsection (a) or an extension of the due date covered by subsection (b)), will correspondingly modify the duties of the principal obligor to the secondary obligor. Under subsection (c)(2), such a modification also will result in discharge of the secondary obligor to the extent the modification causes loss to the secondary obligor. To the extent that the secondary obligor is not discharged and the obligation changes the amount of money payable on the instrument, or the timing of such payment, subsection (c)(3) provides the secondary obligor with a choice: it may satisfy its obligation on the instrument as if the modification had not occurred, or it may treat its obligation to pay the instrument as having been modified in a manner corresponding to the modification of the principal obligor’s obligation.

    The following cases illustrate the application of subsection (c):

    Case 8 . Corporation borrows money from Lender and issues a note payable to Lender. X signs the note as an accommodation party for Corporation. The note refers to a loan agreement under which the note was issued, which states various events of default that allow Lender to accelerate the due date of the note. Among the events of default are breach of covenants not to incur debt beyond specified limits and not to engage in any line of business substantially different from that currently carried on by Corporation. Without consent of X, Lender agrees to modify the covenants to allow Corporation to enter into a new line of business that X considers to be risky, and to incur debt beyond the limits specified in the loan agreement to finance the new venture. This modification discharges X to the extent that the modification otherwise would cause X a loss.

    Case 9 . Corporation borrows money from Lender and issues a note payable to Lender in the amount of $ 100,000. X signs the note as an accommodation party for Corporation. The note calls for 60 equal monthly payments of interest and principal. Before the first payment is made, Corporation and Lender agree to modify the note by changing the repayment schedule to require four annual payments of interest only, followed by a fifth payment of interest and the entire $ 100,000 principal balance. To the extent that the modification does not discharge X, X has the option of fulfilling its obligation on the note in accordance with the original terms or the modified terms.

  7. Subsection (d) is based on Restatement of Suretyship and Guaranty § 42 and deals with the discharge of secondary obligors by impairment of collateral. The last sentence of subsection (d) states four common examples of what is meant by impairment. Because it uses the term “includes,” the provision allows a court to find impairment in other cases as well. There is extensive case law on impairment of collateral. The secondary obligor is discharged to the extent that the secondary obligor proves that impairment was caused by a person entitled to enforce the instrument. For example, assume that the payee of a secured note fails to perfect the security interest. The collateral is owned by the principal obligor who subsequently files in bankruptcy. As a result of the failure to perfect, the security interest is not enforceable in bankruptcy. If the payee were to obtain payment from the secondary obligor, the secondary obligor would be subrogated to the payee’s security interest in the collateral under Section 3-419 and general principles of suretyship law. See Restatement of Suretyship and Guaranty § 28(1)(c). In this situation, though, the value of the security interest is impaired completely because the security interest is unenforceable. Thus, the secondary obligor is discharged from its obligation on the note to the extent of that impairment. If the value of the collateral impaired is as much or more than the amount of the note, and if there will be no recovery on the note as an unsecured claim, there is a complete discharge. Subsection (d) applies whether the collateral is personalty or realty, whenever the obligation in question is in the form of a negotiable instrument.
  8. Subsection (e) is based on the former Section 3-605(h). The requirement of knowledge in the first clause is consistent with Section 9-628. The requirement of notice in the second clause is consistent with Section 3-419(c).
  9. The importance of the suretyship defenses provided in Section 3-605 is greatly diminished by the fact that the right to discharge can be waived as provided in subsection (f). The waiver can be effectuated by a provision in the instrument or in a separate agreement. It is standard practice to include such a waiver of suretyship defenses in notes prepared by financial institutions or other commercial creditors. Thus, Section 3-605 will result in the discharge of an accommodation party on a note only in the occasional case in which the note does not include such a waiver clause and the person entitled to enforce the note nevertheless takes actions that would give rise to a discharge under this section without obtaining the consent of the secondary obligor.

    Because subsection (f) by its terms applies only to a discharge “under this section,” subsection (f) does not operate to waive a defense created by other law (such as the law governing enforcement of security interests under Article 9) that cannot be waived under that law. See, e.g., Section 9-602.

    The last sentence of subsection (f) creates an inference of consent on the part of the secondary obligor whenever the secondary obligor controls the principal obligor or deals with the creditor on behalf of the principal obligor. That sentence is based on Restatement of Suretyship and Guaranty § 48(2).

  10. Subsection (g) explains the criteria for determining whether the terms of a release or extension preserve the secondary obligor’s recourse, a concept of importance in the application of subsections (a) and (b). First, the terms of the release or extension must provide that the person entitled to enforce the instrument retains the right to enforce the instrument against the secondary obligor. Second, the terms of the release or extension must provide that the recourse of the secondary obligor against the principal obligor continues as though the release or extension had not been granted. Those requirements are drawn from Restatement of Suretyship and Guaranty § 38.
  11. Subsections (h) and (i) articulate rules for the burden of persuasion under Section 3-605. Those rules are based on Restatement of Suretyship and Guaranty § 49.

NOTES TO DECISIONS

1.Impairment of Collateral.

The defendant’s obligations as a guarantor were not discharged when the plaintiff impaired the collateral securing the promissory notes at issue as the defendant consented to the impairment. First Sec. Bank & Trust Co. v. Robinson, 2000 U.S. App. LEXIS 9931 (6th Cir. Ky. May 8, 2000).

2.Material Modification of Obligation.

A co-mortgagor’s incurring of additional indebtedness under a mortgage containing a future advance clause, without the knowledge or consent of the other co-mortgagor, did not discharge the indebtedness of the latter co-mortgagor under subsection (4) as the latter co-mortgagor was not an accommodation party or an indorser as she did not sign the notes that evidenced the additional indebtedness. First Commonwealth Bank of Prestonsburg v. West, 27 S.W.3d 472, 2000 Ky. App. LEXIS 98 (Ky. Ct. App. 2000).

3.Effect of Bankruptcy.

The payment made by the borrower to the lender shortly before the borrower filed for bankruptcy protection did not operate to discharge the promissory note co-maker’s obligation under the relevant promissory notes because the payment was later set aside in the bankruptcy proceedings as a preference payment that meant the payment was void, which meant the payment did not operate to discharge the obligation, and that was true whether the promissory note co-maker was a co-maker or guarantor on the relevant notes. Wagner v. Giles, 209 S.W.3d 489, 2006 Ky. App. LEXIS 344 (Ky. Ct. App. 2006).

355.3-606. Impairment of recourse or of collateral. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 3-606, effective July 1, 1960) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

Part 7. Advice of International Sight Draft

355.3-701. Letter of advice of international sight draft. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 3-701, effective July 1, 1960) was repealed retroactive to January 1, 1997, by Acts 1998, ch. 292, § 1, effective July 15, 1998.

Legislative Research Commission Note.

(7/15/96). In 1996 Ky. Acts Chapter 130, the Kentucky General Assembly adopted the 1991 revision of Article 3 (Negotiable Instruments) of the Uniform Commercial Code, effective January 1, 1997. This statute, which is a part of the former version of Article 3, should have been repealed by that Act, but its repeal was inadvertently omitted from the Act.

Part 8. Miscellaneous

355.3-801. Drafts in a set. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 3-801, effective July 1, 1960) was repealed retroactive to January 1, 1997, by Acts 1998, ch. 292, § 1, effective July 15, 1998.

Legislative Research Commission Note.

(7/15/96). In 1996 Ky. Acts Chapter 130, the Kentucky General Assembly adopted the 1991 revision of Article 3 (Negotiable Instruments) of the Uniform Commercial Code, effective January 1, 1997. This statute, which is a part of the former version of Article 3, should have been repealed by that Act, but its repeal was inadvertently omitted from the Act.

355.3-802. Effect of instrument on obligation for which it is given. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 3-802, effective July 1, 1960) was repealed retroactive to January 1, 1997, by Acts 1998, ch. 292, § 1, effective July 15, 1998.

Legislative Research Commission Note.

(7/15/96). In 1996 Ky. Acts Chapter 130, the Kentucky General Assembly adopted the 1991 revision of Article 3 (Negotiable Instruments) of the Uniform Commercial Code, effective January 1, 1997. This statute, which is a part of the former version of Article 3, should have been repealed by that Act, but its repeal was inadvertently omitted from the Act.

355.3-803. Notice to third party. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 3-803, effective July 1, 1960) was repealed retroactive to January 1, 1997, by Acts 1998, ch. 292, § 1, effective July 15, 1998.

Legislative Research Commission Note.

(7/15/96). In 1996 Ky. Acts Chapter 130, the Kentucky General Assembly adopted the 1991 revision of Article 3 (Negotiable Instruments) of the Uniform Commercial Code, effective January 1, 1997. This statute, which is a part of the former version of Article 3, should have been repealed by that Act, but its repeal was inadvertently omitted from the Act.

355.3-804. Lost, destroyed or stolen instruments. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 3-804, effective July 1, 1960) was repealed retroactive to January 1, 1997, by Acts 1998, ch. 292, § 1, effective July 15, 1998.

355.3-805. Instruments not payable to order or to bearer. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 3-805, effective July 1, 1960) was repealed retroactive to January 1, 1997, by Acts 1998, ch. 292, § 1, effective July 15, 1998.

Legislative Research Commission Note.

(7/15/96). In 1996 Ky. Acts Chapter 130, the Kentucky General Assembly adopted the 1991 revision of Article 3 (Negotiable Instruments) of the Uniform Commercial Code, effective January 1, 1997. This statute, which is a part of the former version of Article 3, should have been repealed by that Act, but its repeal was inadvertently omitted from the Act.

Article 4. Bank Deposits and Collections

Compiler’s Notes.

The official comments in this article are copyrighted by the National Conference of Commissioners of Uniform State Laws and the American Law Institute, and are reproduced by permission.

Part 1. General Provisions and Definitions

355.4-101. Short title.

This article may be cited as Uniform Commercial Code — Bank Deposits and Collections.

History. Enact. Acts 1958, ch. 77, § 4-101, effective July 1, 1960; 1996, ch. 130, § 72, effective January 1, 1997.

Compiler’s Notes.

Section 183 of Acts 1996, ch. 130 read:

“(1) This Act does not affect an action or proceeding commenced before this act takes effect.

“(2) If a security interest in a security is perfected at the date this Act takes effect [January 1, 1997], and the action by which the security was perfected would suffice to perfect a security interest under this Act, no further action is required to continue perfection. If a security interest in a security is perfected at the date this Act takes effect but the action by which the security interest was perfected would not suffice to perfect a security interest under this Act, the security interest remains prefected for a period of four months after the effective date and continues perfected thereafter if appropriate action to perfect under this Act is taken within that period. If a security interest is perfected at the date this Act takes effect and the security interest can be perfected by filing under this Act, a financing statement signed by the secured party instead of the debtor may be filed within that period to continue perfection or thereafter to perfect.”

Official Comment

  1. The great number of checks handled by banks and the country-wide nature of the bank collection process require uniformity in the law of bank collections. There is needed a uniform statement of the principal rules of the bank collection process with ample provision for flexibility to meet the needs of the large volume handled and the changing needs and conditions that are bound to come with the years. This Article meets that need.
  2. In 1950 at the time Article 4 was drafted, 6.7 billion checks were written annually. By the time of the 1990 revision of Article 4 annual volume was estimated by the American Bankers Association to be about 50 billion checks. The banking system could not have coped with this increase in check volume had it not developed in the late 1950s and early 1960s an automated system for check collection based on encoding checks with machine-readable information by Magnetic Ink Character Recognition (MICR). An important goal of the 1990 revision of Article 4 is to promote the efficiency of the check collection process by making the provisions of Article 4 more compatible with the needs of an automated system and, by doing so, increase the speed and lower the cost of check collection for those who write and receive checks. An additional goal of the 1990 revision of Article 4 is to remove any statutory barriers in the Article to the ultimate adoption of programs allowing the presentment of checks to payor banks by electronic transmission of information captured from the MICR line on the checks. The potential of these programs for saving the time and expense of transporting the huge volume of checks from depositary to payor banks is evident.
  3. Article 4 defines rights between parties with respect to bank deposits and collections. It is not a regulatory statute. It does not regulate the terms of the bank-customer agreement, nor does it prescribe what constraints different jurisdictions may wish to impose on that relationship in the interest of consumer protection. The revisions in Article 4 are intended to create a legal framework that accommodates automation and truncation for the benefit of all bank customers. This may raise consumer problems which enacting jurisdictions may wish to address in individual legislation. For example, with respect to Section 4-401(c), jurisdictions may wish to examine their unfair and deceptive practices laws to determine whether they are adequate to protect drawers who postdate checks from unscrupulous practices that may arise on the part of persons who induce drawers to issue postdated checks in the erroneous belief that the checks will not be immediately payable. Another example arises from the fact that under various truncation plans customers will no longer receive their cancelled checks and will no longer have the cancelled check to prove payment. Individual legislation might provide that a copy of a bank statement along with a copy of the check is prima facie evidence of payment.

Research References and Practice Aids

Kentucky Law Journal.

Brown, Bank Deposits and Collections, 48 Ky. L.J. 232 (1960).

355.4-102. Applicability.

  1. To the extent that items within this article are also within Articles 3 and 8 of this chapter, they are subject to those articles. If there is conflict, this article governs Article 3 of this chapter but Article 8 of this chapter governs this article.
  2. The liability of a bank for action or nonaction with respect to an item handled by it for purposes of presentment, payment, or collection is governed by the law of the place where the bank is located. In the case of action or nonaction by or at a branch or separate office of a bank, its liability is governed by the law of the place where the branch or separate office is located.

History. Enact. Acts 1958, ch. 77, § 4-102, effective July 1, 1960; 1996, ch. 130, § 73, effective January 1, 1997.

Official Comment

  1. The rules of Article 3 governing negotiable instruments, their transfer, and the contracts of the parties thereto apply to the items collected through banking channels wherever no specific provision is found in this Article. In the case of conflict, this Article governs. See Section 3-102(b).

    Bonds and like instruments constituting investment securities under Article 8 may also be handled by banks for collection purposes. Various sections of Article 8 prescribe rules of transfer some of which (see Sections 8-108 and 8-304) may conflict with provisions of this Article (Sections 4-205, 4-207, and 4-208). In the case of conflict, Article 8 governs.

    Section 4-210 deals specifically with overlapping problems and possible conflicts between this Article and Article 9. However, similar reconciling provisions are not necessary in the case of Articles 5 and 7. Sections 4-301 and 4-302 are consistent with Section 5-112. In the case of Article 7 documents of title frequently accompany items but they are not themselves items. See Section 4-104(a)(9).

    In Clearfield Trust Co. v. United States, 318 U.S. 363 (1943), the Court held that if the United States is a party to an instrument, its rights and duties are governed by federal common law in the absence of a specific federal statute or regulation. In United States v. Kimbell Foods, Inc., 440 U.S. 715 (1979), the Court stated a three-pronged test to ascertain whether the federal common-law rule should follow the state rule. In most instances courts under the Kimbell test have shown a willingness to adopt UCC rules in formulating federal common law on the subject. In Kimbell the Court adopted the priorities rules of Article 9.

    In addition, applicable federal law may supersede provisions of this Article. One federal law that does so is the Expedited Funds Availability Act, 12 U.S.C. § 4001 et seq., and its implementing Regulation CC, 12 CFR Pt. 229. In some instances this law is alluded to in the statute, e.g., Section 4-215(e) and (f). In other instances, although not referred to in this Article, the provisions of the EFAA and Regulation CC control with respect to checks. For example, except between the depositary bank and its customer, all settlements are final and not provisional (Regulation CC, Section 229.36(d)), and the midnight deadline may be extended (Regulation CC, Section 229.30(c)). The Comments to this Article suggest in most instances the relevant Regulation CC provisions.

  2. Subsection (b) is designed to state a workable rule for the solution of otherwise vexatious problems of the conflicts of laws:
    1. The routine and mechanical nature of bank collections makes it imperative that one law govern the activities of one office of a bank. The requirement found in some cases that to hold an indorser notice must be given in accordance with the law of the place of indorsement, since that method of notice became an implied term of the indorser’s contract, is more theoretical than practical.
    2. Adoption of what is in essence a tort theory of the conflict of laws is consistent with the general theory of this Article that the basic duty of a collecting bank is one of good faith and the exercise of ordinary care. Justification lies in the fact that, in using an ambulatory instrument, the drawer, payee, and indorsers must know that action will be taken with respect to it in other jurisdictions. This is especially pertinent with respect to the law of the place of payment.
    3. The phrase “action or non-action with respect to any item handled by it for purposes of presentment, payment, or collection” is intended to make the conflicts rule of subsection (b) apply from the inception of the collection process of an item through all phases of deposit, forwarding, presentment, payment and remittance or credit of proceeds. Specifically the subsection applies to the initial act of a depositary bank in receiving an item and to the incidents of such receipt. The conflicts rule of Weissman v. Banque de Bruxelles, 254 N.Y. 488, 173 N.E. 835 (1930), is rejected. The subsection applies to questions of possible vicarious liability of a bank for action or non-action of sub-agents (see Section 4-202(c)), and tests these questions by the law of the state of the location of the bank which uses the sub-agent. The conflicts rule of St. Nicholas Bank of New York v. State Nat. Bank, 128 N.Y. 26, 27 N.E. 849, 13 L.R.A. 241 (1891), is rejected. The subsection applies to action or non-action of a payor bank in connection with handling an item (see Sections 4-215(a), 4-301, 4-302, 4-303) as well as action or non-action of a collecting bank (Sections 4-201 through 4-216); to action or non-action of a bank which suspends payment or is affected by another bank suspending payment (Section 4-216); to action or non-action of a bank with respect to an item under the rule of Part 4 of Article 4.
    4. In a case in which subsection (b) makes this Article applicable, Section 4-103(a) leaves open the possibility of an agreement with respect to applicable law. This freedom of agreement follows the general policy of Section 1-105.

Opinions of Attorney General.

Nebraska’s statutes on the limitations on suing to recover on a forged instrument are the same as Kentucky’s. OAG 63-825 .

If a credit union’s power of attorney to endorse a principal’s check and apply the proceeds to an outstanding account is not honored by the bank in which the check might be cashed or deposited or by the maker, a party’s recourse would be a legal action pursuant to this article. OAG 82-297 .

Research References and Practice Aids

Kentucky Law Journal.

Cullen, Conflict of Laws — Problems Under the Uniform Commercial Code, 48 Ky. L.J. 417 (1960).

355.4-103. Variation by agreement — Measure of damages — Action constituting ordinary care.

  1. The effect of the provisions of this article may be varied by agreement, but the parties to the agreement cannot disclaim a bank’s responsibility for its lack of good faith or failure to exercise ordinary care or limit the measure of damages for the lack or failure. However, the parties may determine by agreement the standards by which the bank’s responsibility is to be measured if those standards are not manifestly unreasonable.
  2. Federal Reserve regulations and operating circulars, clearing-house rules, and the like have the effect of agreements under subsection (1) of this section, whether or not specifically assented to by all parties interested in items handled.
  3. Action or nonaction approved by this article or pursuant to Federal Reserve regulations or operating circulars is the exercise of ordinary care and, in the absence of special instructions, action or nonaction consistent with clearing-house rules and the like or with a general banking usage not disapproved by this article, is prima facie the exercise of ordinary care.
  4. The specification or approval of certain procedures by this article is not disapproval of other procedures that may be reasonable under the circumstances.
  5. The measure of damages for failure to exercise ordinary care in handling an item is the amount of the item reduced by an amount that could not have been realized by the exercise of ordinary care. If there is also bad faith it includes any other damages the party suffered as a proximate consequence.

History. Enact. Acts 1958, ch. 77, § 4-103, effective July 1, 1960; 1996, ch. 130, § 74, effective January 1, 1997.

Official Comment

  1. Section 1-102 states the general principles and rules for variation of the effect of this Act by agreement and the limitations to this power. Section 4-103 states the specific rules for variation of Article 4 by agreement and also certain standards of ordinary care. In view of the technical complexity of the field of bank collections, the enormous number of items handled by banks, the certainty that there will be variations from the normal in each day’s work in each bank, the certainty of changing conditions and the possibility of developing improved methods of collection to speed the process, it would be unwise to freeze present methods of operation by mandatory statutory rules. This section, therefore, permits within wide limits variation of the effect of provisions of the Article by agreement.
  2. Subsection (a) confers blanket power to vary all provisions of the Article by agreements of the ordinary kind. The agreements may not disclaim a bank’s responsibility for its own lack of good faith or failure to exercise ordinary care and may not limit the measure of damages for the lack or failure, but this subsection like Section 1-102(c) approves the practice of parties determining by agreement the standards by which the responsibility is to be measured. In the absence of a showing that the standards manifestly are unreasonable, the agreement controls. Owners of items and other interested parties are not affected by agreements under this subsection unless they are parties to the agreement or are bound by adoption, ratification, estoppel or the like.

    As here used “agreement” has the meaning given to it by Section 1-201(c). The agreement may be direct, as between the owner and the depositary bank; or indirect, as in the case in which the owner authorizes a particular type of procedure and any bank in the collection chain acts pursuant to such authorization. It may be with respect to a single item; or to all items handled for a particular customer, e.g., a general agreement between the depositary bank and the customer at the time a deposit account is opened. Legends on deposit tickets, collection letters and acknowledgments of items, coupled with action by the affected party constituting acceptance, adoption, ratification, estoppel or the like, are agreements if they meet the tests of the definition of “agreement.” See Section 1-201(3). First Nat. Bank of Denver v. Federal Reserve Bank, 6 F.2d 339 (8th Cir. 1925) (deposit slip); Jefferson County Bldg. Ass’n v. Southern Bank & Trust Co., 225 Ala. 25, 142 So. 66 (1932) (signature card and deposit slip); Semingson v. Stock Yards Nat. Bank, 162 Minn. 424, 203 N.W. 412 (1925) (passbook); Farmers State Bank v. Union Nat. Bank, 42 N.D. 449, 454, 173 N.W. 789, 790 (1919) (acknowledgment of receipt of item).

  3. Subsection (a) (subject to its limitations with respect to good faith and ordinary care) goes far to meet the requirements of flexibility. However, it does not by itself confer fully effective flexibility. Since it is recognized that banks handle a great number of items every business day and that the parties interested in each item include the owner of the item, the drawer (if it is a check), all nonbank indorsers, the payor bank and from one to five or more collecting banks, it is obvious that it is impossible, practically, to obtain direct agreements from all of these parties on all items. In total, the interested parties constitute virtually every adult person and business organization in the United States. On the other hand they may become bound to agreements on the principle that collecting banks acting as agents have authority to make binding agreements with respect to items being handled. This conclusion was assumed but was not flatly decided in Federal Reserve Bank of Richmond v. Malloy, 264 U.S. 160, at 167, 44 S. Ct. 296, at 298, 68 L. Ed. 617, 31 A.L.R. 1261 (1924).

    To meet this problem subsection (b) provides that official or quasi-official rules of collection, that is Federal Reserve regulations and operating circulars, clearing-house rules, and the like, have the effect of agreements under subsection (a), whether or not specifically assented to by all parties interested in items handled. Consequently, such official or quasi-official rules may, standing by themselves but subject to the good faith and ordinary care limitations, vary the effect of the provisions of Article 4.

    Federal Reserve regulations . Various sections of the Federal Reserve Act (12 U.S.C. § 221 et seq.) authorize the Board of Governors of the Federal Reserve System to direct the Federal Reserve banks to exercise bank collection functions. For example, Section 16 (12 U.S.C. § 248(o)) authorizes the Board to require each Federal Reserve bank to exercise the functions of a clearing house for its members and Section 13 (12 U.S.C. § 342) authorizes each Federal Reserve bank to receive deposits from nonmember banks solely for the purposes of exchange or of collection. Under this statutory authorization the Board has issued Regulation J (Subpart A — Collection of Checks and Other Items). Under the supremacy clause of the Constitution, federal regulations prevail over state statutes. Moreover, the Expedited Funds Availability Act, 12 U.S.C. Section 4007(b) provides that the Act and Regulation CC, 12 CFR 229, supersede “any provision of the law of any State, including the Uniform Commercial Code as in effect in such State, which is inconsistent with this chapter or such regulations.” See Comment 1 to Section 4-102.

    Federal Reserve operating circulars . The regulations of the Federal Reserve Board authorize the Federal Reserve banks to promulgate operating circulars covering operating details. Regulation J, for example, provides that “Each Reserve Bank shall receive and handle items in accordance with this subpart, and shall issue operating circulars governing the details of its handling of items and other matters deemed appropriate by the Reserve Bank.” This Article recognizes that “operating circulars” issued pursuant to the regulations and concerned with operating details as appropriate may, within their proper sphere, vary the effect of the Article.

    Clearing-House Rules . Local clearing houses have long issued rules governing the details of clearing; hours of clearing, media of remittance, time for return of mis-sent items and the like. The case law has recognized these rules, within their proper sphere, as binding on affected parties and as appropriate sources for the courts to look to in filling out details of bank collection law. Subsection (b) in recognizing clearing-house rules as a means of preserving flexibility continues the sensible approach indicated in the cases. Included in the term “clearing houses” are county and regional clearing houses as well as those within a single city or town. There is, of course, no intention of authorizing a local clearing house or a group of clearing houses to rewrite the basic law generally. The term “clearing-house rules” should be understood in the light of functions the clearing houses have exercised in the past.

    And the like . This phrase is to be construed in the light of the foregoing. “Federal Reserve regulations and operating circulars” cover rules and regulations issued by public or quasi-public agencies under statutory authority. “Clearing-house rules” cover rules issued by a group of banks which have associated themselves to perform through a clearing house some of their collection, payment and clearing functions. Other agencies or associations of this kind may be established in the future whose rules and regulations could be appropriately looked on as constituting means of avoiding absolute statutory rigidity. The phrase “and the like” leaves open possibilities for future development. An agreement between a number of banks or even all the banks in an area simply because they are banks, would not of itself, by virtue of the phrase “and the like,” meet the purposes and objectives of subsection (b).

  4. Under this Article banks come under the general obligations of the use of good faith and the exercise of ordinary care. “Good faith” is defined in Section 3-103(a)(4). The term “ordinary care” is defined in Section 3-103(a)(7). These definitions are made to apply to Article 4 by Section 4-104(c). Section 4-202 states respects in which collecting banks must use ordinary care. Subsection (c) of Section 4-103 provides that action or non-action approved by the Article or pursuant to Federal Reserve regulations or operating circulars constitutes the exercise of ordinary care. Federal Reserve regulations and operating circulars constitute an affirmative standard of ordinary care equally with the provisions of Article 4 itself.

    Subsection (c) further provides that, absent special instructions, action or non-action consistent with clearing-house rules and the like or with a general banking usage not disapproved by the Article, prima facie constitutes the exercise of ordinary care. Clearing-house rules and the phrase “and the like” have the significance set forth above in these Comments. The term “general banking usage” is not defined but should be taken to mean a general usage common to banks in the area concerned. See Section 1-205(b). In a case in which the adjective “general” is used, the intention is to require a usage broader than a mere practice between two or three banks but it is not intended to require anything as broad as a country-wide usage. A usage followed generally throughout a state, a substantial portion of a state, a metropolitan area or the like would certainly be sufficient. Consistently with the principle of Section 1-205(c), action or non-action consistent with clearing-house rules or the like or with banking usages prima facie constitutes the exercise of ordinary care. However, the phrase “in the absence of special instructions” affords owners of items an opportunity to prescribe other standards and although there may be no direct supervision or control of clearing houses or banking usages by official supervisory authorities, the confirmation of ordinary care by compliance with these standards is prima facie only, thus conferring on the courts the ultimate power to determine ordinary care in any case in which it should appear desirable to do so. The prima facie rule does, however, impose on the party contesting the standards to establish that they are unreasonable, arbitrary or unfair as used by the particular bank.

  5. Subsection (d), in line with the flexible approach required for the bank collection process is designed to make clear that a novel procedure adopted by a bank is not to be considered unreasonable merely because that procedure is not specifically contemplated by this Article or by agreement, or because it has not yet been generally accepted as a bank usage. Changing conditions constantly call for new procedures and someone has to use the new procedure first. If this procedure is found to be reasonable under the circumstances, provided, of course, that it is not inconsistent with any provision of the Article or other law or agreement, the bank which has followed the new procedure should not be found to have failed in the exercise of ordinary care.
  6. Subsection (e) sets forth a rule for determining the measure of damages for failure to exercise ordinary care which, under subsection (a), cannot be limited by agreement. In the absence of bad faith the maximum recovery is the amount of the item concerned. The term “bad faith” is not defined; the connotation is the absence of good faith (Section 3-103). When it is established that some part or all of the item could not have been collected even by the use of ordinary care the recovery is reduced by the amount that would have been in any event uncollectible. This limitation on recovery follows the case law. Finally, if bad faith is established the rule opens to allow the recovery of other damages, whose “proximateness” is to be tested by the ordinary rules applied in comparable cases. Of course, it continues to be as necessary under subsection (e) as it has been under ordinary common law principles that, before the damage rule of the subsection becomes operative, liability of the bank and some loss to the customer or owner must be established.

NOTES TO DECISIONS

1.Duty of Banks to Customers.

KRS 355.1-203 and this section impose a duty of good faith and fair dealing on banks, and implied in this duty of good faith and fair dealing is a duty on the part of a bank to provide its former customers with records of their accounts. Ousley v. First Commonwealth Bank, 8 S.W.3d 45, 1999 Ky. App. LEXIS 11 (Ky. Ct. App. 1999).

2.Failure of Bank to Return Check Before Deadline.

Where a payor bank failed to return two (2) checks before its midnight deadline provided for in KRS 355.4-302 , its liability was not determined under this section since such liability was not based on failure to exercise ordinary care but on the fact that the bank was deemed to have paid the check. Blake v. Woodford Bank & Trust Co., 555 S.W.2d 589, 1977 Ky. App. LEXIS 790 (Ky. Ct. App. 1977).

3.Negligent Payment on Instrument.

While the Uniform Commercial Code as adopted in Kentucky does not expressly state that a collecting or payor bank is liable for negligently paying on an instrument, subsection (1) of this section and KRS 355.1-103 , 355.3-419 (3) and 355.3-406 indirectly indicate that this is so. Bullitt County Bank v. Publishers Printing Co., 684 S.W.2d 289, 1984 Ky. App. LEXIS 568 (Ky. Ct. App. 1984).

4.Failure to Examine Bank Statements.

Failure of bank customer to examine the bank statements and report the claimed unauthorized withdrawals disclosed therein, as required by the terms of the account agreement with the bank, precluded the customer from recovering its alleged losses against the bank caused when customer’s plant manager did not list checks for which he received cash from the bank on duplicate withdrawal slips he prepared and turned into employer. Concrete Materials Corp. v. Bank of Danville & Trust Co., 938 S.W.2d 254, 1997 Ky. LEXIS 4 ( Ky. 1997 ).

Cited:

United Kentucky Bank, Inc. v. Eagle Machine Co., 644 S.W.2d 649, 1983 Ky. App. LEXIS 273 (Ky. Ct. App. 1983); Pulliam v. Pulliam, 738 S.W.2d 846, 1987 Ky. App. LEXIS 588 (Ky. Ct. App. 1987).

Research References and Practice Aids

Kentucky Law Journal.

Leibson, Handling Re-Presented Checks — Risky Business for Collecting and Payor Banks, 72 Ky. L.J. 549 (1983-84).

355.4-104. Definitions and index of definitions.

  1. In this article, unless the context otherwise requires:
    1. “Account” means any deposit or credit account with a bank, including a demand, time, savings, passbook, share draft, or like account, other than an account evidenced by a certificate of deposit;
    2. “Afternoon” means the period of a day between noon and midnight;
    3. “Banking day” means the part of a day on which a bank is open to the public for carrying on substantially all of its banking functions;
    4. “Clearing house” means an association of banks or other payors regularly clearing items;
    5. “Customer” means a person having an account with a bank or for whom a bank has agreed to collect items including a bank that maintains an account at another bank;
    6. “Documentary draft” means a draft to be presented for acceptance or payment if specified documents, certificated securities (KRS 355.8-102 ) or instructions for uncertificated securities (KRS 355.8-102 ), or other certificates, statements, or the like are to be received by the drawee or other payor before acceptance or payment of the draft;
    7. “Draft” means a draft as defined in KRS 355.3-104 or an item, other than an instrument, that is an order;
    8. “Drawee” means a person ordered in a draft to make payment;
    9. “Item” means an instrument or a promise or order to pay money handled by a bank for collection or payment. The term does not include a payment order governed by Article 4A of this chapter or a credit or debit card slip;
    10. “Midnight deadline” with respect to a bank is midnight on its next banking day following the banking day on which it receives the relevant item or notice or from which the time for taking action commences to run, whichever is later;
    11. “Settle” means to pay in cash, by clearing-house settlement, in a charge or credit or by remittance, or otherwise as agreed. A settlement may be either provisional or final; and
    12. “Suspends payments” with respect to a bank means that it has been closed by order of the supervisory authorities, that a public officer has been appointed to take it over, or that it ceases or refuses to make payments in the ordinary course of business.
  2. Other definitions applying to this article and the sections in which they appear are:
    1. “Agreement for electronic presentment.” KRS 355.4-110 ;
    2. “Collecting bank.” KRS 355.4-105 ;
    3. “Depositary bank.” KRS 355.4-105 ;
    4. “Intermediary bank.” KRS 355.4-105;
    5. “Payor bank.” KRS 355.4-105;
    6. “Presenting bank.” KRS 355.4-105; and
    7. “Presentment notice.” KRS 355.4-110 .
  3. The following definitions in other articles apply to this article:
    1. “Acceptance.” KRS 355.3-409 ;
    2. “Alteration.” KRS 355.3-407 ;
    3. “Cashier’s check.” KRS 355.3-104 ;
    4. “Certificate of deposit.” KRS 355.3-104 ;
    5. “Certified check.” KRS 355.3-409 ;
    6. “Check.” KRS 355.3-104;
    7. “Control.” KRS 355.7-106 ;
    8. “Holder in due course.” KRS 355.3-302 ;
    9. “Instrument.” KRS 355.3-104;
    10. “Notice of dishonor.” KRS 355.3-503 ;
    11. “Order.” KRS 355.3-103 ;
    12. “Ordinary care.” KRS 355.3-103 ;
    13. “Person entitled to enforce.” KRS 355.3-301 ;
    14. “Presentment.” KRS 355.3-501 ;
    15. “Promise.” KRS 355.3-103;
    16. “Prove.” KRS 355.3-103;
    17. “Record.” KRS 355.1-201 ;
    18. “Remotely created item.” KRS 355.3-103;
    19. “Teller’s check.” KRS 355.3-104; and
    20. “Unauthorized signature.” KRS 355.3-403 .
  4. In addition, Article 1 of this chapter contains general definitions and principles of construction and interpretation applicable throughout this article.

History. Enact. Acts 1958, ch. 77, § 4-104, effective July 1, 1960; 1996, ch. 130, § 75, effective January 1, 1997; 2006, ch. 242, § 45, effective July 12, 2006; 2012, ch. 132, § 57, effective July 12, 2012.

Legislative Research Commission Notes.

(7/12/2006). Under the authority of KRS 7.136(1), the Reviser of Statutes has added paragraph headings [(a), (b), etc.] before terms referenced in subsection (2) of this statute that are defined in other statutes. The words in the text were not changed.

Official Comment

  1. Paragraph (a)(1): “Account” is defined to include both asset accounts in which a customer has deposited money and accounts from which a customer may draw on a line of credit. The limiting factor is that the account must be in a bank.
  2. Paragraph (a)(3): “Banking day.” Under this definition that part of a business day when a bank is open only for limited functions, e.g., to receive deposits and cash checks, but with loan, bookkeeping and other departments closed, is not part of a banking day.
  3. Paragraph (a)(4): “Clearing house.” Occasionally express companies, governmental agencies and other nonbanks deal directly with a clearing house; hence the definition does not limit the term to an association of banks.
  4. Paragraph (a)(5): “Customer.” It is to be noted that this term includes a bank carrying an account with another bank as well as the more typical nonbank customer or depositor.
  5. Paragraph (a)(6): “Documentary draft” applies even though the documents do not accompany the draft but are to be received by the drawee or other payor before acceptance or payment of the draft.
  6. Paragraph (a)(7): “Draft” is defined in Section 3-104 as a form of instrument. Since Article 4 applies to items that may not fall within the definition of instrument, the term is defined here to include an item that is a written order to pay money, even though the item may not qualify as an instrument. The term “order” is defined in Section 3-103.
  7. Paragraph (a)(8): “Drawee” is defined in Section 3-103 in terms of an Article 3 draft which is a form of instrument. Here “drawee” is defined in terms of an Article 4 draft which includes items that may not be instruments.
  8. Paragraph (a)(9): “Item” is defined broadly to include an instrument, as defined in Section 3-104, as well as promises or orders that may not be within the definition of “instrument.” The terms “promise” and “order” are defined in Section 3-103. A promise is a written undertaking to pay money. An order is a written instruction to pay money. But see Section 4-110(c). Since bonds and other investment securities under Article 8 may be within the term “instrument” or “promise,” they are items and when handled by banks for collection are subject to this Article. See Comment 1 to Section 4-102. The functional limitation on the meaning of this term is the willingness of the banking system to handle the instrument, undertaking or instruction for collection or payment.
  9. Paragraph (a)(10): “Midnight deadline.” The use of this phrase is an example of the more mechanical approach used in this Article. Midnight is selected as a termination point or time limit to obtain greater uniformity and definiteness than would be possible from other possible terminating points, such as the close of the banking day or business day.
  10. Paragraph (a)(11): The term “settle” has substantial importance throughout Article 4. In the American Bankers Association Bank Collection Code, in deferred posting statutes, in Federal Reserve regulations and operating circulars, in clearing-house rules, in agreements between banks and customers and in legends on deposit tickets and collection letters, there is repeated reference to “conditional” or “provisional” credits or payments. Tied in with this concept of credits or payments being in some way tentative, has been a related but somewhat different problem as to when an item is “paid” or “finally paid” either to determine the relative priority of the item as against attachments, stop-payment orders and the like or in insolvency situations. There has been extensive litigation in the various states on these problems. To a substantial extent the confusion, the litigation and even the resulting court decisions fail to take into account that in the collection process some debits or credits are provisional or tentative and others are final and that very many debits or credits are provisional or tentative for awhile but later become final. Similarly, some cases fail to recognize that within a single bank, particularly a payor bank, each item goes through a series of processes and that in a payor bank most of these processes are preliminary to the basic act of payment or “final payment.”

    The term “settle” is used as a convenient term to characterize a broad variety of conditional, provisional, tentative and also final payments of items. Such a comprehensive term is needed because it is frequently difficult or unnecessary to determine whether a particular action is tentative or final or when a particular credit shifts from the tentative class to the final class. Therefore, its use throughout the Article indicates that in that particular context it is unnecessary or unwise to determine whether the debit or the credit or the payment is tentative or final. However, if qualified by the adjective “provisional” its tentative nature is intended, and if qualified by the adjective “final” its permanent nature is intended.

    Examples of the various types of settlement contemplated by the term include payments in cash; the efficient but somewhat complicated process of payment through the adjustment and offsetting of balances through clearing houses; debit or credit entries in accounts between banks; the forwarding of various types of remittance instruments, sometimes to cover a particular item but more frequently to cover an entire group of items received on a particular day.

  11. Paragraph (a)(12): “Suspends payments.” This term is designed to afford an objective test to determine when a bank is no longer operating as a part of the banking system.

NOTES TO DECISIONS

1.Deposit Slip.

The deposit slip is evidence of the deposit transaction and consequently altered deposit slips are “items” for the purposes of KRS 355.4-406 . Concrete Materials Corp. v. Bank of Danville & Trust Co., 938 S.W.2d 254, 1997 Ky. LEXIS 4 ( Ky. 1997 ).

Cited:

Farmers Cooperative Livestock Market, Inc. v. Second Nat’l Bank, 427 S.W.2d 247, 1968 Ky. LEXIS 676 ( Ky. 1968 ); James v. Webb, 827 S.W.2d 702, 1991 Ky. App. LEXIS 149 (Ky. Ct. App. 1991).

Research References and Practice Aids

Kentucky Law Journal.

Leibson, Handling Re-Presented Checks — Risky Business for Collecting and Payor Banks, 72 Ky. L.J. 549 (1983-84).

355.4-105. “Depositary bank” — “Payor bank” — “Intermediary bank” — “Collecting bank” — “Presenting bank.”

In this article:

  1. (Reserved)
  2. “Depositary bank” means the first bank to take an item even though it is also the payor bank, unless the item is presented for immediate payment over the counter;
  3. “Payor bank” means a bank that is the drawee of a draft;
  4. “Intermediary bank” means a bank to which an item is transferred in course of collection except the depositary or payor bank;
  5. “Collecting bank” means a bank handling the item for collection except the payor bank; and
  6. “Presenting bank” means a bank presenting an item except a payor bank.

History. Enact. Acts 1958, ch. 77, § 4-105, effective July 1, 1960; 1996, ch. 130, § 76, effective January 1, 1997; 2006, ch. 242, § 46, effective July 12, 2006.

Official Comment

  1. The definitions in general exclude a bank to which an item is issued, as this bank does not take by transfer except in the particular case covered in which the item is issued to a payee for collection, as in the case in which a corporation is transferring balances from one account to another. Thus, the definition of “depositary bank” does not include the bank to which a check is made payable if a check is given in payment of a mortgage. This bank has the status of a payee under Article 3 on Negotiable Instruments and not that of a collecting bank.
  2. Paragraph (a)(1): “Bank” is defined in Section 1-201(4) as meaning “any person engaged in the business of banking.” The definition in paragraph (a)(1) makes clear that “bank” includes savings banks, savings and loan associations, credit unions and trust companies, in addition to the commercial banks commonly denoted by use of the term “bank.”
  3. Paragraph (a)(2): A bank that takes an “on us” item for collection, for application to a customer’s loan, or first handles the item for other reasons is a depositary bank even though it is also the payor bank. However, if the holder presents the item for immediate payment over the counter, the payor bank is not a depositary bank.
  4. Paragraph (a)(3): The definition of “payor bank” is clarified by use of the term “drawee.” That term is defined in Section 4-104 as meaning “a person ordered in a draft to make payment.” An “order” is defined in Section 3-103 as meaning “a written instruction to pay money …. An authorization to pay is not an order unless the person authorized to pay is also instructed to pay.” The definition of order is incorporated into Article 4 by Section 4-104(c). Thus a payor bank is one instructed to pay in the item. A bank does not become a payor bank by being merely authorized to pay or by being given an instruction to pay not contained in the item.
  5. Paragraph (a)(4): The term “intermediary bank” includes the last bank in the collection process if the drawee is not a bank. Usually the last bank is also a presenting bank.

NOTES TO DECISIONS

1.Payor Bank.

The fact that a check was chargeable to depositor’s account did not make bank a collecting bank since all checks are chargeable to someone’s account and if the check was drawn on or accepted by the bank it was a payor bank. Farmers Cooperative Livestock Market, Inc. v. Second Nat'l Bank, 427 S.W.2d 247, 1968 Ky. LEXIS 676 ( Ky. 1968 ).

The words “we inclose for collection” in a letter attached to a check sent to the bank on which the check was drawn did not change the bank’s status from a payor bank to a collecting bank. Farmers Cooperative Livestock Market, Inc. v. Second Nat'l Bank, 427 S.W.2d 247, 1968 Ky. LEXIS 676 ( Ky. 1968 ).

Research References and Practice Aids

Kentucky Law Journal.

Leibson, Handling Re-Presented Checks — Risky Business for Collecting and Payor Banks, 72 Ky. L.J. 549 (1983-84).

Bhala, The Inverted Pyramid of Wire Transfer Law, 82 Ky. L.J. 347 (1993-94).

355.4-106. Payable through or payable at bank — Collecting bank.

  1. If an item states that it is “payable through” a bank identified in the item:
    1. The item designates the bank as a collecting bank and does not by itself authorize the bank to pay the item; and
    2. The item may be presented for payment only by or through the bank.
  2. If an item states that it is “payable at” a bank identified in the item, the item is equivalent to a draft drawn on the bank.
  3. If a draft names a nonbank drawee and it is unclear whether a bank named in the draft is a co-drawee or a collecting bank, the bank is a collecting bank.

History. Enact. Acts 1996, ch. 130, § 77, effective January 1, 1997.

Compiler’s Notes.

A former KRS 355.4-106 (Enact. Acts 1958, ch. 77, § 4-106; 1964, ch. 130, § 7) was repealed, reenacted, renumbered, and amended as KRS 355.4-107 by Acts 1996, ch. 130, § 78, effective January 1, 1997.

Official Comment

  1. This section replaces former Sections 3-120 and 3-121. Some items are made “payable through” a particular bank. Subsection (a) states that such language makes the bank a collecting bank and not a payor bank. An item identifying a “payable through” bank can be presented for payment to the drawee only by the “payable through” bank. The item cannot be presented to the drawee over the counter for immediate payment or by a collecting bank other than the “payable through” bank.
  2. Subsection (b) retains the alternative approach of the present law. Under Alternative A a note payable at a bank is the equivalent of a draft drawn on the bank and the midnight deadline provisions of Sections 4-301 and 4-302 apply. Under Alternative B a “payable at” bank is in the same position as a “payable through” bank under subsection (a).
  3. Subsection (c) rejects the view of some cases that a bank named below the name of a drawee is itself a drawee. The commercial understanding is that this bank is a collecting bank and is not accountable under Section 4-302 for holding an item beyond its deadline. The liability of the bank is governed by Sections 4-202(a) and 4-103(e).

355.4-107. Separate office of a bank.

A branch or separate office of a bank is a separate bank for the purpose of computing the time within which and determining the place at or to which action may be taken or notice or orders must be given under this article and under Article 3.

History. Repealed, reenact., renumbered, and amend. Acts 1996, ch. 130, § 78, effective January 1, 1997.

Compiler’s Notes.

This section was formerly compiled as KRS 355.4-106 and was repealed, reenacted, renumbered, and amended as KRS 355.4-107 by Acts 1996, ch. 130, § 78, effective January 1, 1997.

A former KRS 355.4-107 (Enact. Acts 1958, ch. 77, § 4-107, effective July 1, 1960) was repealed, reenacted, renumbered, and amended as KRS 355.4-108 by Acts 1996, ch. 130, § 79, effective January 1, 1997.

Official Comment

  1. A rule with respect to the status of a branch or separate office of a bank as a part of any statute on bank collections is highly desirable if not absolutely necessary. However, practices in the operations of branches and separate offices vary substantially in the different states and it has not been possible to find any single rule that is logically correct, fair in all situations and workable under all different types of practices. The decision not to draft the section with greater specificity leaves to the courts the resolution of the issues arising under this section on the basis of the facts of each case.
  2. In many states and for many purposes a branch or separate office of the bank should be treated as a separate bank. Many branches function as separate banks in the handling and payment of items and require time for doing so similar to that of a separate bank. This is particularly true if branch banking is permitted throughout a state or in different towns and cities. Similarly, if there is this separate functioning a particular branch or separate office is the only proper place for various types of action to be taken or orders or notices to be given. Examples include the drawing of a check on a particular branch by a customer whose account is carried at that branch; the presentment of that same check at that branch; the issuance of an order to the branch to stop payment on the check.
  3. Section 1 of the American Bankers Association Bank Collection Code provided simply: “A branch or office of any such bank shall be deemed a bank.” Although this rule appears to be brief and simple, as applied to particular sections of the ABA Code it produces illogical and, in some cases, unreasonable results. For example, under Section 11 of the ABA Code it seems anomalous for one branch of a bank to have charged an item to the account of the drawer and another branch to have the power to elect to treat the item as dishonored. Similar logical problems would flow from applying the same rule to Article 4. Warranties by one branch to another branch under Sections 4-207 and 4-208 (each considered a separate bank) do not make sense.
  4. Assuming that it is not desirable to make each branch a separate bank for all purposes, this section provides that a branch or separate office is a separate bank for certain purposes. In so doing the single legal entity of the bank as a whole is preserved, thereby carrying with it the liability of the institution as a whole on such obligations as it may be under. On the other hand, in cases in which the Article provides a number of time limits for different types of action by banks, if a branch functions as a separate bank, it should have the time limits available to a separate bank. Similarly if in its relations to customers a branch functions as a separate bank, notices and orders with respect to accounts of customers of the branch should be given at the branch. For example, whether a branch has notice sufficient to affect its status as a holder in due course of an item taken by it should depend upon what notice that branch has received with respect to the item. Similarly the receipt of a stop-payment order at one branch should not be notice to another branch so as to impair the right of the second branch to be a holder in due course of the item, although in circumstances in which ordinary care requires the communication of a notice or order to the proper branch of a bank, the notice or order would be effective at the proper branch from the time it was or should have been received. See Section 1-201(27).
  5. The bracketed language (“maintaining its own deposit ledger”) in former Section 4-106 is deleted. Today banks keep records on customer accounts by electronic data storage. This has led most banks with branches to centralize to some degree their record keeping. The place where records are kept has little meaning if the information is electronically stored and is instantly retrievable at all branches of the bank. Hence, the inference to be drawn from the deletion of the bracketed language is that where record keeping is done is no longer an important factor in determining whether a branch is a separate bank.

NOTES TO DECISIONS

1.Branch Banks.

A bank organized under the laws of Kentucky had no right to establish a branch bank. (decided under prior law) Bruner v. Citizens' Bank of Shelbyville, 134 Ky. 283 , 120 S.W. 345, 1909 Ky. LEXIS 392 ( Ky. 1909 ); Marvin v. Kentucky Title Trust Co., 218 Ky. 135 , 291 S.W. 17, 1927 Ky. LEXIS 120 ( Ky. 1927 ).

2.Separate Offices.

Additional offices may be established by a bank throughout a city of its location for the purpose of receiving deposits and paying out checks on demand which are incidental to the bank’s business but which do not require special discretion and business acumen. (decided under prior law) Marvin v. Kentucky Title Trust Co., 218 Ky. 135 , 291 S.W. 17, 1927 Ky. LEXIS 120 ( Ky. 1927 ).

355.4-108. Time of receipt of items.

  1. For the purpose of allowing time to process items, prove balances, and make the necessary entries on its books to determine its position for the day, a bank may fix an afternoon hour of 2 p.m. or later as a cutoff hour for the handling of money and items and the making of entries on its books.
  2. An item or deposit of money received on any day after a cutoff hour so fixed or after the close of the banking day may be treated as being received at the opening of the next banking day.

History. Repealed, reenact., renumbered, and amend. Acts 1996, ch. 130, § 79, effective January 1, 1997.

Compiler’s Notes.

This section was formerly compiled as KRS 355.4-107 and was repealed, reenacted, renumbered, and amended as KRS 355.4-108 by Acts 1996, ch. 130, § 79, effective January 1, 1997.

A former KRS 355.4-108 (Enact. Acts 1958, ch. 77, § 4-108, effective July 1, 1960) was repealed, reenacted, renumbered, and amended as KRS 355.4-109 by Acts 1996, ch. 130, § 80, effective January 1, 1997.

Official Comment

  1. Each of the huge volume of checks processed each day must go through a series of accounting procedures that consume time. Many banks have found it necessary to establish a cutoff hour to allow time for these procedures to be completed within the time limits imposed by Article 4. Subsection (a) approves a cutoff hour of this type provided it is not earlier than 2 P.M. Subsection (b) provides that if such a cutoff hour is fixed, items received after the cutoff hour may be treated as being received at the opening of the next banking day. If the number of items received either through the mail or over the counter tends to taper off radically as the afternoon hours progress, a 2 P.M. cutoff hour does not involve a large portion of the items received but at the same time permits a bank using such a cutoff hour to leave its doors open later in the afternoon without forcing into the evening the completion of its settling and proving process.
  2. The provision in subsection (b) that items or deposits received after the close of the banking day may be treated as received at the opening of the next banking day is important in cases in which a bank closes at twelve or one o’clock, e.g., on a Saturday, but continues to receive some items by mail or over the counter if, for example, it opens Saturday evening for the limited purpose of receiving deposits and cashing checks.

355.4-109. Delays.

  1. Unless otherwise instructed, a collecting bank in a good faith effort to secure payment of a specific item drawn on a payor other than a bank, and with or without the approval of any person involved, may waive, modify, or extend time limits imposed or permitted by this chapter for a period not exceeding two (2) additional banking days without discharge of drawers or indorsers or liability to its transferor or a prior party.
  2. Delay by a collecting bank or payor bank beyond time limits prescribed or permitted by this chapter or by instructions is excused if:
    1. The delay is caused by interruption of communication or computer facilities, suspension of payments by another bank, war, emergency conditions, failure of equipment, or other circumstances beyond the control of the bank; and
    2. The bank exercises such diligence as the circumstances require.

History. Repealed, reenact., renumbered, and amend. Acts 1996, ch. 130, § 80, effective January 1, 1997.

Compiler’s Notes.

This section was formerly compiled as KRS 355.4-108 and was repealed, reenacted, renumbered, and amended as KRS 355.4-109 by Acts 1996, ch. 130, § 80, effective January 1, 1997.

A former KRS 355.4-109 (Enact. Acts 1964, ch. 130, § 8) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

Official Comment

  1. Sections 4-202(b), 4-214, 4-301, and 4-302 prescribe various time limits for the handling of items. These are the limits of time within which a bank, in fulfillment of its obligation to exercise ordinary care, must handle items entrusted to it for collection or payment. Under Section 4-103 they may be varied by agreement or by Federal Reserve regulations or operating circular, clearing-house rules, or the like. Subsection (a) permits a very limited extension of these time limits. It authorizes a collecting bank to take additional time in attempting to collect drafts drawn on nonbank payors with or without the approval of any interested party. The right of a collecting bank to waive time limits under subsection (a) does not apply to checks. The two-day extension can only be granted in a good faith effort to secure payment and only with respect to specific items. It cannot be exercised if the customer instructs otherwise. Thus limited the escape provision should afford a limited degree of flexibility in special cases but should not interfere with the overall requirement and objective of speedy collections.
  2. An extension granted under subsection (a) is without discharge of drawers or indorsers. It therefore extends the times for presentment or payment as specified in Article 3.
  3. Subsection (b) is another escape clause from time limits. This clause operates not only with respect to time limits imposed by the Article itself but also time limits imposed by special instructions, by agreement or by Federal regulations or operating circulars, clearing-house rules or the like. The latter time limits are “permitted” by the Code. For example, a payor bank that fails to make timely return of a dishonored item may be accountable for the amount of the item. Subsection (b) excuses a bank from this liability when its failure to meet its midnight deadline resulted from, for example, a computer breakdown that was beyond the control of the bank, so long as the bank exercised the degree of diligence that the circumstances required. In Port City State Bank v. American National Bank, 486 F.2d 196 (10th Cir. 1973), the court held that a bank exercised sufficient diligence to be excused under this subsection. If delay is sought to be excused under this subsection, the bank has the burden of proof on the issue of whether it exercised “such diligence as the circumstances require.” The subsection is consistent with Regulation CC, Section 229.38(e).

NOTES TO DECISIONS

1.Excuse for Delay.

The cumulative effect of the heavy volume of checks to be processed after a Christmas holiday, the absence of a regular bookkeeper and the breakdown of two posting machines did not excuse a bank’s failure to process two checks by the midnight deadline since such circumstances were foreseeable and since the bank could have met the deadline by simply mailing the checks to its transferor instead of sending them by courier. (decided under prior law) Blake v. Woodford Bank & Trust Co., 555 S.W.2d 589, 1977 Ky. App. LEXIS 790 (Ky. Ct. App. 1977).

Opinions of Attorney General.

The imposition of a curfew which makes it necessary for bank personnel to return home earlier than usual would be an “emergency condition” within the meaning of the term as used in subsection (2) of a former version of this section. OAG 68-256 .

355.4-110. Electronic presentment.

  1. “Agreement for electronic presentment” means an agreement, clearing-house rule, or Federal Reserve regulation or operating circular, providing that presentment of an item may be made by transmission of an image of an item or information describing the item (“presentment notice”) rather than delivery of the item itself. The agreement may provide for procedures governing retention, presentment, payment, dishonor, and other matters concerning items subject to the agreement.
  2. Presentment of an item pursuant to an agreement for presentment is made when the presentment notice is received.
  3. If presentment is made by presentment notice, a reference to “item” or “check” in this article means the presentment notice unless the context otherwise indicates.

History. Enact. Acts 1996, ch. 130, § 81, effective January 1, 1997.

Official Comment

  1. “An agreement for electronic presentment” refers to an agreement under which presentment may be made to a payor bank by a presentment notice rather than by presentment of the item. Under imaging technology now under development, the presentment notice might be an image of the item. The electronic presentment agreement may provide that the item may be retained by a depositary bank, other collecting bank, or even a customer of the depositary bank, or it may provide that the item will follow the presentment notice. The identifying characteristic of an electronic presentment agreement is that presentment occurs when the presentment notice is received. “An agreement for electronic presentment” does not refer to the common case of retention of items by payor banks because the item itself is presented to the payor bank in these cases. Payor bank check retention is a matter of agreement between payor banks and their customers. Provisions on payor bank check retention are found in Section 4-406(b).
  2. The assumptions under which the electronic presentment amendments are based are as follows: No bank will participate in an electronic presentment program without an agreement. These agreements may be either bilateral (Section 4-103(a)), under which two banks that frequently do business with each other may agree to depositary bank check retention, or multilateral (Section 4-103(b)), in which large segments of the banking industry may participate in such a program. In the latter case, federal or other uniform regulatory standards would likely supply the substance of the electronic presentment agreement, the application of which could be triggered by the use of some form of identifier on the item. Regulation CC, Section 229.36(c) authorizes truncation agreements but forbids them from extending return times or otherwise varying requirements of the part of Regulation CC governing check collection without the agreement of all parties interested in the check. For instance, an extension of return time could damage a depositary bank which must make funds available to its customers under mandatory availability schedules. The Expedited Funds Availability Act, 12 U.S.C. Section 4008(b)(ii), directs the Federal Reserve Board to consider requiring that banks provide for check truncation.
  3. The parties affected by an agreement for electronic presentment, with the exception of the customer, can be expected to protect themselves. For example, the payor bank can probably be expected to limit its risk of loss from drawer forgery by limiting the dollar amount of eligible items (Federal Reserve program), by reconcilement agreements (ABA Safekeeping program), by insurance (credit union share draft program), or by other means. Because agreements will exist, only minimal amendments are needed to make clear that the UCC does not prohibit electronic presentment.

355.4-111. Statute of limitations.

An action to enforce an obligation, duty, or right arising under this article must be commenced within three (3) years after the claim for relief accrues.

History. Enact. Acts 1996, ch. 130, § 82, effective January 1, 1997.

Official Comment

This section conforms to the period of limitations set by Section 3-118(g) for actions for breach of warranty and to enforce other obligations, duties or rights arising under Article 3. Bracketing “cause of action” recognizes that some states use a different term, such as “claim for relief.”

NOTES TO DECISIONS

1.Application.

Bank customer’s failure to inspect its bank statement and to notify the bank of the claimed unauthorized withdrawals by its business manager within one year of the time the statements and items were made available to it, as required by KRS 355.4-406 (3), precluded any claim for such unauthorized withdrawals, whether based on the Uniform Commercial Code or common law. The three-year statute of limitations, KRS 355.4-111 , was irrelevant under these facts. Dean v. Commonwealth Bank & Trust Co., 2012 Ky. App. LEXIS 58 (Ky. Ct. App. Apr. 6, 2012), aff'd, 434 S.W.3d 489, 2014 Ky. LEXIS 326 ( Ky. 2014 ).

LLC that declared Chapter 11 bankruptcy did not allege facts that were sufficient to survive motions for summary judgment that were filed by a former member of the LLC, a bank where the LLC had its operating account, and a bank employee who was responsible for overseeing the LLC's account, on claims alleging, inter alia, breach of fiduciary duty and fraud; a claim the LLC filed against the bank, which alleged that it violated Ky. Rev. Stat. Ann. § 355.4-406 when it paid checks that were signed by only one person, instead of requiring two signatures, was time-barred under Ky. Rev. Stat. Ann. § 355.4-111 because the last check was paid more than three years before the LLC filed its adversary proceeding. MERV Props., LLC v. Friedlander (In re MERV Props., LLC), 2015 Bankr. LEXIS 1509 (Bankr. E.D. Ky. May 4, 2015), aff'd, 539 B.R. 516, 2015 Bankr. LEXIS 3388 (B.A.P. 6th Cir. 2015).

Part 2. Collection of Items: Depositary and Collecting Banks

355.4-201. Status of collecting bank as agent and provisional status of credits — Applicability of article — Item indorsed “pay any bank.”

  1. Unless a contrary intent clearly appears and before the time that a settlement given by a collecting bank for an item is or becomes final, the bank, with respect to the item, is an agent or subagent of the owner of the item and any settlement given for the item is provisional. This provision applies regardless of the form of indorsement or lack of indorsement and even though credit given for the item is subject to immediate withdrawal as of right or is in fact withdrawn; but the continuance of ownership of an item by its owner and any rights of the owner to proceeds of the item are subject to rights of a collecting bank, such as those resulting from outstanding advances on the item and rights of recoupment or setoff. If an item is handled by banks for the purposes of presentment, payment, collection, or return, the relevant provisions of this article apply even though action of the parties clearly establishes that a particular bank has purchased the item and is the owner of it.
  2. After an item has been indorsed with the words “pay any bank” or the like, only a bank may acquire the rights of a holder until the item has been:
    1. Returned to the customer initiating collection; or
    2. Specially indorsed by a bank to a person who is not a bank.

History. Enact. Acts 1958, ch. 77, § 4-201, effective July 1, 1960; 1996, ch. 130, § 83, effective January 1, 1997.

Official Comment

  1. This section states certain basic rules of the bank collection process. One basic rule, appearing in the last sentence of subsection (a), is that, to the extent applicable, the provisions of the Article govern without regard to whether a bank handling an item owns the item or is an agent for collection. Historically, much time has been spent and effort expended in determining or attempting to determine whether a bank was a purchaser of an item or merely an agent for collection. See discussion of this subject and cases cited in 11 A.L.R. 1043, 16 A.L.R. 1084, 42 A.L.R. 492, 68 A.L.R. 725, 99 A.L.R. 486. See also Section 4 of the American Bankers Association Bank Collection Code. The general approach of Article 4, similar to that of other articles, is to provide, within reasonable limits, rules or answers to major problems known to exist in the bank collection process without regard to questions of status and ownership but to keep general principles such as status and ownership available to cover residual areas not covered by specific rules. In line with this approach, the last sentence of subsection (a) says in effect that Article 4 applies to practically every item moving through banks for the purpose of presentment, payment or collection.
  2. Within this general rule of broad coverage, the first two sentences of subsection (a) state a rule of agency status. “Unless a contrary intent clearly appears” the status of a collecting bank is that of an agent or sub-agent for the owner of the item. Although as indicated in Comment 1 it is much less important under Article 4 to determine status than has been the case heretofore, status may have importance in some residual areas not covered by specific rules. Further, since status has been considered so important in the past, to omit all reference to it might cause confusion. The status of agency “applies regardless of the form of indorsement or lack of indorsement and even though credit given for the item is subject to immediate withdrawal as of right or is in fact withdrawn.” Thus questions heretofore litigated as to whether ordinary indorsements “for deposit,” “for collection” or in blank have the effect of creating an agency status or a purchase, no longer have significance in varying the prima facie rule of agency. Similarly, the nature of the credit given for an item or whether it is subject to immediate withdrawal as of right or is in fact withdrawn, does not alter the agency status. See A.L.R. references supra in Comment 1.

    A contrary intent can change agency status but this must be clear. An example of a clear contrary intent would be if collateral papers established or the item bore a legend stating that the item was sold absolutely to the depositary bank.

  3. The prima facie agency status of collecting banks is consistent with prevailing law and practice today. Section 2 of the American Bankers Association Bank Collection Code so provided. Legends on deposit tickets, collection letters and acknowledgments of items and Federal Reserve operating circulars consistently so provide. The status is consistent with rights of charge-back (Section 4-214 and Section 11 of the ABA Code) and risk of loss in the event of insolvency (Section 4-216 and Section 13 of the ABA Code). The right of charge-back with respect to checks is limited by Regulation CC, Section 226.36(d).
  4. Affirmative statement of a prima facie agency status for collecting banks requires certain limitations and qualifications. Under current practices substantially all bank collections sooner or later merge into bank credits, at least if collection is effected. Usually, this takes place within a few days of the initiation of collection. An intermediary bank receives final collection and evidences the result of its collection by a “credit” on its books to the depositary bank. The depositary bank evidences the results of its collection by a “credit” in the account of its customer. As used in these instances the term “credit” clearly indicates a debtor-creditor relationship. At some stage in the bank collection process the agency status of a collecting bank changes to that of debtor, a debtor of its customer. Usually at about the same time it also becomes a creditor for the amount of the item, a creditor of some intermediary, payor or other bank. Thus the collection is completed, all agency aspects are terminated and the identity of the item has become completely merged in bank accounts, that of the customer with the depositary bank and that of one bank with another.

    Although Section 4-215(a) provides that an item is finally paid when the payor bank takes or fails to take certain action with respect to the item, the final payment of the item may or may not result in the simultaneous final settlement for the item in the case of all prior parties. If a series of provisional debits and credits for the item have been entered in accounts between banks, the final payment of the item by the payor bank may result in the automatic firming up of all these provisional debits and credits under Section 4-215(c), and the consequent receipt of final settlement for the item by each collecting bank and the customer of the depositary bank simultaneously with such action of the payor bank. However, if the payor bank or some intermediary bank accounts for the item with a remittance draft, the next prior bank usually does not receive final settlement for the item until the remittance draft finally clears. See Section 4-213(c). The first sentence of subsection (a) provides that the agency status of a collecting bank (whether intermediary or depositary) continues until the settlement given by it for the item is or becomes final. In the case of the series of provisional credits covered by Section 4-215(c), this could be simultaneously with the final payment of the item by the payor bank. In cases in which remittance drafts are used or in straight noncash collections, this would not be until the times specified in Sections 4-213(c) and 4-215(d). With respect to checks Regulation CC Sections 229.31(c), 229.32(b) and 229.36(d) provide that all settlements between banks are final in both the forward collection and return of checks.

    Under Section 4-213(a) settlements for items may be made by any means agreed to by the parties. Since it is impossible to contemplate all the kinds of settlements that will be utilized, no attempt is made in Article 4 to provide when settlement is final in all cases. The guiding principle is that settlements should be final when the presenting person has received usable funds. Section 4-213(c) and (d) and Section 4-215(c) provide when final settlement occurs with respect to certain kinds of settlement, but these provisions are not intended to be exclusive.

    A number of practical results flow from the rule continuing the agency status of a collecting bank until its settlement for the item is or becomes final, some of which are specifically set forth in this Article. One is that risk of loss continues in the owner of the item rather than the agent bank. See Section 4-214. Offsetting rights favorable to the owner are that pending such final settlement, the owner has the preference rights of Section 4-216 and the direct rights of Section 4-302 against the payor bank. It also follows from this rule that the dollar limitations of Federal Deposit Insurance are measured by the claim of the owner of the item rather than that of the collecting bank. With respect to checks, rights of the parties in insolvency are determined by Regulation CC Section 229.39 and the liability of a bank handling a check to a subsequent bank that does not receive payment because of suspension of payments by another bank is stated in Regulation CC Section 229.35(b).

  5. In those cases in which some period of time elapses between the final payment of the item by the payor bank and the time that the settlement of the collecting bank is or becomes final, e.g., if the payor bank or an intermediary bank accounts for the item with a remittance draft or in straight noncash collections, the continuance of the agency status of the collecting bank necessarily carries with it the continuance of the owner’s status as principal. The second sentence of subsection (a) provides that whatever rights the owner has to proceeds of the item are subject to the rights of collecting banks for outstanding advances on the item and other valid rights, if any. The rule provides a sound rule to govern cases of attempted attachment of proceeds of a noncash item in the hands of the payor bank as property of the absent owner. If a collecting bank has made an advance on an item which is still outstanding, its right to obtain reimbursement for this advance should be superior to the rights of the owner to the proceeds or to the rights of a creditor of the owner. An intentional crediting of proceeds of an item to the account of a prior bank known to be insolvent, for the purpose of acquiring a right of setoff, would not produce a valid setoff. See 8 Zollman, Banks and Banking (1936) Sec. 5443.
  6. This section and Article 4 as a whole represent an intentional abandonment of the approach to bank collection problems appearing in Section 4 of the American Bankers Association Bank Collection Code. Because the tremendous volume of items handled makes impossible the examination by all banks of all indorsements on all items and thus in fact this examination is not made, except perhaps by depositary banks, it is unrealistic to base the rights and duties of all banks in the collection chain on variations in the form of indorsements. It is anomalous to provide throughout the ABA Code that the prima facie status of collecting banks is that of agent or sub-agent but in Section 4 to provide that subsequent holders (sub-agents) shall have the right to rely on the presumption that the bank of deposit (the primary agent) is the owner of the item. It is unrealistic, particularly in this background, to base rights and duties on status of agent or owner. Thus Section 4-201 makes the pertinent provisions of Article 4 applicable to substantially all items handled by banks for presentment, payment or collection, recognizes the prima facie status of most banks as agents, and then seeks to state appropriate limits and some attributes to the general rules so expressed.
  7. Subsection (b) protects the ownership rights with respect to an item indorsed “pay any bank or banker” or in similar terms of a customer initiating collection or of any bank acquiring a security interest under Section 4-210, in the event the item is subsequently acquired under improper circumstances by a person who is not a bank and transferred by that person to another person, whether or not a bank. Upon return to the customer initiating collection of an item so indorsed, the indorsement may be cancelled (Section 3-207). A bank holding an item so indorsed may transfer the item out of banking channels by special indorsement; however, under Section 4-103(e), the bank would be liable to the owner of the item for any loss resulting therefrom if the transfer had been made in bad faith or with lack of ordinary care. If briefer and more simple forms of bank indorsements are developed under Section 4-206 (e.g., the use of bank transit numbers in lieu of present lengthy forms of bank indorsements), a depositary bank having the transit number “X100” could make subsection (b) operative by indorsements such as “Pay any bank — X100.” Regulation CC Section 229.35(c) states the effect of an indorsement on a check by a bank.

NOTES TO DECISIONS

1.Agency.

At common law forwarding bank was principal and collecting bank was agent until the agency was terminated by collection of the paper at which time the collecting bank became a debtor. (decided under prior law) Jennings v. United States Fidelity & Guaranty Co., 294 U.S. 216, 55 S. Ct. 394, 79 L. Ed. 869, 1935 U.S. LEXIS 254 (U.S. 1935).

Where drawer deposited drafts with forwarding bank together with instructions designating collecting bank, the collecting bank was agent of drawer and liable for resulting loss to drawer. (decided under prior law) Grant County Deposit Bank v. McCampbell, 194 F.2d 469, 1952 U.S. App. LEXIS 2785 (6th Cir. Ky. 1952 ); Grant County Deposit Bank v. Greene, 200 F.2d 835, 1952 U.S. App. LEXIS 2372 (6th Cir. Ky. 1952 ).

A bank receiving a draft for collection was agent of holder and was not liable for negligence of bank to which it sent the draft for collection in delivering the bill of lading by direction of drawer without collecting, and thus the forwarding bank had no right of action against the other bank for its negligence. (decided under prior law) Commercial Nat'l Bank v. First Nat'l Bank, 158 Ky. 392 , 165 S.W. 398, 1914 Ky. LEXIS 621 ( Ky. 1914 ).

A holder of paper who delivered it to a bank for collection and credit was at liberty to treat the bank as an agent until the proceeds were collected by the bank in money and authority of the bank to credit the customer did not arise until he had actually received the money. (decided under prior law) Commercial Nat'l Bank v. First Nat'l Bank, 158 Ky. 392 , 165 S.W. 398, 1914 Ky. LEXIS 621 ( Ky. 1914 ).

Solvent national bank receiving items for deposit or collection was depositor’s agent as well as a state bank and, if bank became insolvent, the depositor had priority in the distribution of the bank’s assets as to such deposit to extent assets in bank still included the deposit. (decided under prior law) Bell Nat'l Bank v. Green, 258 Ky. 317 , 79 S.W.2d 967, 1935 Ky. LEXIS 146 ( Ky. 1935 ).

2.Debtor and Creditor.

Where bank credited at par sight drafts sent it for collection on the day of their receipt and, for a short time, had the right to use the proceeds of the collection in the same manner as that of other depositors, and customer had the right to withdraw funds twice a week in excess of nonchecking deposits, and bank remitted out of own funds if collection had not been made, the relationship of debtor and creditor and not principal and agent was created and the amount owing customer when bank closed was not held in trust which would give customer priority. (decided under prior law) American Sugar Refining Co. v. Anderson, 20 F. Supp. 55, 1937 U.S. Dist. LEXIS 1541 (D. Ky. 1937 ), aff'd, 107 F.2d 948, 1939 U.S. App. LEXIS 4687 (6th Cir. Ky. 1939 ).

3.Certified Check.

Bank certifying check was an insurer of the check and bank receiving it was a holder for value although it permitted depositor to withdraw the proceeds after notice of protest and dishonor. (decided under prior law) First Nat'l Bank v. Bank of Ravenswood, 141 Ky. 671 , 133 S.W. 581, 1911 Ky. LEXIS 68 ( Ky. 1911 ).

4.Negotiation.

Bank’s indorsement and mailing of check for collection to its correspondent bank was an act of negotiation. (decided under prior law) Louisa Nat'l Bank v. Kentucky Nat'l Bank, 239 Ky. 302 , 39 S.W.2d 497, 1931 Ky. LEXIS 776 ( Ky. 1931 ).

5.Holder in Due Course.

Bank taking depositor’s check for collection and crediting it to depositor’s account upon condition that it be charged back in case of dishonor when the depositor had no other funds to his credit was nevertheless a holder in due course to the extent it honored depositor’s checks or became liable thereon before receiving notice of any infirmity in the check, and this was true whether bank was regarded as absolute owner of the check or merely as having a lien thereon for sums paid out or for the payment of which it had become bound. (decided under prior law) National Deposit Bank v. Ohio Oil Co., 250 Ky. 288 , 62 S.W.2d 1048, 1933 Ky. LEXIS 686 ( Ky. 1933 ).

Research References and Practice Aids

Kentucky Law Journal.

Leibson, Handling Re-Presented Checks — Risky Business for Collecting and Payor Banks, 72 Ky. L.J. 549 (1983-84).

355.4-202. Responsibility for collection or return — When action timely.

  1. A collecting bank must exercise ordinary care in:
    1. Presenting an item or sending it for presentment;
    2. Sending notice of dishonor or nonpayment or returning an item other than a documentary draft to the bank’s transferor after learning that the item has not been paid or accepted, as the case may be;
    3. Settling for an item when the bank receives final settlement; and
    4. Notifying its transferor of any loss or delay in transit within a reasonable time after discovery thereof.
  2. A collecting bank exercises ordinary care under subsection (1) of this section by taking proper action before its midnight deadline following receipt of an item, notice, or settlement. Taking proper action within a reasonably longer time may constitute the exercise of ordinary care, but the bank has the burden of establishing timeliness.
  3. Subject to subsection (1)(a) of this section, a bank is not liable for the insolvency, neglect, misconduct, mistake, or default of another bank or person or for loss or destruction of an item in the possession of others or in transit.

History. Enact. Acts 1958, ch. 77, § 4-202, effective July 1, 1960; 1996, ch. 130, § 84, effective January 1, 1997.

Official Comment

  1. Subsection (a) states the basic responsibilities of a collecting bank. Of course, under Section 1-203 a collecting bank is subject to the standard requirement of good faith. By subsection (a) it must also use ordinary care in the exercise of its basic collection tasks. By Section 4-103(a) neither requirement may be disclaimed.
  2. If the bank makes presentment itself, subsection (a)(i) requires ordinary care with respect both to the time and manner of presentment. (Sections 3-501 and 4-212.) If it forwards the item to be presented the subsection requires ordinary care with respect to routing (Section 4-204), and also in the selection of intermediary banks or other agents.
  3. Subsection (a) describes types of basic action with respect to which a collecting bank must use ordinary care. Subsection (b) deals with the time for taking action. It first prescribes the general standard for timely action, namely, for items received on Monday, proper action (such as forwarding or presenting) on Monday or Tuesday is timely. Although under current “production line” operations banks customarily move items along on regular schedules substantially briefer than two days, the subsection states an outside time within which a bank may know it has taken timely action. To provide flexibility from this standard norm, the subsection further states that action within a reasonably longer time may be timely but the bank has the burden of proof. In the case of time items, action after the midnight deadline, but sufficiently in advance of maturity for proper presentation, is a clear example of a “reasonably longer time” that is timely. The standard of requiring action not later than Tuesday in the case of Monday items is also subject to possibilities of variation under the general provisions of Section 4-103, or under the special provisions regarding time of receipt of items (Section 4-108), and regarding delays (Section 4-109). This subsection (b) deals only with collecting banks. The time limits applicable to payor banks appear in Sections 4-301 and 4-302.
  4. At common law the so-called New York collection rule subjected the initial collecting bank to liability for the actions of subsequent banks in the collection chain; the so-called Massachusetts rule was that each bank, subject to the duty of selecting proper intermediaries, was liable only for its own negligence. Subsection (c) adopts the Massachusetts rule. But since this is stated to be subject to subsection (a)(i) a collecting bank remains responsible for using ordinary care in selecting properly qualified intermediary banks and agents and in giving proper instructions to them. Regulation CC Section 229.36(d) states the liability of a bank during the forward collection of checks.

NOTES TO DECISIONS

1.Untimely Notice of Dishonor.

Where bank did not notify seller of dishonor of buyer’s check until 48 days after bank received notice of such dishonor, such notice was not timely and bank was liable for failure to give timely notice and was not entitled to recover on counterclaim against seller for amount of the check. United Kentucky Bank, Inc. v. Eagle Machine Co., 644 S.W.2d 649, 1983 Ky. App. LEXIS 273 (Ky. Ct. App. 1983).

2.Acceptance of Payment Other Than Cash.

An agent bank was at fault when it accepted anything but cash in the absence of custom or agreement for acceptance of a substitute. (decided under prior law) Jennings v. United States Fidelity & Guaranty Co., 294 U.S. 216, 55 S. Ct. 394, 79 L. Ed. 869, 1935 U.S. LEXIS 254 (U.S. 1935).

3.Liability of Collecting Bank.

Where collecting bank failed to follow instructions and notify forwarding bank by telegram of dishonor and without authority extended credit to drawee by not requiring him to pay sight drafts upon presentment, although well aware of his unsatisfactory financial condition, collecting bank was liable for the resulting loss. (decided under prior law) Grant County Deposit Bank v. McCampbell, 194 F.2d 469, 1952 U.S. App. LEXIS 2785 (6th Cir. Ky. 1952 ).

4.Cashing Check Without Identification.

Where a bank cashed a check without requiring identification of a holder and such check, upon being forwarded to the drawee bank, was paid, the drawee bank was entitled to recover from the bank which first took the check. (decided under prior law) Farmers' Nat'l Bank v. Farmers' & Traders' Bank, 159 Ky. 141 , 166 S.W. 986, 1914 Ky. LEXIS 772 ( Ky. 1914 ) ( Ky. 1914 ).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Leibson, Handling Re-Presented Checks — Risky Business for Collecting and Payor Banks, 72 Ky. L.J. 549 (1983-84).

355.4-203. Effect of instructions.

Subject to Article 3 of this chapter concerning conversion of instruments (KRS 355.3-420 ) and restrictive indorsements (KRS 355.3-206 ), only a collecting bank’s transferor can give instructions that affect the bank or constitute notice to it, and a collecting bank is not liable to prior parties for any action taken pursuant to the instructions or in accordance with any agreement with its transferor.

History. Enact. Acts 1958, ch. 77, § 4-203, effective July 1, 1960; 1996, ch. 130, § 85, effective January 1, 1997.

Official Comment

This section adopts a “chain of command” theory which renders it unnecessary for an intermediary or collecting bank to determine whether its transferor is “authorized” to give the instructions. Equally the bank is not put on notice of any “revocation of authority” or “lack of authority” by notice received from any other person. The desirability of speed in the collection process and the fact that, by reason of advances made, the transferor may have the paramount interest in the item requires the rule.

The section is made subject to the provisions of Article 3 concerning conversion of instruments (Section 3-420) and restrictive indorsements (Section 3-206). Of course instructions from or an agreement with its transferor does not relieve a collecting bank of its general obligation to exercise good faith and ordinary care. See Section 4-103(a). If in any particular case a bank has exercised good faith and ordinary care and is relieved of responsibility by reason of instructions of or an agreement with its transferor, the owner of the item may still have a remedy for loss against the transferor (another bank) if such transferor has given wrongful instructions.

The rules of the section are applied only to collecting banks. Payor banks always have the problem of making proper payment of an item; whether such payment is proper should be based upon all of the rules of Articles 3 and 4 and all of the facts of any particular case, and should not be dependent exclusively upon instructions from or an agreement with a person presenting the item.

355.4-204. Methods of sending and presenting — Sending directly to payor bank.

  1. A collecting bank shall send items by a reasonably prompt method, taking into consideration relevant instructions, the nature of the item, the number of those items on hand, the cost of collection involved, and the method generally used by it or others to present those items.
  2. A collecting bank may send:
    1. An item directly to the payor bank;
    2. An item to a nonbank payor if authorized by its transferor; and
    3. An item other than documentary drafts to a nonbank payor, if authorized by Federal Reserve regulation or operating circular, clearing-house rule, or the like.
  3. Presentment may be made by a presenting bank at a place where the payor bank or other payor has requested that presentment be made.

History. Enact. Acts 1958, ch. 77, § 4-204; 1964, ch. 130, § 9; 1996, ch. 130, § 86, effective January 1, 1997.

Official Comment

  1. Subsection (a) prescribes the general standards applicable to proper sending or forwarding of items. Because of the many types of methods available and the desirability of preserving flexibility any attempt to prescribe limited or precise methods is avoided.
  2. Subsection (b)(1) codifies the practice of direct mail, express, messenger or like presentment to payor banks. The practice is now country-wide and is justified by the need for speed, the general responsibility of banks, Federal Deposit Insurance protection and other reasons.
  3. Full approval of the practice of direct sending is limited to cases in which a bank is a payor. Since nonbank drawees or payors may be of unknown responsibility, substantial risks may be attached to placing in their hands the instruments calling for payments from them. This is obviously so in the case of documentary drafts. However, in some cities practices have long existed under clearing-house procedures to forward certain types of items to certain nonbank payors. Examples include insurance loss drafts drawn by field agents on home offices. For the purpose of leaving the door open to legitimate practices of this kind, subsection (b)(iii) affirmatively approves direct sending of any item other than documentary drafts to any nonbank payor, if authorized by Federal Reserve regulation or operating circular, clearing-house rule or the like.

    On the other hand subsection (b)(2) approves sending any item directly to a nonbank payor if authorized by a collecting bank’s transferor. This permits special instructions or agreements out of the norm and is consistent with the “chain of command” theory of Section 4-203. However, if a transferor other than the owner of the item, e.g., a prior collecting bank, authorizes a direct sending to a nonbank payor, such transferor assumes responsibility for the propriety or impropriety of such authorization.

  4. Section 3-501(b) provides where presentment may be made. This provision is expressly subject to Article 4. Section 4-204(c) specifically approves presentment by a presenting bank at any place requested by the payor bank or other payor. The time when a check is received by a payor bank for presentment is governed by Regulation CC Section 229.36(b).

NOTES TO DECISIONS

1.Failure to Follow Instructions.

Where forwarding bank designated collecting bank, the collecting bank was agent of drawer and liable for resulting loss to drawer where it failed to disclose knowledge of drawee’s financial condition and to follow instructions to notify forwarding bank by telegram if drafts were not honored on presentation. (decided under prior law) Grant County Deposit Bank v. Greene, 200 F.2d 835, 1952 U.S. App. LEXIS 2372 (6th Cir. Ky. 1952 ).

Research References and Practice Aids

Kentucky Law Journal.

Leibson, Handling Re-Presented Checks — Risky Business for Collecting and Payor Banks, 72 Ky. L.J. 549 (1983-84).

355.4-205. Depositary bank holder of unindorsed item.

If a customer delivers an item to a depositary bank for collection:

  1. The depositary bank becomes a holder of the item at the time it receives the item for collection if the customer at the time of delivery was a holder of the item, whether or not the customer indorses the item, and, if the bank satisfies the other requirements of KRS 355.3-302 , it is a holder in due course; and
  2. The depositary bank warrants to collecting banks, the payor bank or other payor, and the drawer that the amount of the item was paid to the customer or deposited to the customer’s account.

History. Enact. Acts 1958, ch. 77, § 4-205, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 87, effective January 1, 1997.

Official Comment

Section 3-201(b) provides that negotiation of an instrument payable to order requires indorsement by the holder. The rule of former Section 4-205(1) was that the depositary bank may supply a missing indorsement of its customer unless the item contains the words “payee’s indorsement required” or the like. The cases have differed on the status of the depositary bank as a holder if it fails to supply its customer’s indorsement. Marine Midland Bank, N.A. v. Price, Miller, Evans & Flowers, 446 N.Y.S.2d 797 (N.Y.App.Div. 4th Dept. 1981), rev’d, 455 N.Y.S.2d 565 (N.Y. 1982). It is common practice for depositary banks to receive unindorsed checks under so-called “lock-box” agreements from customers who receive a high volume of checks. No function would be served by requiring a depositary bank to run these items through a machine that would supply the customer’s indorsement except to afford the drawer and the subsequent banks evidence that the proceeds of the item reached the customer’s account. Paragraph (1) provides that the depositary bank becomes a holder when it takes the item for deposit if the depositor is a holder. Whether it supplies the customer’s indorsement is immaterial. Paragraph (2) satisfies the need for a receipt of funds by the depositary bank by imposing on that bank a warranty that it paid the customer or deposited the item to the customer’s account. This warranty runs not only to collecting banks and to the payor bank or nonbank drawee but also to the drawer, affording protection to these parties that the depositary bank received the item and applied it to the benefit of the holder.

355.4-206. Transfer between banks.

Any agreed method that identifies the transferor bank is sufficient for the item’s further transfer to another bank.

History. Enact. Acts 1958, ch. 77, § 4-206, effective July 1, 1960; 1996, ch. 130, § 88, effective January 1, 1997.

Official Comment

This section is designed to permit the simplest possible form of transfer from one bank to another, once an item gets in the bank collection chain, provided only identity of the transferor bank is preserved. This is important for tracing purposes and if recourse is necessary. However, since the responsibilities of the various banks appear in the Article it becomes unnecessary to have liability or responsibility depend on more formal indorsements. Simplicity in the form of transfer is conducive to speed. If the transfer is between banks, this section takes the place of the more formal requirements of Section 3-201.

355.4-207. Transfer warranties.

  1. A customer or collecting bank that transfers an item and receives a settlement or other consideration warrants to the transferee and to any subsequent collecting bank that:
    1. The warrantor is a person entitled to enforce the item;
    2. All signatures on the item are authentic and authorized;
    3. The item has not been altered;
    4. The item is not subject to a defense or claim in recoupment (KRS 355.3-305 (1)) of any party that can be asserted against the warrantor; and
    5. The warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer; and
    6. With respect to any remotely created item, that person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn.
  2. If an item is dishonored, a customer or collecting bank transferring the item and receiving settlement or other consideration is obliged to pay the amount due on the item:
    1. According to the terms of the item at the time it was transferred; or
    2. If the transfer was of an incomplete item, according to its terms when completed as stated in KRS 355.3-115 and 355.3-407 . The obligation of a transferor is owed to the transferee and to any subsequent collecting bank that takes the item in good faith. A transferor cannot disclaim its obligation under this subsection by an indorsement stating that it is made “without recourse” or otherwise disclaiming liability.
  3. A person to whom the warranties under subsection (1) of this section are made and who took the item in good faith may recover from the warrantor as damages for breach of warranty an amount equal to the loss suffered as a result of the breach, but not more than the amount of the item plus expenses and loss of interest incurred as a result of the breach.
  4. The warranties stated in subsection (1) of this section cannot be disclaimed with respect to checks. Unless notice of a claim for breach of warranty is given to the warrantor within thirty (30) days after the claimant has reason to know of the breach and the identity of the warrantor, the warrantor is discharged to the extent of any loss caused by the delay in giving notice of the claim.
  5. A claim for relief for breach of warranty under this section accrues when the claimant has reason to know of the breach.

History. Enact. Acts 1958, ch. 77, § 4-207, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 89, effective January 1, 1997; 2006, ch. 242, § 47, effective July 12, 2006.

Official Comment

Except for subsection (b), this section conforms to Section 3-416 and extends its coverage to items. The substance of this section is discussed in the Comment to Section 3-416. Subsection (b) provides that customers or collecting banks that transfer items, whether by indorsement or not, undertake to pay the item if the item is dishonored. This obligation cannot be disclaimed by a “without recourse” indorsement or otherwise. With respect to checks, Regulation CC Section 229.34 states the warranties made by paying and returning banks.

NOTES TO DECISIONS

1.Applicability.

Bank’s negotiation of an insurer’s reimbursement check that named a mobile home owner and a holder of a security interest in the mobile home as non-alternative co-payees, despite receiving the check with only the owner’s indorsement, was a violation of KRS 355.3-110 (4) and entitled the security interest holder to summary judgment on an action sounding in conversion under KRS 355.3-420 ; since the action was for statutory conversion and was not a statutory warranty action under KRS 355.4-207 (1), that statute’s 30-day notice requirement was inapplicable. Tri-County Nat'l Bank v. Greenpoint Credit, LLC, 190 S.W.3d 360, 2006 Ky. App. LEXIS 104 (Ky. Ct. App. 2006).

2.Payment of Forged Check.

Although money paid by mistake could generally be recovered, the payment of a forged check by a bank upon which it was drawn was an exception, as a bank was bound to know the signature of its depositors. (decided under prior law) Farmers' Nat'l Bank v. Farmers' & Traders' Bank, 159 Ky. 141 , 166 S.W. 986, 1914 Ky. LEXIS 772 ( Ky. 1914 ) ( Ky. 1914 ).

3.Warranties of Customer.

The signature of the drawer was not warranted by the indorser of a check to the drawee bank who paid the check. (decided under prior law) Louisa Nat'l Bank v. Kentucky Nat'l Bank, 239 Ky. 302 , 39 S.W.2d 497, 1931 Ky. LEXIS 776 ( Ky. 1931 ).

4.Warranties of Collecting Banks.

In insurer’s third party action for indemnity against collecting bank which, over widow’s forged indorsement, cashed draft given to widow’s attorney in settlement of widow’s claim, insurer’s recovery was based on the finding that the collecting bank erroneously warranted that it had good title as to widow’s interest in the draft. (decided under prior law) First Nat'l Bank v. Progressive Casualty Ins. Co., 517 S.W.2d 226, 1974 Ky. LEXIS 19 ( Ky. 1974 ).

355.4-208. Presentment warranties.

    1. If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, (1) (a) If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft,
      1. The person obtaining payment or acceptance, at the time of presentment; and
      2. A previous transferor of the draft, at the time of transfer,

        warrant to the drawee that pays or accepts the draft in good faith the conditions set out in paragraph (b) of this subsection.

      1. The warrantor is, or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft; (b) 1. The warrantor is, or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft;
      2. The draft has not been altered;
      3. The warrantor has no knowledge that the signature of the purported drawer of the draft is unauthorized; and
      4. With respect to any remotely created item, that the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn.
  1. A drawee making payment may recover from a warrantor damages for breach of warranty equal to the amount paid by the drawee less the amount the drawee received or is entitled to receive from the drawer because of the payment. In addition, the drawee is entitled to compensation for expenses and loss of interest resulting from the breach. The right of the drawee to recover damages under this subsection is not affected by any failure of the drawee to exercise ordinary care in making payment. If the drawee accepts the draft:
    1. Breach of warranty is a defense to the obligation of the acceptor; and
    2. If the acceptor makes payment with respect to the draft, the acceptor is entitled to recover from a warrantor for breach of warranty the amounts stated in this subsection.
  2. If a drawee asserts a claim for breach of warranty under subsection (1) of this section based on an unauthorized indorsement of the draft or an alteration of the draft, the warrantor may defend by proving that the indorsement is effective under KRS 355.3-404 or 355.3-405 or the drawer is precluded under KRS 355.3-406 or 355.4-406 from asserting against the drawee the unauthorized indorsement or alteration.
  3. If:
    1. A dishonored draft is presented for payment to the drawer or an indorser; or
    2. Any other item is presented for payment to a party obliged to pay the item,

      and the item is paid, the person obtaining payment and a prior transferor of the item warrant to the person making payment in good faith that the warrantor is, or was, at the time the warrantor transferred the item, a person entitled to enforce the item or authorized to obtain payment on behalf of a person entitled to enforce the item. The person making payment may recover from any warrantor for breach of warranty an amount equal to the amount paid plus expenses and loss of interest resulting from the breach.

  4. The warranties stated in subsections (1) and (4) of this section cannot be disclaimed with respect to checks. Unless notice of a claim for breach of warranty is given to the warrantor within thirty (30) days after the claimant has reason to know of the breach and the identity of the warrantor, the warrantor is discharged to the extent of any loss caused by the delay in giving notice of the claim.
  5. A claim for relief for breach of warranty under this section accrues when the claimant has reason to know of the breach.

History. Enact. Acts 1996, ch. 130, § 90, effective January 1, 1997; 2006, ch. 242, § 48, effective July 12, 2006.

Compiler’s Notes.

A former KRS 355.4-208 (Enact. Acts 1958, ch. 77, § 4-208, effective July 1, 1960) was repealed, reenacted, renumbered, and amended as KRS 355.4-210 by Acts 1996, ch. 130, § 92, effective January 1, 1997.

Official Comment

This section conforms to Section 3-417 and extends its coverage to items. The substance of this section is discussed in the Comment to Section 3-417. “Draft” is defined in Section 4-104 as including an item that is an order to pay so as to make clear that the term “draft” in Article 4 may include items that are not instruments within Section 3-104.

355.4-209. Encoding and retention warranties.

  1. A person who encodes information on or with respect to an item after issue warrants to any subsequent collecting bank and to the payor bank or other payor that the information is correctly encoded. If the customer of a depositary bank encodes, that bank also makes the warranty.
  2. A person who undertakes to retain an item pursuant to an agreement for electronic presentment warrants to any subsequent collecting bank and to the payor bank or other payor that retention and presentment of the item comply with the agreement. If a customer of a depositary bank undertakes to retain an item, that bank also makes this warranty.
  3. A person to whom warranties are made under this section and who took the item in good faith may recover from the warrantor as damages for breach of warranty an amount equal to the loss suffered as a result of the breach, plus expenses and loss of interest incurred as a result of the breach.

History. Enact. Acts 1996, ch. 130, § 91, effective January 1, 1997.

Compiler’s Notes.

A former KRS 355.4-209 (Enact. Acts 1958, ch. 77, § 4-209, effective July 1, 1960) was repealed, reenacted, renumbered, and amended as KRS 355.4-211 by Acts 1996, ch. 130, § 93, effective January 1, 1997.

Official Comment

  1. Encoding and retention warranties are included in Article 4 because they are unique to the bank collection process. These warranties are breached only by the person doing the encoding or retaining the item and not by subsequent banks handling the item. Encoding and check retention may be done by customers who are payees of a large volume of checks; hence, this section imposes warranties on customers as well as banks. If a customer encodes or retains, the depositary bank is also liable for any breach of this warranty.
  2. A misencoding of the amount on the MICR line is not an alteration under Section 3-407(a) which defines alteration as changing the contract of the parties. If a drawer wrote a check for $2,500 and the depositary bank encoded $25,000 on the MICR line, the payor bank could debit the drawer’s account for only $2,500. This subsection would allow the payor bank to hold the depositary bank liable for the amount paid out over $2,500 without first pursuing the person who received payment. Intervening collecting banks would not be liable to the payor bank for the depositary bank’s error. If a drawer wrote a check for $25,000 and the depositary bank encoded $2,500, the payor bank becomes liable for the full amount of the check. The payor bank’s rights against the depositary bank depend on whether the payor bank has suffered a loss. Since the payor bank can debit the drawer’s account for $25,000, the payor bank has a loss only to the extent that the drawer’s account is less than the full amount of the check. There is no requirement that the payor bank pursue collection against the drawer beyond the amount in the drawer’s account as a condition to the payor bank’s action against the depositary bank for breach of warranty. See Georgia Railroad Bank & Trust Co. v. First National Bank & Trust, 229 S.E.2d 482 (Ga. App. 1976), aff’d, 235 S.E.2d 1 (Ga. 1977), and First National Bank of Boston v. Fidelity Bank, National Association, 724 F.Supp. 1168 (E.D. Pa. 1989).
  3. A person retaining items under an electronic presentment agreement (Section 4-110) warrants that it has complied with the terms of the agreement regarding its possession of the item and its sending a proper presentment notice. If the keeper is a customer, its depositary bank also makes this warranty.

355.4-210. Security interest of collecting bank in items, accompanying documents, and proceeds.

  1. A collecting bank has a security interest in an item and any accompanying documents or the proceeds of either:
    1. In case of an item deposited in an account, to the extent to which credit given for the item has been withdrawn or applied;
    2. In case of an item for which it has given credit available for withdrawal as of right, to the extent of the credit given, whether or not the credit is drawn upon or there is a right of charge-back; or
    3. If it makes an advance on or against the item.
  2. If credit given for several items received at one (1) time or pursuant to a single agreement is withdrawn or applied in part, the security interest remains upon all the items, any accompanying documents or the proceeds of either. For the purpose of this section, credits first given are first withdrawn.
  3. Receipt by a collecting bank of a final settlement for an item is a realization on its security interest in the item, accompanying documents, and proceeds. So long as the bank does not receive final settlement for the item or give up possession of the item or possession or control of the accompanying documents for purposes other than collection, the security interest continues to that extent and is subject to Article 9 of this chapter, but:
    1. No security agreement is necessary to make the security interest enforceable (KRS 355.9-203 (2)(c)1.); and
    2. No filing is required to perfect the security interest; and
    3. The security interest has priority over conflicting perfected security interests in the item, accompanying documents, or proceeds.

History. Enact Acts 1958, ch. 77, § 4-210, effective July 1, 1960; Repealed, reenact., renumbered, and amend. Acts 1996, ch. 130, § 92, effective January 1, 1997; 2000, ch. 408, § 167, effective July 1, 2001; 2012, ch. 132, § 58, effective July 12, 2012.

Compiler’s Notes.

This section was formerly compiled as KRS 355.4-208 and was repealed, reenacted, renumbered, and amended as KRS 355.4-210 by Acts 1996, ch. 130, § 92, effective January 1, 1997.

A former KRS 355.4-210 (Enact. Acts 1958, ch. 77, § 4-210, effective July 1, 1960) was repealed, reenacted, renumbered, and amended as KRS 355.4-212 by Acts 1996, ch. 130, § 94, effective January 1, 1997.

Official Comment

  1. Subsection (a) states a rational rule for the interest of a bank in an item. The customer of the depositary bank is normally the owner of the item and the several collecting banks are agents of the customer (Section 4-201). A collecting agent may properly make advances on the security of paper held for collection, and acquires at common law a possessory lien for these advances. Subsection (a) applies an analogous principle to a bank in the collection chain which extends credit on items in the course of collection. The bank has a security interest to the extent stated in this section. To the extent of its security interest it is a holder for value (Sections 3-303, 4-211) and a holder in due course if it satisfies the other requirements for that status (Section 3-302). Subsection (a) does not derogate from the banker’s general common law lien or right of setoff against indebtedness owing in deposit accounts. See Section 1-103. Rather subsection (a) specifically implements and extends the principle as a part of the bank collection process.
  2. Subsection (b) spreads the security interest of the bank over all items in a single deposit or received under a single agreement and a single giving of credit. It also adopts the “first-in, first-out” rule.
  3. Collection statistics establish that the vast majority of items handled for collection are in fact collected. The first sentence of subsection (c) reflects the fact that in the normal case the bank’s security interest is self-liquidating. The remainder of the subsection correlates the security interest with the provisions of Article 9, particularly for use in the cases of noncollection in which the security interest may be important.

NOTES TO DECISIONS

1.Certified Checks.

Bank certifying check was an insurer of the check and bank receiving it was a holder for value although it permitted depositor to withdraw the proceeds after notice of protest and dishonor. (decided under prior law) First Nat'l Bank v. Bank of Ravenswood, 141 Ky. 671 , 133 S.W. 581, 1911 Ky. LEXIS 68 ( Ky. 1911 ).

Research References and Practice Aids

Kentucky Law Journal.

Weinberg, Pleading and Practice in Commercial Paper Cases: Burdens of Proof, 72 Ky. L.J. 575 (1983-84).

355.4-211. When bank gives value for purposes of holder in due course.

For purposes of determining its status as a holder in due course, a bank has given value to the extent it has a security interest in an item, if the bank otherwise complies with the requirements of KRS 355.3-302 on what constitutes a holder in due course.

History. Repealed, reenact., renumbered, and amend. Acts 1996, ch. 130, § 93, effective January 1, 1997.

Compiler’s Notes.

This section was formerly compiled as KRS 355.4-209 and was repealed, reenacted, renumbered, and amended as KRS 355.4-211 by Acts 1996, ch. 130, § 93, effective January 1, 1997.

A former KRS 355.4-211 (Enact. Acts 1958, ch. 77, § 4-211, effective July 1, 1960) was repealed, reenacted, and renumbered as KRS 355.4-213 by Acts 1996, ch. 130, § 95, effective January 1, 1997.

Official Comment

The section completes the thought of the previous section and makes clear that a security interest in an item is “value” for the purpose of determining the holder’s status as a holder in due course. The provision is in accord with the prior law (N.I.L. Section 27) and with Article 3 (Section 3-303). The section does not prescribe a security interest under Section 4-210 as a test of “value” generally because the meaning of “value” under other Articles is adequately defined in Section 1-201.

Research References and Practice Aids

Kentucky Law Journal.

Weinberg, Pleading and Practice in Commercial Paper Cases: Burdens of Proof, 72 Ky. L.J. 575 (1983-84).

355.4-212. Presentment by notice of item not payable by, through, or at bank — Liability of drawer or indorser.

  1. Unless otherwise instructed, a collecting bank may present an item not payable by, through, or at a bank by sending to the party to accept or pay a record providing notice that the bank holds the item for acceptance or payment. The notice must be sent in time to be received on or before the day when presentment is due and the bank must meet any requirement of the party to accept or pay under KRS 355.3-501 by the close of the bank’s next banking day after it knows of the requirement.
  2. If presentment is made by notice and payment, acceptance, or request for compliance with a requirement under KRS 355.3-501 is not received by the close of business on the day after maturity or, in the case of demand items, by the close of business on the third banking day after notice was sent, the presenting bank may treat the item as dishonored and charge any drawer or indorser by sending it notice of the facts.

History. Repealed, reenact., renumbered, and amend. Acts 1996, ch. 130, § 94, effective January 1, 1997; 2006, ch. 242, § 49, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 355.4-210 and was repealed, reenacted, renumbered, and amended as KRS 355.4-212 by Acts 1996, ch. 130, § 94, effective January 1, 1997.

A former KRS 355.4-212 (Enact. Acts 1958, ch. 77, § 4-212, effective July 1, 1960) was repealed, reenacted, renumbered, and amended as KRS 355.4-214 by Acts 1996, ch. 130, § 96, effective January 1, 1997.

Official Comment

  1. This section codifies a practice extensively followed in presentation of trade acceptances and documentary and other drafts drawn on nonbank payors. It imposes a duty on the payor to respond to the notice of the item if the item is not to be considered dishonored. Notice of such a dishonor charges drawers and indorsers. Presentment under this section is good presentment under Article 3. See Section 3-501.
  2. A drawee not receiving notice is not, of course, liable to the drawer for wrongful dishonor.
  3. A bank so presenting an instrument must be sufficiently close to the drawee to be able to exhibit the instrument on the day it is requested to do so or the next business day at the latest.

355.4-213. Medium and time of settlement by bank.

  1. With respect to settlement by a bank, the medium and time of settlement may be prescribed by Federal Reserve regulations or circulars, clearing-house rules, and the like, or agreement. In the absence of such prescription:
    1. The medium of settlement is cash or credit to an account in a Federal Reserve bank of or specified by the person to receive settlement; and
    2. The time of settlement, is:
      1. With respect to tender of settlement by cash, a cashier’s check, or teller’s check, when the cash or check is sent or delivered;
      2. With respect to tender of settlement by credit in an account in a Federal Reserve bank, when the credit is made;
      3. With respect to tender of settlement by a credit or debit to an account in a bank, when the credit or debit is made or, in the case of tender of settlement by authority to charge an account, when the authority is sent or delivered; or
      4. With respect to tender of settlement by a funds transfer, when payment is made pursuant to KRS 355.4A-406 (1) to the person receiving settlement.
  2. If the tender of settlement is not by a medium authorized by subsection (1) of this section or the time of settlement is not fixed by subsection (1) of this section, no settlement occurs until the tender of settlement is accepted by the person receiving settlement.
  3. If settlement for an item is made by cashier’s check or teller’s check and the person receiving settlement, before its midnight deadline:
    1. Presents or forwards the check for collection, settlement is final when the check is finally paid; or
    2. Fails to present or forward the check for collection, settlement is final at the midnight deadline of the person receiving settlement.
  4. If settlement for an item is made by giving authority to charge the account of the bank giving settlement in the bank receiving settlement, settlement is final when the charge is made by the bank receiving settlement if there are funds available in the account for the amount of the item.

History. Repealed, reenact., and renumbered Acts 1996, ch. 130, § 95, effective January 1, 1997.

Compiler’s Notes.

This section was formerly compiled as KRS 355.4-211 and was repealed, reenacted, and renumbered as KRS 355.4-213 by Acts 1996, ch. 130, § 95, effective January 1, 1997.

A former KRS 355.4-213 (Enact. Acts 1958, ch. 77, § 4-213, effective July 1, 1960) was repealed, reenacted, renumbered, and amended as KRS 355.4-215 by Acts 1996, ch. 130, § 97, effective January 1, 1997.

Official Comment

  1. Subsection (a) sets forth the medium of settlement that the person receiving settlement must accept. In nearly all cases the medium of settlement will be determined by agreement or by Federal Reserve regulations and circulars, clearing-house rules, and the like. In the absence of regulations, rules or agreement, the person receiving settlement may demand cash or credit in a Federal Reserve bank. If the person receiving settlement does not have an account in a Federal Reserve bank, it may specify the account of another bank in a Federal Reserve bank. In the unusual case in which there is no agreement on the medium of settlement and the bank making settlement tenders settlement other than cash or Federal Reserve bank credit, no settlement has occurred under subsection (b) unless the person receiving settlement accepts the settlement tendered. For example, if a payor bank, without agreement, tenders a teller’s check, the bank receiving the settlement may reject the check and return it to the payor bank or it may accept the check as settlement.
  2. In several provisions of Article 4 the time that a settlement occurs is relevant. Subsection (a) sets out a general rule that the time of settlement, like the means of settlement, may be prescribed by agreement. In the absence of agreement, the time of settlement for tender of the common agreed media of settlement is that set out in subsection (a)(ii). The time of settlement by cash, cashier’s or teller’s check or authority to charge an account is the time the cash, check or authority is sent, unless presentment is over the counter in which case settlement occurs upon delivery to the presenter. If there is no agreement on the time of settlement and the tender of settlement is not made by one of the media set out in subsection (a), under subsection (b) the time of settlement is the time the settlement is accepted by the person receiving settlement.
  3. Subsections (c) and (d) are special provisions for settlement by remittance drafts and authority to charge an account in the bank receiving settlement. The relationship between final settlement and final payment under Section 4-215 is addressed in subsection (b) of Section 4-215. With respect to settlement by cashier’s checks or teller’s checks, other than in response to over-the-counter presentment, the bank receiving settlement can keep the risk that the check will not be paid on the bank tendering the check in settlement by acting to initiate collection of the check within the midnight deadline of the bank receiving settlement. If the bank fails to initiate settlement before its midnight deadline, final settlement occurs at the midnight deadline, and the bank receiving settlement assumes the risk that the check will not be paid. If there is no agreement that permits the bank tendering settlement to tender a cashier’s or teller’s check, subsection (b) allows the bank receiving the check to reject it, and, if it does, no settlement occurs. However, if the bank accepts the check, settlement occurs and the time of final settlement is governed by subsection (c).

    With respect to settlement by tender of authority to charge the account of the bank making settlement in the bank receiving settlement, subsection (d) provides that final settlement does not take place until the account charged has available funds to cover the amount of the item. If there is no agreement that permits the bank tendering settlement to tender an authority to charge an account as settlement, subsection (b) allows the bank receiving the tender to reject it. However, if the bank accepts the authority, settlement occurs and the time of final settlement is governed by subsection (d).

NOTES TO DECISIONS

1.Collection in Cash.

Collecting bank must collect in cash unless another way is sanctioned by law or custom to which parties have consented. (decided under prior law) Jennings v. United States Fidelity & Guaranty Co., 294 U.S. 216, 55 S. Ct. 394, 79 L. Ed. 869, 1935 U.S. LEXIS 254 (U.S. 1935).

355.4-214. Right of charge-back or refund — Liability of collecting bank — Return of item.

  1. If a collecting bank has made provisional settlement with its customer for an item and fails by reason of dishonor, suspension of payments by a bank, or otherwise to receive settlement for the item which is or becomes final, the bank may revoke the settlement given by it, charge back the amount of any credit given for the item to its customer’s account, or obtain refund from its customer, whether or not it is able to return the item, if by its midnight deadline or within a longer reasonable time after it learns the facts it returns the item or sends notification of the facts. If the return or notice is delayed beyond the bank’s midnight deadline or a longer reasonable time after it learns the facts, the bank may revoke the settlement, charge back the credit, or obtain refund from its customer, but it is liable for any loss resulting from the delay. These rights to revoke, charge back, and obtain refund terminate if and when a settlement for the item received by the bank is or becomes final.
  2. A collecting bank returns an item when it is sent or delivered to the bank’s customer or transferor or pursuant to its instructions.
  3. A depositary bank that is also the payor may charge back the amount of an item to its customer’s account or obtain refund in accordance with the section governing return of an item received by a payor bank for credit on its books (KRS 355.4-301 ).
  4. The right to charge back is not affected by:
    1. Previous use of the credit given for the item; or
    2. Failure by any bank to exercise ordinary care with respect to the item, but a bank so failing remains liable.
  5. A failure to charge back or claim refund does not affect other rights of the bank against the customer or any other party.
  6. If credit is given in dollars as the equivalent of the value of an item payable in foreign money, the dollar amount of any charge-back or refund must be calculated on the basis of the bank-offered spot rate for the foreign money prevailing on the day when the person entitled to the charge-back or refund learns that it will not receive payment in ordinary course.

History. Repealed, reenact., renumbered, and amend. Acts 1996, ch. 130, § 96, effective January 1, 1997.

Compiler’s Notes.

This section was formerly compiled as KRS 355.4-212 and was repealed, reenacted, renumbered, and amended as KRS 355.4-214 by Acts 1996, ch. 130, § 96, effective January 1, 1997.

A former KRS 355.4-214 (Enact. Acts 1958, ch. 77, § 4-214, effective July 1, 1960) was repealed, reenacted, renumbered, and amended as KRS 355.4-216 by Acts 1996, ch. 130, § 98, effective January 1, 1997.

Official Comment

  1. Under current bank practice, in a major portion of cases banks make provisional settlement for items when they are first received and then await subsequent determination of whether the item will be finally paid. This is the principal characteristic of what are referred to in banking parlance as “cash items.” Statistically, this practice of settling provisionally first and then awaiting final payment is justified because the vast majority of such cash items are finally paid, with the result that in this great preponderance of cases it becomes unnecessary for the banks making the provisional settlements to make any further entries. In due course the provisional settlements become final simply with the lapse of time. However, in those cases in which the item being collected is not finally paid or if for various reasons the bank making the provisional settlement does not itself receive final payment, provision is made in subsection (a) for the reversal of the provisional settlements, charge-back of provisional credits and the right to obtain refund.
  2. Various causes of a bank’s not receiving final payment, with the resulting right of charge-back or refund, are stated or suggested in subsection (a). These include dishonor of the original item; dishonor of a remittance instrument given for it; reversal of a provisional credit for the item; suspension of payments by another bank. The causes stated are illustrative; the right of charge-back or refund is stated to exist whether the failure to receive final payment in ordinary course arises through one of them “or otherwise.”
  3. The right of charge-back or refund exists if a collecting bank has made a provisional settlement for an item with its customer but terminates if and when a settlement received by the bank for the item is or becomes final. If the bank fails to receive such a final settlement the right of charge-back or refund must be exercised promptly after the bank learns the facts. The right exists (if so promptly exercised) whether or not the bank is able to return the item. The second sentence of subsection (a) adopts the view of Appliance Buyers Credit Corp. v. Prospect National Bank, 708 F.2d 290 (7th Cir. 1983), that if the midnight deadline for returning an item or giving notice is not met, a collecting bank loses its rights only to the extent of damages for any loss resulting from the delay.
  4. Subsection (b) states when an item is returned by a collecting bank. Regulation CC, Section 229.31 preempts this subsection with respect to checks by allowing direct return to the depositary bank. Because a returned check may follow a different path than in forward collection, settlement given for the check is final and not provisional except as between the depositary bank and its customer. Regulation CC Section 229.36(d). See also Regulations CC Sections 229.31(c) and 229.32(b). Thus owing to the federal preemption, this subsection applies only to noncheck items.
  5. The rule of subsection (d) relating to charge-back (as distinguished from claim for refund) applies irrespective of the cause of the nonpayment, and of the person ultimately liable for nonpayment. Thus charge-back is permitted even if nonpayment results from the depositary bank’s own negligence. Any other rule would result in litigation based upon a claim for wrongful dishonor of other checks of the customer, with potential damages far in excess of the amount of the item. Any other rule would require a bank to determine difficult questions of fact. The customer’s protection is found in the general obligation of good faith (Sections 1-203 and 4-103). If bad faith is established the customer’s recovery “includes other damages, if any, suffered by the party as a proximate consequence” (Section 4-103(e); see also Section 4-402).
  6. It is clear that the charge-back does not relieve the bank from any liability for failure to exercise ordinary care in handling the item. The measure of damages for such failure is stated in Section 4-103(e).
  7. Subsection (f) states a rule fixing the time for determining the rate of exchange if there is a charge-back or refund of a credit given in dollars for an item payable in a foreign currency. Compare Section 3-107. Fixing such a rule is desirable to avoid disputes. If in any case the parties wish to fix a different time for determining the rate of exchange, they may do so by agreement.

355.4-215. Final payment of item by payor bank — When provisional debits and credits become final — When certain credits become available for withdrawal.

  1. An item is finally paid by a payor bank when the bank has first done any of the following:
    1. Paid the item in cash;
    2. Settled for the item without having a right to revoke the settlement under statute, clearing-house rule, or agreement; or
    3. Made a provisional settlement for the item and failed to revoke the settlement in the time and manner permitted by statute, clearing-house rule, or agreement.
  2. If provisional settlement for an item does not become final, the item is not finally paid.
  3. If provisional settlement for an item between the presenting and payor banks is made through a clearing-house or by debits or credits in an account between them, then to the extent that provisional debits or credits for the item are entered in accounts between the presenting and payor banks or between the presenting and successive prior collecting banks seriatim, they become final upon final payment of the item by the payor bank.
  4. If a collecting bank receives a settlement for an item which is or becomes final, the bank is accountable to its customer for the amount of the item and any provisional credit given for the item in an account with its customer becomes final.
    1. Subject to: (5) (a) Subject to:
      1. Applicable law stating a time for availability of funds; and
      2. Any right of the bank to apply the credit to an obligation of the customer,

        credit given by a bank for an item in an account with its customer becomes available for withdrawal as of right as set out in paragraph (b) of this subsection.

      1. If the bank has received a provisional settlement for the item, the credit becomes available when the settlement becomes final and the bank has had a reasonable time to receive return of the item and the item has not been received within that time; (b) 1. If the bank has received a provisional settlement for the item, the credit becomes available when the settlement becomes final and the bank has had a reasonable time to receive return of the item and the item has not been received within that time;
      2. If the bank is both the depositary bank and the payor bank, and the item is finally paid, the credit becomes available at the opening of the bank’s second banking day following receipt of the item.
  5. Subject to applicable law stating a time for availability of funds and any right of a bank to apply a deposit to an obligation of the depositor, a deposit of money becomes available for withdrawal as of right at the opening of the bank’s next banking day after receipt of the deposit.

History. Repealed, reenact., renumbered, and amend. Acts 1996, ch. 130, § 97, effective January 1, 1997.

Compiler’s Notes.

This section was formerly compiled as KRS 355.4-213 and was repealed, reenacted, renumbered, and amended as KRS 355.4-215 by Acts 1996, ch. 130, § 97, effective January 1, 1997.

Official Comment

  1. By the definition and use of the term “settle” (Section 4-104(a)(11)) this Article recognizes that various debits or credits, remittances, settlements or payments given for an item may be either provisional or final, that settlements sometimes are provisional and sometimes are final and sometimes are provisional for awhile but later become final. Subsection (a) defines when settlement for an item constitutes final payment.

    Final payment of an item is important for a number of reasons. It is one of several factors determining the relative priorities between items and notices, stop-payment orders, legal process and setoffs (Section 4-303). It is the “end of the line” in the collection process and the “turn around” point commencing the return flow of proceeds. It is the point at which many provisional settlements become final. See Section 4-215(c). Final payment of an item by the payor bank fixes preferential rights under Section 4-216.

  2. If an item being collected moves through several states, e.g., is deposited for collection in California, moves through two or three California banks to the Federal Reserve Bank of San Francisco, to the Federal Reserve Bank of Boston, to a payor bank in Maine, the collection process involves the eastward journey of the item from California to Maine and the westward journey of the proceeds from Maine to California. Subsection (a) recognizes that final payment does not take place, in this hypothetical case, on the journey of the item eastward. It also adopts the view that neither does final payment occur on the journey westward because what in fact is journeying westward are proceeds of the item.
  3. Traditionally and under various decisions payment in cash of an item by a payor bank has been considered final payment. Subsection (a)(1) recognizes and provides that payment of an item in cash by a payor bank is final payment.
  4. Section 4-104(a)(11) defines “settle” as meaning “to pay in cash, by clearing-house settlement, in a charge or credit or by remittance, or otherwise as agreed. A settlement may be either provisional or final.” Subsection (a)(2) of Section 4-215 provides that an item is finally paid by a payor bank when the bank has “settled for the item without having a right to revoke the settlement under statute, clearing-house rule or agreement.” Former subsection (1)(b) is modified by subsection (a)(2) to make clear that a payor bank cannot make settlement provisional by unilaterally reserving a right to revoke the settlement. The right must come from a statute (e.g., Section 4-301), clearing-house rule or other agreement. Subsection (a)(2) provides in effect that if the payor bank finally settles for an item this constitutes final payment of the item. The subsection operates if nothing has occurred and no situation exists making the settlement provisional. If under statute, clearing-house rule or agreement, a right of revocation of the settlement exists, the settlement is provisional. Conversely, if there is an absence of a right to revoke under statute, clearing-house rule or agreement, the settlement is final and such final settlement constitutes final payment of the item.

    A primary example of a statutory right on the part of the payor bank to revoke a settlement is the right to revoke conferred by Section 4-301. The underlying theory and reason for deferred posting statutes (Section 4-301) is to require a settlement on the date of receipt of an item but to keep that settlement provisional with the right to revoke prior to the midnight deadline. In any case in which Section 4-301 is applicable, any settlement by the payor bank is provisional solely by virtue of the statute, subsection (a)(2) of Section 4-215 does not operate, and such provisional settlement does not constitute final payment of the item. With respect to checks, Regulation CC Section 229.36(d) provides that settlement between banks for the forward collection of checks is final. The relationship of this provision to Article 4 is discussed in the Commentary to that section.

    A second important example of a right to revoke a settlement is that arising under clearing-house rules. It is very common for clearing-house rules to provide that items exchanged and settled for in a clearing (e.g., before 10:00 a.m. on Monday) may be returned and the settlements revoked up to but not later than 2:00 p.m. on the same day (Monday) or under deferred posting at some hour on the next business day (e.g., 2:00 p.m. Tuesday). Under this type of rule the Monday morning settlement is provisional and being provisional does not constitute a final payment of the item.

    An example of an agreement allowing the payor bank to revoke a settlement is a case in which the payor bank is also the depositary bank and has signed a receipt or duplicate deposit ticket or has made an entry in a passbook acknowledging receipt, for credit to the account of A, of a check drawn on it by B. If the receipt, deposit ticket, passbook or other agreement with A is to the effect that any credit so entered is provisional and may be revoked pending the time required by the payor bank to process the item to determine if it is in good form and there are funds to cover it, the agreement keeps the receipt or credit provisional and avoids its being either final settlement or final payment.

    The most important application of subsection (a)(2) is that in which presentment of an item has been made over the counter for immediate payment. In this case Section 4-301(a) does not apply to make the settlement provisional, and final payment has occurred unless a rule or agreement provides otherwise.

  5. Former Section 4-213(1)(c) provided that final payment occurred when the payor bank completed the “process of posting.” The term was defined in former Section 4-109. In the present Article, Section 4-109 has been deleted and the process-of-posting test has been abandoned in Section 4-215(a) for determining when final payment is made. Difficulties in determining when the events described in former Section 4-109 take place make the process-of-posting test unsuitable for a system of automated check collection or electronic presentment.
  6. The last sentence of former Section 4-213(1) is deleted as an unnecessary source of confusion. Initially the view that payor bank may be accountable for, that is, liable for the amount of, an item that it has already paid seems incongruous. This is particularly true in the light of the language formerly found in Section 4-302 stating that the payor bank can defend against liability for accountability by showing that it has already settled for the item. But, at least with respect to former Section 4-213(1)(c), such a provision was needed because under the process-of-posting test a payor bank may have paid an item without settling for it. Now that Article 4 has abandoned the process-of-posting test, the sentence is no longer needed. If the payor bank has neither paid the item nor returned it within its midnight deadline, the payor bank is accountable under Section 4-302.
  7. Subsection (a)(3) covers the situation in which the payor bank makes a provisional settlement for an item, and this settlement becomes final at a later time by reason of the failure of the payor bank to revoke it in the time and manner permitted by statute, clearing-house rule or agreement. An example of this type of situation is the clearing-house settlement referred to in Comment 4. In the illustration there given if the time limit for the return of items received in the Monday morning clearing is 2:00 p.m. on Tuesday and the provisional settlement has not been revoked at that time in a manner permitted by the clearing-house rules, the provisional settlement made on Monday morning becomes final at 2:00 p.m. on Tuesday. Subsection (a)(3) provides specifically that in this situation the item is finally paid at 2:00 p.m. Tuesday. If on the other hand a payor bank receives an item in the mail on Monday and makes some provisional settlement for the item on Monday, it has until midnight on Tuesday to return the item or give notice and revoke any settlement under Section 4-301. In this situation subsection (a)(iii) of Section 4-215 provides that if the provisional settlement made on Monday is not revoked before midnight on Tuesday as permitted by Section 4-301, the item is finally paid at midnight on Tuesday. With respect to checks, Regulation CC Section 229.30(c) allows an extension of the midnight deadline under certain circumstances. If a bank does not expeditiously return a check liability may accrue under Regulation CC Section 229.38. For the relationship of that liability to responsibility under this Article, see Regulation CC Sections 229.30 and 229.38.
  8. Subsection (b) relates final settlement to final payment under Section 4-215. For example, if a payor bank makes provisional settlement for an item by sending a cashier’s or teller’s check and that settlement fails to become final under Section 4-213(c), subsection (b) provides that final payment has not occurred. If the item is not paid, the drawer remains liable, and under Section 4-302(a) the payor bank is accountable unless it has returned the item before its midnight deadline. In this regard, subsection (b) is an exception to subsection (a)(3). Even if the payor bank has not returned an item by its midnight deadline there is still no final payment if provisional settlement had been made and settlement failed to become final. However, if presentment of the item was over the counter for immediate payment, final payment has occurred under Section 4-215(a)(2). Subsection (b) does not apply because the settlement was not provisional. Section 4-301(a). In this case the presenting person, often the payee of the item, has the right to demand cash or the cash equivalent of federal reserve credit. If the presenting person accepts another medium of settlement such as a cashier’s or teller’s check, the presenting person takes the risk that the payor bank may fail to pay a cashier’s check because of insolvency or that the drawee of a teller’s check may dishonor it.
  9. Subsection (c) states the country-wide usage that when the item is finally paid by the payor bank under subsection (a) this final payment automatically without further action “firms up” other provisional settlements made for it. However, the subsection makes clear that this “firming up” occurs only if the settlement between the presenting and payor banks was made either through a clearing house or by debits and credits in accounts between them. It does not take place if the payor bank remits for the item by sending some form of remittance instrument. Further, the “firming up” continues only to the extent that provisional debits and credits are entered seriatim in accounts between banks which are successive to the presenting bank. The automatic “firming up” is broken at any time that any collecting bank remits for the item by sending a remittance draft, because final payment to the remittee then usually depends upon final payment of the remittance draft.
  10. Subsection (d) states the general rule that if a collecting bank receives settlement for an item which is or becomes final, the bank is accountable to its customer for the amount of the item. One means of accounting is to remit to its customer the amount it has received on the item. If previously it gave to its customer a provisional credit for the item in an account its receipt of final settlement for the item “firms up” this provisional credit and makes it final. When this credit given by it so becomes final, in the usual case its agency status terminates and it becomes a debtor to its customer for the amount of the item. See Section 4-201(a). If the accounting is by a remittance instrument or authorization to charge further time will usually be required to complete its accounting (Section 4-213).
  11. Subsection (e) states when certain credits given by a bank to its customer become available for withdrawal as of right. Subsection (e)(1) deals with the situation in which a bank has given a credit (usually provisional) for an item to its customer and in turn has received a provisional settlement for the item from an intermediary or payor bank to which it has forwarded the item. In this situation before the provisional credit entered by the collecting bank in the account of its customer becomes available for withdrawal as of right, it is not only necessary that the provisional settlement received by the bank for the item becomes final but also that the collecting bank has a reasonable time to receive return of the item and the item has not been received within that time. How much time is “reasonable” for these purposes will of course depend on the distance the item has to travel and the number of banks through which it must pass (having in mind not only travel time by regular lines of transmission but also the successive midnight deadlines of the several banks) and other pertinent facts. Also, if the provisional settlement received is some form of a remittance instrument or authorization to charge, the “reasonable” time depends on the identity and location of the payor of the remittance instrument, the means for clearing such instrument, and other pertinent facts. With respect to checks Regulation CC Sections 229.10-229.13 or similar applicable state law (Section 229.20) control. This is also time for the situation described in Comment 12.
  12. Subsection (e)(2) deals with the situation of a bank that is both a depositary bank and a payor bank. The subsection recognizes that if A and B are both customers of a depositary-payor bank and A deposits B’s check on the depositary-payor in A’s account on Monday, time must be allowed to permit the check under the deferred posting rules of Section 4-301 to reach the bookkeeper for B’s account at some time on Tuesday, and, if there are insufficient funds in B’s account, to reverse or charge back the provisional credit in A’s account. Consequently this provisional credit in A’s account does not become available for withdrawal as of right until the opening of business on Wednesday. If it is determined on Tuesday that there are insufficient funds in B’s account to pay the check, the credit to A’s account can be reversed on Tuesday. On the other hand if the item is in fact paid on Tuesday, the rule of subsection (e)(2) is desirable to avoid uncertainty and possible disputes between the bank and its customer as to exactly what hour within the day the credit is available.

NOTES TO DECISIONS

1.Drafts.

Draft of a corporation was drawn on its treasurer but indicated any one of several banks, where corporation maintained deposit, as paying agent. When presented to such agent, final debit on the bank’s books against the corporation was payment and could not be revoked. (decided under prior law) First Nat'l Bank & Trust Co. v. First Nat'l Bank, 260 Ky. 581 , 86 S.W.2d 325, 1935 Ky. LEXIS 525 ( Ky. 1935 ).

2.Checks.

Garnishment prior to presentment of check was superior to rights of the check holder, since issuance of check by depositor was not an assignment even though deposit was made for purpose of paying check. (decided under prior law) Boswell v. Citizens' Sav. Bank, 123 Ky. 485 , 96 S.W. 797, 29 Ky. L. Rptr. 988 , 1906 Ky. LEXIS 175 ( Ky. 1906 ).

A check was not paid at insolvency where it had been drawn in another town and deposited but, before final credit, forwarding bank went into insolvency. (decided under prior law) Bell Nat'l Bank v. Green, 258 Ky. 317 , 79 S.W.2d 967, 1935 Ky. LEXIS 146 ( Ky. 1935 ).

Under former similar law, final payment of a check “firms up” all of the provisional settlements made in the collection process. (decided under prior law) Blake v. Woodford Bank & Trust Co., 555 S.W.2d 589, 1977 Ky. App. LEXIS 790 (Ky. Ct. App. 1977).

3.Settlement Through Clearing House.

Collecting bank was not required to collect in cash but could have the item set off against checks owed it in the clearing house and become liable as debtor to forwarder or owner. (decided under prior law) Jennings v. United States Fidelity & Guaranty Co., 294 U.S. 216, 55 S. Ct. 394, 79 L. Ed. 869, 1935 U.S. LEXIS 254 (U.S. 1935).

As to items not presented over the counter or by a local clearinghouse, law similar to subdivision (1)(c) of this section meant that a payor bank was deemed to have made final payment of a check when it failed to revoke a provisional settlement by its midnight deadline. (decided under prior law) Blake v. Woodford Bank & Trust Co., 555 S.W.2d 589, 1977 Ky. App. LEXIS 790 (Ky. Ct. App. 1977).

355.4-216. Insolvency and preference.

  1. If an item is in or comes into the possession of a payor or collecting bank that suspends payment and the item has not been finally paid, the item must be returned by the receiver, trustee, or agent in charge of the closed bank to the presenting bank or the closed bank’s customer.
  2. If a payor bank finally pays an item and suspends payments without making a settlement for the item with its customer or the presenting bank which settlement is or becomes final, the owner of the item has a preferred claim against the payor bank.
  3. If a payor bank gives or a collecting bank gives or receives a provisional settlement for an item and thereafter suspends payments, the suspension does not prevent or interfere with the settlement’s becoming final if the finality occurs automatically upon the lapse of certain time or the happening of certain events.
  4. If a collecting bank receives from subsequent parties settlement for an item which settlement is or becomes final and the bank suspends payments without making a settlement for the item with its customer which settlement is or becomes final, the owner of the item has a preferred claim against the collecting bank.

History. Repealed, reenact., renumbered, and amend. Acts 1996, ch. 130, § 98, effective January 1, 1997.

Compiler’s Notes.

This section was formerly compiled as KRS 355.4-214 and was repealed, reenacted, renumbered, and amended as KRS 355.4-216 by Acts 1996, ch. 130, § 98, effective January 1, 1997.

Official Comment

  1. The underlying purpose of the provisions of this section is not to confer upon banks, holders of items or anyone else preferential positions in the event of bank failures over general depositors or any other creditors of the failed banks. The purpose is to fix as definitely as possible the cut-off point of time for the completion or cessation of the collection process in the case of items that happen to be in the process at the time a particular bank suspends payments. It must be remembered that in bank collections as a whole and in the handling of items by an individual bank, items go through a whole series of processes. It must also be remembered that at any particular point of time a particular bank (at least one of any size) is functioning as a depositary bank for some items, as an intermediary bank for others, as a presenting bank for still others and as a payor bank for still others, and that when it suspends payments it will have close to its normal load of items working through its various processes. For the convenience of receivers, owners of items, banks, and in fact substantially everyone concerned, it is recognized that at the particular moment of time that a bank suspends payment, a certain portion of the items being handled by it have progressed far enough in the bank collection process that it is preferable to permit them to continue the remaining distance, rather than to send them back and reverse the many entries that have been made or the steps that have been taken with respect to them. Therefore, having this background and these purposes in mind, the section states what items must be turned backward at the moment suspension intervenes and what items have progressed far enough that the collection process with respect to them continues, with the resulting necessary statement of rights of various parties flowing from this prescription of the cut-off time.
  2. The rules stated are similar to those stated in the American Bankers Association Bank Collection Code, but with the abandonment of any theory of trust. On the other hand, some law previous to this Act may be relevant. See Note, Uniform Commercial Code: Stopping Payment of an Item Deposited with an Insolvent Depositary Bank, 40 Okla. L. Rev. 689 (1987). Although for practical purposes Federal Deposit Insurance affects materially the result of bank failures on holders of items and banks, no attempt is made to vary the rules of the section by reason of such insurance.
  3. It is recognized that in view of Jennings v. United States Fidelity & Guaranty Co., 294 U.S. 216, 55 S. Ct. 394, 79 L. Ed. 869, 99 A.L.R. 1248 (1935), amendment of the National Bank Act would be necessary to have this section apply to national banks. But there is no reason why it should not apply to others. See Section 1-108.

NOTES TO DECISIONS

1.Check Not Paid at Insolvency.

Check drawn on bank in another town was deposited but, before final credit, forwarding bank went into hands of receiver. As check was not paid at insolvency, receiver held fund in trust capacity. Hence, depositor had not become general creditor before insolvency and as he could trace his funds, he could recover them but without interest thereon. (decided under prior law) Bell Nat'l Bank v. Green, 258 Ky. 317 , 79 S.W.2d 967, 1935 Ky. LEXIS 146 ( Ky. 1935 ).

2.Certified Check.

Certified check was not a preferred claim against assets of insolvent bank. (decided under prior law) Perry Bank & Trust Co. v. Riggins, 233 Ky. 257 , 25 S.W.2d 386, 1930 Ky. LEXIS 535 ( Ky. 1930 ); Freeman Shoe Corp. v. Dorman, 271 Ky. 541 , 112 S.W.2d 999, 1938 Ky. LEXIS 24 ( Ky. 1938 ).

Part 3. Collection of Items: Payor Banks

355.4-301. Deferred posting — Recovery of payment by return of items — Time of dishonor — Return of items by payor bank.

  1. If a payor bank settles for a demand item other than a documentary draft presented otherwise than for immediate payment over the counter before midnight of the banking day of receipt, the payor bank may revoke the settlement and recover the settlement if, before it has made final payment and before its midnight deadline, it:
    1. Returns the item; or
    2. Sends a record providing notice of dishonor or nonpayment if the item is unavailable for return.
  2. If a demand item is received by a payor bank for credit on its books, it may return the item or send notice of dishonor and may revoke any credit given or recover the amount thereof withdrawn by its customer, if it acts within the time limit and in the manner specified in subsection (1) of this section.
  3. Unless previous notice of dishonor has been sent, an item is dishonored at the time when for purposes of dishonor it is returned or notice sent in accordance with this section.
  4. An item is returned:
    1. As to an item presented through a clearing house, when it is delivered to the presenting or last collecting bank or to the clearing house or is sent or delivered in accordance with clearing-house rules; or
    2. In all other cases, when it is sent or delivered to the bank’s customer or transferor or pursuant to instructions.

History. Enact. Acts 1958, ch. 77, § 4-301, effective July 1, 1960; 1996, ch. 130, § 99, effective January 1, 1997; 2006, ch. 242, § 50, effective July 12, 2006.

Official Comment

  1. The term “deferred posting” appears in the caption of Section 4-301. This refers to the practice permitted by statute in most of the states before the UCC under which a payor bank receives items on one day but does not post the items to the customer’s account until the next day. Items dishonored were then returned after the posting on the day after receipt. Under Section 4-301 the concept of “deferred posting” merely allows a payor bank that has settled for an item on the day of receipt to return a dishonored item on the next day before its midnight deadline, without regard to when the item was actually posted. With respect to checks Regulation CC Section 229.30(c) extends the midnight deadline under the UCC under certain circumstances. See the Commentary to Regulation CC Section 229.38(d) on the relationship between the UCC and Regulation CC on settlement.
  2. The function of this section is to provide the circumstances under which a payor bank that has made timely settlement for an item may return the item and revoke the settlement so that it may recover any settlement made. These circumstances are: (1) the item must be a demand item other than a documentary draft; (2) the item must be presented otherwise than for immediate payment over the counter; and (3) the payor bank must return the item (or give notice if the item is unavailable for return) before its midnight deadline and before it has paid the item. With respect to checks, see Regulation CC Section 229.31(f) on notice in lieu of return and Regulation CC Section 229.33 as to the different requirement of notice of nonpayment. An instance of when an item may be unavailable for return arises under a collecting bank check retention plan under which presentment is made by a presentment notice and the item is retained by the collecting bank. Subsection 4-215(a)(2) provides that final payment occurs if the payor bank has settled for an item without a right to revoke the settlement under statute, clearing-house rule or agreement. In any case in which Section 4-301(a) is applicable, the payor bank has a right to revoke the settlement by statute; therefore, Section 4-215(a)(2) is inoperable, and the settlement is provisional. Hence, if the settlement is not over the counter and the payor bank settles in a manner that does not constitute final payment, the payor bank can revoke the settlement by returning the item before its midnight deadline.
  3. The relationship of Section 4-301(a) to final settlement and final payment under Section 4-215 is illustrated by the following case. Depositary Bank sends by mail an item to Payor Bank with instructions to settle by remitting a teller’s check drawn on a bank in the city where Depositary Bank is located. Payor Bank sends the teller’s check on the day the item was presented. Having made timely settlement, under the deferred posting provisions of Section 4-301(a), Payor Bank may revoke that settlement by returning the item before its midnight deadline. If it fails to return the item before its midnight deadline, it has finally paid the item if the bank on which the teller’s check was drawn honors the check. But if the teller’s check is dishonored there has been no final settlement under Section 4-213(c) and no final payment under Section 4-215(b). Since the Payor Bank has neither paid the item nor made timely return, it is accountable for the item under Section 4-302(a).
  4. The time limits for action imposed by subsection (a) are adopted by subsection (b) for cases in which the payor bank is also the depositary bank, but in this case the requirement of a settlement on the day of receipt is omitted.
  5. Subsection (c) fixes a base point from which to measure the time within which notice of dishonor must be given. See Section 3-503.
  6. Subsection (d) leaves banks free to agree upon the manner of returning items but establishes a precise time when an item is “returned.” For definition of “sent” as used in paragraphs (1) and (2) see Section 1-201(38). Obviously the subsection assumes that the item has not been “finally paid” under Section 4-215(a). If it has been, this provision has no operation.
  7. The fact that an item has been paid under proposed Section 4-215 does not preclude the payor bank from asserting rights of restitution or revocation under Section 3-418. National Savings and Trust Co. v. Park Corp., 722 F.2d 1303 (6th Cir. 1983), cert. denied, 466 U.S. 939 (1984), is the correct interpretation of the present law on this issue.

NOTES TO DECISIONS

1.Revocation of Provisional Settlement.

Where two (2) checks, one (1) of which had been dishonored and then again presented, were available to the payor bank for return and were not being held for protest, so that notice of dishonor was not available as a means of revoking the provisional settlement, the only way the bank could revoke such settlement was by returning the check before its midnight deadline and the provisions of KRS 355.3-511 excusing notice of dishonor were not applicable. Blake v. Woodford Bank & Trust Co., 555 S.W.2d 589, 1977 Ky. App. LEXIS 790 (Ky. Ct. App. 1977).

Under subsection (1), written notice of dishonor is a permitted method of revoking a provisional settlement only if the check is unavailable for return or it is being held for protest and, otherwise, the check itself must be returned. Blake v. Woodford Bank & Trust Co., 555 S.W.2d 589, 1977 Ky. App. LEXIS 790 (Ky. Ct. App. 1977).

2.Midnight Deadline.

Whether a payor bank has met its midnight deadline for return of an item is determined by this section, not by KRS 355.4-302 . Blake v. Woodford Bank & Trust Co., 555 S.W.2d 589, 1977 Ky. App. LEXIS 790 (Ky. Ct. App. 1977).

3.Credit Not Revocable.

Where draft designated certain bank as paying agent and such bank, after having paid draft by debiting drawer’s account and crediting holder’s, sought, two weeks later, to recharge accounts, the draft had already been finally paid and the credit given by the bank was not revocable. (decided under prior law) First Nat'l Bank & Trust Co. v. First Nat'l Bank, 260 Ky. 581 , 86 S.W.2d 325, 1935 Ky. LEXIS 525 ( Ky. 1935 ).

Research References and Practice Aids

Kentucky Law Journal.

Leibson, Handling Re-Presented Checks — Risky Business for Collecting and Payor Banks, 72 Ky. L.J. 549 (1983-84).

Bhala, The Inverted Pyramid of Wire Transfer Law, 82 Ky. L.J. 347 (1993-94).

355.4-302. Payor bank’s responsibility for late return of item.

  1. If an item is presented to and received by a payor bank the bank, is accountable for the amount of:
    1. a demand item, other than a documentary draft, whether properly payable or not, if the bank, in any case in which it is not also the depositary bank, retains the item beyond midnight of the banking day of receipt without settling for it or, whether or not it is also the depositary bank, does not pay or return the item or send notice of dishonor until after its midnight deadline; or
    2. any other properly payable item unless, within the time allowed for acceptance or payment of that item, the bank either accepts or pays the item or returns it and accompanying documents.
  2. The liability of a payor bank to pay an item pursuant to subsection (1) of this section is subject to defenses based on breach of a presentment warranty (KRS 355.4-208 ) or proof that the person seeking enforcement of the liability presented or transferred the item for the purpose of defrauding the payor bank.

History. Enact. Acts 1958, ch. 77, § 4-302, effective July 1, 1960; 1996, ch. 130, § 100, effective January 1, 1997.

Official Comment

  1. Subsection (a)(1) continues the former law distinguishing between cases in which the payor bank is not also the depositary bank and those in which the payor bank is also the depositary bank (“on us” items). For “on us” items the payor bank is accountable if it retains the item beyond its midnight deadline without settling for it. If the payor bank is not the depositary bank it is accountable if it retains the item beyond midnight of the banking day of receipt without settling for it. It may avoid accountability either by settling for the item on the day of receipt and returning the item before its midnight deadline under Section 4-301 or by returning the item on the day of receipt. This rule is consistent with the deferred posting practice authorized by Section 4-301 which allows the payor bank to make provisional settlement for an item on the day of receipt and to revoke that settlement by returning the item on the next day. With respect to checks, Regulation CC Section 229.36(d) provides that settlements between banks for forward collection of checks are final when made. See the Commentary on that provision for its effect on the UCC.
  2. If the settlement given by the payor bank does not become final, there has been no payment under Section 4-215(b), and the payor bank giving the failed settlement is accountable under subsection (a)(1) of Section 4-302. For instance, the payor bank makes provisional settlement by sending a teller’s check that is dishonored. In such a case settlement is not final under Section 4-213(c) and no payment occurs under Section 4-215(b). Payor bank is accountable on the item. The general principle is that unless settlement provides the presenting bank with usable funds, settlement has failed and the payor bank is accountable for the amount of the item.
  3. Subsection (b) is an elaboration of the deleted introductory language of former Section 4-302: “In the absence of a valid defense such as breach of a presentment warranty (subsection (1) of Section 4-207), settlement effected or the like ….” A payor bank can defend an action against it based on accountability by showing that the item contained a forged indorsement or a fraudulent alteration. Subsection (b) drops the ambiguous “or the like” language and provides that the payor bank may also raise the defense of fraud. Decisions that hold an accountable bank’s liability to be “absolute” are rejected. A payor bank that makes a late return of an item should not be liable to a defrauder operating a check kiting scheme. In Bank of Leumi Trust Co. v. Bally’s Park Place Inc., 528 F.Supp. 349 (S.D.N.Y. 1981), and American National Bank v. Foodbasket, 497 P.2d 546 (Wyo. 1972), banks that were accountable under Section 4-302 for missing their midnight deadline were successful in defending against parties who initiated collection knowing that the check would not be paid. The “settlement effected” language is deleted as unnecessary. If a payor bank is accountable for an item it is liable to pay it. If it has made final payment for an item, it is no longer accountable for the item.

NOTES TO DECISIONS

1.Payor Bank.

Where an agent wrote and signed a check but indicated it was to be drawn on his principal’s account, the bank on which it was written was a payor bank and not a collecting bank. Farmers Cooperative Livestock Market, Inc. v. Second Nat'l Bank, 427 S.W.2d 247, 1968 Ky. LEXIS 676 ( Ky. 1968 ).

2.Demand Item.

Where an instrument was signed by the drawer, contained an unconditional order to pay a sum certain in money, was payable on demand, and was payable to the order of the appellee, it was a “demand item” under the commercial code. Farmers Cooperative Livestock Market, Inc. v. Second Nat'l Bank, 427 S.W.2d 247, 1968 Ky. LEXIS 676 ( Ky. 1968 ).

3.Midnight Deadline.

The “midnight deadline” prescribed in this section is defined in subsection (h) of KRS 355.4-104 as midnight on the next banking day following the banking day on which the item was received. Farmers Cooperative Livestock Market, Inc. v. Second Nat'l Bank, 427 S.W.2d 247, 1968 Ky. LEXIS 676 ( Ky. 1968 ).

Where a payor bank fails to return a check by its midnight deadline, it is liable for the face amount of the check because it is deemed to have paid the check and its liability does not rest on a failure to exercise ordinary care nor have any relationship to “damages” as such. Blake v. Woodford Bank & Trust Co., 555 S.W.2d 589, 1977 Ky. App. LEXIS 790 (Ky. Ct. App. 1977).

Whether a payor bank has met its midnight deadline for return of an item is not determined by this section, but by KRS 355.4-301 . Blake v. Woodford Bank & Trust Co., 555 S.W.2d 589, 1977 Ky. App. LEXIS 790 (Ky. Ct. App. 1977).

Summary judgment was proper where, under KRS 355.4-302 (1), once a check was presented to and received by payor bank, that bank was accountable for amount of the check if it did not pay or return item or send notice of dishonor until after its midnight deadline, and defendant admitted it returned checks after deadline. Farmers Deposit Bank v. Bank One, 2005 U.S. Dist. LEXIS 33778 (E.D. Ky. Dec. 16, 2005).

4.Damages.

Where the payor bank held a check presented for payment past the statutory deadline before returning it as dishonored, the bank was liable in damages for the full face amount of the check and not just for the actual damages sustained as a result of the delay. Farmers Cooperative Livestock Market, Inc. v. Second Nat'l Bank, 427 S.W.2d 247, 1968 Ky. LEXIS 676 ( Ky. 1968 ).

Research References and Practice Aids

Kentucky Law Journal.

Leibson, Handling Re-Presented Checks — Risky Business for Collecting and Payor Banks, 72 Ky. L.J. 549 (1983-84).

355.4-303. When items subject to notice, stop-payment order, legal process, or setoff — Order in which items may be charged or certified.

  1. Any knowledge, notice, or stop-payment order received by, legal process served upon, or setoff exercised by a payor bank comes too late to terminate, suspend, or modify the bank’s right or duty to pay an item or to charge its customer’s account for the item if the knowledge, notice, stop-payment order, or legal process is received or served and a reasonable time for the bank to act thereon expires or the setoff is exercised after the earliest of the following:
    1. The bank accepts or certifies the item;
    2. The bank pays the item in cash;
    3. The bank settles for the item without having a right to revoke the settlement under statute, clearing-house rule, or agreement;
    4. The bank becomes accountable for the amount of the item under KRS 355.4-302 dealing with the payor bank’s responsibility for late return of items; or
    5. With respect to checks, a cutoff hour no earlier than one (1) hour after the opening of the next banking day after the banking day on which the bank received the check and no later than the close of that next banking day or, if no cutoff hour is fixed, the close of the next banking day after the banking day on which the bank received the check.
  2. Subject to subsection (1), items may be accepted, paid, certified, or charged to the indicated account of its customer in any order.

History. Enact. Acts 1958, ch. 77, § 4-303, effective July 1, 1960; 1996, ch. 130, § 101, effective January 1, 1997.

Official Comment

  1. While a payor bank is processing an item presented for payment, it may receive knowledge or a legal notice affecting the item, such as knowledge or a notice that the drawer has filed a petition in bankruptcy or made an assignment for the benefit of creditors; may receive an order of the drawer stopping payment on the item; may have served on it an attachment of the account of the drawer; or the bank itself may exercise a right of setoff against the drawer’s account. Each of these events affects the account of the drawer and may eliminate or freeze all or part of whatever balance is available to pay the item. Subsection (a) states the rule for determining the relative priorities between these various legal events and the item.
  2. The rule is that if any one of several things has been done to the item or if it has reached any one of several stages in its processing at the time the knowledge, notice, stop-payment order or legal process is received or served and a reasonable time for the bank to act thereon expires or the setoff is exercised, the knowledge, notice, stop-payment order, legal process or setoff comes too late, the item has priority and a charge to the customer’s account may be made and is effective. With respect to the effect of the customer’s bankruptcy, the bank’s rights are governed by Bankruptcy Code Section 542(c) which codifies the result of Bank of Marin v. England, 385 U.S. 99 (1966). Section 4-405 applies to the death or incompetence of the customer.
  3. Once a payor bank has accepted or certified an item or has paid the item in cash, the event has occurred that determines priorities between the item and the various legal events usually described as the “four legals.” Paragraphs (1) and (2) of subsection (a) so provide. If a payor bank settles for an item presented over the counter for immediate payment by a cashier’s check or teller’s check which the presenting person agrees to accept, paragraph (3) of subsection (a) would control and the event determining priority has occurred. Because presentment was over the counter, Section 4-301(a) does not apply to give the payor bank the statutory right to revoke the settlement. Thus the requirements of paragraph (3) have been met unless a clearing-house rule or agreement of the parties provides otherwise.
  4. In the usual case settlement for checks is by entries in bank accounts. Since the process-of-posting test has been abandoned as inappropriate for automated check collection, the determining event for priorities is a given hour on the day after the item is received. (Paragraph (5) of subsection (a).) The hour may be fixed by the bank no earlier than one hour after the opening on the next banking day after the bank received the check and no later than the close of that banking day. If an item is received after the payor bank’s regular Section 4-108 cutoff hour, it is treated as received the next banking day. If a bank receives an item after its regular cutoff hour on Monday and an attachment is levied at noon on Tuesday, the attachment is prior to the item if the bank had not before that hour taken the action described in paragraphs (1), (2), and (3) of subsection (a). The Commentary to Regulation CC Section 229.36(d) explains that even though settlement by a paying bank for a check is final for Regulation CC purposes, the paying bank’s right to return the check before its midnight deadline under the UCC is not affected.
  5. Another event conferring priority for an item and a charge to the customer’s account based upon the item is stated by the language “become accountable for the amount of the item under Section 4-302 dealing with the payor bank’s responsibility for late return of items.” Expiration of the deadline under Section 4-302 with resulting accountability by the payor bank for the amount of the item, establishes priority of the item over notices, stop-payment orders, legal process or setoff.
  6. In the case of knowledge, notice, stop-payment orders and legal process the effective time for determining whether they were received too late to affect the payment of an item and a charge to the customer’s account by reason of such payment, is receipt plus a reasonable time for the bank to act on any of these communications. Usually a relatively short time is required to communicate to the accounting department advice of one of these events but certainly some time is necessary. Compare Sections 1-201(27) and 4-403. In the case of setoff the effective time is when the setoff is actually made.
  7. As between one item and another no priority rule is stated. This is justified because of the impossibility of stating a rule that would be fair in all cases, having in mind the almost infinite number of combinations of large and small checks in relation to the available balance on hand in the drawer’s account; the possible methods of receipt; and other variables. Further, the drawer has drawn all the checks, the drawer should have funds available to meet all of them and has no basis for urging one should be paid before another; and the holders have no direct right against the payor bank in any event, unless of course, the bank has accepted, certified or finally paid a particular item, or has become liable for it under Section 4-302. Under subsection (b) the bank has the right to pay items for which it is itself liable ahead of those for which it is not.

NOTES TO DECISIONS

1.Burden of Proof.

Bank has the burden of proof as to when the setoff of balance in debtor’s account against debtor’s indebtedness to the bank actually occurred, which must be evidenced by intent, by affirmative acts, and by some record that the right of setoff has been exercised. Ferguson Enters. v. Main Supply, 868 S.W.2d 98, 1993 Ky. App. LEXIS 21 (Ky. Ct. App. 1993).

Research References and Practice Aids

Kentucky Law Journal.

Leary, Commercial Papers: Some Aspects of Article 3 of the Uniform Commercial Code, 48 Ky. L.J. 198 (1960).

Brown, Bank Deposits and Collections, 48 Ky. L.J. 232 (1960).

Part 4. Relationship Between Payor Bank and Its Customer

355.4-401. When bank may charge customer’s account.

  1. A bank may charge against the account of a customer an item that is properly payable from that account even though the charge creates an overdraft. An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank.
  2. A customer is not liable for the amount of an overdraft if the customer neither signed the item nor benefited from the proceeds of the item.
  3. A bank may charge against the account of a customer a check that is otherwise properly payable from the account, even though payment was made before the date of the check, unless the customer has given notice to the bank of the postdating describing the check with reasonable certainty. The notice is effective for the period stated in KRS 355.4-403 (2) for stop-payment orders, and must be received at such time and in such manner as to afford the bank a reasonable opportunity to act on it before the bank takes any action with respect to the check described in KRS 355.4-303 . If a bank charges against the account of a customer a check before the date stated in the notice of postdating, the bank is liable for damages for the loss resulting from its act. The loss may include damages for dishonor of subsequent items under KRS 355.4-402 .
  4. A bank that in good faith makes payment to a holder may charge the indicated account of its customer according to:
    1. The original terms of the altered item; or
    2. The terms of the completed item, even though the bank knows the item has been completed unless the bank has notice that the completion was improper.

History. Enact. Acts 1958, ch. 77, § 4-401, effective July 1, 1960; 1996, ch. 130, § 102, effective January 1, 1997.

Official Comment

  1. An item is properly payable from a customer’s account if the customer has authorized the payment and the payment does not violate any agreement that may exist between the bank and its customer. For an example of a payment held to violate an agreement with a customer, see Torrance National Bank v. Enesco Federal Credit Union, 285 P.2d 737 (Cal.App. 1955). An item drawn for more than the amount of a customer’s account may be properly payable. Thus under subsection (a) a bank may charge the customer’s account for an item even though payment results in an overdraft. An item containing a forged drawer’s signature or forged indorsement is not properly payable. Concern has arisen whether a bank may require a customer to execute a stop-payment order when the customer notifies the bank of the loss of an unindorsed or specially indorsed check. Since such a check cannot be properly payable from the customer’s account, it is inappropriate for a bank to require stop-payment order in such a case.
  2. Subsection (b) adopts the view of case authority holding that if there is more than one customer who can draw on an account, the nonsigning customer is not liable for an overdraft unless that person benefits from the proceeds of the item.
  3. Subsection (c) is added because the automated check collection system cannot accommodate postdated checks. A check is usually paid upon presentment without respect to the date of the check. Under the former law, if a payor bank paid a postdated check before its stated date, it could not charge the customer’s account because the check was not “properly payable.” Hence, the bank might have been liable for wrongfully dishonoring subsequent checks of the drawer that would have been paid had the postdated check not been prematurely paid. Under subsection (c) a customer wishing to postdate a check must notify the payor bank of its postdating in time to allow the bank to act on the customer’s notice before the bank has to commit itself to pay the check. If the bank fails to act on the customer’s timely notice, it may be liable for damages for the resulting loss which may include damages for dishonor of subsequent items. This Act does not regulate fees that banks charge their customers for a notice of postdating or other services covered by the Act, but under principles of law such as unconscionability or good faith and fair dealing, courts have reviewed fees and the bank’s exercise of a discretion to set fees. Perdue v. Crocker National Bank, 38 Cal.3d 913 (1985) (unconscionability); Best v. United Bank of Oregon, 739 P.2d 554, 562-566 (1987) (good faith and fair dealing). In addition, Section 1-203 provides that every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.
  4. Section 3-407(c) states that a payor bank or drawee which pays a fraudulently altered instrument in good faith and without notice of the alteration may enforce rights with respect to the instrument according to its original terms or, in the case of an incomplete instrument altered by unauthorized completion, according to its terms as completed. Section 4-401(d) follows the rule stated in Section 3-407(c) by applying it to an altered item and allows the bank to enforce rights with respect to the altered item by charging the customer’s account.

NOTES TO DECISIONS

1.Condition of Repayment.

Payment of an overdraft by the bank is in the nature of a loan to the customer, premised upon the condition of repayment. Dalton v. First Nat'l Bank, 712 S.W.2d 954, 1986 Ky. App. LEXIS 1165 (Ky. Ct. App. 1986).

2.Altered Checks.

Bank on which checks were drawn and which paid the checks was entitled to credits in the amount drawn where the checks had been drawn in pencil without completely filling the spaces and were raised by insertion of words and figures in the blank spaces by an unauthorized person. (decided under prior law) Commercial Bank of Grayson v. Arden & Fraley, 177 Ky. 520 , 177 Ky. 620 , 197 S.W. 951, 1917 Ky. LEXIS 615 ( Ky. 1917 ) ( Ky. 1917 ).

355.4-402. Bank’s liability to customer for wrongful dishonor — Time of determining insufficiency of account.

  1. Except as otherwise provided in this article, a payor bank wrongfully dishonors an item if it dishonors an item that is properly payable, but a bank may dishonor an item that would create an overdraft unless it has agreed to pay the overdraft.
  2. A payor bank is liable to its customer for damages proximately caused by the wrongful dishonor of an item. Liability is limited to actual damages proved and may include damages for an arrest or prosecution of the customer or other consequential damages. Whether any consequential damages are proximately caused by the wrongful dishonor is a question of fact to be determined in each case.
  3. A payor bank’s determination of the customer’s account balance on which a decision to dishonor for insufficiency of available funds is based may be made at any time between the time the item is received by the payor bank and the time that the payor bank returns the item or gives notice in lieu of return, and no more than one determination need be made. If, at the election of the payor bank, a subsequent balance determination is made for the purpose of reevaluating the bank’s decision to dishonor the item, the account balance at that time is determinative of whether a dishonor for insufficiency of available funds is wrongful.

History. Enact. Acts 1958, ch. 77, § 4-402, effective July 1, 1960; 1996, ch. 130, § 103, effective January 1, 1997.

Official Comment

  1. Subsection (a) states positively what has been assumed under the original Article: that if a bank fails to honor a properly payable item it may be liable to its customer for wrongful dishonor. Under subsection (b) the payor bank’s wrongful dishonor of an item gives rise to a statutory cause of action. Damages may include consequential damages. Confusion has resulted from the attempts of courts to reconcile the first and second sentences of former Section 4-402. The second sentence implied that the bank was liable for some form of damages other than those proximately caused by the dishonor if the dishonor was other than by mistake. But nothing in the section described what these noncompensatory damages might be. Some courts have held that in distinguishing between mistaken dishonors and nonmistaken dishonors, the so-called “trader” rule has been retained that allowed a “merchant or trader” to recover substantial damages for wrongful dishonor without proof of damages actually suffered. Comment 3 to former Section 4-402 indicated that this was not the intent of the drafters. White & Summers, Uniform Commercial Code, Section 18-4 (1988), states: “The negative implication is that when wrongful dishonors occur not ‘through mistake’ but willfully, the court may impose damages greater than ‘actual damages’ …. Certainly the reference to ‘mistake’ in the second sentence of 4-402 invites a court to adopt the relevant pre-Code distinction.” Subsection (b) by deleting the reference to mistake in the second sentence precludes any inference that Section 4-402 retains the “trader” rule. Whether a bank is liable for noncompensatory damages, such as punitive damages, must be decided by Section 1-103 and Section 1-106 (“by other rule of law”).
  2. Wrongful dishonor is different from “failure to exercise ordinary care in handling an item,” and the measure of damages is that stated in this section, not that stated in Section 4-103(e). By the same token, if a dishonor comes within this section, the measure of damages of this section applies and not another measure of damages. If the wrongful refusal of the beneficiary’s bank to make funds available from a funds transfer causes the beneficiary’s check to be dishonored, no specific guidance is given as to whether recovery is under this section or Article 4A. In each case this issue must be viewed in its factual context, and it was thought unwise to seek to establish certainty at the cost of fairness.
  3. The second and third sentences of the subsection (b) reject decisions holding that as a matter of law the dishonor of a check is not the “proximate cause” of the arrest and prosecution of the customer and leave to determination in each case as a question of fact whether the dishonor is or may be the “proximate cause.”
  4. Banks commonly determine whether there are sufficient funds in an account to pay an item after the close of banking hours on the day of presentment when they post debit and credit items to the account. The determination is made on the basis of credits available for withdrawal as of right or made available for withdrawal by the bank as an accommodation to its customer. When it is determined that payment of the item would overdraw the account, the item may be returned at any time before the bank’s midnight deadline the following day. Before the item is returned new credits that are withdrawable as of right may have been added to the account. Subsection (c) eliminates uncertainty under Article 4 as to whether the failure to make a second determination before the item is returned on the day following presentment is a wrongful dishonor if new credits were added to the account on that day that would have covered the amount of the check.
  5. Section 4-402 has been construed to preclude an action for wrongful dishonor by a plaintiff other than the bank’s customer. Loucks v. Albuquerque National Bank, 418 P.2d 191 (N.Mex. 1966). Some courts have allowed a plaintiff other than the customer to sue when the customer is a business entity that is one and the same with the individual or individuals operating it. Murdaugh Volkswagen, Inc. v. First National Bank, 801 F.2d 719 (4th Cir. 1986) and Karsh v. American City Bank, 113 Cal.App.3d 419, 169 Cal.Rptr. 851 (1980). However, where the wrongful dishonor impugns the reputation of an operator of the business, the issue is not merely, as the court in Koger v. East First National Bank, 443 So.2d 141 (Fla.App. 1983), put it, one of a literal versus a liberal interpretation of Section 4-402. Rather the issue is whether the statutory cause of action in Section 4-402 displaces, in accordance with Section 1-103, any cause of action that existed at common law in a person who is not the customer whose reputation was damaged. See Marcum v. Security Trust and Savings Co., 221 Ala. 419, 129 So. 74 (1930). While Section 4-402 should not be interpreted to displace the latter cause of action, the section itself gives no cause of action to other than a “customer,” however that definition is construed, and thus confers no cause of action on the holder of a dishonored item. First American National Bank v. Commerce Union Bank, 692 S.W.2d 642 (Tenn.App. 1985).

NOTES TO DECISIONS

1.Damages.
2.— Proper Items.

Where the defendant bank dishonored two (2) of the plaintiff’s checks due to mistake and without malice, a charge for a telephone call was a proper item of damages. Bank of Louisville Royal v. Sims, 435 S.W.2d 57, 1968 Ky. LEXIS 190 ( Ky. 1968 ).

3.— Improper Items.

Where the defendant bank dishonored two (2) of the plaintiff’s checks due to mistake and without malice, and due to the incident the plaintiff took a two (2) weeks’ leave of absence for her “nerves,” she was not entitled to recover for her two (2) weeks’ lost time from work even if her mental state actually contributed to this loss. Bank of Louisville Royal v. Sims, 435 S.W.2d 57, 1968 Ky. LEXIS 190 ( Ky. 1968 ).

Where the defendant bank dishonored two (2) of the plaintiff’s checks due to mistake and without malice, the plaintiff was not entitled to recover for her hurt feelings or for her “nerves.” Bank of Louisville Royal v. Sims, 435 S.W.2d 57, 1968 Ky. LEXIS 190 ( Ky. 1968 ).

4.— Consequential.

For “consequential” damages to be recovered, they must be proximately caused by the wrongful dishonor. Bank of Louisville Royal v. Sims, 435 S.W.2d 57, 1968 Ky. LEXIS 190 ( Ky. 1968 ).

5.— Proximately Caused.

“Proximately caused” damages, whether direct or consequential, would be those which could be reasonably foreseeable by the parties as the natural and probable result of the breach. Bank of Louisville Royal v. Sims, 435 S.W.2d 57, 1968 Ky. LEXIS 190 ( Ky. 1968 ).

6.Suit for Wrongful Dishonor.

Where plaintiff-bank mistakenly transferred $30,000 to defendant bank for deposit to the account of a customer of the latter, then notified defendant of the mistake requesting a retransfer, the defendant correctly refused to do so since it would have opened itself for suit for wrongful dishonor, under this section, had the customer sought to transfer the money so deposited. French Bank of California v. First Nat'l Bank, 585 S.W.2d 431, 1979 Ky. App. LEXIS 442 (Ky. Ct. App. 1979).

Cited:

Pulliam v. Pulliam, 738 S.W.2d 846, 1987 Ky. App. LEXIS 588 (Ky. Ct. App. 1987).

Research References and Practice Aids

Treatises

Kentucky Instructions To Juries (Civil), 5th Ed., Banks, §§ 35.03, 35.04.

355.4-403. Customer’s right to stop payment — Burden of proof of loss.

  1. A customer or any person authorized to draw on the account if there is more than one (1) person may stop payment of any item drawn on the customer’s account or close the account by an order to the bank describing the item or account with reasonable certainty received at a time and in a manner that affords the bank a reasonable opportunity to act on it before any action by the bank with respect to the item described in KRS 355.4-303 . If the signature of more than one (1) person is required to draw on an account, any of these persons may stop payment or close the account.
  2. A stop-payment order is effective for six (6) months, but it lapses after fourteen (14) calendar days if the original order was oral and was not confirmed in a record within that period. A stop-payment order may be renewed for additional six (6) month periods by a record given to the bank within a period during which the stop-payment order is effective.
  3. The burden of establishing the fact and amount of loss resulting from the payment of an item contrary to a stop-payment order or order to close an account is on the customer. The loss from payment of an item contrary to a stop-payment order may include damages for dishonor of subsequent items under KRS 355.4-402 .

History. Enact. Acts 1958, ch. 77, § 4-403, effective July 1, 1960; 1996, ch. 130, § 104, effective January 1, 1997; 2006, ch. 242, § 51, effective July 12, 2006.

Official Comment

  1. The position taken by this section is that stopping payment or closing an account is a service which depositors expect and are entitled to receive from banks notwithstanding its difficulty, inconvenience and expense. The inevitable occasional losses through failure to stop or close should be borne by the banks as a cost of the business of banking.
  2. Subsection (a) follows the decisions holding that a payee or indorsee has no right to stop payment. This is consistent with the provision governing payment or satisfaction. See Section 3-602. The sole exception to this rule is found in Section 4-405 on payment after notice of death, by which any person claiming an interest in the account can stop payment.
  3. Payment is commonly stopped only on checks; but the right to stop payment is not limited to checks, and extends to any item payable by any bank. If the maker of a note payable at a bank is in a position analogous to that of a drawer (Section 4-106) the maker may stop payment of the note. By analogy the rule extends to drawees other than banks.
  4. A cashier’s check or teller’s check purchased by a customer whose account is debited in payment for the check is not a check drawn on the customer’s account within the meaning of subsection (a); hence, a customer purchasing a cashier’s check or teller’s check has no right to stop payment of such a check under subsection (a). If a bank issuing a cashier’s check or teller’s check refuses to pay the check as an accommodation to its customer or for other reasons, its liability on the check is governed by Section 3-411. There is no right to stop payment after certification of a check or other acceptance of a draft, and this is true no matter who procures the certification. See Sections 3-411 and 4-303. The acceptance is the drawee’s own engagement to pay, and it is not required to impair its credit by refusing payment for the convenience of the drawer.
  5. Subsection (a) makes clear that if there is more than one person authorized to draw on a customer’s account any one of them can stop payment of any check drawn on the account or can order the account closed. Moreover, if there is a customer, such as a corporation, that requires its checks to bear the signatures of more than one person, any of these persons may stop payment on a check. In describing the item, the customer, in the absence of a contrary agreement, must meet the standard of what information allows the bank under the technology then existing to identify the item with reasonable certainty.
  6. Under subsection (b), a stop-payment order is effective after the order, whether written or oral, is received by the bank and the bank has a reasonable opportunity to act on it. If the order is written it remains in effect for six months from that time. If the order is oral it lapses after 14 days unless there is written confirmation. If there is written confirmation within the 14-day period, the six-month period dates from the giving of the oral order. A stop-payment order may be renewed any number of times by written notice given during a six-month period while a stop order is in effect. A new stop-payment order may be given after a six-month period expires, but such a notice takes effect from the date given. When a stop-payment order expires it is as though the order had never been given, and the payor bank may pay the item in good faith under Section 4-404 even though a stop-payment order had once been given.
  7. A payment in violation of an effective direction to stop payment is an improper payment, even though it is made by mistake or inadvertence. Any agreement to the contrary is invalid under Section 4-103(a) if in paying the item over the stop-payment order the bank has failed to exercise ordinary care. An agreement to the contrary which is imposed upon a customer as part of a standard form contract would have to be evaluated in the light of the general obligation of good faith. Sections 1-203 and 4-104(c). The drawee is, however, entitled to subrogation to prevent unjust enrichment (Section 4-407); retains common law defenses, e.g., that by conduct in recognizing the payment the customer has ratified the bank’s action in paying over a stop-payment order (Section 1-103); and retains common law rights, e.g., to recover money paid under a mistake under Section 3-418. It has sometimes been said that payment cannot be stopped against a holder in due course, but the statement is inaccurate. The payment can be stopped but the drawer remains liable on the instrument to the holder in due course (Sections 3-305, 3-414) and the drawee, if it pays, becomes subrogated to the rights of the holder in due course against the drawer. Section 4-407. The relationship between Sections 4-403 and 4-407 is discussed in the Comments to Section 4-407. Any defenses available against a holder in due course remain available to the drawer, but other defenses are cut off to the same extent as if the holder were bringing the action.

NOTES TO DECISIONS

1.Maker’s Liability for Stop-Payment.

Holder of a check could maintain suit thereon against drawer, in case it was not paid due to stop-payment order. Thomson v. Peck, 217 Ky. 766 , 290 S.W. 722, 1927 Ky. LEXIS 79 ( Ky. 1927 ).

Where maker stopped payment on a check, he was liable for the amount thereon. (decided under prior law) Thomson v. Peck, 217 Ky. 766 , 290 S.W. 722, 1927 Ky. LEXIS 79 ( Ky. 1927 ).

2.Pleading.

Where it appeared that check was not honored because drawer countermanded payment, the petition was not bad on demurrer because of failure to allege that drawer was not injured by delay in presenting for payment. (decided under prior law) Hazard Bank & Trust Co. v. Morgan, 211 Ky. 134 , 277 S.W. 307, 1925 Ky. LEXIS 828 ( Ky. 1925 ).

Cited:

Dalton v. First Nat’l Bank, 712 S.W.2d 954, 1986 Ky. App. LEXIS 1165 (Ky. Ct. App. 1986).

355.4-404. Bank not obligated to pay check more than six months old.

A bank is under no obligation to a customer having a checking account to pay a check, other than a certified check, which is presented more than six (6) months after its date, but it may charge its customer’s account for a payment made thereafter in good faith.

History. Enact. Acts 1958, ch. 77, § 4-404, effective July 1, 1960.

Official Comment

This section incorporates a type of statute that had been adopted in 26 jurisdictions before the Code. The time limit is set at six months because banking and commercial practice regards a check outstanding for longer than that period as stale, and a bank will normally not pay such a check without consulting the depositor. It is therefore not required to do so, but is given the option to pay because it may be in a position to know, as in the case of dividend checks, that the drawer wants payment made.

Certified checks are excluded from the section because they are the primary obligation of the certifying bank (Sections 3-409 and 3-413). The obligation runs directly to the holder of the check. The customer’s account was presumably charged when the check was certified.

NOTES TO DECISIONS

1.Payment of Check over Six Months Old.

Where bank cashed a check nine (9) months after date, it was not a holder in due course. (decided under prior law) Fayette Nat'l Bank v. Meyers, 211 Ky. 185 , 277 S.W. 292, 1925 Ky. LEXIS 842 ( Ky. 1925 ).

Research References and Practice Aids

Kentucky Law Journal.

Leary, Commercial Paper: Some Aspects of Article 3 of the Uniform Commercial Code, 48 Ky. L.J. 198 (1960).

355.4-405. Death or incompetence of customer.

  1. A payor or collecting bank’s authority to accept, pay, or collect an item or to account for proceeds of its collection, if otherwise effective, is not rendered ineffective by incompetence of a customer of either bank existing at the time the item is issued or its collection is undertaken if the bank does not know of an adjudication of incompetence. Neither death nor incompetence of a customer revokes the authority to accept, pay, collect, or account until the bank knows of the fact of death or of an adjudication of incompetence and has reasonable opportunity to act on it.
  2. Even with knowledge, a bank may for ten (10) days after the date of death pay or certify checks drawn on or before that date unless ordered to stop payment by a person claiming an interest in the account.

History. Enact. Acts 1958, ch. 77, § 4-405, effective July 1, 1960; 1996, ch. 130, § 105, effective January 1, 1997.

Official Comment

  1. Subsection (a) follows existing decisions holding that a drawee (payor) bank is not liable for the payment of a check before it has notice of the death or incompetence of the drawer. The justice and necessity of the rule are obvious. A check is an order to pay which the bank must obey under penalty of possible liability for dishonor. Further, with the tremendous volume of items handled any rule that required banks to verify the continued life and competency of drawers would be completely unworkable.

    One or both of these same reasons apply to other phases of the bank collection and payment process and the rule is made wide enough to apply to these other phases. It applies to all kinds of “items”; to “customers” who own items as well as “customers” who draw or make them; to the function of collecting items as well as the function of accepting or paying them; to the carrying out of instructions to account for proceeds even though these may involve transfers to third parties; to depositary and intermediary banks as well as payor banks; and to incompetency existing at the time of the issuance of an item or the commencement of the collection or payment process as well as to incompetency occurring thereafter. Further, the requirement of actual knowledge makes inapplicable the rule of some cases that an adjudication of incompetency is constructive notice to all the world because obviously it is as impossible for banks to keep posted on such adjudications (in the absence of actual knowledge) as it is to keep posted as to death of immediate or remote customers.

  2. Subsection (b) provides a limited period after death during which a bank may continue to pay checks (as distinguished from other items) even though it has notice. The purpose of the provision, as of the existing statutes, is to permit holders of checks drawn and issued shortly before death to cash them without the necessity of filing a claim in probate. The justification is that these checks normally are given in immediate payment of an obligation, that there is almost never any reason why they should not be paid, and that filing in probate is a useless formality, burdensome to the holder, the executor, the court and the bank.

    This section does not prevent an executor or administrator from recovering the payment from the holder of the check. It is not intended to affect the validity of any gift causa mortis or other transfer in contemplation of death, but merely to relieve the bank of liability for the payment.

  3. Any surviving relative, creditor or other person who claims an interest in the account may give a direction to the bank not to pay checks, or not to pay a particular check. Such notice has the same effect as a direction to stop payment. The bank has no responsibility to determine the validity of the claim or even whether it is “colorable.” But obviously anyone who has an interest in the estate, including the person named as executor in a will, even if the will has not yet been admitted to probate, is entitled to claim an interest in the account.

355.4-406. Customer’s duty to discover and report unauthorized signature or alteration.

  1. A bank that sends or makes available to a customer a statement of account showing payment of items for the account shall either return or make available to the customer the items paid or provide information in the statement of account sufficient to allow the customer reasonably to identify the items paid. The statement of account provides sufficient information if the item is described by item number, amount, and date of payment.
  2. If the items are not returned to the customer, the person retaining the items shall either retain the items or, if the items are destroyed, maintain the capacity to furnish legible copies of the items until the expiration of seven (7) years after receipt of the items. A customer may request an item from the bank that paid the item, and that bank must provide in a reasonable time either the item or, if the item has been destroyed or is not otherwise obtainable, a legible copy of the item.
  3. If a bank sends or makes available a statement of account or items pursuant to subsection (1) of this section, the customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration of an item or because a purported signature by or on behalf of the customer was not authorized. If, based on the statement or items provided, the customer should reasonably have discovered the unauthorized payment, the customer must promptly notify the bank of the relevant facts.
  4. If the bank proves that the customer failed, with respect to an item, to comply with the duties imposed on the customer by subsection (3) of this section, the customer is precluded from asserting against the bank:
    1. The customer’s unauthorized signature or any alteration on the item, if the bank also proves that it suffered a loss by reason of the failure; and
    2. The customer’s unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank if the payment was made before the bank received notice from the customer of the unauthorized signature or alteration and after the customer had been afforded a reasonable period of time, not exceeding thirty (30) days, in which to examine the item or statement of account and notify the bank.
  5. If subsection (4) of this section applies and the customer proves that the bank failed to exercise ordinary care in paying the item and that the failure substantially contributed to loss, the loss is allocated between the customer precluded and the bank asserting the preclusion according to the extent to which the failure of the customer to comply with subsection (3) of this section and the failure of the bank to exercise ordinary care contributed to the loss. If the customer proves that the bank did not pay the item in good faith, the preclusion under subsection (4) of this section does not apply.
  6. Without regard to care or lack of care of either the customer or the bank, a customer who does not within one (1) year after the statement or items are made available to the customer (subsection (1)) discover and report the customer’s unauthorized signature on or any alteration on the item is precluded from asserting against the bank the unauthorized signature or alteration. If there is a preclusion under this subsection, the payor bank may not recover for breach of warranty under KRS 355.4-208 with respect to the unauthorized signature or alteration to which the preclusion applies.

History. Enact. Acts 1958, ch. 77, § 4-406, effective July 1, 1960; 1996, ch. 130, § 106, effective January 1, 1997.

Official Comment

  1. Under subsection (a), if a bank that has paid a check or other item for the account of a customer makes available to the customer a statement of account showing payment of the item, the bank must either return the item to the customer or provide a description of the item sufficient to allow the customer to identify it. Under subsection (c), the customer has a duty to exercise reasonable promptness in examining the statement or the returned item to discover any unauthorized signature of the customer or any alteration and to promptly notify the bank if the customer should reasonably have discovered the unauthorized signature or alteration.

    The duty stated in subsection (c) becomes operative only if the “bank sends or makes available a statement of account or items pursuant to subsection (a).” A bank is not under a duty to send a statement of account or the paid items to the customer; but, if it does not do so, the customer does not have any duties under subsection (c).

    Under subsection (a), a statement of account must provide information “sufficient to allow the customer reasonably to identify the items paid.” If the bank supplies its customer with an image of the paid item, it complies with this standard. But a safe harbor rule is provided. The bank complies with the standard of providing “sufficient information” if “the item is described by item number, amount, and date of payment.” This means that the customer’s duties under subsection (c) are triggered if the bank sends a statement of account complying with the safe harbor rule without returning the paid items. A bank does not have to return the paid items unless it has agreed with the customer to do so. Whether there is such an agreement depends upon the particular circumstances. See Section 1-201(3). If the bank elects to provide the minimum information that is “sufficient” under subsection (a) and, as a consequence, the customer could not “reasonably have discovered the unauthorized payment,” there is no preclusion under subsection (d). If the customer made a record of the issued checks on the check stub or carbonized copies furnished by the bank in the checkbook, the customer should usually be able to verify the paid items shown on the statement of account and discover any unauthorized or altered checks. But there could be exceptional circumstances. For example, if a check is altered by changing the name of the payee, the customer could not normally detect the fraud unless the customer is given the paid check or the statement of account discloses the name of the payee of the altered check. If the customer could not “reasonably have discovered the unauthorized payment” under subsection (c) there would not be a preclusion under subsection (d).

    The “safe harbor” provided by subsection (a) serves to permit a bank, based on the state of existing technology, to trigger the customer’s duties under subsection (c) by providing a “statement of account showing payment of items” without having to return the paid items, in any case in which the bank has not agreed with the customer to return the paid items. The “safe harbor” does not, however, preclude a customer under subsection (d) from asserting its unauthorized signature or an alteration against a bank in those circumstances in which under subsection (c) the customer should not “reasonably have discovered the unauthorized payment.” Whether the customer has failed to comply with its duties under subsection (c) is determined on a case-by-case basis.

    The provision in subsection (a) that a statement of account contains “sufficient information if the item is described by item number, amount, and date of payment” is based upon the existing state of technology. This information was chosen because it can be obtained by the bank’s computer from the check’s MICR line without examination of the items involved. The other two items of information that the customer would normally want to know — the name of the payee and the date of the item — cannot currently be obtained from the MICR line. The safe harbor rule is important in determining the feasibility of payor or collecting bank check retention plans. A customer who keeps a record of checks written, e.g., on the check stubs or carbonized copies of the checks supplied by the bank in the checkbook, will usually have sufficient information to identify the items on the basis of item number, amount, and date of payment. But customers who do not utilize these record-keeping methods may not. The policy decision is that accommodating customers who do not keep adequate records is not as desirable as accommodating customers who keep more careful records. This policy results in less cost to the check collection system and thus to all customers of the system. It is expected that technological advances such as image processing may make it possible for banks to give customers more information in the future in a manner that is fully compatible with automation or truncation systems. At that time the Permanent Editorial Board may wish to make recommendations for an amendment revising the safe harbor requirements in the light of those advances.

  2. Subsection (d) states the consequences of a failure by the customer to perform its duty under subsection (c) to report an alteration or the customer’s unauthorized signature. Subsection (d)(1) applies to the unauthorized payment of the item to which the duty to report under subsection (c) applies. If the bank proves that the customer “should reasonably have discovered the unauthorized payment” (See Comment 1) and did not notify the bank, the customer is precluded from asserting against the bank the alteration or the customer’s unauthorized signature if the bank proves that it suffered a loss as a result of the failure of the customer to perform its subsection (c) duty. Subsection (d)(2) applies to cases in which the customer fails to report an unauthorized signature or alteration with respect to an item in breach of the subsection (c) duty (See Comment 1) and the bank subsequently pays other items of the customer with respect to which there is an alteration or unauthorized signature of the customer and the same wrongdoer is involved. If the payment of the subsequent items occurred after the customer has had a reasonable time (not exceeding 30 days) to report with respect to the first item and before the bank received notice of the unauthorized signature or alteration of the first item, the customer is precluded from asserting the alteration or unauthorized signature with respect to the subsequent items.

    If the customer is precluded in a single or multiple item unauthorized payment situation under subsection (d), but the customer proves that the bank failed to exercise ordinary care in paying the item or items and that the failure substantially contributed to the loss, subsection (e) provides a comparative negligence test for allocating loss between the customer and the bank. Subsection (e) also states that, if the customer proves that the bank did not pay the item in good faith, the preclusion under subsection (d) does not apply.

    Subsection (d)(2) changes former subsection (2)(b) by adopting a 30-day period in place of a 14-day period. Although the 14-day period may have been sufficient when the original version of Article 4 was drafted in the 1950s, given the much greater volume of checks at the time of the revision, a longer period was viewed as more appropriate. The rule of subsection (d)(2) follows pre-Code case law that payment of an additional item or items bearing an unauthorized signature or alteration by the same wrongdoer is a loss suffered by the bank traceable to the customer’s failure to exercise reasonable care (See Comment 1) in examining the statement and notifying the bank of objections to it. One of the most serious consequences of failure of the customer to comply with the requirements of subsection (c) is the opportunity presented to the wrongdoer to repeat the misdeeds. Conversely, one of the best ways to keep down losses in this type of situation is for the customer to promptly examine the statement and notify the bank of an unauthorized signature or alteration so that the bank will be alerted to stop paying further items. Hence, the rule of subsection (d)(2) is prescribed, and to avoid dispute a specific time limit, 30 days, is designated for cases to which the subsection applies. These considerations are not present if there are no losses resulting from the payment of additional items. In these circumstances, a reasonable period for the customer to comply with its duties under subsection (c) would depend on the circumstances (Section 1-204(b)) and the subsection (d)(2) time limit should not be imported by analogy into subsection (c).

  3. Subsection (b) applies if the items are not returned to the customer. Check retention plans may include a simple payor bank check retention plan or the kind of check retention plan that would be authorized by a truncation agreement in which a collecting bank or the payee may retain the items. Even after agreeing to a check retention plan, a customer may need to see one or more checks for litigation or other purposes. The customer’s request for the check may always be made to the payor bank. Under subsection (b) retaining banks may destroy items but must maintain the capacity to furnish legible copies for seven years. A legible copy may include an image of an item. This Act does not define the length of the reasonable period of time for a bank to provide the check or copy of the check. What is reasonable depends on the capacity of the bank and the needs of the customer. This Act does not specify sanctions for failure to retain or furnish the items or legible copies; this is left to other laws regulating banks. See Comment 3 to Section 4-101. Moreover, this Act does not regulate fees that banks charge their customers for furnishing items or copies or other services covered by the Act, but under principles of law such as unconscionability or good faith and fair dealing, courts have reviewed fees and the bank’s exercise of a discretion to set fees. Perdue v. Crocker National Bank, 38 Cal.3d 913 (1985) (unconscionability); Best v. United Bank of Oregon, 739 P.2d 554, 562-566 (1987) (good faith and fair dealing). In addition, Section 1-203 provides that every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.
  4. Subsection (e) replaces former subsection (3) and poses a modified comparative negligence test for determining liability. See the discussion on this point in the Comments to Sections 3-404, 3-405, and 3-406. The term “good faith” is defined in Section 3-103(a)(4) as including “observance of reasonable commercial standards of fair dealing.” The connotation of this standard is fairness and not absence of negligence.

    The term “ordinary care” used in subsection (e) is defined in Section 3-103(a)(7), made applicable to Article 4 by Section 4-104(c), to provide that sight examination by a payor bank is not required if its procedure is reasonable and is commonly followed by other comparable banks in the area. The case law is divided on this issue. The definition of “ordinary care” in Section 3-103 rejects those authorities that hold, in effect, that failure to use sight examination is negligence as a matter of law. The effect of the definition of “ordinary care” on Section 4-406 is only to provide that in the small percentage of cases in which a customer’s failure to examine its statement or returned items has led to loss under subsection (d) a bank should not have to share that loss solely because it has adopted an automated collection or payment procedure in order to deal with the great volume of items at a lower cost to all customers.

  5. Several changes are made in former Section 4-406(5). First, former subsection (5) is deleted and its substance is made applicable only to the one-year notice preclusion in former subsection (4) (subsection (f)). Thus if a drawer has not notified the payor bank of an unauthorized check or material alteration within the one-year period, the payor bank may not choose to recredit the drawer’s account and pass the loss to the collecting banks on the theory of breach of warranty. Second, the reference in former subsection (4) to unauthorized indorsements is deleted. Section 4-406 imposes no duties on the drawer to look for unauthorized indorsements. Section 4-111 sets out a statute of limitations allowing a customer a three-year period to seek a credit to an account improperly charged by payment of an item bearing an unauthorized indorsement. Third, subsection (c) is added to Section 4-208 to assure that if a depositary bank is sued for breach of a presentment warranty, it can defend by showing that the drawer is precluded by Section 3-406 or Section 4-406(c) and (d).

NOTES TO DECISIONS

1.Liability of Bank.

Depositor is under a duty to examine the checks returned to him by the bank and notify the bank of any forgeries within a reasonable time so that the bank may be on the lookout for future forgeries. Thus, where a series of forged checks over a period of 18 months were presented to the bank, the bank would be liable on the first one, but thereafter, in the absence of any notice of such forgery, the bank would not be liable. Wuest Bros. Inc. v. Liberty Nat'l Bank & Trust Co., 388 S.W.2d 364, 1965 Ky. LEXIS 423 ( Ky. 1965 ).

2.Statute of Limitations.

Statute of limitations provided by subsection (1) of KRS 413.120 pertains to facts in which a customer has received a bank “statement of accounts” and fails to point out any error shown in the statement and it does not begin to run until depositor is refused a withdrawal. It has no application to bar an action against a bank for losses through bank allowing withdrawals from a trust account on checks not properly signed. Long v. Watkins, 271 F. Supp. 630, 1967 U.S. Dist. LEXIS 7185 (E.D. Ky. 1967 ).

LLC that declared Chapter 11 bankruptcy did not allege facts that were sufficient to survive motions for summary judgment that were filed by a former member of the LLC, a bank where the LLC had its operating account, and a bank employee who was responsible for overseeing the LLC's account on claims alleging, inter alia, breach of fiduciary duty and fraud; a claim the LLC filed against the bank, which alleged that it violated Ky. Rev. Stat. Ann. § 355.4-406 when it paid checks that were signed by only one person, instead of requiring two signatures, was time-barred under Ky. Rev. Stat. Ann. § 355.4-111 because the last check was paid more than three years before the LLC filed its adversary proceeding. MERV Props., LLC v. Friedlander (In re MERV Props., LLC), 2015 Bankr. LEXIS 1509 (Bankr. E.D. Ky. May 4, 2015), aff'd, 539 B.R. 516, 2015 Bankr. LEXIS 3388 (B.A.P. 6th Cir. 2015).

3.Deposit Slip.

The deposit slip is evidence of the deposit transaction and consequently altered deposit slips are “items” for the purposes of this section. Concrete Materials Corp. v. Bank of Danville & Trust Co., 938 S.W.2d 254, 1997 Ky. LEXIS 4 ( Ky. 1997 ).

4.Failure to Examine Bank Statement.

Failure of bank customer to examine the bank statements and report the claimed unauthorized withdrawals disclosed therein, as required by the terms of the account agreement with the bank, precluded the customer from recovering its alleged losses against the bank caused when customer’s plant manager did not list checks for which he received cash from the bank on duplicate withdrawal slips he prepared and turned into employer. Concrete Materials Corp. v. Bank of Danville & Trust Co., 938 S.W.2d 254, 1997 Ky. LEXIS 4 ( Ky. 1997 ).

Bank customer’s failure to inspect its bank statement and to notify the bank of the claimed unauthorized withdrawals by its business manager within one year of the time the statements and items were made available to it, as required by KRS 355.4-406 (3), precluded any claim for such unauthorized withdrawals, whether based on the Uniform Commercial Code or common law. The three-year statute of limitations, KRS 355.4-111 , was irrelevant under these facts. Dean v. Commonwealth Bank & Trust Co., 2012 Ky. App. LEXIS 58 (Ky. Ct. App. Apr. 6, 2012), aff'd, 434 S.W.3d 489, 2014 Ky. LEXIS 326 ( Ky. 2014 ).

5.Altered Checks.

Where maker sued depository bank to recover amount paid on altered checks, it was immaterial whether payee-indorser’s agent who altered checks had written authority or not. (decided under prior law) Commercial Bank of Grayson v. Arden & Fraley, 177 Ky. 520 , 177 Ky. 620 , 197 S.W. 951, 1917 Ky. LEXIS 615 ( Ky. 1917 ) ( Ky. 1917 ).

Cited:

Ousley v. First Commonwealth Bank, 8 S.W.3d 45, 1999 Ky. App. LEXIS 11 (Ky. Ct. App. 1999).

Research References and Practice Aids

Treatises

Kentucky Instructions To Juries (Civil), 5th Ed., Banks, §§ 35.01, 35.02.

355.4-407. Payor bank’s right to subrogation on improper payment.

If a payor bank has paid an item over the order of the drawer or maker to stop payment, or after an account has been closed, or otherwise under circumstances giving a basis for objection by the drawer or maker, to prevent unjust enrichment and only to the extent necessary to prevent loss to the bank by reason of its payment of the item, the payor bank is subrogated to the rights

  1. of any holder in due course on the item against the drawer or maker;
  2. of the payee or any other holder of the item against the drawer or maker either on the item or under the transaction out of which the item arose; and
  3. of the drawer or maker against the payee or any other holder of the item with respect to the transaction out of which the item arose.

History. Enact. Acts 1958, ch. 77, § 4-407, effective July 1, 1960; 1996, ch. 130, § 107, effective January 1, 1997.

Official Comment

  1. Section 4-403 states that a stop-payment order or an order to close an account is binding on a bank. If a bank pays an item over such an order it is prima facie liable, but under subsection (c) of Section 4-403 the burden of establishing the fact and amount of loss from such payment is on the customer. A defense frequently interposed by a bank in an action against it for wrongful payment over a stop-payment order is that the drawer or maker suffered no loss because it would have been liable to a holder in due course in any event. On this argument some cases have held that payment cannot be stopped against a holder in due course. Payment can be stopped, but if it is, the drawer or maker is liable and the sound rule is that the bank is subrogated to the rights of the holder in due course. The preamble and paragraph (a)(1) of this section state this rule.
  2. Paragraph (a)(2) also subrogates the bank to the rights of the payee or other holder against the drawer or maker either on the item or under the transaction out of which it arose. It may well be that the payee is not a holder in due course but still has good rights against the drawer. These may be on the check but also may not be as, for example, where the drawer buys goods from the payee and the goods are partially defective so that the payee is not entitled to the full price, but the goods are still worth a portion of the contract price. If the drawer retains the goods it is obligated to pay a part of the agreed price. If the bank has paid the check it should be subrogated to this claim of the payee against the drawer.
  3. Paragraph (3) subrogates the bank to the rights of the drawer or maker against the payee or other holder with respect to the transaction out of which the item arose. If, for example, the payee was a fraudulent salesman inducing the drawer to issue a check for defective securities, and the bank pays the check over a stop-payment order but reimburses the drawer for such payment, the bank should have a basis for getting the money back from the fraudulent salesman.
  4. The limitations of the preamble prevent the bank itself from getting any double recovery or benefits out of its subrogation rights conferred by the section.
  5. The spelling out of the affirmative rights of the bank in this section does not destroy other existing rights (Section 1-103). Among others these may include the defense of a payor bank that by conduct in recognizing the payment a customer has ratified the bank’s action in paying in disregard of a stop-payment order or right to recover money paid under a mistake.

NOTES TO DECISIONS

1.Cause of Action.

In order to state a cause of action under this section, a plaintiff bank must (1) acknowledge credit to the depositor’s account or otherwise show a loss incurred in paying the item; (2) identify the party who is thereby unjustly enriched and affirmatively assert the bank’s subrogation rights; and (3) identify the status of the parties in whose place it claims and the rights or defenses to which it is therefore subrogated. Dalton v. First Nat'l Bank, 712 S.W.2d 954, 1986 Ky. App. LEXIS 1165 (Ky. Ct. App. 1986).

2.— Failure to State.

The bank’s complaint which alleged that the bank paid a check to the proper payee over a valid stop payment order and the payor received value for the check was insufficient to establish liability for the amount of the check to the bank by either the payor or payee. Dalton v. First Nat'l Bank, 712 S.W.2d 954, 1986 Ky. App. LEXIS 1165 (Ky. Ct. App. 1986).

Part 5. Collection of Documentary Drafts

355.4-501. Handling of documentary drafts — Duty to send for presentment and to notify customer of dishonor.

A bank that takes a documentary draft for collection shall present or send the draft and accompanying documents for presentment and, upon learning that the draft has not been paid or accepted in due course, shall seasonably notify its customer of the fact even though it may have discounted or bought the draft or extended credit available for withdrawal as of right.

History. Enact. Acts 1958, ch. 77, § 4-501, effective July 1, 1960; 1996, ch. 130, § 108, effective January 1, 1997.

Compiler’s Notes.

Section 183 of Acts 1996, ch. 130 read:

“(1) This Act does not affect an action or proceeding commenced before this act takes effect.

“(2) If a security interest in a security is perfected at the date this Act takes effect [January 1, 1997], and the action by which the security was perfected would suffice to perfect a security interest under this Act, no further action is required to continue perfection. If a security interest in a security is perfected at the date this Act takes effect but the action by which the security interest was perfected would not suffice to perfect a security interest under this Act, the security interest remains prefected for a period of four months after the effective date and continues perfected thereafter if appropriate action to perfect under this Act is taken within that period. If a security interest is perfected at the date this Act takes effect and the security interest can be perfected by filing under this Act, a financing statement signed by the secured party instead of the debtor may be filed within that period to continue perfection or thereafter to perfect.”

Official Comment

This section states the duty of a bank handling a documentary draft for a customer. “Documentary draft” is defined in Section 4-104. The duty stated exists even if the bank has bought the draft. This is because to the customer the draft normally represents an underlying commercial transaction, and if that is not going through as planned the customer should know it promptly.

355.4-502. Presentment of “on arrival” drafts.

If a draft or the relevant instructions require presentment “on arrival,” “when goods arrive” or the like, the collecting bank need not present until in its judgment a reasonable time for arrival of the goods has expired. Refusal to pay or accept because the goods have not arrived is not dishonor; the bank must notify its transferor of the refusal but need not present the draft again until it is instructed to do so or learns of the arrival of the goods.

History. Enact. Acts 1958, ch. 77, § 4-502, effective July 1, 1960; 1996, ch. 130, § 109, effective January 1, 1997.

Official Comment

The section is designed to establish a definite rule for “on arrival” drafts. The term includes not only drafts drawn payable “on arrival” but also drafts forwarded with instructions to present “on arrival.” The term refers to the arrival of the relevant goods. Unless a bank has actual knowledge of the arrival of the goods, as for example, when it is the “notify” party on the bill of lading, the section only requires the exercise of such judgment in estimating time as a bank may be expected to have. Commonly the buyer-drawee will want the goods and will therefore call for the documents and take up the draft when they do arrive.

355.4-503. Responsibility of presenting bank for documents and goods — Report of reasons for dishonor — Referee in case of need.

Unless otherwise instructed and except as provided in Article 5 of this chapter, a bank presenting a documentary draft:

  1. Must deliver the documents to the drawee on acceptance of the draft if it is payable more than three (3) days after presentment; otherwise, only on payment; and
  2. Upon dishonor, either in the case of presentment for acceptance or presentment for payment, may seek and follow instructions from any referee in case of need designated in the draft or, if the presenting bank does not choose to utilize the referee’s services, it must use diligence and good faith to ascertain the reason for dishonor, must notify its transferor of the dishonor and of the results of its efforts to ascertain the reasons therefor, and must request instructions.

However, the presenting bank is under no obligation with respect to goods represented by the documents except to follow any reasonable instructions seasonably received; it has a right to reimbursement for any expense incurred in following instructions and to prepayment of or indemnity for those expenses.

History. Enact. Acts 1958, ch. 77, § 4-503, effective July 1, 1960; 1996, ch. 130, § 110, effective January 1, 1997.

Official Comment

  1. This section states the rules governing, in the absence of instructions, the duty of the presenting bank in case either of honor or of dishonor of a documentary draft. The section should be read in connection with Section 2-514 on when documents are deliverable on acceptance, when on payment.
  2. If the draft is drawn under a letter of credit, Article 5 controls. See Sections 5-109 through 5-114.

355.4-504. Privilege of presenting bank to deal with goods — Security interest for expenses.

  1. A presenting bank that, following the dishonor of a documentary draft, has seasonably requested instructions but does not receive them within a reasonable time may store, sell, or otherwise deal with the goods in any reasonable manner.
  2. For its reasonable expenses incurred by action under subsection (1) the presenting bank has a lien upon the goods or their proceeds, which may be foreclosed in the same manner as an unpaid seller’s lien.

History. Enact. Acts 1958, ch. 77, § 4-504, effective July 1, 1960; 1996, ch. 130, § 111, effective January 1, 1997.

Official Comment

The section gives the presenting bank, after dishonor, a privilege to deal with the goods in any commercially reasonable manner pending instructions from its transferor and, if still unable to communicate with its principal after a reasonable time, a right to realize its expenditures as if foreclosing on an unpaid seller’s lien (Section 2-706). The provision includes situations in which storage of goods or other action becomes commercially necessary pending receipt of any requested instructions, even if the requested instructions are later received.

The “reasonable manner” referred to means one reasonable in the light of business factors and the judgment of a business man.

Article 4A. Funds Transfers

Compiler’s Notes.

The official comments in this article are copyrighted by the National Conference of Commissioners of Uniform State Laws and the American Law Institute, and are reproduced by permission.

Part 1. Subject Matter and Definitions

355.4A-101. Short title.

This article may be cited as the Uniform Commercial Code — Funds Transfers.

History. Enact. Acts 1992, ch. 116, § 24, effective July 14, 1992.

355.4A-102. Subject matter.

Except as otherwise provided in KRS 355.4A-108 , this article applies to funds transfers defined in KRS 355.4A-104 .

History. Enact. Acts 1992, ch. 116, § 25, effective July 14, 1992.

Official Comment

Article 4A governs a specialized method of payment referred to in the Article as a funds transfer but also commonly referred to in the commercial community as a wholesale wire transfer. A funds transfer is made by means of one or more payment orders. The scope of Article 4A is determined by the definitions of “payment order” and “funds transfer” found in Section 4A-103 and Section 4A-104.

The funds transfer governed by Article 4A is in large part a product of recent and developing technological changes. Before this Article was drafted there was no comprehensive body of law — statutory or judicial — that defined the juridical nature of a funds transfer or the rights and obligations flowing from payment orders. Judicial authority with respect to funds transfers is sparse, undeveloped and not uniform. Judges have had to resolve disputes by referring to general principles of common law or equity, or they have sought guidance in statutes such as Article 4 which are applicable to other payment methods. But attempts to define rights and obligations in funds transfers by general principles or by analogy to rights and obligations in negotiable instrument law or the law of check collection have not been satisfactory.

In the drafting of Article 4A, a deliberate decision was made to write on a clean slate and to treat a funds transfer as a unique method of payment to be governed by unique rules that address the particular issues raised by this method of payment. A deliberate decision was also made to use precise and detailed rules to assign responsibility, define behavioral norms, allocate risks and establish limits on liability, rather than to rely on broadly stated, flexible principles. In the drafting of these rules, a critical consideration was that the various parties to funds transfers need to be able to predict risk with certainty, to insure against risk, to adjust operational and security procedures, and to price funds transfer services appropriately. This consideration is particularly important given the very large amounts of money that are involved in funds transfers.

Funds transfers involve competing interests — those of the banks that provide funds transfer services and the commercial and financial organizations that use the services, as well as the public interest. These competing interests were represented in the drafting process and they were thoroughly considered. The rules that emerged represent a careful and delicate balancing of those interests and are intended to be the exclusive means of determining the rights, duties and liabilities of the affected parties in any situation covered by particular provisions of the Article. Consequently, resort to principles of law or equity outside of Article 4A is not appropriate to create rights, duties and liabilities inconsistent with those stated in this Article.

NOTES TO DECISIONS

1.Conversion.

Common law conversion claim against two real estate investors was not preempted by the Uniform Commercial Code because they were not parties to any of the fund transfers; their alleged misconduct occurred after the funds transfer process was complete. Baerg v. Angela Ford, 2016 Ky. App. LEXIS 19 (Ky. Ct. App. Feb. 19, 2016).

355.4A-103. Payment order — Definitions.

  1. In this article:
    1. “Payment order” means an instruction of a sender to a receiving bank, transmitted orally, electronically, or in writing, to pay, or to cause another bank to pay, a fixed or determinable amount of money to a beneficiary if:
      1. The instruction does not state a condition to payment to the beneficiary other than time of payment;
      2. The receiving bank is to be reimbursed by debiting an account of, or otherwise receiving payment from, the sender; and
      3. The instruction is transmitted by the sender directly to the receiving bank or to an agent, funds-transfer system, or communication system for transmittal to the receiving bank.
    2. “Beneficiary” means the person to be paid by the beneficiary’s bank.
    3. “Beneficiary’s bank” means the bank identified in a payment order in which an account of the beneficiary is to be credited pursuant to the order or which otherwise is to make payment to the beneficiary if the order does not provide for payment to an account.
    4. “Receiving bank” means the bank to which the sender’s instruction is addressed.
    5. “Sender” means the person giving the instruction to the receiving bank.
  2. If an instruction complying with subsection (1)(a) is to make more than one (1) payment to a beneficiary, the instruction is a separate payment order with respect to each payment.
  3. A payment order is issued when it is sent to the receiving bank.

History. Enact. Acts 1992, ch. 116, § 26, effective July 14, 1992.

Official Comment

This section is discussed in the Comment following Section 4A-104.

NOTES TO DECISIONS

1.Conversion.

Common law conversion claim against two real estate investors was not preempted by the Uniform Commercial Code because they were not parties to any of the fund transfers; their alleged misconduct occurred after the funds transfer process was complete. Baerg v. Angela Ford, 2016 Ky. App. LEXIS 19 (Ky. Ct. App. Feb. 19, 2016).

Research References and Practice Aids

Kentucky Law Journal.

Bhala, The Inverted Pyramid of Wire Transfer Law, 82 Ky. L.J. 347 (1993-94).

355.4A-104. Funds transfer — Definitions.

In this article:

  1. “Funds transfer” means the series of transactions, beginning with the originator’s payment order, made for the purpose of making payment to the beneficiary of the order. The term includes any payment order issued by the originator’s bank or an intermediary bank intended to carry out the originator’s payment order. A funds transfer is completed by acceptance by the beneficiary’s bank of a payment order for the benefit of the beneficiary of the originator’s payment order.
  2. “Intermediary bank” means a receiving bank other than the originator’s bank or the beneficiary’s bank.
  3. “Originator” means the sender of the first payment order in a funds transfer.
  4. “Originator’s bank” means:
    1. The receiving bank to which the payment order of the originator is issued if the originator is not a bank; or
    2. The originator if the originator is a bank.

History. Enact. Acts 1992, ch. 116, § 27, effective July 14, 1992.

Official Comment

  1. Article 4A governs a method of payment in which the person making payment (the “originator”) directly transmits an instruction to a bank either to make payment to the person receiving payment (the “beneficiary”) or to instruct some other bank to make payment to the beneficiary. The payment from the originator to the beneficiary occurs when the bank that is to pay the beneficiary becomes obligated to pay the beneficiary. There are two basic definitions: “Payment order” stated in Section 4A-103 and “Funds transfer” stated in Section 4A-104. These definitions, other related definitions, and the scope of Article 4A can best be understood in the context of specific fact situations. Consider the following cases:

    Case #1. X, which has an account in Bank A, instructs that bank to pay $1,000,000 to Y’s account in Bank A. Bank A carries out X’s instruction by making a credit of $1,000,000 to Y’s account and notifying Y that the credit is available for immediate withdrawal. The instruction by X to Bank A is a “payment order” which was issued when it was sent to Bank A. Section 4A-103(a)(1) and (c). X is the “sender” of the payment order and Bank A is the “receiving bank.” Section 4A-103(a)(5) and (a)(4). Y is the “beneficiary” of the payment order and Bank A is the “beneficiary’s bank.” Section 4A-103(a)(2) and (a)(3). When Bank A notified Y of receipt of the payment order, Bank A “accepted” the payment order. Section 4A-209(b)(1). When Bank A accepted the order it incurred an obligation to Y to pay the amount of the order. Section 4A-404(a). When Bank A accepted X’s order, X incurred an obligation to pay Bank A the amount of the order. Section 4A-402(b). Payment from X to Bank A would normally be made by a debit to X’s account in Bank A. Section 4A-403(a)(3). At the time Bank A incurred the obligation to pay Y, payment of $1,000,000 by X to Y was also made. Section 4A-406(a). Bank A paid Y when it gave notice to Y of a withdrawable credit of $1,000,000 to Y’s account. Section 4A-405(a). The overall transaction, which comprises the acts of X and Bank A, in which the payment by X to Y is accomplished is referred to as the “funds transfer.” Section 4A-104(a). In this case only one payment order was involved in the funds transfer. A one-payment-order funds transfer is usually referred to as a “book transfer” because the payment is accomplished by the receiving bank’s debiting the account of the sender and crediting the account of the beneficiary in the same bank. X, in addition to being the sender of the payment order to Bank A, is the “originator” of the funds transfer. Section 4A-104(c). Bank A is the “originator’s bank” in the funds transfer as well as the beneficiary’s bank. Section 4A-104(d).

    Case #2. Assume the same facts as in Case #1 except that X instructs Bank A to pay $1,000,000 to Y’s account in Bank B. With respect to this payment order, X is the sender, Y is the beneficiary, and Bank A is the receiving bank. Bank A carries out X’s order by instructing Bank B to pay $1,000,000 to Y’s account. This instruction is a payment order in which Bank A is the sender, Bank B is the receiving bank, and Y is the beneficiary. When Bank A issued its payment order to Bank B, Bank A “executed” X’s order. Section 4A-301(a). In the funds transfer, X is the originator, Bank A is the originator’s bank, and Bank B is the beneficiary’s bank. When Bank A executed X’s order, X incurred an obligation to pay Bank A the amount of the order. Section 4A-402(c). When Bank B accepts the payment order issued to it by Bank A, Bank B incurs an obligation to Y to pay the amount of the order (Section 4A-404(a)) and Bank A incurs an obligation to pay Bank B. Section 4A-402(b). Acceptance by Bank B also results in payment of $1,000,000 by X to Y. Section 4A-406(a). In this case two payment orders are involved in the funds transfer.

    Case #3. Assume the same facts as in Case #2 except that Bank A does not execute X’s payment order by issuing a payment order to Bank B. One bank will not normally act to carry out a funds transfer for another bank unless there is a preexisting arrangement between the banks for transmittal of payment orders and settlement of accounts. For example, if Bank B is a foreign bank with which Bank A has no relationship, Bank A can utilize a bank that is a correspondent of both Bank A and Bank B. Assume Bank A issues a payment order to Bank C to pay $1,000,000 to Y’s account in Bank B. With respect to this order, Bank A is the sender, Bank C is the receiving Bank, and Y is the beneficiary. Bank C will execute the payment order of Bank A by issuing a payment order to Bank B to pay $1,000,000 to Y’s account in Bank B. With respect to Bank C’s payment order, Bank C is the sender, Bank B is the receiving bank, and Y is the beneficiary. Payment of $1,000,000 by X to Y occurs when Bank B accepts the payment order issued to it by Bank C. In this case the funds transfer involves three payment orders. In the funds transfer, X is the originator, Bank A is the originator’s bank, Bank B is the beneficiary’s bank, and Bank C is an “intermediary bank.” Section 4A-104(b). In some cases there may be more than one intermediary bank, and in those cases each intermediary bank is treated like Bank C in Case #3.

    As the three cases demonstrate, a payment under Article 4A involves an overall transaction, the funds transfer, in which the originator, X, is making payment to the beneficiary, Y, but the funds transfer may encompass a series of payment orders that are issued in order to effect the payment initiated by the originator’s payment order.

    In some cases the originator and the beneficiary may be the same person. This will occur, for example, when a corporation orders a bank to transfer funds from an account of the corporation in that bank to another account of the corporation in that bank or in some other bank. In some funds transfers the first bank to issue a payment order is a bank that is executing a payment order of a customer that is not a bank. In this case the customer is the originator. In other cases, the first bank to issue a payment order is not acting for a customer, but is making a payment for its own account. In that event the first bank to issue a payment order is the originator as well as the originator’s bank.

  2. “Payment order” is defined in Section 4A-103(a)(1) as an instruction to a bank to pay, or to cause another bank to pay, a fixed or determinable amount of money. The bank to which the instruction is addressed is known as the “receiving bank.” Section 4A-103(a)(4). “Bank” is defined in Section 4A-105(a)(2). The effect of this definition is to limit Article 4A to payments made through the banking system. A transfer of funds made by an entity outside the banking system is excluded. A transfer of funds through an entity other than a bank is usually a consumer transaction involving relatively small amounts of money and a single contract carried out by transfers of cash or a cash equivalent such as a check. Typically, the transferor delivers cash or a check to the company making the transfer, which agrees to pay a like amount to a person designated by the transferor. Transactions covered by Article 4A typically involve very large amounts of money in which several transactions involving several banks may be necessary to carry out the payment. Payments are normally made by debits or credits to bank accounts. Originators and beneficiaries are almost always business organizations and the transfers are usually made to pay obligations. Moreover, these transactions are frequently done on the basis of very short-term credit granted by the receiving bank to the sender of the payment order. Wholesale wire transfers involve policy questions that are distinct from those involved in consumer-based transactions by nonbanks.
  3. Further limitations on the scope of Article 4A are found in the three requirements found in subparagraphs (i), (ii), and (iii) of Section 4A-103(a)(1). Subparagraph (i) states that the instruction to pay is a payment order only if it “does not state a condition to payment to the beneficiary other than time of payment.” An instruction to pay a beneficiary sometimes is subject to a requirement that the beneficiary perform some act such as delivery of documents. For example, a New York bank may have issued a letter of credit in favor of X, a California seller of goods to be shipped to the New York bank’s customer in New York. The terms of the letter of credit provide for payment to X if documents are presented to prove shipment of the goods. Instead of providing for presentment of the documents to the New York bank, the letter of credit states that they may be presented to a California bank that acts as an agent for payment. The New York bank sends an instruction to the California bank to pay X upon presentation of the required documents. The instruction is not covered by Article 4A because payment to the beneficiary is conditional upon receipt of shipping documents. The function of banks in a funds transfer under Article 4A is comparable to the role of banks in the collection and payment of checks in that it is essentially mechanical in nature. The low price and high speed that characterize funds transfers reflect this fact. Conditions to payment by the California bank other than time of payment impose responsibilities on that bank that go beyond those in Article 4A funds transfers. Although the payment by the New York bank to X under the letter of credit is not covered by Article 4A, if X is paid by the California bank, payment of the obligation of the New York bank to reimburse the California bank could be made by an Article 4A funds transfer. In such a case there is a distinction between the payment by the New York bank to X under the letter of credit and the payment by the New York bank to the California bank. For example, if the New York bank pays its reimbursement obligation to the California bank by a Fedwire naming the California bank as beneficiary (see Comment 1 to Section 4A-107), payment is made to the California bank rather than to X. That payment is governed by Article 4A and it could be made either before or after payment by the California bank to X. The payment by the New York bank to X under the letter of credit is not governed by Article 4A and it occurs when the California bank, as agent of the New York bank, pays X. No payment order was involved in that transaction. In this example, if the New York bank had erroneously sent an instruction to the California bank unconditionally instructing payment to X, the instruction would have been an Article 4A payment order. If the payment order was accepted (Section 4A-209(b)) by the California bank, a payment by the New York bank to X would have resulted (Section 4A-406(a)). But Article 4A would not prevent recovery of funds from X on the basis that X was not entitled to retain the funds under the law of mistake and restitution, letter of credit law or other applicable law.
  4. Transfers of funds made through the banking system are commonly referred to as either “credit” transfers or “debit” transfers. In a credit transfer the instruction to pay is given by the person making payment. In a debit transfer the instruction to pay is given by the person receiving payment. The purpose of subparagraph (ii) of subsection (a)(1) of Section 4A-103 is to include credit transfers in Article 4A and to exclude debit transfers. All of the instructions to pay in the three cases described in Comment 1 fall within subparagraph (ii). Take Case #2 as an example. With respect to X’s instruction given to Bank A, Bank A will be reimbursed by debiting X’s account or otherwise receiving payment from X. With respect to Bank A’s instruction to Bank B, Bank B will be reimbursed by receiving payment from Bank A. In a debit transfer, a creditor, pursuant to authority from the debtor, is enabled to draw on the debtor’s bank account by issuing an instruction to pay to the debtor’s bank. If the debtor’s bank pays, it will be reimbursed by the debtor rather than by the person giving the instruction. For example, the holder of an insurance policy may pay premiums by authorizing the insurance company to order the policyholder’s bank to pay the insurance company. The order to pay may be in the form of a draft covered by Article 3, or it might be an instruction to pay that is not an instrument under that Article. The bank receives reimbursement by debiting the policyholder’s account. Or, a subsidiary corporation may make payments to its parent by authorizing the parent to order the subsidiary’s bank to pay the parent from the subsidiary’s account. These transactions are not covered by Article 4A because subparagraph (2) is not satisfied. Article 4A is limited to transactions in which the account to be debited by the receiving bank is that of the person in whose name the instruction is given.

    If the beneficiary of a funds transfer is the originator of the transfer, the transfer is governed by Article 4A if it is a credit transfer in form. If it is in the form of a debit transfer it is not governed by Article 4A. For example, Corporation has accounts in Bank A and Bank B. Corporation instructs Bank A to pay to Corporation’s account in Bank B. The funds transfer is governed by Article 4A. Sometimes, Corporation will authorize Bank B to draw on Corporation’s account in Bank A for the purpose of transferring funds into Corporation’s account in Bank B. If Corporation also makes an agreement with Bank A under which Bank A is authorized to follow instructions of Bank B, as agent of Corporation, to transfer funds from Customer’s account in Bank A, the instruction of Bank B is a payment order of Customer and is governed by Article 4A. This kind of transaction is known in the wire-transfer business as a “draw-down transfer.” If Corporation does not make such an agreement with Bank A and Bank B instructs Bank A to make the transfer, the order is in form a debit transfer and is not governed by Article 4A. These debit transfers are normally ACH transactions in which Bank A relies on Bank B’s warranties pursuant to ACH rules, including the warranty that the transfer is authorized.

  5. The principal effect of subparagraph (iii) of subsection (a) of Section 4A-103 is to exclude from Article 4A payments made by check or credit card. In those cases the instruction of the debtor to the bank on which the check is drawn or to which the creditcard slip is to be presented is contained in the check or creditcard slip signed by the debtor. The instruction is not transmitted by the debtor directly to the debtor’s bank. Rather, the instruction is delivered or otherwise transmitted by the debtor to the creditor who then presents it to the bank either directly or through bank collection channels. These payments are governed by Articles 3 and 4 and federal law. There are, however, limited instances in which the paper on which a check is printed can be used as the means of transmitting a payment order that is covered by Article 4A. Assume that Originator instructs Originator’s Bank to pay $10,000 to the account of Beneficiary in Beneficiary’s Bank. Since the amount of Originator’s payment order is small, if Originator’s Bank and Beneficiary’s Bank do not have an account relationship, Originator’s Bank may execute Originator’s order by issuing a teller’s check payable to Beneficiary’s Bank for $10,000 along with instructions to credit Beneficiary’s account in that amount. The instruction to Beneficiary’s Bank to credit Beneficiary’s account is a payment order. The check is the means by which Originator’s Bank pays its obligation as sender of the payment order. The instruction of Originator’s Bank to Beneficiary’s Bank might be given in a letter accompanying the check or it may be written on the check itself. In either case the instruction to Beneficiary’s Bank is a payment order but the check itself (which is an order to pay addressed to the drawee rather than to Beneficiary’s Bank) is an instrument under Article 3 and is not a payment order. The check can be both the means by which Originator’s Bank pays its obligation under § 4A-402(b) to Beneficiary’s Bank and the means by which the instruction to Beneficiary’s Bank is transmitted.
  6. Most payments covered by Article 4A are commonly referred to as wire transfers and usually involve some kind of electronic transmission, but the applicability of Article 4A does not depend upon the means used to transmit the instruction of the sender. Transmission may be by letter or other written communication, oral communication or electronic communication. An oral communication is normally given by telephone. Frequently the message is recorded by the receiving bank to provide evidence of the transaction, but apart from problems of proof there is no need to record the oral instruction. Transmission of an instruction may be a direct communication between the sender and the receiving bank or through an intermediary such as an agent of the sender, a communication system such as international cable, or a funds transfer system such as CHIPS, SWIFT or an automated clearing house.

NOTES TO DECISIONS

1.Fund Transfer.

Bank’s transfer of funds was a fund transfer under KRS 355.4A-104 (1), rather than an automated clearing house transfer, where the money never went through an automated clearing house, but was transferred between two bank accounts within the bank, in accordance with an internet transfer and an in house request. Wholesale Petroleum Partners, LP v. South Cent. Bank of Daviess County, Inc., 2012 U.S. Dist. LEXIS 64132 (W.D. Ky. Jan. 6, 2012).

2.Conversion.

Common law conversion claim against two real estate investors was not preempted by the Uniform Commercial Code because they were not parties to any of the fund transfers; their alleged misconduct occurred after the funds transfer process was complete. Baerg v. Angela Ford, 2016 Ky. App. LEXIS 19 (Ky. Ct. App. Feb. 19, 2016).

Research References and Practice Aids

Kentucky Law Journal.

Bhala, The Inverted Pyramid of Wire Transfer Law, 82 Ky. L.J. 347 (1993-94).

355.4A-105. Other definitions.

  1. In this article:
    1. “Authorized account” means a deposit account of a customer in a bank designated by the customer as a source of payment of payment orders issued by the customer to the bank. If a customer does not so designate an account, any account of the customer is an authorized account if payment of a payment order from that account is not inconsistent with a restriction on the use of that account;
    2. “Bank” means a person engaged in the business of banking and includes a savings bank, savings and loan association, credit union, and trust company. A branch or separate office of a bank is a separate bank for purposes of this article;
    3. “Customer” means a person, including a bank, having an account with a bank or from whom a bank has agreed to receive payment orders;
    4. “Funds-transfer business day” of a receiving bank means the part of a day during which the receiving bank is open for the receipt, processing, and transmittal of payment orders and cancellations and amendments of payment orders;
    5. “Funds-transfer system” means a wire transfer network, automated clearing house, or other communication system of a clearing house or other association of banks through which a payment order by a bank may be transmitted to the bank to which the order is addressed; and
    6. (Reserved)
    7. “Prove” with respect to a fact means to meet the burden of establishing the fact, as defined in KRS 355.1-201 (2).
  2. Other definitions applying to this article and the sections of this article in which they appear are:
    1. “Acceptance.” KRS 355.4A-209 ;
    2. “Beneficiary.” KRS 355.4A-103 ;
    3. “Beneficiary’s bank.” KRS 355.4A-103 ;
    4. “Executed.” KRS 355.4A-301 ;
    5. “Execution date.” KRS 355.4A-301 ;
    6. “Funds transfer.” KRS 355.4A-104 ;
    7. “Funds-transfer system rule.” KRS 355.4A-501 ;
    8. “Intermediary bank.” KRS 355.4A-104 ;
    9. “Originator.” KRS 355.4A-104;
    10. “Originator’s bank.” KRS 355.4A-104;
    11. “Payment by beneficiary’s bank to beneficiary.” KRS 355.4A-405 ;
    12. “Payment by originator to beneficiary.” KRS 355.4A-406 ;
    13. “Payment by sender to receiving bank.” KRS 355.4A-403 ;
    14. “Payment date.” KRS 355.4A-401 ;
    15. “Payment order.” KRS 355.4A-103;
    16. “Receiving bank.” KRS 355.4A-103;
    17. “Security procedure.” KRS 355.4A-201 ; and
    18. “Sender.” KRS 355.4A-103.
  3. The following definitions in Article 4 of KRS Chapter 355 apply to this article:
    1. “Clearing house.” KRS 355.4-104 ;
    2. “Item.” KRS 355.4-104 ; and
    3. “Suspends payments.” KRS 355.4-104.
  4. In addition, Article 1 of KRS Chapter 355 contains general definitions and principles of construction and interpretation applicable throughout this article.

History. Enact. Acts 1992, ch. 116, § 28, effective July 14, 1992; 2006, ch. 242, § 52, effective July 12, 2006.

Legislative Research Commission Note.

(7/12/2006). Under the authority of KRS 7.136(1), the Reviser of Statutes has added paragraph headings [(a), (b), etc.] before terms referenced in subsection (2) of this statute that are defined in other statutes. The words in the text were not changed.

Official Comment

  1. The definition of “bank” in subsection (a)(2) includes some institutions that are not commercial banks. The definition reflects the fact that many financial institutions now perform functions previously restricted to commercial banks, including acting on behalf of customers in funds transfers. Since many funds transfers involve payment orders to or from foreign countries the definition also covers foreign banks. The definition also includes Federal Reserve Banks. Funds transfers carried out by Federal Reserve Banks are described in Comments 1 and 2 to Section 4A-107.
  2. Funds transfer business is frequently transacted by banks outside of general banking hours. Thus, the definition of banking day in Section 4-104(1)(c) cannot be used to describe when a bank is open for funds transfer business. Subsection (a)(4) defines a new term, “funds transfer business day,” which is applicable to Article 4A. The definition states, “is open for the receipt, processing, and transmittal of payment orders and cancellations and amendments of payment orders.” In some cases it is possible to electronically transmit payment orders and other communications to a receiving bank at any time. If the receiving bank is not open for the processing of an order when it is received, the communication is stored in the receiving bank’s computer for retrieval when the receiving bank is open for processing. The use of the conjunctive makes clear that the defined term is limited to the period during which all functions of the receiving bank can be performed, i.e., receipt, processing, and transmittal of payment orders, cancellations and amendments.
  3. Subsection (a)(5) defines “funds transfer system.” The term includes a system such as CHIPS which provides for transmission of a payment order as well as settlement of the obligation of the sender to pay the order. It also includes automated clearing houses, operated by a clearing house or other association of banks, which process and transmit payment orders of banks to other banks. In addition the term includes organizations that provide only transmission services such as SWIFT. The definition also includes the wire transfer network and automated clearing houses of Federal Reserve Banks. Systems of the Federal Reserve Banks, however, are treated differently from systems of other associations of banks. Funds transfer systems other than systems of the Federal Reserve Banks are treated in Article 4A as a means of communication of payment orders between participating banks. Section 4A-206. The Comment to that section and the Comment to Section 4A-107 explain how Federal Reserve Banks function under Article 4A. Funds transfer systems are also able to promulgate rules binding on participating banks that, under Section 4A-501, may supplement or in some cases may even override provisions of Article 4A.
  4. Subsection (d) incorporates definitions stated in Article 1 as well as principles of construction and interpretation stated in that Article. Included is Section 1-103. The last paragraph of the Comment to Section 4A-102 is addressed to the issue of the extent to which general principles of law and equity should apply to situations covered by provisions of Article 4A.

Research References and Practice Aids

Kentucky Law Journal.

Bhala, The Inverted Pyramid of Wire Transfer Law, 82 Ky. L.J. 347 (1993-94).

355.4A-106. Time payment order is received.

  1. The time of receipt of a payment order or communication canceling or amending a payment order is determined by the rules applicable to receipt of a notice stated in KRS 355.1-202 . A receiving bank may fix a cutoff time or times on a funds-transfer business day for the receipt and processing of payment orders and communications canceling or amending payment orders. Different cutoff times may apply to payment orders, cancellations, or amendments, or to different categories of payment orders, cancellations, or amendments. A cutoff time may apply to senders generally or different cutoff times may apply to different senders or categories of payment orders. If a payment order or communication canceling or amending a payment order is received after the close of a funds-transfer business day or after the appropriate cutoff time on a funds-transfer business day, the receiving bank may treat the payment order or communication as received at the opening of the next funds-transfer business day.
  2. If this article refers to an execution date or payment date or states a day on which a receiving bank is required to take action, and the date or day does not fall on a funds-transfer business day, the next day that is a funds-transfer business day is treated as the date or day stated, unless the contrary is stated in this article.

History. Enact. Acts 1992, ch. 116, § 29, effective July 14, 1992; 2006, ch. 242, § 53, effective July 12, 2006.

Official Comment

The time that a payment order is received by a receiving bank usually defines the payment date or the execution date of a payment order. Section 4A-401 and Section 4A-301. The time of receipt of a payment order, or communication cancelling or amending a payment order is defined in subsection (a) by reference to the rules stated in Section 1-202. Thus, time of receipt is determined by the same rules that determine when a notice is received. Time of receipt, however, may be altered by a cut-off time.

355.4A-107. Federal Reserve regulations and operating circulars.

Regulations of the board of governors of the Federal Reserve System and operating circulars of the Federal Reserve Banks supersede any inconsistent provision of this article to the extent of the inconsistency.

History. Enact. Acts 1992, ch. 116, § 30, effective July 14, 1992.

Official Comment

  1. Funds transfers under Article 4A may be made, in whole or in part, by payment orders through a Federal Reserve Bank in what is usually referred to as a transfer by Fedwire. If Bank A, which has an account in Federal Reserve Bank X, wants to pay $1,000,000 to Bank B, which has an account in Federal Reserve Bank Y, Bank A can issue an instruction to Reserve Bank X requesting a debit of $1,000,000 to Bank A’s Reserve account and an equal credit to Bank B’s Reserve account. Reserve Bank X will debit Bank A’s account and will credit the account of Reserve Bank Y. Reserve Bank X will issue an instruction to Reserve Bank Y requesting a debit of $1,000,000 to the account of Reserve Bank X and an equal credit to Bank B’s account in Reserve Bank Y. Reserve Bank Y will make the requested debit and credit and will give Bank B an advice of credit. The definition of “bank” in Section 4A-105(a)(2) includes both Reserve Bank X and Reserve Bank Y. Bank A’s instruction to Reserve Bank X to pay money to Bank B is a payment order under Section 4A-103(a)(1). Bank A is the sender and Reserve Bank X is the receiving bank. Bank B is the beneficiary of Bank A’s order and of the funds transfer. Bank A is the originator of the funds transfer and is also the originator’s bank. Section 4A-104(c) and (d). Reserve Bank X, an intermediary bank under Section 4A-104(b), executes Bank A’s order by sending a payment order to Reserve Bank Y instructing that bank to credit the Federal Reserve account of Bank B. Reserve Bank Y is the beneficiary’s bank.

    Suppose the transfer of funds from Bank A to Bank B is part of a larger transaction in which Originator, a customer of Bank A, wants to pay Beneficiary, a customer of Bank B. Originator issues a payment order to Bank A to pay $1,000,000 to the account of Beneficiary in Bank B. Bank A may execute Originator’s order by means of Fedwire which simultaneously transfers $1,000,000 from Bank A to Bank B and carries a message instructing Bank B to pay $1,000,000 to the account of Y. The Fedwire transfer is carried out as described in the previous paragraph, except that the beneficiary of the funds transfer is Beneficiary rather than Bank B. Reserve Bank X and Reserve Bank Y are intermediary banks. When Reserve Bank Y advises Bank B of the credit to its Federal Reserve account it will also instruct Bank B to pay to the account of Beneficiary. The instruction is a payment order to Bank B which is the beneficiary’s bank. When Reserve Bank Y advises Bank B of the credit to its Federal Reserve account Bank B receives payment of the payment order issued to it by Reserve Bank Y. Section 4A-403(a)(1). The payment order is automatically accepted by Bank B at the time it receives the payment order of Reserve Bank Y. Section 4A-209(b)(2). At the time of acceptance by Bank B payment by Originator to Beneficiary also occurs. Thus, in a Fedwire transfer, payment to the beneficiary’s bank, acceptance by the beneficiary’s bank and payment by the originator to the beneficiary all occur simultaneously by operation of law at the time the payment order to the beneficiary’s bank is received.

    If originator orders payment to the account of Beneficiary in Bank C rather than Bank B, the analysis is somewhat modified. Bank A may not have any relationship with Bank C and may not be able to make payment directly to Bank C. In that case, Bank A could send a Fedwire instructing Bank B to instruct Bank C to pay Beneficiary. The analysis is the same as the previous case except that Bank B is an intermediary bank and Bank C is the beneficiary’s bank.

  2. A funds transfer can also be made through a Federal Reserve Bank in an automated clearing house transaction. In a typical case, Originator instructs Originator’s Bank to pay to the account of Beneficiary in Beneficiary’s Bank. Originator’s instruction to pay a particular beneficiary is transmitted to Originator’s Bank along with many other instructions for payment to other beneficiaries by many different beneficiary’s banks. All of these instructions are contained in a magnetic tape or other electronic device. Transmission of instructions to the various beneficiary’s banks requires that Originator’s instructions be processed and repackaged with instructions of other originators so that all instructions to a particular beneficiary’s bank are transmitted together to that bank. The repackaging is done in processing centers usually referred to as automated clearing houses. Automated clearing houses are operated either by Federal Reserve Banks or by other associations of banks. If Originator’s Bank chooses to execute Originator’s instructions by transmitting them to a Federal Reserve Bank for processing by the Federal Reserve Bank, the transmission to the Federal Reserve Bank results in the issuance of payment orders by Originator’s Bank to the Federal Reserve Bank, which is an intermediary bank. Processing by the Federal Reserve Bank will result in the issuance of payment orders by the Federal Reserve Bank to Beneficiary’s Bank as well as payment orders to other beneficiary’s banks making payments to carry out Originator’s instructions.
  3. Although the terms of Article 4A apply to funds transfers involving Federal Reserve Banks, federal preemption would make ineffective any Article 4A provision that conflicts with federal law. The payments activities of the Federal Reserve Banks are governed by regulations of the Federal Reserve Board and by operating circulars issued by the Reserve Banks themselves. In some instances, the operating circulars are issued pursuant to a Federal Reserve Board regulation. In other cases, the Reserve Bank issues the operating circular under its own authority under the Federal Reserve Act, subject to review by the Federal Reserve Board. Section 4A-107 states that Federal Reserve Board regulations and operating circulars of the Federal Reserve Banks supersede any inconsistent provision of Article 4A to the extent of the inconsistency. Federal Reserve Board regulations, being valid exercises of regulatory authority pursuant to a federal statute, take precedence over state law if there is an inconsistency. Childs v. Federal Reserve Bank of Dallas, 719 F.2d 812 (5th Cir. 1983), reh. den. 724 F.2d 127 (5th Cir. 1984). Section 4A-107 treats operating circulars as having the same effect whether issued under the Reserve Bank’s own authority or under a Federal Reserve Board regulation.

355.4A-108. Exclusion of consumer transactions.

  1. Except as provided in subsection (2) of this section, this article does not apply to a funds transfer any part of which is governed by the Electronic Fund Transfer Act of 1978 (Title XX, P.L. 95-630, 92 Stat. 3728, 15 U.S.C. secs. 1693 et seq.) as amended from time to time.
  2. This article applies to a funds transfer that is a remittance transfer as defined in the Electronic Fund Transfer Act, 15 U.S.C. sec. 1693 o-1, as amended from time to time, unless the remittance transfer is an electronic fund transfer as defined in the Electronic Fund Transfer Act, 15 U.S.C. sec. 1693 a, as amended from time to time.
  3. In a funds transfer to which this article applies, in the event of an inconsistency between an applicable provision of this article and an applicable provision of the Electronic Fund Transfer Act, the provision of the Electronic Fund Transfer Act governs to the extent of the inconsistency.

History. Enact. Acts 1992, ch. 116, § 31, effective July 14, 1992; 2013, ch. 10, § 1, effective March 14, 2013.

Official Comment

The Electronic Fund Transfer Act of 1978 is a federal statute that covers a wide variety of electronic funds transfers involving consumers. The types of transfers covered by the federal statute are essentially different from the wholesale wire transfers that are the primary focus of Article 4A. Section 4A-108 excludes a funds transfer from Article 4A if any part of the transfer is covered by the federal law. Existing procedures designed to comply with federal law will not be affected by Article 4A. The effect of Section 4A-108 is to make Article 4A and EFTA mutually exclusive. For example, if a funds transfer is to a consumer account in the beneficiary’s bank and the funds transfer is made in part by use of Fedwire and in part by means of an automated clearing house, EFTA applies to the ACH part of the transfer but not to the Fedwire part. Under Section 4A-108, Article 4A does not apply to any part of the transfer. However, in the absence of any law to govern the part of the funds transfer that is not subject to EFTA, a court might apply appropriate principles from Article 4A by analogy.

Research References and Practice Aids

Kentucky Law Journal.

Bhala, The Inverted Pyramid of Wire Transfer Law, 82 Ky. L.J. 347 (1993-94).

Part 2. Issue and Acceptance of Payment Order

355.4A-201. Security procedure.

“Security procedure” means a procedure established by agreement of a customer and a receiving bank for the purpose of:

  1. Verifying that a payment order or communication amending or canceling a payment order is that of the customer; or
  2. Detecting error in the transmission or the content of the payment order or communication.

A security procedure may require the use of algorithms or other codes, identifying words or numbers, encryption, callback procedures, or similar security devices. Comparison of a signature on a payment order or communication with an authorized specimen signature of the customer is not by itself a security procedure.

History. Enact. Acts 1992, ch. 116, § 32, effective July 14, 1992.

Official Comment

A large percentage of payment orders and communications amending or cancelling payment orders are transmitted electronically and it is standard practice to use security procedures that are designed to assure the authenticity of the message. Security procedures can also be used to detect error in the content of messages or to detect payment orders that are transmitted by mistake as in the case of multiple transmission of the same payment order. Security procedures might also apply to communications that are transmitted by telephone or in writing. Section 4A-201 defines these security procedures. The definition of security procedure limits the term to a procedure “established by agreement of a customer and a receiving bank.” The term does not apply to procedures that the receiving bank may follow unilaterally in processing payment orders. The question of whether loss that may result from the transmission of a spurious or erroneous payment order will be borne by the receiving bank or the sender or purported sender is affected by whether a security procedure was or was not in effect and whether there was or was not compliance with the procedure. Security procedures are referred to in Sections 4A-202 and 4A-203, which deal with authorized and verified payment orders, and Section 4A-205, which deals with erroneous payment orders.

355.4A-202. Authorized and verified payment orders.

  1. A payment order received by the receiving bank is the authorized order of the person identified as sender if that person authorized the order or is otherwise bound by it under the law of agency.
  2. If a bank and its customer have agreed that the authenticity of payment orders issued to the bank in the name of the customer as sender will be verified pursuant to a security procedure, a payment order received by the receiving bank is effective as the order of the customer, whether or not authorized, if:
    1. The security procedure is a commercially reasonable method of providing security against unauthorized payment orders; and
    2. The bank proves that it accepted the payment order in good faith and in compliance with the security procedure and any written agreement or instruction of the customer restricting acceptance of payment orders issued in the name the customer.

      The bank is not required to follow an instruction that violates a written agreement with the customer or notice of which is not received at a time and in a manner affording the bank a reasonable opportunity to act on it before the payment order is accepted.

  3. Commercial reasonableness of a security procedure is a question of law to be determined by considering the wishes of the customer expressed to the bank, the circumstances of the customer known to the bank, including the size, type, and frequency of payment orders normally issued by the customer to the bank, alternative security procedures offered to the customer, and security procedures in general use by customers and receiving banks similarly situated. A security procedure is deemed to be commercially reasonable if:
    1. The security procedure was chosen by the customer after the bank offered, and the customer refused, a security procedure that was commercially reasonable for that customer; and
    2. The customer expressly agreed in writing to be bound by any payment order, whether or not authorized, issued in its name and accepted by the bank in compliance with the security procedure chosen by the customer.
  4. The term “sender” in this article includes the customer in whose name a payment order is issued if the order is the authorized order of the customer under subsection (1), or it is effective as the order of the customer under subsection (2).
  5. This section applies to amendments and cancellations of payment orders to the same extent it applies to payment orders.
  6. Except as provided in this section and in KRS 355.4A-203 (1)(a), rights and obligations arising under this section or KRS 355.4A-203 may not be varied by agreement.

History. Enact. Acts 1992, ch. 116, § 33, effective July 14, 1992.

Official Comment

This section is discussed in the Comment following Section 4A-203.

NOTES TO DECISIONS

1.Summary Judgment Denied.

Summary judgment was denied on a claim that a bank violated KRS 355.4A-202 by failing to execute an authorized payment order where the issue of whether the transfer was authorized depended on the parties’ agreement, and there were issues of fact as to the nature of the funds deposited in the account under that agreement. Wholesale Petroleum Partners, LP v. South Cent. Bank of Daviess County, Inc., 2012 U.S. Dist. LEXIS 64132 (W.D. Ky. Jan. 6, 2012).

355.4A-203. Unenforceability of certain verified payment orders.

  1. If an accepted payment order is not, under KRS 355.4A-202 (1), an authorized order of a customer identified as sender, but is effective as an order of the customer pursuant to KRS 355.4A-202 (2), the following rules apply:
    1. By express written agreement, the receiving bank may limit the extent to which it is entitled to enforce or retain payment of the payment order.
    2. The receiving bank is not entitled to enforce or retain payment of the payment order if the customer proves that the order was not caused, directly or indirectly, by a person:
      1. Entrusted at any time with duties to act for the customer with respect to payment orders or the security procedure; or
      2. Who obtained access to transmitting facilities of the customer or who obtained, from a source controlled by the customer and without authority of the receiving bank, information facilitating breach of the security procedure, regardless of how the information was obtained or whether the customer was at fault. Information includes any access device, computer software, or the like.
  2. This section applies to amendments of payment orders to the same extent it applies to payment orders.

History. Enact. Acts 1992, ch. 116, § 34, effective July 14, 1992.

Official Comment

  1. Some person will always be identified as the sender of a payment order. Acceptance of the order by the receiving bank is based on a belief by the bank that the order was authorized by the person identified as the sender. If the receiving bank is the beneficiary’s bank acceptance means that the receiving bank is obliged to pay the beneficiary. If the receiving bank is not the beneficiary’s bank, acceptance means that the receiving bank has executed the sender’s order and is obliged to pay the bank that accepted the order issued in execution of the sender’s order. In either case the receiving bank may suffer a loss unless it is entitled to enforce payment of the payment order that it accepted. If the person identified as the sender of the order refuses to pay on the ground that the order was not authorized by that person, what are the rights of the receiving bank? In the absence of a statute or agreement that specifically addresses the issue, the question usually will be resolved by the law of agency. In some cases, the law of agency works well. For example, suppose the receiving bank executes a payment order given by means of a letter apparently written by a corporation that is a customer of the bank and apparently signed by an officer of the corporation. If the receiving bank acts solely on the basis of the letter, the corporation is not bound as the sender of the payment order unless the signature was that of the officer and the officer was authorized to act for the corporation in the issuance of payment orders, or some other agency doctrine such as apparent authority or estoppel causes the corporation to be bound. Estoppel can be illustrated by the following example. Suppose P is aware that A, who is unauthorized to act for P, has fraudulently misrepresented to T that A is authorized to act for P. T believes A and is about to rely on the misrepresentation. If P does not notify T of the true facts although P could easily do so, P may be estopped from denying A’s lack of authority. A similar result could follow if the failure to notify T is the result of negligence rather than a deliberate decision. Restatement, Second, Agency § 8B. Other equitable principles such as subrogation or restitution might also allow a receiving bank to recover with respect to an unauthorized payment order that it accepted. In Gatoil (U.S.A.), Inc. v. Forest Hill State Bank, 1 U.C.C. Rep.Serv.2d 171 (D.Md. 1986), a joint venturer not authorized to order payments from the account of the joint venture, ordered a funds transfer from the account. The transfer paid a bona fide debt of the joint venture. Although the transfer was unauthorized the court refused to require recredit of the account because the joint venture suffered no loss. The result can be rationalized on the basis of subrogation of the receiving bank to the right of the beneficiary of the funds transfer to receive the payment from the joint venture.

    But in most cases these legal principles give the receiving bank very little protection in the case of an authorized payment order. Cases like those just discussed are not typical of the way that most payment orders are transmitted and accepted, and such cases are likely to become even less common. Given the large amount of the typical payment order, a prudent receiving bank will be unwilling to accept a payment order unless it has assurance that the order is what it purports to be. This assurance is normally provided by security procedures described in Section 4A-201.

    In a very large percentage of cases covered by Article 4A, transmission of the payment order is made electronically. The receiving bank may be required to act on the basis of a message that appears on a computer screen. Common law concepts of authority of agent to bind principal are not helpful. There is no way of determining the identity or the authority of the person who caused the message to be sent. The receiving bank is not relying on the authority of any particular person to act for the purported sender. The case is not comparable to payment of a check by the drawee bank on the basis of a signature that is forged. Rather, the receiving bank relies on a security procedure pursuant to which the authenticity of the message can be “tested” by various devices which are designed to provide certainty that the message is that of the sender identified in the payment order. In the wire transfer business the concept of “authorized” is different from that found in agency law. In that business a payment order is treated as the order of the person in whose name it is issued if it is properly tested pursuant to a security procedure and the order passes the test.

    Section 4A-202 reflects the reality of the wire transfer business. A person in whose name a payment order is issued is considered to be the sender of the order if the order is “authorized” as stated in subsection (a) or if the order is “verified” pursuant to a security procedure in compliance with subsection (b). If subsection (b) does not apply, the question of whether the customer is responsible for the order is determined by the law of agency. The issue is one of actual or apparent authority of the person who caused the order to be issued in the name of the customer. In some cases the law of agency might allow the customer to be bound by an unauthorized order if conduct of the customer can be used to find an estoppel against the customer to deny that the order was unauthorized. If the customer is bound by the order under any of these agency doctrines, subsection (a) treats the order as authorized and thus the customer is deemed to be the sender of the order. In most cases, however, subsection (b) will apply. In that event there is no need to make an agency law analysis to determine authority. Under Section 4A-202, the issue of liability of the purported sender of the payment order will be determined by agency law only if the receiving bank did not comply with subsection (b).

2. The scope of Section 4A-202 can be illustrated by the following cases.

Case #1. A payment order purporting to be that of Customer is received by Receiving Bank but the order was fraudulently transmitted by a person who had no authority to act for Customer.

Case #2. An authentic payment order was sent by Customer, but before the order was received by Receiving Bank the order was fraudulently altered by an unauthorized person to change the beneficiary.

Case #3. An authentic payment order was received by Receiving Bank, but before the order was executed by Receiving Bank a person who had no authority to act for Customer fraudulently sent a communication purporting to amend the order by changing the beneficiary.

In each case Receiving Bank acted on the fraudulent communication by accepting the payment order. These cases are all essentially similar and they are treated identically by Section 4A-202. In each case Receiving Bank acted on a communication that it thought was authorized by Customer when in fact the communication was fraudulent. No distinction is made between Case #1 in which Customer took no part at all in the transaction and Case #2 and Case #3 in which an authentic order was fraudulently altered or amended by an unauthorized person. If subsection (b) does not apply, each case is governed by subsection (a). If there are no additional facts on which an estoppel might be found, Customer is not responsible in Case #1 for the fraudulently issued payment order, in Case #2 for the fraudulent alteration or in Case #3 for the fraudulent amendment. Thus, in each case Customer is not liable to pay the order and Receiving Bank takes the loss. The only remedy of Receiving Bank is to seek recovery from the person who received payment as beneficiary of the fraudulent order. If there was verification in compliance with subsection (b), Customer will take the loss unless Section 4A-203 applies.

3. Subsection (b) of Section 4A-202 is based on the assumption that losses due to fraudulent payment orders can best be avoided by the use of commercially reasonable security procedures, and that the use of such procedures should be encouraged. The subsection is designed to protect both the customer and the receiving bank. A receiving bank needs to be able to rely on objective criteria to determine whether it can safely act on a payment order. Employees of the bank can be trained to “test” a payment order according to the various steps specified in the security procedure. The bank is responsible for the acts of these employees. Subsection (b)(ii) requires the bank to prove that it accepted the payment order in good faith and “in compliance with the security procedure.” If the fraud was not detected because the bank’s employee did not perform the acts required by the security procedure, the bank has not complied. Subsection (b)(ii) also requires the bank to prove that it complied with any agreement or instruction that restricts acceptance of payment orders issued in the name of the customer. A customer may want to protect itself by imposing limitations on acceptance of payment orders by the bank. For example, the customer may prohibit the bank from accepting a payment order that is not payable from an authorized account, that exceeds the credit balance in specified accounts of the customer, or that exceeds some other amount. Another limitation may relate to the beneficiary. The customer may provide the bank with a list of authorized beneficiaries and prohibit acceptance of any payment order to a beneficiary not appearing on the list. Such limitations may be incorporated into the security procedure itself or they may be covered by a separate agreement or instruction. In either case, the bank must comply with the limitations if the conditions stated in subsection (b) are met. Normally limitations on acceptance would be incorporated into an agreement between the customer and the receiving bank, but in some cases the instruction might be unilaterally given by the customer. If standing instructions or an agreement state limitations on the ability of the receiving bank to act, provision must be made for later modification of the limitations. Normally this would be done by an agreement that specifies particular procedures to be followed. Thus, subsection (b) states that the receiving bank is not required to follow an instruction that violates a written agreement. The receiving bank is not bound by an instruction unless it has adequate notice of it. Subsections (25), (26) and (27) of Section 1-201 apply.

Subsection (b)(i) assures that the interests of the customer will be protected by providing an incentive to a bank to make available to the customer a security procedure that is commercially reasonable. If a commercially reasonable security procedure is not made available to the customer, subsection (b) does not apply. The result is that subsection (a) applies and the bank acts at its peril in accepting a payment order that may be unauthorized. Prudent banking practice may require that security procedures be utilized in virtually all cases except for those in which personal contact between the customer and the bank eliminates the possibility of an unauthorized order. The burden of making available commercially reasonable security procedures is imposed on receiving banks because they generally determine what security procedures can be used and are in the best position to evaluate the efficacy of the procedures offered to customers to combat fraud. The burden on the customer is to supervise its employees to assure compliance with the security procedure and to safeguard confidential security information and access to transmitting facilities so that the security procedure cannot be breached.

4. The principal issue that is likely to arise in litigation involving subsection (b) is whether the security procedure in effect when a fraudulent payment order was accepted was commercially reasonable. The concept of what is commercially reasonable in a given case is flexible. Verification entails labor and equipment costs that can vary greatly depending upon the degree of security that is sought. A customer that transmits very large numbers of payment orders in very large amounts may desire and may reasonably expect to be provided with state-of-the-art procedures that provide maximum security. But the expense involved may make use of a state-of-the-art procedure infeasible for a customer that normally transmits payment orders infrequently or in relatively low amounts. Another variable is the type of receiving bank. It is reasonable to require large money center banks to make available state-of-the-art security procedures. On the other hand, the same requirement may not be reasonable for a small country bank. A receiving bank might have several security procedures that are designed to meet the varying needs of different customers. The type of payment order is another variable. For example, in a wholesale wire transfer, each payment order is normally transmitted electronically and individually. A testing procedure will be individually applied to each payment order. In funds transfers to be made by means of an automated clearing house many payment orders are incorporated into an electronic device such as a magnetic tape that is physically delivered. Testing of the individual payment orders is not feasible. Thus, a different kind of security procedure must be adopted to take into account the different mode of transmission.

The issue of whether a particular security procedure is commercially reasonable is a question of law. Whether the receiving bank complied with the procedure is a question of fact. It is appropriate to make the finding concerning commercial reasonability a matter of law because security procedures are likely to be standardized in the banking industry and a question of law standard leads to more predictability concerning the level of security that a bank must offer to its customers. The purpose of subsection (b) is to encourage banks to institute reasonable safeguards against fraud but not to make them insurers against fraud. A security procedure is not commercially unreasonable simply because another procedure might have been better or because the judge deciding the question would have opted for a more stringent procedure. The standard is not whether the security procedure is the best available. Rather it is whether the procedure is reasonable for the particular customer and the particular bank, which is a lower standard. On the other hand, a security procedure that fails to meet prevailing standards of good banking practice applicable to the particular bank should not be held to be commercially reasonable. Subsection (c) states factors to be considered by the judge in making the determination of commercial reasonableness. Sometimes an informed customer refuses a security procedure that is commercially reasonable and suitable for that customer and insists on using a higher-risk procedure because it is more convenient or cheaper. In that case, under the last sentence of subsection (c), the customer has voluntarily assumed the risk of failure of the procedure and cannot shift the loss to the bank. But this result follows only if the customer expressly agrees in writing to assume that risk. It is implicit in the last sentence of subsection (c) that a bank that accedes to the wishes of its customer in this regard is not acting in bad faith by so doing so long as the customer is made aware of the risk. In all cases, however, a receiving bank cannot get the benefit of subsection (b) unless it has made available to the customer a security procedure that is commercially reasonable and suitable for use by that customer. In most cases, the mutual interest of bank and customer to protect against fraud should lead to agreement to a security procedure which is commercially reasonable.

5. The effect of Section 4A-202(b) is to place the risk of loss on the customer if an unauthorized payment order is accepted by the receiving bank after verification by the bank in compliance with a commercially reasonable security procedure. An exception to this result is provided by Section 4A-203(a)(2). The customer may avoid the loss resulting from such a payment order if the customer can prove that the fraud was not committed by a person described in that subsection. Breach of a commercially reasonable security procedure requires that the person committing the fraud have knowledge of how the procedure works and knowledge of codes, identifying devices, and the like. That person may also need access to transmitting facilities through an access device or other software in order to breach the security procedure. This confidential information must be obtained either from a source controlled by the customer or from a source controlled by the receiving bank. If the customer can prove that the person committing the fraud did not obtain the confidential information from an agent or former agent of the customer or from a source controlled by the customer, the loss is shifted to the bank. “Prove” is defined in Section 4A-105(a)(7). Because of bank regulation requirements, in this kind of case there will always be a criminal investigation as well as an internal investigation of the bank to determine the probable explanation for the breach of security. Because a funds transfer fraud usually will involve a very large amount of money, both the criminal investigation and the internal investigation are likely to be thorough. In some cases there may be an investigation by bank examiners as well. Frequently, these investigations will develop evidence of who is at fault and the cause of the loss. The customer will have access to evidence developed in these investigations and that evidence can be used by the customer in meeting its burden of proof.

6. The effect of Section 4A-202(b) may also be changed by an agreement meeting the requirements of Section 4A-203(a)(1). Some customers may be unwilling to take all or part of the risk of loss with respect to unauthorized payment orders even if all of the requirements of Section 4A-202(b) are met. By virtue of Section 4A-203(a)(1), a receiving bank may assume all of the risk of loss with respect to unauthorized payment orders or the customer and bank may agree that losses from unauthorized payment orders are to be divided as provided in the agreement.

7. In a large majority of cases the sender of a payment order is a bank. In many cases in which there is a bank sender, both the sender and the receiving bank will be members of a funds transfer system over which the payment order is transmitted. Since Section 4A-202(f) does not prohibit a funds transfer system rule from varying rights and obligations under Section 4A-202, a rule of the funds transfer system can determine how loss due to an unauthorized payment order from a participating bank to another participating bank is to be allocated. A funds transfer system rule, however, cannot change the rights of a customer that is not a participating bank. § 4A-501(b). Section 4A-202(f) also prevents variation by agreement except to the extent stated.

355.4A-204. Refund of payment and duty of customer to report with respect to unauthorized payment order.

  1. If a receiving bank accepts a payment order issued in the name of its customer as sender which is:
    1. Not authorized and not effective as the order of the customer under KRS 355.4A-202 ; or
    2. Not enforceable, in whole or in part, against the customer under KRS 355.4A-203 , the bank shall refund any payment of the payment order received from the customer to the extent the bank is not entitled to enforce payment and shall pay interest on the refundable amount calculated from the date the bank received payment to the date of the refund. However, the customer is not entitled to interest from the bank on the amount to be refunded if the customer fails to exercise ordinary care to determine that the order was not authorized by the customer and to notify the bank of the relevant facts within a reasonable time not exceeding ninety (90) days after the date the customer received notification from the bank that the order was accepted or that the customer’s account was debited with respect to the order. The bank is not entitled to any recovery from the customer on account of a failure by the customer to give notification as stated in this section.
  2. Reasonable time under subsection (1) of this section may be fixed by agreement as stated in KRS 355.1-302 (2), but the obligation of a receiving bank to refund payment as stated in subsection (1) may not otherwise be varied by agreement.

History. Enact. Acts 1992, ch. 116, § 35, effective July 14, 1992; 2006, ch. 242, § 54, effective July 12, 2006.

Official Comment

  1. With respect to unauthorized payment orders, in a very large percentage of cases a commercially reasonable security procedure will be in effect. Section 4A-204 applies only to cases in which (i) no commercially reasonable security procedure is in effect, (ii) the bank did not comply with a commercially reasonable security procedure that was in effect, (iii) the sender can prove, pursuant to Section 4A-203(a)(2), that the culprit did not obtain confidential security information controlled by the customer, or (iv) the bank, pursuant to Section 4A-203(a)(1) agreed to take all or part of the loss resulting from an unauthorized payment order. In each of these cases the bank takes the risk of loss with respect to an unauthorized payment order because the bank is not entitled to payment from the customer with respect to the order. The bank normally debits the customer’s account or otherwise receives payment from the customer shortly after acceptance of the payment order. Subsection (a) of Section 4A-204 states that the bank must recredit the account or refund payment to the extent the bank is not entitled to enforce payment.
  2. Section 4A-204 is designed to encourage a customer to promptly notify the receiving bank that it has accepted an unauthorized payment order. Since cases of unauthorized payment orders will almost always involve fraud, the bank’s remedy is normally to recover from the beneficiary of the unauthorized order if the beneficiary was party to the fraud. This remedy may not be worth very much and it may not make any difference whether or not the bank promptly learns about the fraud. But in some cases prompt notification may make it easier for the bank to recover some part of its loss from the culprit. The customer will routinely be notified of the debit to its account with respect to an unauthorized order or will otherwise be notified of acceptance of the order. The customer has a duty to exercise ordinary care to determine that the order was unauthorized after it has received notification from the bank, and to advise the bank of the relevant facts within a reasonable time not exceeding 90 days after receipt of notification. Reasonable time is not defined and it may depend on the facts of the particular case. If a payment order for $1,000,000 is wholly unauthorized, the customer should normally discover it in far less than 90 days. If a $1,000,000 payment order was authorized but the name of the beneficiary was fraudulently changed, a much longer period may be necessary to discover the fraud. But in any event, if the customer delays more than 90 days the customer’s duty has not been met. The only consequence of a failure of the customer to perform this duty is a loss of interest on the refund payable by the bank. A customer that acts promptly is entitled to interest from the time the customer’s account was debited or the customer otherwise made payment. The rate of interest is stated in Section 4A-506. If the customer fails to perform the duty, no interest is recoverable for any part of the period before the bank learns that it accepted an unauthorized order. But the bank is not entitled to any recovery from the customer based on negligence for failure to inform the bank. Loss of interest is in the nature of a penalty on the customer designed to provide an incentive for the customer to police its account. There is no intention to impose a duty on the customer that might result in shifting loss from the unauthorized order to the customer.

355.4A-205. Erroneous payment orders.

  1. If an accepted payment order was transmitted pursuant to a security procedure for the detection of error and the payment order:
    1. Erroneously instructed payment to a beneficiary not intended by the sender;
    2. Erroneously instructed payment in an amount greater than the amount intended by the sender; or
    3. Was an erroneously transmitted duplicate of a payment order previously sent by the sender, the following rules apply:
      1. If the sender proves that the sender or a person acting on behalf of the sender pursuant to KRS 355.4A-206 complied with the security procedure and that the error would have been detected if the receiving bank had also complied, the sender is not obliged to pay the order to the extent stated in paragraphs 2. and 3.
      2. If the funds transfer is completed on the basis of an erroneous payment order described in clause (a) or (c) of subsection (1), the sender is not obliged to pay the order and the receiving bank is entitled to recover from the beneficiary any amount paid to the beneficiary to the extent allowed by the law governing mistake and restitution.
      3. If the funds transfer is completed on the basis of a payment order described in clause (b) of subsection (1), the sender is not obliged to pay the order to the extent the amount received by the beneficiary is greater than the amount intended by the sender. In that case, the receiving bank is entitled to recover from the beneficiary the excess amount received to the extent allowed by the law governing mistake and restitution.
    1. If the sender of an erroneous payment order described in subsection (1) is not obliged to pay all or part of the order; and (2) (a) If the sender of an erroneous payment order described in subsection (1) is not obliged to pay all or part of the order; and
    2. The sender receives notification from the receiving bank that the order was accepted by the bank or that the sender’s account was debited with respect to the order, the sender has a duty to exercise ordinary care, on the basis of information available to the sender, to discover the error with respect to the order and to advise the bank of the relevant facts within a reasonable time, not exceeding ninety (90) days, after the bank’s notification was received by the sender. If the bank proves that the sender failed to perform that duty, the sender is liable to the bank for the loss the bank proves it incurred as a result of the failure, but the liability of the sender may not exceed the amount of the sender’s order.
  2. This section applies to amendments to payment orders to the same extent it applies to payment orders.

History. Enact. Acts 1992, ch. 116, § 36, effective July 14, 1992.

Official Comment

  1. This section concerns error in the content or in the transmission of payment orders. It deals with three kinds of error. Case #1. The order identifies a beneficiary not intended by the sender. For example, Sender intends to wire funds to a beneficiary identified only by an account number. The wrong account number is stated in the order. Case #2. The error is in the amount of the order. For example, Sender intends to wire $1,000 to Beneficiary. Through error, the payment order instructs payment of $1,000,000. Case #3. A payment order is sent to the receiving bank and then, by mistake, the same payment order is sent to the receiving bank again. In Case #3, the receiving bank may have no way of knowing whether the second order is a duplicate of the first or is another order. Similarly, in Case #1 and Case #2, the receiving bank may have no way of knowing that the error exists. In each case, if this section does not apply and the funds transfer is completed, Sender is obliged to pay the order. Section 4A-402. Sender’s remedy, based on payment by mistake, is to recover from the beneficiary that received payment.

    Sometimes, however, transmission of payment orders of the sender to the receiving bank is made pursuant to a security procedure designed to detect one or more of the errors described above. Since “security procedure” is defined by Section 4A-201 as “a procedure established by agreement of a customer and a receiving bank for the purpose of * * * detecting error * * *,” Section 4A-205 does not apply if the receiving bank and the customer did not agree to the establishment of a procedure for detecting error. A security procedure may be designed to detect an account number that is not one to which Sender normally makes payment. In that case, the security procedure may require a special verification that payment to the stated account number was intended. In the case of dollar amounts, the security procedure may require different codes for different dollar amounts. If a $1,000,000 payment order contains a code that is inappropriate for that amount, the error in amount should be detected. In the case of duplicate orders, the security procedure may require that each payment order be identified by a number or code that applies to no other order. If the number or code of each payment order received is registered in a computer base, the receiving bank can quickly identify a duplicate order. The three cases covered by this section are essentially similar. In each, if the error is not detected, some beneficiary will receive funds that the beneficiary was not intended to receive. If this section applies, the risk of loss with respect to the error of the sender is shifted to the bank which has the burden of recovering the funds from the beneficiary. The risk of loss is shifted to the bank only if the sender proves that the error would have been detected if there had been compliance with the procedure and that the sender (or an agent under Section 4A-206) complied. In the case of a duplicate order or a wrong beneficiary, the sender doesn’t have to pay the order. In the case of an overpayment, the sender does not have to pay the order to the extent of the overpayment. If subsection (a)(1) applies, the position of the receiving bank is comparable to that of a receiving bank that erroneously executes a payment order as stated in Section 4A-303. However, failure of the sender to timely report the error is covered by Section 4A-205(b) rather than by Section 4A-304 which applies only to erroneous execution under Section 4A-303. A receiving bank to which the risk of loss is shifted by subsection (a)(1) or (2) is entitled to recover the amount erroneously paid to the beneficiary to the extent allowed by the law of mistake and restitution. Rights of the receiving bank against the beneficiary are similar to those of a receiving bank that erroneously executes a payment order as stated in Section 4A-303. Those rights are discussed in Comment 2 to Section 4A-303.

  2. A security procedure established for the purpose of detecting error is not effective unless both sender and receiving bank comply with the procedure. Thus, the bank undertakes a duty of complying with the procedure for the benefit of the sender. This duty is recognized in subsection (a)(1). The loss with respect to the sender’s error is shifted to the bank if the bank fails to comply with the procedure and the sender (or an agent under Section 4A-206) does comply. Although the customer may have been negligent in transmitting the erroneous payment order, the loss is put on the bank on a last-clear-chance theory. A similar analysis applies to subsection (b). If the loss with respect to an error is shifted to the receiving bank and the sender is notified by the bank that the erroneous payment order was accepted, the sender has a duty to exercise ordinary care to discover the error and notify the bank of the relevant facts within a reasonable time not exceeding 90 days. If the bank can prove that the sender failed in this duty it is entitled to compensation for the loss incurred as a result of the failure. Whether the bank is entitled to recover from the sender depends upon whether the failure to give timely notice would have made any difference. If the bank could not have recovered from the beneficiary that received payment under the erroneous payment order even if timely notice had been given, the sender’s failure to notify did not cause any loss of the bank.
  3. Section 4A-205 is subject to variation by agreement under Section 4A-501. Thus, if a receiving bank and its customer have agreed to a security procedure for detection of error, the liability of the receiving bank for failing to detect an error of the customer as provided in Section 4A-205 may be varied as provided in an agreement of the bank and the customer.

355.4A-206. Transmission of payment order through funds — Transfer or other communication system.

  1. If a payment order addressed to a receiving bank is transmitted to a funds-transfer system or other third-party communication system for transmittal to the bank, the system is deemed to be an agent of the sender for the purpose of transmitting the payment order to the bank. If there is a discrepancy between the terms of the payment order transmitted to the system and the terms of the payment order transmitted by the system to the bank, the terms of the payment order of the sender are those transmitted by the system. This section does not apply to a funds-transfer system of the Federal Reserve Banks.
  2. This section applies to cancellations and amendments of payment orders to the same extent it applies to payment orders.

History. Enact. Acts 1992, ch. 116, § 37, effective July 14, 1992.

Official Comment

  1. A payment order may be issued to a receiving bank directly by delivery of a writing or electronic device or by an oral or electronic communication. If an agent of the sender is employed to transmit orders on behalf of the sender, the sender is bound by the order transmitted by the agent on the basis of agency law. Section 4A-206 is an application of that principle to cases in which a funds transfer or communication system acts as an intermediary in transmitting the sender’s order to the receiving bank. The intermediary is deemed to be an agent of the sender for the purpose of transmitting payment orders and related messages for the sender. Section 4A-206 deals with error by the intermediary.
  2. Transmission by an automated clearing house of an association of banks other than the Federal Reserve Banks is an example of a transaction covered by Section 4A-206. Suppose Originator orders Originator’s Bank to cause a large number of payments to be made to many accounts in banks in various parts of the country. These payment orders are electronically transmitted to Originator’s Bank and stored in an electronic device that is held by Originator’s Bank. Or, transmission of the various payment orders is made by delivery to Originator’s Bank of an electronic device containing the instruction to the bank. In either case the terms of the various payment orders by Originator are determined by the information contained in the electronic device. In order to execute the various orders, the information in the electronic device must be processed. For example, if some of the orders are for payments to accounts in Bank X and some to accounts in Bank Y, Originator’s Bank will execute these orders of Originator by issuing a series of payment orders to Bank X covering all payments to accounts in that bank, and by issuing a series of payment orders to Bank Y covering all payments to accounts in that bank. The orders to Bank X may be transmitted together by means of an electronic device, and those to Bank Y may be included in another electronic device. Typically, this processing is done by an automated clearing house acting for a group of banks including Originator’s Bank. The automated clearing house is a funds transfer system. Section 4A-105(a)(5). Originator’s Bank delivers Originator’s electronic device or transmits the information contained in the device to the funds transfer system for processing into payment orders of Originator’s Bank to the appropriate beneficiary’s banks. The processing may result in an erroneous payment order. Originator’s Bank, by use of Originator’s electronic device, may have given information to the funds transfer system instructing payment of $100,000 to an account in Bank X, but because of human error or an equipment malfunction the processing may have converted that instruction into an instruction to Bank X to make a payment of $1,000,000. Under Section 4A-206, Originator’s Bank issued a payment order for $1,000,000 to Bank X when the erroneous information was sent to Bank X. Originator’s Bank is responsible for the error of the automated clearing house. The liability of the funds transfer system that made the error is not governed by Article 4A. It is left to the law of contract, a funds transfer system rule, or other applicable law.

    In the hypothetical case just discussed, if the automated clearing house is operated by a Federal Reserve Bank, the analysis is different. Section 4A-206 does not apply. Originator’s Bank will execute Originator’s payment orders by delivery or transmission of the electronic information to the Federal Reserve Bank for processing. The result is that Originator’s Bank has issued payment orders to the Federal Reserve Bank which, in this case, is acting as an intermediary bank. When the Federal Reserve Bank has processed the information given to it by Originator’s Bank it will issue payment orders to the various beneficiary’s banks. If the processing results in an erroneous payment order, the Federal Reserve Bank has erroneously executed the payment order of Originator’s Bank and the case is governed by Section 4A-303.

355.4A-207. Misdescription of beneficiary.

  1. Subject to subsection (2), if, in a payment order received by the beneficiary’s bank, the name, bank account number, or other identification of the beneficiary refers to a nonexistent or unidentifiable person or account, no person has rights as a beneficiary of the order and acceptance of the order cannot occur.
  2. If a payment order received by the beneficiary’s bank identifies the beneficiary both by name and by an identifying or bank account number and the name and number identify different persons, the following rules apply:
    1. Except as otherwise provided in subsection (3), if the beneficiary’s bank does not know that the name and number refer to different persons, it may rely on the number as the proper identification of the beneficiary of the order. The beneficiary’s bank need not determine whether the name and number refer to the same person.
    2. If the beneficiary’s bank pays the person identified by name or knows that the name and number identify different persons, no person has rights as beneficiary except the person paid by the beneficiary’s bank if that person was entitled to receive payment from the originator of the funds transfer. If no person has rights as beneficiary, acceptance of the order cannot occur.
    1. If a payment order described in subsection (2) is accepted; (3) (a) If a payment order described in subsection (2) is accepted;
    2. The originator’s payment order described the beneficiary inconsistently by name and number; and
    3. The beneficiary’s bank pays the person identified by number as permitted by subsection (2)(a), the following rules apply:
      1. If the originator is a bank, the originator is obliged to pay its order.
      2. If the originator is not a bank and proves that the person identified by number was not entitled to receive payment from the originator, the originator is not obliged to pay its order unless the originator’s bank proves that the originator, before acceptance of the originator’s order, had notice that payment of a payment order issued by the originator might be made by the beneficiary’s bank on the basis of an identifying or bank account number even if it identifies a person different from the named beneficiary. Proof of notice may be made by any admissible evidence. The originator’s bank satisfies the burden of proof if it proves that the originator, before the payment order was accepted, signed a writing stating the information to which the notice relates.
  3. In a case governed by subsection (2)(a), if the beneficiary’s bank rightfully pays the person identified by number and that person was not entitled to receive payment from the originator, the amount paid may be recovered from that person to the extent allowed by the law governing mistake and restitution as follows:
    1. If the originator is obliged to pay its payment order as stated in subsection (3), the originator has the right to recover.
    2. If the originator is not a bank and is not obliged to pay its payment order, the originator’s bank has the right to recover.

History. Enact. Acts 1992, ch. 116, § 38, effective July 14, 1992.

Official Comment

  1. Subsection (a) deals with the problem of payment orders issued to the beneficiary’s bank for payment to nonexistent or unidentifiable persons or accounts. Since it is not possible in that case for the funds transfer to be completed, subsection (a) states that the order cannot be accepted. Under Section 4A-402(c), a sender of a payment order is not obliged to pay its order unless the beneficiary’s bank accepts a payment order instructing payment to the beneficiary of that sender’s order. Thus, if the beneficiary of a funds transfer is nonexistent or unidentifiable, each sender in the funds transfer that has paid its payment order is entitled to get its money back.
  2. Subsection (b), which takes precedence over subsection (a), deals with the problem of payment orders in which the description of the beneficiary does not allow identification of the beneficiary because the beneficiary is described by name and by an identifying number or an account number and the name and number refer to different persons. A very large percentage of payment orders issued to the beneficiary’s bank by another bank are processed by automated means using machines capable of reading orders on standard formats that identify the beneficiary by an identifying number or the number of a bank account. The processing of the order by the beneficiary’s bank and the crediting of the beneficiary’s account are done by use of the identifying or bank account number without human reading of the payment order itself. The process is comparable to that used in automated payment of checks. The standard format, however, may also allow the inclusion of the name of the beneficiary and other information which can be useful to the beneficiary’s bank and the beneficiary but which plays no part in the process of payment. If the beneficiary’s bank has both the account number and name of the beneficiary supplied by the originator of the funds transfer, it is possible for the beneficiary’s bank to determine whether the name and number refer to the same person, but if a duty to make that determination is imposed on the beneficiary’s bank the benefits of automated payment are lost. Manual handling of payment orders is both expensive and subject to human error. If payment orders can be handled on an automated basis there are substantial economies of operation and the possibility of clerical error is reduced. Subsection (b) allows banks to utilize automated processing by allowing banks to act on the basis of the number without regard to the name if the bank does not know that the name and number refer to different persons. “Know” is defined in Section 1-201(25) to mean actual knowledge, and Section 1-201(27) states rules for determining when an organization has knowledge of information received by the organization. The time of payment is the pertinent time at which knowledge or lack of knowledge must be determined.

    Although the clear trend is for beneficiary’s banks to process payment orders by automated means, Section 4A-207 is not limited to cases in which processing is done by automated means. A bank that processes by semi-automated means or even manually may rely on number as stated in Section 4A-207.

    In cases covered by subsection (b) the erroneous identification would in virtually all cases be the identifying or bank account number. In the typical case the error is made by the originator of the funds transfer. The originator should know the name of the person who is to receive payment and can further identify that person by an address that would normally be known to the originator. It is not unlikely, however, that the originator may not be sure whether the identifying or account number refers to the person the originator intends to pay. Subsection (b)(1) deals with the typical case in which the beneficiary’s bank pays on the basis of the account number and is not aware at the time of payment that the named beneficiary is not the holder of the account which was paid. In some cases the false number will be the result of error by the originator. In other cases fraud is involved. For example, Doe is the holder of shares in Mutual Fund. Thief, impersonating Doe, requests redemption of the shares and directs Mutual Fund to wire the redemption proceeds to Doe’s account #12345 in Beneficiary’s Bank. Mutual Fund originates a funds transfer by issuing a payment order to Originator’s Bank to make the payment to Doe’s account #12345 in Beneficiary’s Bank. Originator’s Bank executes the order by issuing a conforming payment order to Beneficiary’s Bank which makes payment to account #12345. That account is the account of Roe rather than Doe. Roe might be a person acting in concert with Thief or Roe might be an innocent third party. Assume that Roe is a gem merchant that agreed to sell gems to Thief who agreed to wire the purchase price to Roe’s account in Beneficiary’s Bank. Roe believed that the credit to Roe’s account was a transfer of funds from Thief and released the gems to Thief in good faith in reliance on the payment. The case law is unclear on the responsibility of a beneficiary’s bank in carrying out a payment order in which the identification of the beneficiary by name and number is conflicting. See Securities Fund Services, Inc. v. American National Bank, 542 F.Supp. 323 (N.D.Ill.1982) and Bradford Trust Co. v. Texas American Bank, 790 F.2d 407 (5th Cir.1986). Section 4A-207 resolves the issue.

    If Beneficiary’s Bank did not know about the conflict between the name and number, subsection (b)(1) applies. Beneficiary’s Bank has no duty to determine whether there is a conflict and it may rely on the number as the proper identification of the beneficiary of the order. When it accepts the order, it is entitled to payment from Originator’s Bank. Section 4A-402(b). On the other hand, if Beneficiary’s Bank knew about the conflict between the name and number and nevertheless paid Roe, subsection (b)(2) applies. Under that provision, acceptance of the payment order of Originator’s Bank did not occur because there is no beneficiary of that order. Since acceptance did not occur Originator’s Bank is not obliged to pay Beneficiary’s Bank. Section 4A-402(b). Similarly, Mutual Fund is excused from its obligation to pay Originator’s Bank. Section 4A-402(c). Thus, Beneficiary’s Bank takes the loss. Its only cause of action is against Thief. Roe is not obliged to return the payment to the beneficiary’s bank because Roe received the payment in good faith and for value. Article 4A makes irrelevant the issue of whether Mutual Fund was or was not negligent in issuing its payment order.

  3. Normally, subsection (b)(1) will apply to the hypothetical case discussed in Comment 2. Beneficiary’s Bank will pay on the basis of the number without knowledge of the conflict. In that case subsection (c) places the loss on either Mutual Fund or Originator’s Bank. It is not unfair to assign the loss to Mutual Fund because it is the person who dealt with the impostor and it supplied the wrong account number. It could have avoided the loss if it had not used an account number that it was not sure was that of Doe. Mutual Fund, however, may not have been aware of the risk involved in giving both name and number. Subsection (c) is designed to protect the originator, Mutual Fund, in this case. Under that subsection, the originator is responsible for the inconsistent description of the beneficiary if it had notice that the order might be paid by the beneficiary’s bank on the basis of the number. If the originator is a bank, the originator always has that responsibility. The rationale is that any bank should know how payment orders are processed and paid. If the originator is not a bank, the originator’s bank must prove that its customer, the originator, had notice. Notice can be proved by any admissible evidence, but the bank can always prove notice by providing the customer with a written statement of the required information and obtaining the customer’s signature to the statement. That statement will then apply to any payment order accepted by the bank thereafter. The information need not be supplied more than once.

    In the hypothetical case if Originator’s Bank made the disclosure stated in the last sentence of subsection (c)(2), Mutual Fund must pay Originator’s Bank. Under subsection (d)(1), Mutual Fund has an action to recover from Roe if recovery from Roe is permitted by the law governing mistake and restitution. Under the assumed facts Roe should be entitled to keep the money as a person who took it in good faith and for value since it was taken as payment for the gems. In that case, Mutual Fund’s only remedy is against Thief. If Roe was not acting in good faith, Roe has to return the money to Mutual Fund. If Originator’s Bank does not prove that Mutual Fund had notice as stated in subsection (c)(2), Mutual Fund is not required to pay Originator’s Bank. Thus, the risk of loss falls on Originator’s Bank whose remedy is against Roe or Thief as stated above. Subsection (d)(2).

Research References and Practice Aids

Kentucky Law Journal.

Bhala, The Inverted Pyramid of Wire Transfer Law, 82 Ky. L.J. 347 (1993-94).

355.4A-208. Misdescription of intermediary bank or beneficiary’s bank.

  1. This subsection applies to a payment order identifying an intermediary bank or the beneficiary’s bank only by an identifying number.
    1. The receiving bank may rely on the number as the proper identification of the intermediary or beneficiary’s bank and need not determine whether the number identifies a bank.
    2. The sender is obliged to compensate the receiving bank for any loss and expenses incurred by the receiving bank as a result of its reliance on the number in executing or attempting to execute the order.
  2. This subsection applies to a payment order identifying an intermediary bank or the beneficiary’s bank both by name and an identifying number if the name and number identify different persons.
    1. If the sender is a bank, the receiving bank may rely on the number as the proper identification of the intermediary or beneficiary’s bank if the receiving bank, when it executes the sender’s order, does not know that the name and number identify different persons. The receiving bank need not determine whether the name and number refer to the same person or whether the number refers to a bank. The sender is obliged to compensate the receiving bank for any loss and expenses incurred by the receiving bank as a result of its reliance on the number in executing or attempting to execute the order.
    2. If the sender is not a bank and the receiving bank proves that the sender, before the payment order was accepted, had notice that the receiving bank might rely on the number as the proper identification of the intermediary or beneficiary’s bank even if it identifies a person different from the bank identified by name, the rights and obligations of the sender and the receiving bank are governed by subsection (1)(b), as though the sender were a bank. Proof of notice may be made by any admissible evidence. The receiving bank satisfies the burden of proof if it proves that the sender, before the payment order was accepted, signed a writing stating the information to which the notice relates.
    3. Regardless of whether the sender is a bank, the receiving bank may rely on the name as the proper identification of the intermediary or beneficiary’s bank if the receiving bank, at the time it executes the sender’s order, does not know that the name and number identify different persons. The receiving bank need not determine whether the name and number refer to the same person.
    4. If the receiving bank knows that the name and number identify different persons, reliance on either the name or the number in executing the sender’s payment order is a breach of the obligation stated in KRS 355.4A-302 (1)(a).

History. Enact. Acts 1992, ch. 116, § 39, effective July 14, 1992.

Official Comment

  1. This section addresses an issue similar to that addressed by Section 4A-207. Because of automation in the processing of payment orders, a payment order may identify the beneficiary’s bank or an intermediary bank by an identifying number. The bank identified by number might or might not also be identified by name. The following two cases illustrate Section 4A-208(a) and (b):

    Case #1. Originator’s payment order to Originator’s Bank identifies the beneficiary’s bank as Bank A and instructs payment to Account #12345 in that bank. Originator’s Bank executes Originator’s order by issuing a payment order to Intermediary Bank. In the payment order of Originator’s Bank the beneficiary’s bank is identified as Bank A but is also identified by number, #67890. The identifying number refers to Bank B rather than Bank A. If processing by Intermediary Bank of the payment order of Originator’s Bank is done by automated means, Intermediary Bank, in executing the order, will rely on the identifying number and will issue a payment order to Bank B rather than Bank A. If there is an Account #12345 in Bank B, the payment order of Intermediary Bank would normally be accepted and payment would be made to a person not intended by Originator. In this case, Section 4A-208(b)(1) puts the risk of loss on Originator’s Bank. Intermediary Bank may rely on the number #67890 as the proper identification of the beneficiary’s bank. Intermediary Bank has properly executed the payment order of Originator’s Bank. By using the wrong number to describe the beneficiary’s bank, Originator’s Bank has improperly executed Originator’s payment order because the payment order of Originator’s Bank provides for payment to the wrong beneficiary, the holder of Account #12345 in Bank B rather than the holder of Account #12345 in Bank A. Section 4A-302(a)(1) and Section 4A-303(c). Originator’s Bank is not entitled to payment from Originator but is required to pay Intermediary Bank. Section 4A-303(c) and Section 4A-402(c). Intermediary Bank is also entitled to compensation for any loss and expenses resulting from the error by Originator’s Bank.

    If there is no Account #12345 in Bank B, the result is that there is no beneficiary of the payment order issued by Originator’s Bank and the funds transfer will not be completed. Originator’s Bank is not entitled to payment from Originator and Intermediary Bank is not entitled to payment from Originator’s Bank. Section 4A-402(c). Since Originator’s Bank improperly executed Originator’s payment order it may be liable for damages under Section 4A-305. As stated above, Intermediary Bank is entitled to compensation for loss and expenses resulting from the error by Originator’s Bank.

    Case #2. Suppose the same payment order by Originator to Originator’s Bank as in Case #1. In executing the payment order Originator’s Bank issues a payment order to Intermediary Bank in which the beneficiary’s bank is identified only by number, #67890. That number does not refer to Bank A. Rather, it identifies a person that is not a bank. If processing by Intermediary Bank of the payment order of Originator’s Bank is done by automated means, Intermediary Bank will rely on the number #67890 to identify the beneficiary’s bank. Intermediary Bank has no duty to determine whether the number identifies a bank. The funds transfer cannot be completed in this case because no bank is identified as the beneficiary’s bank. Subsection (a) puts the risk of loss on Originator’s Bank. Originator’s Bank is not entitled to payment from Originator. Section 4A-402(c). Originator’s Bank has improperly executed Originator’s payment order and may be liable for damages under Section 4A-305. Originator’s Bank is obliged to compensate Intermediary Bank for loss and expenses resulting from the error by Originator’s Bank.

    Subsection (a) also applies if #67890 identifies a bank, but the bank is not Bank A. Intermediary Bank may rely on the number as the proper identification of the beneficiary’s bank. If the bank to which Intermediary Bank sends its payment order accepts the order, Intermediary Bank is entitled to payment from Originator’s Bank, but Originator’s Bank is not entitled to payment from Originator. The analysis is similar to that in Case #1.

  2. Subsection (b)(2) of Section 4A-208 addresses cases in which an erroneous identification of a beneficiary’s bank or intermediary bank by name and number is made in a payment order of a sender that is not a bank. Suppose Originator issues a payment order to Originator’s Bank that instructs that bank to use an intermediary bank identified as Bank A and by an identifying number, #67890. The identifying number refers to Bank B. Originator intended to identify Bank A as intermediary bank. If Originator’s Bank relied on the number and issued a payment order to Bank B the rights of Originator’s Bank depend upon whether the proof of notice stated in subsection (b)(2) is made by Originator’s Bank. If proof is made, Originator’s Bank’s rights are governed by subsection (b)(1) of Section 4A-208. Originator’s Bank is not liable for breach of Section 4A-302(a)(1) and is entitled to compensation from Originator for any loss and expenses resulting from Originator’s error. If notice is not proved, Originator’s Bank may not rely on the number in executing Originator’s payment order. Since Originator’s Bank does not get the benefit of subsection (b)(1) in that case, Originator’s Bank improperly executed Originator’s payment order and is in breach of the obligation stated in Section 4A-302(a)(1). If notice is not given, Originator’s Bank can rely on the name if it is not aware of the conflict in name and number. Subsection (b)(3).
  3. Although the principal purpose of Section 4A-208 is to accommodate automated processing of payment orders, Section 4A-208 applies regardless of whether processing is done by automation, semi-automated means or manually.

Research References and Practice Aids

Kentucky Law Journal.

Bhala, The Inverted Pyramid of Wire Transfer Law, 82 Ky. L.J. 347 (1993-94).

355.4A-209. Acceptance of payment order.

  1. Subject to subsection (4), a receiving bank other than the beneficiary’s bank accepts a payment order when it executes the order.
  2. Subject to subsections (3) and (4), a beneficiary’s bank accepts a payment order at the earliest of the following times:
    1. When the bank:
      1. Pays the beneficiary as stated in KRS 355.4A-405 (1) or (2); or
      2. Notifies the beneficiary of receipt of the order or that the account of the beneficiary has been credited with respect to the order unless the notice indicates that the bank is rejecting the order or that funds with respect to the order may not be withdrawn or used until receipt of payment from the sender of the order.
    2. When the bank receives payment of the entire amount of the sender’s order pursuant to KRS 355.4A-403 (1)(a) or (b); or
    3. The opening of the next funds-transfer business day of the bank following the payment date of the order if, at that time, the amount of the sender’s order is fully covered by a withdrawable credit balance in an authorized account of the sender or the bank has otherwise received full payment from the sender, unless the order was rejected before that time or is rejected within;
      1. One hour after that time; or
      2. One hour after the opening of the next business day of the sender following the payment date if that time is later. If notice of rejection is received by the sender after the payment date and the authorized account of the sender does not bear interest, the bank is obliged to pay interest to the sender on the amount of the order for the number of days elapsing after the payment date to the day the sender receives notice or learns that the order was not accepted, counting that day as an elapsed day. If the withdrawable credit balance during that period falls below the amount of the order, the amount of interest payable is reduced accordingly.
  3. Acceptance of a payment order cannot occur before the order is received by the receiving bank. Acceptance does not occur under subsection (2)(b) or (2)(c) if the beneficiary of the payment order does not have an account with the receiving bank, the account has been closed, or the receiving bank is not permitted by law to receive credits for the beneficiary’s account.
  4. A payment order issued to the originator’s bank cannot be accepted until the payment date if the bank is the beneficiary’s bank, or the execution date if the bank is not the beneficiary’s bank. If the originator’s bank executes the originator’s payment order before the execution date or pays the beneficiary of the originator’s payment order before the payment date and the payment order is subsequently canceled pursuant to KRS 355.4A-211 (2), the bank may recover from the beneficiary any payment received to the extent allowed by the law governing mistake and restitution.

History. Enact. Acts 1992, ch. 116, § 40, effective July 14, 1992.

Official Comment

  1. This section treats the sender’s payment order as a request by the sender to the receiving bank to execute or pay the order and that request can be accepted or rejected by the receiving bank. Section 4A-209 defines when acceptance occurs. Section 4A-210 covers rejection. Acceptance of the payment order imposes an obligation on the receiving bank to the sender if the receiving bank is not the beneficiary’s bank, or to the beneficiary if the receiving bank is the beneficiary’s bank. These obligations are stated in Section 4A-302 and Section 4A-404.
  2. Acceptance by a receiving bank other than the beneficiary’s bank is defined in Section 4A-209(a). That subsection states the only way that a bank other than the beneficiary’s bank can accept a payment order. A payment order to a bank other than the beneficiary’s bank is, in effect, a request that the receiving bank execute the sender’s order by issuing a payment order to the beneficiary’s bank or to an intermediary bank. Normally, acceptance occurs at the time of execution, but there is an exception stated in subsection (d) and discussed in Comment 9. Execution occurs when the receiving bank “issues a payment order intended to carry out” the sender’s order. Section 4A-301(a). In some cases the payment order issued by the receiving bank may not conform to the sender’s order. For example, the receiving bank might make a mistake in the amount of its order, or the order might be issued to the wrong beneficiary’s bank or for the benefit of the wrong beneficiary. In all of these cases there is acceptance of the sender’s order by the bank when the receiving bank issues its order intended to carry out the sender’s order, even though the bank’s payment order does not in fact carry out the instruction of the sender. Improper execution of the sender’s order may lead to liability to the sender for damages or it may mean that the sender is not obliged to pay its payment order. These matters are covered in Section 4A-303, Section 4A-305, and Section 4A-402.
  3. A receiving bank has no duty to accept a payment order unless the bank makes an agreement, either before or after issuance of the payment order, to accept it, or acceptance is required by a funds transfer system rule. If the bank makes such an agreement it incurs a contractual obligation based on the agreement and may be held liable for breach of contract if a failure to execute violates the agreement. In many cases a bank will enter into an agreement with its customer to govern the rights and obligations of the parties with respect to payment orders issued to the bank by the customer or, in cases in which the sender is also a bank, there may be a funds transfer system rule that governs the obligations of a receiving bank with respect to payment orders transmitted over the system. Such agreements or rules can specify the circumstances under which a receiving bank is obliged to execute a payment order and can define the extent of liability of the receiving bank for breach of the agreement or rule. Section 4A-305(d) states the liability for breach of an agreement to execute a payment order.
  4. In the case of a payment order issued to the beneficiary’s bank, acceptance is defined in Section 4A-209(b). The function of a beneficiary’s bank that receives a payment order is different from that of a receiving bank that receives a payment order for execution. In the typical case, the beneficiary’s bank simply receives payment from the sender of the order, credits the account of the beneficiary and notifies the beneficiary of the credit. Acceptance by the beneficiary’s bank does not create any obligation to the sender. Acceptance by the beneficiary’s bank means that the bank is liable to the beneficiary for the amount of the order. Section 4A-404(a). There are three ways in which the beneficiary’s bank can accept a payment order which are described in the following comments.
  5. Under Section 4A-209(b)(1), the beneficiary’s bank can accept a payment order by paying the beneficiary. In the normal case of crediting an account of the beneficiary, payment occurs when the beneficiary is given notice of the right to withdraw the credit, the credit is applied to a debt of the beneficiary, or “funds with respect to the order” are otherwise made available to the beneficiary. Section 4A-405(a). The quoted phrase covers cases in which funds are made available to the beneficiary as a result of receipt of a payment order for the benefit of the beneficiary but the release of funds is not expressed as payment of the order. For example, the beneficiary’s bank might express a release of funds equal to the amount of the order as a “loan” that will be automatically repaid when the beneficiary’s bank receives payment by the sender of the order. If the release of funds is designated as a loan pursuant to a routine practice of the bank, the release is conditional payment of the order rather than a loan, particularly if normal incidents of a loan such as the signing of a loan agreement or note and the payment of interest are not present. Such a release of funds is payment to the beneficiary under Section 4A-405(a). Under Section 4A-405(c) the bank cannot recover the money from the beneficiary if the bank does not receive payment from the sender of the payment order that it accepted. Exceptions to this rule are stated in § 4A-405(d) and (e). The beneficiary’s bank may also accept by notifying the beneficiary that the order has been received. “Notifies” is defined in Section 1-201(26). In some cases a beneficiary’s bank will receive a payment order during the day but settlement of the sender’s obligation to pay the order will not occur until the end of the day. If the beneficiary’s bank wants to defer incurring liability to the beneficiary until the beneficiary’s bank receives payment, it can do so. The beneficiary’s bank incurs no liability to the beneficiary with respect to a payment order that it receives until it accepts the order. If the bank does not accept pursuant to subsection (b)(1), acceptance does not occur until the end of the day when the beneficiary’s bank receives settlement. If the sender settles, the payment order will be accepted under subsection (b)(2) and the funds will be released to the beneficiary the next morning. If the sender doesn’t settle, no acceptance occurs. In either case the beneficiary’s bank suffers no loss.
  6. In most cases the beneficiary’s bank will receive a payment order from another bank. If the sender is a bank and the beneficiary’s bank receives payment from the sender by final settlement through the Federal Reserve System or a funds transfer system (Section 4A-403(a)(1)) or, less commonly, through credit to an account of the beneficiary’s bank with the sender or another bank (Section 4A-403(a)(2)), acceptance by the beneficiary’s bank occurs at the time payment is made. Section 4A-209(b)(2). A minor exception to this rule is stated in Section 4A-209(c). Section 4A-209(b)(2) results in automatic acceptance of payment orders issued to a beneficiary’s bank by means of Fedwire because the Federal Reserve account of the beneficiary’s bank is credited and final payment is made to that bank when the payment order is received.

    Subsection (b)(2) would also apply to cases in which the beneficiary’s bank mistakenly pays a person who is not the beneficiary of the payment order issued to the beneficiary’s bank. For example, suppose the payment order provides for immediate payment to Account #12345. The beneficiary’s bank erroneously credits Account #12346 and notifies the holder of that account of the credit. No acceptance occurs in this case under subsection (b)(1) because the beneficiary of the order has not been paid or notified. The holder of Account #12345 is the beneficiary of the order issued to the beneficiary’s bank. But acceptance will normally occur if the beneficiary’s bank takes no other action, because the bank will normally receive settlement with respect to the payment order. At that time the bank has accepted because the sender paid its payment order. The bank is liable to pay the holder of Account #12345. The bank has paid the holder of Account #12346 by mistake, and has a right to recover the payment if the credit is withdrawn, to the extent provided in the law governing mistake and restitution.

  7. Subsection (b)(3) covers cases of inaction by the beneficiary’s bank. It applies whether or not the sender is a bank and covers a case in which the sender and the beneficiary both have accounts with the receiving bank and payment will be made by debiting the account of the sender and crediting the account of the beneficiary. Subsection (b)(3) is similar to subsection (b)(2) in that it bases acceptance by the beneficiary’s bank on payment by the sender. Payment by the sender is effected by a debit to the sender’s account if the account balance is sufficient to cover the amount of the order. On the payment date (Section 4A-401) of the order the beneficiary’s bank will normally credit the beneficiary’s account and notify the beneficiary of receipt of the order if it is satisfied that the sender’s account balance covers the order or is willing to give credit to the sender. In some cases, however, the bank may not be willing to give credit to the sender and it may not be possible for the bank to determine until the end of the day on the payment date whether there are sufficient good funds in the sender’s account. There may be various transactions during the day involving funds going into and out of the account. Some of these transactions may occur late in the day or after the close of the banking day. To accommodate this situation, subsection (b)(3) provides that the status of the account is determined at the opening of the next funds transfer business day of the beneficiary’s bank after the payment date of the order. If the sender’s account balance is sufficient to cover the order, the beneficiary’s bank has a source of payment and the result in almost all cases is that the bank accepts the order at that time if it did not previously accept under subsection (b)(1). In rare cases, a bank may want to avoid acceptance under subsection (b)(3) by rejecting the order as discussed in Comment 8.
  8. Section 4A-209 is based on a general principle that a receiving bank is not obliged to accept a payment order unless it has agreed or is bound by a funds transfer system rule to do so. Thus, provision is made to allow the receiving bank to prevent acceptance of the order. This principle is consistently followed if the receiving bank is not the beneficiary’s bank. If the receiving bank is not the beneficiary’s bank, acceptance is in the control of the receiving bank because it occurs only if the order is executed. But in the case of the beneficiary’s bank acceptance can occur by passive receipt of payment under subsection (b)(2) or (3). In the case of a payment made by Fedwire acceptance cannot be prevented. In other cases the beneficiary’s bank can prevent acceptance by giving notice of rejection to the sender before payment occurs under Section 4A-403(a)(1) or (2). A minor exception to the ability of the beneficiary’s bank to reject is stated in Section 4A-502(c)(3).

    Under subsection (b)(3) acceptance occurs at the opening of the next funds transfer business day of the beneficiary’s bank following the payment date unless the bank rejected the order before that time or it rejects within one hour after that time. In some cases the sender and the beneficiary’s bank may not be in the same time zone or the beginning of the business day of the sender and the funds transfer business day of the beneficiary’s bank may not coincide. For example, the sender may be located in California and the beneficiary’s bank in New York. Since in most cases notice of rejection would be communicated electronically or by telephone, it might not be feasible for the bank to give notice before one hour after the opening of the funds transfer business day in New York because at that hour, the sender’s business day may not have started in California. For that reason, there are alternative deadlines stated in subsection (b)(3). In the case stated, the bank acts in time if it gives notice within one hour after the opening of the business day of the sender. But if the notice of rejection is received by the sender after the payment date, the bank is obliged to pay interest to the sender if the sender’s account does not bear interest. In that case the bank had the use of funds of the sender that the sender could reasonably assume would be used to pay the beneficiary. The rate of interest is stated in Section 4A-506. If the sender receives notice on the day after the payment date the sender is entitled to one day’s interest. If receipt of notice is delayed for more than one day, the sender is entitled to interest for each additional day of delay.

  9. Subsection (d) applies only to a payment order by the originator of a funds transfer to the originator’s bank and it refers to the following situation. On April 1, Originator instructs Bank A to make a payment on April 15 to the account of Beneficiary in Bank B. By mistake, on April 1, Bank A executes Originator’s payment order by issuing a payment order to Bank B instructing immediate payment to Beneficiary. Bank B credited Beneficiary’s account and immediately released the funds to Beneficiary. Under subsection (d) no acceptance by Bank A occurred on April 1 when Originator’s payment order was executed because acceptance cannot occur before the execution date which in this case would be April 15 or shortly before that date. Section 4A-301(b). Under Section 4A-402(c), Originator is not obliged to pay Bank A until the order is accepted and that can’t occur until the execution date. But Bank A is required to pay Bank B when Bank B accepted Bank A’s order on April 1. Unless Originator and Beneficiary are the same person, in almost all cases Originator is paying a debt owed to Beneficiary and early payment does not injure Originator because Originator does not have to pay Bank A until the execution date. Section 4A-402(c). Bank A takes the interest loss. But suppose that on April 3, Originator concludes that no debt was owed to Beneficiary or that the debt was less than the amount of the payment order. Under Section 4A-211(b) Originator can cancel its payment order if Bank A has not accepted. If early execution of Originator’s payment order is acceptance, Originator can suffer a loss because cancellation after acceptance is not possible without the consent of Bank A and Bank B. Section 4A-211(c). If Originator has to pay Bank A, Originator would be required to seek recovery of the money from Beneficiary. Subsection (d) prevents this result and puts the risk of loss on Bank A by providing that the early execution does not result in acceptance until the execution date. Since on April 3 Originator’s order was not yet accepted, Originator can cancel it under Section 4A-211(b). The result is that Bank A is not entitled to payment from Originator but is obliged to pay Bank B. Bank A has paid Beneficiary by mistake. If Originator’s payment order is cancelled, Bank A becomes the originator of an erroneous funds transfer to Beneficiary. Bank A has the burden of recovering payment from Beneficiary on the basis of a payment by mistake. If Beneficiary received the money in good faith in payment of a debt owed to Beneficiary by Originator, the law of mistake and restitution may allow Beneficiary to keep all or part of the money received. If Originator owed money to Beneficiary, Bank A has paid Originator’s debt and, under the law of restitution, which applies pursuant to Section 1-103, Bank A is subrogated to Beneficiary’s rights against Originator on the debt.

    If Bank A is the Beneficiary’s bank and Bank A credited Beneficiary’s account and released the funds to Beneficiary on April 1, the analysis is similar. If Originator’s order is cancelled, Bank A has paid Beneficiary by mistake. The right of Bank A to recover the payment from Beneficiary is similar to Bank A’s rights in the preceding paragraph.

355.4A-210. Rejection of payment order.

  1. A payment order is rejected by the receiving bank by a notice of rejection transmitted to the sender orally, electronically, or in writing. A notice of rejection need not use any particular words and is sufficient if it indicates that the receiving bank is rejecting the order or will not execute or pay the order. Rejection is effective when the notice is given if transmission is by a means that is reasonable in the circumstances. If notice of rejection is given by a means that is not reasonable, rejection is effective when the notice is received. If an agreement of the sender and receiving bank establishes the means to be used to reject a payment order:
    1. Any means complying with the agreement is reasonable; and
    2. Any means not complying is not reasonable unless no significant delay in receipt of the notice resulted from the use of the noncomplying means.
  2. This subsection applies if a receiving bank other than the beneficiary’s bank fails to execute a payment order despite the existence on the execution date of a withdrawable credit balance in an authorized account of the sender sufficient to cover the order. If the sender does not receive notice of rejection of the order on the execution date and the authorized account of the sender does not bear interest, the bank is obliged to pay interest to the sender on the amount of the order for the number of days elapsing after the execution date to the earlier of the day the order is canceled pursuant to KRS 355.4A-211 (4) or the day the sender receives notice or learns that the order was not executed, counting the final day of the period as an elapsed day. If the withdrawable credit balance during that period falls below the amount of the order, the amount of interest is reduced accordingly.
  3. If a receiving bank suspends payments, all unaccepted payment orders issued to it are deemed rejected at the time the bank suspends payments.
  4. Acceptance of a payment order precludes a later rejection of the order. Rejection of a payment order precludes a later acceptance of the order.

History. Enact. Acts 1992, ch. 116, § 41, effective July 14, 1992.

Official Comment

  1. With respect to payment orders issued to a receiving bank other than the beneficiary’s bank, notice of rejection is not necessary to prevent acceptance of the order. Acceptance can occur only if the receiving bank executes the order. Section 4A-209(a). But notice of rejection will routinely be given by such a bank in cases in which the bank cannot or is not willing to execute the order for some reason. There are many reasons why a bank doesn’t execute an order. The payment order may not clearly instruct the receiving bank because of some ambiguity in the order or an internal inconsistency. In some cases, the receiving bank may not be able to carry out the instruction because of equipment failure, credit limitations on the receiving bank, or some other factor which makes proper execution of the order infeasible. In those cases notice of rejection is a means of informing the sender of the facts so that a corrected payment order can be transmitted or the sender can seek alternate means of completing the funds transfer. The other major reason for not executing an order is that the sender’s account is insufficient to cover the order and the receiving bank is not willing to give credit to the sender. If the sender’s account is sufficient to cover the order and the receiving bank chooses not to execute the order, notice of rejection is necessary to prevent liability to pay interest to the sender if the case falls within Section 4A-210(b) which is discussed in Comment 3.
  2. A payment order to the beneficiary’s bank can be accepted by inaction of the bank. Section 4A-209(b)(2) and (3). To prevent acceptance under those provisions it is necessary for the receiving bank to send notice of rejection before acceptance occurs. Subsection (a) of Section 4A-210 states the rule that rejection is accomplished by giving notice of rejection. This incorporates the definitions in Section 1-201(26). Rejection is effective when notice is given if it is given by a means that is reasonable in the circumstances. Otherwise it is effective when the notice is received. The question of when rejection is effective is important only in the relatively few cases under subsection (b)(2) and (3) in which a notice of rejection is necessary to prevent acceptance. The question of whether a particular means is reasonable depends on the facts in a particular case. In a very large percentage of cases the sender and the receiving bank will be in direct electronic contact with each other and in those cases a notice of rejection can be transmitted instantaneously. Since time is of the essence in a large proportion of funds transfers, some quick means of transmission would usually be required, but this is not always the case. The parties may specify by agreement the means by which communication between the parties is to be made.
  3. Subsection (b) deals with cases in which a sender does not learn until after the execution date that the sender’s order has not been executed. It applies only to cases in which the receiving bank was assured of payment because the sender’s account was sufficient to cover the order. Normally, the receiving bank will accept the sender’s order if it is assured of payment, but there may be some cases in which the bank chooses to reject. Unless the receiving bank had obligated itself by agreement to accept, the failure to accept is not wrongful. There is no duty of the receiving bank to accept the payment order unless it is obliged to accept by express agreement. Section 4A-212. But even if the bank has not acted wrongfully, the receiving bank had the use of the sender’s money that the sender could reasonably assume was to be the source of payment of the funds transfer. Until the sender learns that the order was not accepted the sender is denied the use of that money. Subsection (b) obliges the receiving bank to pay interest to the sender as restitution unless the sender receives notice of rejection on the execution date. The time of receipt of notice is determined pursuant to § 1-201(27). The rate of interest is stated in Section 4A-506. If the sender receives notice on the day after the execution date, the sender is entitled to one day’s interest. If receipt of notice is delayed for more than one day, the sender is entitled to interest for each additional day of delay.
  4. Subsection (d) treats acceptance and rejection as mutually exclusive. If a payment order has been accepted, rejection of that order becomes impossible. If a payment order has been rejected it cannot be accepted later by the receiving bank. Once notice of rejection has been given, the sender may have acted on the notice by making the payment through other channels. If the receiving bank wants to act on a payment order that it has rejected it has to obtain the consent of the sender. In that case the consent of the sender would amount to the giving of a second payment order that substitutes for the rejected first order. If the receiving bank suspends payments (Section 4-104(1)(k)), subsection (c) provides that unaccepted payment orders are deemed rejected at the time suspension of payments occurs. This prevents acceptance by passage of time under Section 4A-209(b)(3).

355.4A-211. Cancellation and amendment of payment order.

  1. A communication of the sender of a payment order canceling or amending the order may be transmitted to the receiving bank orally, electronically, or in writing. If a security procedure is in effect between the sender and the receiving bank, the communication is not effective to cancel or amend the order unless the communication is verified pursuant to the security procedure or the bank agrees to the cancellation or amendment.
  2. Subject to subsection (1), a communication by the sender canceling or amending a payment order is effective to cancel or amend the order if notice of the communication is received at a time and in a manner affording the receiving bank a reasonable opportunity to act on the communication before the bank accepts the payment order.
  3. After a payment order has been accepted, cancellation or amendment of the order is not effective unless the receiving bank agrees or a funds-transfer system rule allows cancellation or amendment without agreement of the bank.
    1. With respect to a payment order accepted by a receiving bank other than the beneficiary’s bank, cancellation or amendment is not effective unless a conforming cancellation or amendment of the payment order issued by the receiving bank is also made.
    2. With respect to a payment order accepted by the beneficiary’s bank, cancellation or amendment is not effective unless the order was issued in execution of an unauthorized payment order, or because of a mistake by a sender in the funds transfer which resulted in the issuance of a payment order:
      1. That is a duplicate of a payment order previously issued by the sender;
      2. That orders payment to a beneficiary not entitled to receive payment from the originator; or
      3. That orders payment in an amount greater than the amount the beneficiary was entitled to receive from the originator. If the payment order is canceled or amended, the beneficiary’s bank is entitled to recover from the beneficiary any amount paid to the beneficiary to the extent allowed by the law governing mistake and restitution.
  4. An unaccepted payment order is canceled by operation of law at the close of the fifth funds-transfer business day of the receiving bank after the execution date or payment date of the order.
  5. A canceled payment order cannot be accepted. If an accepted payment order is canceled, the acceptance is nullified and no person has any right or obligation based on the acceptance. Amendment of a payment order is deemed to be cancellation of the original order at the time of amendment and issue of a new payment order in the amended form at the same time.
  6. Unless otherwise provided in an agreement of the parties or in a funds-transfer system rule, if the receiving bank, after accepting a payment order, agrees to cancellation or amendment of the order by the sender or is bound by a funds-transfer system rule allowing cancellation or amendment without the bank’s agreement, the sender, whether or not cancellation or amendment is effective, is liable to the bank for any loss and expenses, including reasonable attorney’s fees, incurred by the bank as a result of the cancellation or amendment or attempted cancellation or amendment.
  7. A payment order is not revoked by the death or legal incapacity of the sender unless the receiving bank knows of the death or of an adjudication of incapacity by a court of competent jurisdiction and has reasonable opportunity to act before acceptance of the order.
  8. A funds-transfer system rule is not effective to the extent it conflicts with subsection (3)(b).

History. Enact. Acts 1992, ch. 116, § 42, effective July 14, 1992.

Official Comment

  1. This section deals with cancellation and amendment of payment orders. It states the conditions under which cancellation or amendment is both effective and rightful. There is no concept of wrongful cancellation or amendment of a payment order. If the conditions stated in this section are not met the attempted cancellation or amendment is not effective. If the stated conditions are met the cancellation or amendment is effective and rightful. The sender of a payment order may want to withdraw or change the order because the sender has had a change of mind about the transaction or because the payment order was erroneously issued or for any other reason. One common situation is that of multiple transmission of the same order. The sender that mistakenly transmits the same order twice wants to correct the mistake by cancelling the duplicate order. Or, a sender may have intended to order a payment of $1,000,000 but mistakenly issued an order to pay $10,000,000. In this case the sender might try to correct the mistake by cancelling the order and issuing another order in the proper amount. Or, the mistake could be corrected by amending the order to change it to the proper amount. Whether the error is corrected by amendment or cancellation and reissue the net result is the same. This result is stated in the last sentence of subsection (e).
  2. Subsection (a) allows a cancellation or amendment of a payment order to be communicated to the receiving bank “orally, electronically, or in writing.” The quoted phrase is consistent with the language of Section 4A-103(a) applicable to payment orders. Cancellations and amendments are normally subject to verification pursuant to security procedures to the same extent as payment orders. Subsection (a) recognizes this fact by providing that in cases in which there is a security procedure in effect between the sender and the receiving bank the bank is not bound by a communication cancelling or amending an order unless verification has been made. This is necessary to protect the bank because under subsection (b) a cancellation or amendment can be effective by unilateral action of the sender. Without verification the bank cannot be sure whether the communication was or was not effective to cancel or amend a previously verified payment order.
  3. If the receiving bank has not yet accepted the order, there is no reason why the sender should not be able to cancel or amend the order unilaterally so long as the requirements of subsections (a) and (b) are met. If the receiving bank has accepted the order, it is possible to cancel or amend but only if the requirements of subsection (c) are met.

    First consider the case of a receiving bank other than the beneficiary’s bank. If the bank has not yet accepted the order, the sender can unilaterally cancel or amend. The communication amending or cancelling the payment order must be received in time to allow the bank to act on it before the bank issues its payment order in execution of the sender’s order. The time that the sender’s communication is received is governed by Section 4A-106. If a payment order does not specify a delayed payment date or execution date, the order will normally be executed shortly after receipt. Thus, as a practical matter, the sender will have very little time in which to instruct cancellation or amendment before acceptance. In addition, a receiving bank will normally have cut-off times for receipt of such communications, and the receiving bank is not obliged to act on communications received after the cut-off hour. Cancellation by the sender after execution of the order by the receiving bank requires the agreement of the bank unless a funds transfer rule otherwise provides. Subsection (c). Although execution of the sender’s order by the receiving bank does not itself impose liability on the receiving bank (under Section 4A-402 no liability is incurred by the receiving bank to pay its order until it is accepted), it would commonly be the case that acceptance follows shortly after issuance. Thus, as a practical matter, a receiving bank that has executed a payment order will incur a liability to the next bank in the chain before it would be able to act on the cancellation request of its customer. It is unreasonable to impose on the receiving bank a risk of loss with respect to a cancellation request without the consent of the receiving bank.

    The statute does not state how or when the agreement of the receiving bank must be obtained for cancellation after execution. The receiving bank’s consent could be obtained at the time cancellation occurs or it could be based on a preexisting agreement. Or, a funds transfer system rule could provide that cancellation can be made unilaterally by the sender. By virtue of that rule any receiving bank covered by the rule is bound. Section 4A-501. If the receiving bank has already executed the sender’s order, the bank would not consent to cancellation unless the bank to which the receiving bank has issued its payment order consents to cancellation of that order. It makes no sense to allow cancellation of a payment order unless all subsequent payment orders in the funds transfer that were issued because of the cancelled payment order are also cancelled. Under subsection (c)(1), if a receiving bank consents to cancellation of the payment order after it is executed, the cancellation is not effective unless the receiving bank also cancels the payment order issued by the bank.

  4. With respect to a payment order issued to the beneficiary’s bank, acceptance is particularly important because it creates liability to pay the beneficiary, it defines when the originator pays its obligation to the beneficiary, and it defines when any obligation for which the payment is made is discharged. Since acceptance affects the rights of the originator and the beneficiary it is not appropriate to allow the beneficiary’s bank to agree to cancellation or amendment except in unusual cases. Except as provided in subsection (c)(2), cancellation or amendment after acceptance by the beneficiary’s bank is not possible unless all parties affected by the order agree. Under subsection (c)(2), cancellation or amendment is possible only in the four cases stated. The following examples illustrate subsection (c)(2):

    Case #1. Originator’s Bank executed a payment order issued in the name of its customer as sender. The order was not authorized by the customer and was fraudulently issued. Beneficiary’s Bank accepted the payment order issued by Originator’s Bank. Under subsection (c)(2) Originator’s Bank can cancel the order if Beneficiary’s Bank consents. It doesn’t make any difference whether the payment order that Originator’s Bank accepted was or was not enforceable against the customer under Section 4A-202(b). Verification under that provision is important in determining whether Originator’s Bank or the customer has the risk of loss, but it has no relevance under Section 4A-211(c)(2). Whether or not verified, the payment order was not authorized by the customer. Cancellation of the payment order to Beneficiary’s Bank causes the acceptance of Beneficiary’s Bank to be nullified. Subsection (e). Beneficiary’s Bank is entitled to recover payment from the beneficiary to the extent allowed by the law of mistake and restitution. In this kind of case the beneficiary is usually a party to the fraud who has no right to receive or retain payment of the order.

    Case #2. Originator owed Beneficiary $1,000,000 and ordered Bank A to pay that amount to the account of Beneficiary in Bank B. Bank A issued a complying order to Bank B, but by mistake issued a duplicate order as well. Bank B accepted both orders. Under subsection (c)(2)(i) cancellation of the duplicate order could be made by Bank A with the consent of Bank B. Beneficiary has no right to receive or retain payment of the duplicate payment order if only $1,000,000 was owed by Originator to Beneficiary. If Originator owed $2,000,000 to Beneficiary, the law of restitution might allow Beneficiary to retain the $1,000,000 paid by Bank B on the duplicate order. In that case Bank B is entitled to reimbursement from Bank A under subsection (f).

    Case #3. Originator owed $1,000,000 to X. Intending to pay X, Originator ordered Bank A to pay $1,000,000 to Y’s account in Bank B. Bank A issued a complying payment order to Bank B which Bank B accepted by releasing the $1,000,000 to Y. Under subsection (c)(2)(ii) Bank A can cancel its payment order to Bank B with the consent of Bank B if Y was not entitled to receive payment from Originator. Originator can also cancel its order to Bank A with Bank A’s consent. Subsection (c)(1). Bank B may recover the $1,000,000 from Y unless the law of mistake and restitution allows Y to retain some or all of the amount paid. If no debt was owed to Y, Bank B should have a right of recovery.

    Case #4. Originator owed Beneficiary $10,000. By mistake Originator ordered Bank A to pay $1,000,000 to the account of Beneficiary in Bank B. Bank A issued a complying order to Bank B which accepted by notifying Beneficiary of its right to withdraw $1,000,000. Cancellation is permitted in this case under subsection (c)(2)(iii). If Bank B paid Beneficiary it is entitled to recover the payment except to the extent the law of mistake and restitution allows Beneficiary to retain payment. In this case Beneficiary might be entitled to retain $10,000, the amount of the debt owed to Beneficiary. If Beneficiary may retain $10,000, Bank B would be entitled to $10,000 from Bank A pursuant to subsection (f). In this case Originator also cancelled its order. Thus Bank A would be entitled to $10,000 from Originator pursuant to subsection (f).

  5. Unless constrained by a funds transfer system rule, a receiving bank may agree to cancellation or amendment of the payment order under subsection (c) but is not required to do so regardless of the circumstances. If the receiving bank has incurred liability as a result of its acceptance of the sender’s order, there are substantial risks in agreeing to cancellation or amendment. This is particularly true for a beneficiary’s bank. Cancellation or amendment after acceptance by the beneficiary’s bank can be made only in the four cases stated and the beneficiary’s bank may not have any way of knowing whether the requirements of subsection (c) have been met or whether it will be able to recover payment from the beneficiary that received payment. Even with indemnity the beneficiary’s bank may be reluctant to alienate its customer, the beneficiary, by denying the customer the funds. Subsection (c) leaves the decision to the beneficiary’s bank unless the consent of the beneficiary’s bank is not required under a funds transfer system rule or other interbank agreement. If a receiving bank agrees to cancellation or amendment under subsection (c)(1) or (2), it is automatically entitled to indemnification from the sender under subsection (f). The indemnification provision recognizes that a sender has no right to cancel a payment order after it is accepted by the receiving bank. If the receiving bank agrees to cancellation, it is doing so as an accommodation to the sender and it should not incur a risk of loss in doing so.
  6. Acceptance by the receiving bank of a payment order issued by the sender is comparable to acceptance of an offer under the law of contracts. Under that law the death or legal incapacity of an offeror terminates the offer even though the offeree has no notice of the death or incapacity. Restatement Second, Contracts § 48. Comment a. to that section states that the “rule seems to be a relic of the obsolete view that a contract requires a ‘meeting of minds,’ and it is out of harmony with the modern doctrine that a manifestation of assent is effective without regard to actual mental assent.” Subsection (g), which reverses the Restatement rule in the case of a payment order, is similar to Section 4-405(a) which applies to checks. Subsection (g) does not address the effect of the bankruptcy of the sender of a payment order before the order is accepted, but the principle of subsection (g) has been recognized in Bank of Marin v. England, 385 U.S. 99 (1966). Although Bankruptcy Code Section 542(c) may not have been drafted with wire transfers in mind, its language can be read to allow the receiving bank to charge the sender’s account for the amount of the payment order if the receiving bank executed it in ignorance of the bankruptcy.
  7. Subsection (d) deals with stale payment orders. Payment orders normally are executed on the execution date or the day after. An order issued to the beneficiary’s bank is normally accepted on the payment date or the day after. If a payment order is not accepted on its execution or payment date or shortly thereafter, it is probable that there was some problem with the terms of the order or the sender did not have sufficient funds or credit to cover the amount of the order. Delayed acceptance of such an order is normally not comtemplated, but the order may not have been cancelled by the sender. Subsection (d) provides for cancellation by operation of law to prevent an unexpected delayed acceptance.
  8. A funds transfer system rule can govern rights and obligations between banks that are parties to payment orders transmitted over the system even if the rule conflicts with Article 4A. In some cases, however, a rule governing a transaction between two banks can affect a third party in an unacceptable way. Subsection (h) deals with such a case. A funds transfer system rule cannot allow cancellation of a payment order accepted by the beneficiary’s bank if the rule conflicts with subsection (c)(2). Because rights of the beneficiary and the originator are directly affected by acceptance, subsection (c)(2) severely limits cancellation. These limitations cannot be altered by funds transfer system rule.

NOTES TO DECISIONS

1.Cancellation.

Bank and its president were properly granted summary judgment on a company’s breach of contract action because the company failed to meet its burden to show that a deposit from its former owner was a loan as the former owner never accepted and possessed the company’s promissory notes, the notes themselves did not establish the existence of a contract governing the deposit, and there was considerable evidence that the parties understood that there was no contract between the parties as to the deposit; because the company failed to establish that the deposit was a loan, the transfer of the funds was unauthorized and the bank properly cancelled and returned them. Wholesale Petro. Partners, L.P. v. South Cent. Bank of Daviess County, Inc., 565 Fed. Appx. 361, 2014 FED App. 0336N, 2014 U.S. App. LEXIS 8256 (6th Cir. Ky. 2014 ).

Research References and Practice Aids

Kentucky Law Journal.

Bhala, The Inverted Pyramid of Wire Transfer Law, 82 Ky. L.J. 347 (1993-94).

355.4A-212. Liability and duty of receiving bank regarding unaccepted payment order.

If a receiving bank fails to accept a payment order that it is obliged by express agreement to accept, the bank is liable for breach of the agreement to the extent provided in the agreement or in this article, but does not otherwise have any duty to accept a payment order or, before acceptance, to take any action, or refrain from taking action, with respect to the order except as provided in this article or by express agreement. Liability based on acceptance arises only when acceptance occurs as stated in KRS 355.4A-209 , and liability is limited to that provided in this article. A receiving bank is not the agent of the sender or beneficiary of the payment order it accepts, or of any other party to the funds transfer, and the bank owes no duty to any party to the funds transfer except as provided in this article or by express agreement.

History. Enact. Acts 1992, ch. 116, § 43, effective July 14, 1992.

Official Comment

With limited exceptions stated in this Article, the duties and obligations of receiving banks that carry out a funds transfer arise only as a result of acceptance of payment orders or of agreements made by receiving banks. Exceptions are stated in Section 4A-209(b)(3) and Section 4A-210(b). A receiving bank is not like a collecting bank under Article 4. No receiving bank, whether it be an originator’s bank, an intermediary bank or a beneficiary’s bank, is an agent for any other party in the funds transfer.

Part 3. Execution of Sender’s Payment Order by Receiving Bank

355.4A-301. Execution and execution date.

  1. A payment order is “executed” by the receiving bank when it issues a payment order intended to carry out the payment order received by the bank. A payment order received by the beneficiary’s bank can be accepted but cannot be executed.
  2. “Execution date” of a payment order means the day on which the receiving bank may properly issue a payment order in execution of the sender’s order. The execution date may be determined by instruction of the sender but cannot be earlier than the day the order is received and, unless otherwise determined, is the day the order is received. If the sender’s instruction states a payment date, the execution date is the payment date or an earlier date on which execution is reasonably necessary to allow payment to the beneficiary on the payment date.

History. Enact. Acts 1992, ch. 116, § 44, effective July 14, 1992.

Official Comment

  1. The terms “executed,” “execution” and “execution date” are used only with respect to a payment order to a receiving bank other than the beneficiary’s bank. The beneficiary’s bank can accept the payment order that it receives, but it does not execute the order. Execution refers to the act of the receiving bank in issuing a payment order “intended to carry out” the payment order that the bank received. A receiving bank has executed an order even if the order issued by the bank does not carry out the order received by the bank. For example, the bank may have erroneously issued an order to the wrong beneficiary, or in the wrong amount or to the wrong beneficiary’s bank. In each of these cases execution has occurred but the execution is erroneous. Erroneous execution is covered in Section 4A-303.
  2. “Execution date” refers to the time a payment order should be executed rather than the day it is actually executed. Normally the sender will not specify an execution date, but most payment orders are meant to be executed immediately. Thus, the execution date is normally the day the order is received by the receiving bank. It is common for the sender to specify a “payment date” which is defined in Section 4A-401 as “the day on which the amount of the order is payable to the beneficiary by the beneficiary’s bank.” Except for automated clearing house transfers, if a funds transfer is entirely within the United States and the payment is to be carried out electronically, the execution date is the payment date unless the order is received after the payment date. If the payment is to be carried out through an automated clearing house, execution may occur before the payment date. In an ACH transfer the beneficiary is usually paid one or two days after issue of the originator’s payment order. The execution date is determined by the stated payment date and is a date before the payment date on which execution is reasonably necessary to allow payment on the payment date. A funds transfer system rule could also determine the execution date of orders received by the receiving bank if both the sender and the receiving bank are participants in the funds transfer system. The execution date can be determined by the payment order itself or by separate instructions of the sender or an agreement of the sender and the receiving bank. The second sentence of subsection (b) must be read in the light of Section 4A-106 which states that if a payment order is received after the cut-off time of the receiving bank it may be treated by the bank as received at the opening of the next funds transfer business day.
  3. Execution on the execution date is timely, but the order can be executed before or after the execution date. Section 4A-209(d) and Section 4A-402(c) state the consequences of early execution and Section 4A-305(a) states the consequences of late execution.

Research References and Practice Aids

Kentucky Law Journal.

Bhala, The Inverted Pyramid of Wire Transfer Law, 82 Ky. L.J. 347 (1993-94).

355.4A-302. Obligation of receiving bank in execution of payment order.

  1. Except as provided in subsections (2) through (4), if the receiving bank accepts a payment order pursuant to KRS 355.4A-209 (1), the bank has the following obligations in executing the order:
    1. The receiving bank is obliged to issue, on the execution date, a payment order complying with the sender’s order and to follow the sender’s instructions concerning:
      1. Any intermediary bank or funds-transfer system to be used in carrying out the funds transfer; or
      2. The means by which payment orders are to be transmitted in the funds transfer. If the originator’s bank issues a payment order to an intermediary bank, the originator’s bank is obliged to instruct the intermediary bank according to the instruction of the originator. An intermediary bank in the funds transfer is similarly bound by an instruction given to it by the sender of the payment order it accepts;
    2. If the sender’s instruction states that the funds transfer is to be carried out telephonically or by wire transfer or otherwise indicates that the funds transfer is to be carried out by the most expeditious means, the receiving bank is obliged to transmit its payment order by the most expeditious available means, and to instruct any intermediary bank accordingly. If a sender’s instruction states a payment date, the receiving bank is obliged to transmit its payment order at a time and by means reasonably necessary to allow payment to the beneficiary on the payment date or as soon thereafter as is feasible.
  2. Unless otherwise instructed, a receiving bank executing a payment order may:
    1. Use any funds-transfer system if use of that system is reasonable in the circumstances; and
    2. Issue a payment order to the beneficiary’s bank or to an intermediary bank through which a payment order conforming to the sender’s order can expeditiously be issued to the beneficiary’s bank if the receiving bank exercises ordinary care in the selection of the intermediary bank. A receiving bank is not required to follow an instruction of the sender designating a funds-transfer system to be used in carrying out the funds transfer if the receiving bank, in good faith, determines that it is not feasible to follow the instruction or that following the instruction would unduly delay completion of the funds transfer.
  3. Unless subsection (1)(b) applies or the receiving bank is otherwise instructed, the bank may execute a payment order by transmitting its payment order by first class mail or by any means reasonable in the circumstances. If the receiving bank is instructed to execute the sender’s order by transmitting its payment order by a particular means, the receiving bank may issue its payment order by the means stated or by any means as expeditious as the means stated.
  4. Unless instructed by the sender:
    1. The receiving bank may not obtain payment of its charges for services and expenses in connection with the execution of the sender’s order by issuing a payment order in an amount equal to the amount of the sender’s order less the amount of the charges; and
    2. May not instruct a subsequent receiving bank to obtain payment of its charges in the same manner.

History. Enact. Acts 1992, ch. 116, § 45, effective July 14, 1992.

Official Comment

  1. In the absence of agreement, the receiving bank is not obliged to execute an order of the sender. Section 4A-212. Section 4A-302 states the manner in which the receiving bank may execute the sender’s order if execution occurs. Subsection (a)(1) states the residual rule. The payment order issued by the receiving bank must comply with the sender’s order and, unless some other rule is stated in the section, the receiving bank is obliged to follow any instruction of the sender concerning which funds transfer system is to be used, which intermediary banks are to be used, and what means of transmission is to be used. The instruction of the sender may be incorporated in the payment order itself or may be given separately. For example, there may be a master agreement between the sender and receiving bank containing instructions governing payment orders to be issued from time to time by the sender to the receiving bank. In most funds transfers, speed is a paramount consideration. A sender that wants assurance that the funds transfer will be expeditiously completed can specify the means to be used. The receiving bank can follow the instructions literally or it can use an equivalent means. For example, if the sender instructs the receiving bank to transmit by telex, the receiving bank could use telephone instead. Subsection (c). In most cases the sender will not specify a particular means but will use a general term such as “by wire” or “wire transfer” or “as soon as possible.” These words signify that the sender wants a same-day transfer. In these cases the receiving bank is required to use a telephonic or electronic communication to transmit its order and is also required to instruct any intermediary bank to which it issues its order to transmit by similar means. Subsection (a)(2). In other cases, such as an automated clearing house transfer, a same-day transfer is not contemplated. Normally the sender’s instruction or the context in which the payment order is received makes clear the type of funds transfer that is appropriate. If the sender states a payment date with respect to the payment order, the receiving bank is obliged to execute the order at a time and in a manner to meet the payment date if that is feasible. Subsection (a)(2). This provision would apply to many ACH transfers made to pay recurring debts of the sender. In other cases, involving relatively small amounts, time may not be an important factor and cost may be a more important element. Fast means, such as telephone or electronic transmission, are more expensive than slow means such as mailing. Subsection (c) states that in the absence of instructions the receiving bank is given discretion to decide. It may issue its payment order by first class mail or by any means reasonable in the circumstances. Section 4A-305 states the liability of a receiving bank for breach of the obligations stated in Section 4A-302.
  2. Subsection (b) concerns the choice of intermediary banks to be used in completing the funds transfer, and the funds transfer system to be used. If the receiving bank is not instructed about the matter, it can issue an order directly to the beneficiary’s bank or can issue an order to an intermediary bank. The receiving bank also has discretion concerning use of a funds transfer system. In some cases it may be reasonable to use either an automated clearing house system or a wire transfer system such as Fedwire or CHIPS. Normally, the receiving bank will follow the instruction of the sender in these matters, but in some cases it may be prudent for the bank not to follow instructions. The sender may have designated a funds transfer system to be used in carrying out the funds transfer, but it may not be feasible to use the designated system because of some impediment such as a computer breakdown which prevents prompt execution of the order. The receiving bank is permitted to use an alternate means of transmittal in a good faith effort to execute the order expeditiously. The same leeway is not given to the receiving bank if the sender designates an intermediary bank through which the funds transfer is to be routed. The sender’s designation of that intermediary bank may mean that the beneficiary’s bank is expecting to obtain a credit from that intermediary bank and may have relied on that anticipated credit. If the receiving bank uses another intermediary bank the expectations of the beneficiary’s bank may not be realized. The receiving bank could choose to route the transfer to another intermediary bank and then to the designated intermediary bank if there was some reason such as a lack of a correspondent-bank relationship or a bilateral credit limitation, but the designated intermediary bank cannot be circumvented. To do so violates the sender’s instructions.
  3. The normal rule, under subsection (a)(`), is that the receiving bank, in executing a payment order, is required to issue a payment order that complies as to amount with that of the sender’s order. In most cases the receiving bank issues an order equal to the amount of the sender’s order and makes a separate charge for services and expenses in executing the sender’s order. In some cases, particularly if it is an intermediary bank that is executing an order, charges are collected by deducting them from the amount of the payment order issued by the executing bank. If that is done, the amount of the payment order accepted by the beneficiary’s bank will be slightly less than the amount of the originator’s payment order. For example, Originator, in order to pay an obligation of $1,000,000 owed to Beneficiary, issues a payment order to Originator’s Bank to pay $1,000,000 to the account of Beneficiary in Beneficiary’s Bank. Originator’s Bank issues a payment order to Intermediary Bank for $1,000,000 and debits Originator’s account for $1,000,010. The extra $10 is the fee of Originator’s Bank. Intermediary Bank executes the payment order of Originator’s Bank by issuing a payment order to Beneficiary’s Bank for $999,990, but under § 4A-402(c) is entitled to receive $1,000,000 from Originator’s bank. The $10 difference is the fee of Intermediary Bank. Beneficiary’s Bank credits Beneficiary’s account for $999,990. When Beneficiary’s Bank accepts the payment order of Intermediary Bank the result is a payment of $999,990 from Originator to Beneficiary. Section 4A-406(a). If that payment discharges the $1,000,000 debt, the effect is that Beneficiary has paid the charges of Intermediary Bank and Originator has paid charges of Originator’s Bank. Subsection (d) of Section 4A-302 allows Intermediary Bank to collect its charges by deducting them from the amount of the payment order, but only if instructed to do so by Originator’s Bank. Originator’s Bank is not authorized to give that instruction to Intermediary Bank unless Originator authorized the instruction. Thus, Originator can control how the charges of Originator’s Bank and Intermediary Bank are to be paid. Subsection (d) does not apply to charges of Beneficiary’s Bank to Beneficiary.

    In the case discussed in the preceding paragraph the $10 charge is trivial in relation to the amount of the payment and it may not be important to Beneficiary how the charge is paid. But it may be very important if the $1,000,000 obligation represented the price of exercising a right such as an option favorable to Originator and unfavorable to Beneficiary. Beneficiary might well argue that it was entitled to receive $1,000,000. If the option was exercised shortly before its expiration date, the result could be loss of the option benefit because the required payment of $1,000,000 was not made before the option expired. Section 4A-406(c) allows Originator to preserve the option benefit. The amount received by Beneficiary is deemed to be $1,000,000 unless Beneficiary demands the $10 and Originator does not pay it.

355.4A-303. Erroneous execution of payment order.

  1. A receiving bank that:
    1. Executes the payment order of the sender by issuing a payment order in an amount greater than the amount of the sender’s order; or
    2. Issues a payment order in execution of the sender’s order and then issues a duplicate order, is entitled to payment of the amount of the sender’s order under KRS 355.4A-402 (3) if that subsection is otherwise satisfied. The bank is entitled to recover from the beneficiary of the erroneous order the excess payment received to the extent allowed by the law governing mistake and restitution.
  2. A receiving bank that executes the payment order of the sender by issuing a payment order in an amount less than the amount of the sender’s order is entitled to payment of the amount of the sender’s order under KRS 355.4A-402 (3) if:
    1. That subsection is otherwise satisfied; and
    2. The bank corrects its mistake by issuing an additional payment order for the benefit of the beneficiary of the sender’s order. If the error is not corrected, the issuer of the erroneous order is entitled to receive or retain payment from the sender of the order it accepted only to the extent of the amount of the erroneous order. This subsection does not apply if the receiving bank executes the sender’s payment order by issuing a payment order in an amount less than the amount of the sender’s order for the purpose of obtaining payment of its charges for services and expenses pursuant to instruction of the sender.
  3. If a receiving bank executes the payment order of the sender by issuing a payment order to a beneficiary different from the beneficiary of the sender’s order and the funds transfer is completed on the basis of that error, the sender of the payment order that was erroneously executed and all previous senders in the funds transfer are not obliged to pay the payment orders they issued. The issuer of the erroneous order is entitled to recover from the beneficiary of the order the payment received to the extent allowed by the law governing mistake and restitution.

History. Enact. Acts 1992, ch. 116, § 46, effective July 14, 1992.

Official Comment

  1. Section 4A-303 states the effect of erroneous execution of a payment order by the receiving bank. Under Section 4A-402(c) the sender of a payment order is obliged to pay the amount of the order to the receiving bank if the bank executes the order, but the obligation to pay is excused if the beneficiary’s bank does not accept a payment order instructing payment to the beneficiary of the sender’s order. If erroneous execution of the sender’s order causes the wrong beneficiary to be paid, the sender is not required to pay. If erroneous execution causes the wrong amount to be paid the sender is not obliged to pay the receiving bank an amount in excess of the amount of the sender’s order. Section 4A-303 takes precedence over Section 4A-402(c) and states the liability of the sender and the rights of the receiving bank in various cases of erroneous execution.
  2. Subsections (a) and (b) deal with cases in which the receiving bank executes by issuing a payment order in the wrong amount. If Originator ordered Originator’s Bank to pay $1,000,000 to the account of Beneficiary in Beneficiary’s Bank, but Originator’s Bank erroneously instructed Beneficiary’s Bank to pay $2,000,000 to Beneficiary’s account, subsection (a) applies. If Beneficiary’s Bank accepts the order of Originator’s Bank, Beneficiary’s Bank is entitled to receive $2,000,000 from Originator’s Bank, but Originator’s Bank is entitled to receive only $1,000,000 from Originator. Originator’s Bank is entitled to recover the overpayment from Beneficiary to the extent allowed by the law governing mistake and restitution. Originator’s Bank would normally have a right to recover the overpayment from Beneficiary, but in unusual cases the law of restitution might allow Beneficiary to keep all or part of the overpayment. For example, if Originator owed $2,000,000 to Beneficiary and Beneficiary received the extra $1,000,000 in good faith in discharge of the debt, Beneficiary may be allowed to keep it. In this case Originator’s Bank has paid an obligation of Originator and under the law of restitution, which applies through Section 1-103, Originator’s Bank would be subrogated to Beneficiary’s rights against Originator on the obligation paid by Originator’s Bank.

    If Originator’s Bank erroneously executed Originator’s order by instructing Beneficiary’s Bank to pay less than $1,000,000, subsection (b) applies. If Originator’s Bank corrects its error by issuing another payment order to Beneficiary’s Bank that results in payment of $1,000,000 to Beneficiary, Originator’s Bank is entitled to payment of $1,000,000 from Originator. If the mistake is not corrected, Originator’s Bank is entitled to payment from Originator only in the amount of the order issued by Originator’s Bank.

  3. Subsection (a) also applies to duplicate payment orders. Assume Originator’s Bank properly executes Originator’s $1,000,000 payment order and then by mistake issues a second $1,000,000 payment order in execution of Originator’s order. If Beneficiary’s Bank accepts both orders issued by Originator’s Bank, Beneficiary’s Bank is entitled to receive $2,000,000 from Originator’s Bank but Originator’s Bank is entitled to receive only $1,000,000 from Originator. The remedy of Originator’s Bank is the same as that of a receiving bank that executes by issuing an order in an amount greater than the sender’s order. It may recover the overpayment from Beneficiary to the extent allowed by the law governing mistake and restitution and in a proper case as stated in Comment 2 may have subrogation rights if it is not entitled to recover from Beneficiary.
  4. Suppose Originator instructs Originator’s Bank to pay $1,000,000 to Account #12345 in Beneficiary’s Bank. Originator’s Bank erroneously instructs Beneficiary’s Bank to pay $1,000,000 to Account #12346 and Beneficiary’s Bank accepted. Subsection (c) covers this case. Originator is not obliged to pay its payment order, but Originator’s Bank is required to pay $1,000,000 to Beneficiary’s Bank. The remedy of Originator’s Bank is to recover $1,000,000 from the holder of Account #12346 that received payment by mistake. Recovery based on the law of mistake and restitution is described in Comment 2.

NOTES TO DECISIONS

1.Commercial Law.

Discharge-for-value defense, allowed under KRS 355.4A-303 , can be raised in the wire transfer context only when the beneficiary of the error does not receive actual or constructive notice of the mistake in the transfer before it credits the payor’s account; it is not unfair to require a payee to return an excess payment if it receives notice of an erroneous payment before it has credited the payee’s account. First Natl Bank & Trust Co. v. Brant (In re Calumet Farm, Inc.), 398 F.3d 555, 2005 FED App. 0077P, 2005 U.S. App. LEXIS 2767 (6th Cir. Ky.), cert. denied, 546 U.S. 824, 126 S. Ct. 362, 163 L. Ed. 2d 69, 2005 U.S. LEXIS 6081 (U.S. 2005).

2.—Defenses.

Lower courts erred in granting summary judgment to creditors on their KRS 355.4A-303 (1), discharge-for-value defense because the creditors had not yet credited a debtor company’s account when they received notice that the amount of the company’s wire transfer was erroneous because: (1) the lower courts had improperly focused upon when the transfer was received by the creditors’ bank; (2) the relevant issue was whether the creditors became aware that a mistake had been made before or after the company’s account had been credited; and (3) the creditors’ discharge-for-value defense failed because, as a matter of law, they had prior notice of the mistake in the wire transfer before they applied the payment to the company’s account. First Natl Bank & Trust Co. v. Brant (In re Calumet Farm, Inc.), 398 F.3d 555, 2005 FED App. 0077P, 2005 U.S. App. LEXIS 2767 (6th Cir. Ky.), cert. denied, 546 U.S. 824, 126 S. Ct. 362, 163 L. Ed. 2d 69, 2005 U.S. LEXIS 6081 (U.S. 2005).

355.4A-304. Duty of sender to report erroneously executed payment order.

If the sender of a payment order that is erroneously executed as stated in KRS 355.4A-303 receives notification from the receiving bank that the order was executed or that the sender’s account was debited with respect to the order, the sender has a duty to exercise ordinary care to determine, on the basis of information available to the sender, that the order was erroneously executed and to notify the bank of the relevant facts within a reasonable time not exceeding ninety (90) days after the notification from the bank was received by the sender. If the sender fails to perform that duty, the bank is not obliged to pay interest on any amount refundable to the sender under KRS 355.4A-402 (4) for the period before the bank learns of the execution error. The bank is not entitled to any recovery from the sender on account of a failure by the sender to perform the duty stated in this section.

History. Enact. Acts 1992, ch. 116, § 47, effective July 14, 1992.

Official Comment

This section is identical in effect to Section 4A-204 which applies to unauthorized orders issued in the name of a customer of the receiving bank. The rationale is stated in Comment 2 to Section 4A-204.

355.4A-305. Liability for late or improper execution or failure to execute payment order.

  1. If a funds transfer is completed but execution of a payment order by the receiving bank in breach of KRS 355.4A-302 results in delay in payment to the beneficiary, the bank is obliged to pay interest to either the originator or the beneficiary of the funds transfer for the period of delay caused by the improper execution. Except as provided in subsection (3), additional damages are not recoverable.
  2. If execution of a payment order by a receiving bank in breach of KRS 355.4A-302 results in:
    1. Noncompletion of the funds transfer;
    2. Failure to use an intermediary bank designated by the originator; or
    3. Issuance of a payment order that does not comply with the terms of the payment order of the originator, the bank is liable to the originator for its expenses in the funds transfer and for incidental expenses and interest losses, to the extent not covered by subsection (1), resulting from the improper execution. Except as provided in subsection (3), additional damages are not recoverable.
  3. In addition to the amounts payable under subsections (1) and (2), damages, including consequential damages, are recoverable to the extent provided in an express written agreement of the receiving bank.
  4. If a receiving bank fails to execute a payment order it was obliged by express agreement to execute, the receiving bank is liable to the sender for its expenses in the transaction and for incidental expenses and interest losses resulting from the failure to execute. Additional damages, including consequential damages, are recoverable to the extent provided in an express written agreement of the receiving bank, but are not otherwise recoverable.
  5. Reasonable attorney’s fees are recoverable if demand for compensation under subsection (1) or (2) is made and refused before an action is brought on the claim. If a claim is made for breach of an agreement under subsection (4) and the agreement does not provide for damages, reasonable attorney’s fees are recoverable if demand for compensation under subsection (4) is made and refused before an action is brought on the claim.
  6. Except as stated in this section, the liability of a receiving bank under subsections (1) and (2) may not be varied by agreement.

History. Enact. Acts 1992, ch. 116, § 48, effective July 14, 1992.

Official Comment

  1. Subsection (a) covers cases of delay in completion of a funds transfer resulting from an execution by a receiving bank in breach of Section 4A-302(a). The receiving bank is obliged to pay interest on the amount of the order for the period of the delay. The rate of interest is stated in Section 4A-506. With respect to wire transfers (other than ACH transactions) within the United States, the expectation is that the funds transfer will be completed the same day. In those cases, the originator can reasonably expect that the originator’s account will be debited on the same day as the beneficiary’s account is credited. If the funds transfer is delayed, compensation can be paid either to the originator or to the beneficiary. The normal practice is to compensate the beneficiary’s bank to allow that bank to compensate the beneficiary by back-valuing the payment by the number of days of delay. Thus, the beneficiary is in the same position that it would have been in if the funds transfer had been completed on the same day. Assume on Day 1, Originator’s Bank issues its payment order to Intermediary Bank which is received on that day. Intermediary Bank does not execute that order until Day 2 when it issues an order to Beneficiary’s Bank which is accepted on that day. Intermediary Bank complies with subsection (a) by paying one day’s interest to Beneficiary’s Bank for the account of Beneficiary.
  2. Subsection (b) applies to cases of breach of Section 4A-302 involving more than mere delay. In those cases the bank is liable for damages for improper execution but they are limited to compensation for interest losses and incidental expenses of the sender resulting from the breach, the expenses of the sender in the funds transfer and attorney’s fees. This subsection reflects the judgement that imposition of consequential damages on a bank for commission of an error is not justified.

    The leading common law case on the subject of consequential damages is Evra Corp. v. Swiss Bank Corp., 673 F.2d 951 (7th Cir. 1982), in which Swiss Bank, an intermediary bank, failed to execute a payment order. Because the beneficiary did not receive timely payment the originator lost a valuable ship charter. The lower court awarded the originator $2.1 million for lost profits even though the amount of the payment order was only $27,000. The Seventh Circuit reversed, in part on the basis of the common law rule of Hadley v. Baxendale that consequential damages may not be awarded unless the defendant is put on notice of the special circumstances giving rise to them. Swiss Bank may have known that the originator was paying the shipowner for the hire of a vessel but did not know that a favorable charter would be lost if the payment was delayed. “Electronic payments are not so unusual as to automatically place a bank on notice of extraordinary consequences if such a transfer goes awry. Swiss Bank did not have enough information to infer that if it lost a $27,000 payment order it would face liability in excess of $2 million.” 673 F.2d at 956.

    If Evra means that consequential damages can be imposed if the culpable bank has notice of particular circumstances giving rise to the damages, it does not provide an acceptable solution to the problem of bank liability for consequential damages. In the typical case transmission of the payment order is made electronically. Personnel of the receiving bank that process payment orders are not the appropriate people to evaluate the risk of liability for consequential damages in relation to the price charged for the wire transfer service. Even if notice is received by higher level management personnel who could make an appropriate decision whether the risk is justified by the price, liability based on notice would require evaluation of payment orders on an individual basis. This kind of evaluation is inconsistent with the high-speed, low-price, mechanical nature of the processing system that characterizes wire transfers. Moreover, in Evra the culpable bank was an intermediary bank with which the originator did not deal. Notice to the originator’s bank would not bind the intermediary bank, and it seems impractical for the originator’s bank to convey notice of this kind to intermediary banks in the funds transfer. The success of the wholesale wire transfer industry has largely been based on its ability to effect payment at low cost and great speed. Both of these essential aspects of the modern wire transfer system would be adversely affected by a rule that imposed on banks liability for consequential damages. A banking industry amicus brief in Evra stated: “Whether banks can continue to make EFT services available on a widespread basis, by charging reasonable rates, depends on whether they can do so without incurring unlimited consequential risks. Certainly, no bank would handle for $3.25 a transaction entailing potential liability in the millions of dollars.”

    As the court in Evra also noted, the originator of the funds transfer is in the best position to evaluate the risk that a funds transfer will not be made on time and to manage that risk by issuing a payment order in time to allow monitoring of the transaction. The originator, by asking the beneficiary, can quickly determine if the funds transfer has been completed. If the originator has sent the payment order at a time that allows a reasonable margin for correcting error, no loss is likely to result if the transaction is monitored. The other published cases on this issue reach the Evra result. Central Coordinates, Inc. v. Morgan Guaranty Trust Co., 40 U.C.C. Rep. Serv. 1340 (N.Y.Sup.Ct.1985), and Gatoil (U.S.A.), Inc. v. Forest Hill State Bank, 1 U.C.C. Rep.Serv.2d 171 (D.Md.1986).

    Subsection (c) allows the measure of damages in subsection (b) to be increased by an express written agreement of the receiving bank. An originator’s bank might be willing to assume additional responsibilities and incur additional liability in exchange for a higher fee.

  3. Subsection (d) governs cases in which a receiving bank has obligated itself by express agreement to accept payment orders of a sender. In the absence of such an agreement there is no obligation by a receiving bank to accept a payment order. Section 4A-212. The measure of damages for breach of an agreement to accept a payment order is the same as that stated in subsection (b). As in the case of subsection (b), additional damages, including consequential damages, may be recovered to the extent stated in an express written agreement of the receiving bank.
  4. Reasonable attorney’s fees are recoverable only in cases in which damages are limited to statutory damages stated in subsections (a), (b) and (d). If additional damages are recoverable because provided for by an express written agreement, attorney’s fees are not recoverable. The rationale is that there is no need for statutory attorney’s fees in the latter case, because the parties have agreed to a measure of damages which may or may not provide for attorney’s fees.
  5. The effect of subsection (f) is to prevent reduction of a receiving bank’s liability under Section 4A-305.

Research References and Practice Aids

Kentucky Law Journal.

Bhala, The Inverted Pyramid of Wire Transfer Law, 82 Ky. L.J. 347 (1993-94).

Part 4. Payment

355.4A-401. Payment date.

“Payment date” of a payment order means the day on which the amount of the order is payable to the beneficiary by the beneficiary’s bank. The payment date may be determined by instruction of the sender but cannot be earlier than the day the order is received by the beneficiary’s bank and, unless otherwise determined, is the day the order is received by the beneficiary’s bank.

History. Enact. Acts 1992, ch. 116, § 49, effective July 14, 1992.

Official Comment

“Payment date” refers to the day the beneficiary’s bank is to pay the beneficiary. The payment date may be expressed in various ways so long as it indicates the day the beneficiary is to receive payment. For example, in ACH transfers the payment date is the equivalent of “settlement date” or “effective date.” Payment date applies to the payment order issued to the beneficiary’s bank, but a payment order issued to a receiving bank other than the beneficiary’s bank may also state a date for payment to the beneficiary. In the latter case, the statement of a payment date is to instruct the receiving bank concerning time of execution of the sender’s order. Section 4A-301(b).

NOTES TO DECISIONS

Cited:

Wilder v. Noonchester, 113 S.W.3d 189, 2003 Ky. App. LEXIS 187 (Ky. Ct. App. 2003).

355.4A-402. Obligation of sender to pay receiving bank.

  1. This section is subject to KRS 355.4A-205 and 355.4A-207 .
  2. With respect to a payment order issued to the beneficiary’s bank, acceptance of the order by the bank obliges the sender to pay the bank the amount of the order, but payment is not due until the payment date of the order.
  3. This subsection is subject to subsection (5) and to KRS 355.4A-303 . With respect to a payment order issued to a receiving bank other than the beneficiary’s bank, acceptance of the order by the receiving bank obliges the sender to pay the bank the amount of the sender’s order. Payment by the sender is not due until the execution date of the sender’s order. The obligation of that sender to pay its payment order is excused if the funds transfer is not completed by acceptance by the beneficiary’s bank of a payment order instructing payment to the beneficiary of that sender’s payment order.
  4. If the sender of a payment order pays the order and was not obliged to pay all or part of the amount paid, the bank receiving payment is obliged to refund payment to the extent the sender was not obliged to pay. Except as provided in KRS 355.4A-204 and 355.4A-304 , interest is payable on the refundable amount from the date of payment.
  5. If a funds transfer is not completed as stated in subsection (3) and an intermediary bank is obliged to refund payment as stated in subsection (4) but is unable to do so because not permitted by applicable law or because the bank suspends payments, a sender in the funds transfer that executed a payment order in compliance with an instruction, as stated in KRS 355.4A-302 (1)(a), to route the funds transfer through that intermediary bank is entitled to receive or retain payment from the sender of the payment order that it accepted. The first sender in the funds transfer that issued an instruction requiring routing through that intermediary bank is subrogated to the right of the bank that paid the intermediary bank to refund as stated in subsection (4).
  6. The right of the sender of a payment order to be excused from the obligation to pay the order as stated in subsection (3) or to receive refund under subsection (4) may not be varied by agreement.

History. Enact. Acts 1992, ch. 116, § 50, effective July 14, 1992.

Official Comment

  1. Subsection (b) states that the sender of a payment order to the beneficiary’s bank must pay the order when the beneficiary’s bank accepts the order. At that point the beneficiary’s bank is obliged to pay the beneficiary. Section 4A-404(a). The last clause of subsection (b) covers a case of premature acceptance by the beneficiary’s bank. In some funds transfers, notably automated clearing house transfers, a beneficiary’s bank may receive a payment order with a payment date after the day the order is received. The beneficiary’s bank might accept the order before the payment date by notifying the beneficiary of receipt of the order. Although the acceptance obliges the beneficiary’s bank to pay the beneficiary, payment is not due until the payment date. The last clause of subsection (b) is consistent with that result. The beneficiary’s bank is also not entitled to payment from the sender until the payment date.
  2. Assume that Originator instructs Bank A to order immediate payment to the account of Beneficiary in Bank B. Execution of Originator’s payment order by Bank A is acceptance under Section 4A-209(a). Under the second sentence of Section 4A-402(c) the acceptance creates an obligation of Originator to pay Bank A the amount of the order. The last clause of that sentence deals with attempted funds transfers that are not completed. In that event the obligation of the sender to pay its payment order is excused. Originator makes payment to Beneficiary when Bank B, the beneficiary’s bank, accepts a payment order for the benefit of Beneficiary. Section 4A-406(a). If that acceptance by Bank B does not occur, the funds transfer has miscarried because Originator has not paid Beneficiary. Originator doesn’t have to pay its payment order, and if it has already paid it is entitled to refund of the payment with interest. The rate of interest is stated in Section 4A-506. This “money-back guarantee” is an important protection of Originator. Originator is assured that it will not lose its money if something goes wrong in the transfer. For example, risk of loss resulting from payment to the wrong beneficiary is borne by some bank, not by Originator. The most likely reason for noncompletion is a failure to execute or an erroneous execution of a payment order by Bank A or an intermediary bank. Bank A may have issued its payment order to the wrong bank or it may have identified the wrong beneficiary in its order. The money-back guarantee is particularly important to Originator if noncompletion of the funds transfer is due to the fault of an intermediary bank rather than Bank A. In that case Bank A must refund payment to Originator, and Bank A has the burden of obtaining refund from the intermediary bank that it paid.

    Subsection (c) can result in loss if an intermediary bank suspends payments. Suppose Originator instructs Bank A to pay to Beneficiary’s account in Bank B and to use Bank C as an intermediary bank. Bank A executes Originator’s order by issuing a payment order to Bank C. Bank A pays Bank C. Bank C fails to execute the order of Bank A and suspends payments. Under subsections (c) and (d), Originator is not obliged to pay Bank A and is entitled to refund from Bank A of any payment that it may have made. Bank A is entitled to a refund from Bank C, but Bank C is insolvent. Subsection (e) deals with this case. Bank A was required to issue its payment order to Bank C because Bank C was designated as an intermediary bank by Originator. Section 4A-302(a)(i). In this case Originator takes the risk of insolvency of Bank C. Under subsection (e), Bank A is entitled to payment from Originator and Originator is subrogated to the right of Bank A under subsection (d) to refund of payment from Bank C.

  3. A payment order is not like a negotiable instrument on which the drawer or maker has liability. Acceptance of the order by the receiving bank creates an obligation of the sender to pay the receiving bank the amount of the order. That is the extent of the sender’s liability to the receiving bank and no other person has any rights against the sender with respect to the sender’s order.

Research References and Practice Aids

Kentucky Law Journal.

Bhala, The Inverted Pyramid of Wire Transfer Law, 82 Ky. L.J. 347 (1993-94).

355.4A-403. Payment by sender to receiving bank.

  1. Payment of the sender’s obligation under KRS 355.4A-402 to pay the receiving bank occurs as follows:
    1. If the sender is a bank, payment occurs when the receiving bank receives final settlement of the obligation through a Federal Reserve Bank or through a funds-transfer system.
    2. If the sender is a bank and the sender:
      1. Credited an account of the receiving bank with the sender; or
      2. Caused an account of the receiving bank in another bank to be credited, payment occurs when the credit is withdrawn or, if not withdrawn, at midnight of the day on which the credit is withdrawable and the receiving bank learns of that fact.
    3. If the receiving bank debits an account of the sender with the receiving bank, payment occurs when the debit is made to the extent the debit is covered by a withdrawable credit balance in the account.
  2. If the sender and receiving bank are members of a funds-transfer system that nets obligations multilaterally among participants, the receiving bank receives final settlement when settlement is complete in accordance with the rules of the system. The obligation of the sender to pay the amount of a payment order transmitted through the funds-transfer system may be satisfied, to the extent permitted by the rules of the system, by setting off and applying against the sender’s obligation the right of the sender to receive payment from the receiving bank of the amount of any other payment order transmitted to the sender by the receiving bank through the funds-transfer system. The aggregate balance of obligations owed by each sender to each receiving bank in the funds-transfer system may be satisfied, to the extent permitted by the rules of the system, by setting off and applying against that balance the aggregate balance of obligations owed to the sender by other members of the system. The aggregate balance is determined after the right of setoff stated in the second sentence of this subsection has been exercised.
  3. If two (2) banks transmit payment orders to each other under an agreement that settlement of the obligations of each bank to the other under KRS 355.4A-402 will be made at the end of the day or other period, the total amount owed with respect to all orders transmitted by one (1) bank shall be set off against the total amount owed with respect to all orders transmitted by the other bank. To the extent of the setoff, each bank has made payment to the other.
  4. In a case not covered by subsection (1), the time when payment of the sender’s obligation under KRS 355.4A-402 (2) or (3) occurs is governed by applicable principles of law that determine when an obligation is satisfied.

History. Enact. Acts 1992, ch. 116, § 51, effective July 14, 1992.

Official Comment

  1. This section defines when a sender pays the obligation stated in Section 4A-402. If a group of two or more banks engage in funds transfers with each other, the participating banks will sometimes be senders and sometimes receiving banks. With respect to payment orders other than Fedwires, the amounts of the various payment orders may be credited and debited to accounts of one bank with another or to a clearing house account of each bank and amounts owed and amounts due are netted. Settlement is made through a Federal Reserve Bank by charges to the Federal Reserve accounts of the net debtor banks and credits to the Federal Reserve accounts of the net creditor banks. In the case of Fedwires the sender’s obligation is settled by a debit to the Federal Reserve account of the sender and a credit to the Federal Reserve account of the receiving bank at the time the receiving bank receives the payment order. Both of these cases are covered by subsection (a)(i). When the Federal Reserve settlement becomes final the obligation of the sender under Section 4A-402 is paid.
  2. In some cases a bank does not settle an obligation owed to another bank through a Federal Reserve Bank. This is the case if one of the banks is a foreign bank without access to the Federal Reserve payment system. In this kind of case, payment is usually made by credits or debits to accounts of the two banks with each other or to accounts of the two banks in a third bank. Suppose Bank B has an account in Bank A. Bank A advises Bank B that its account in Bank A has been credited $1,000,000 and that the credit is immediately withdrawable. Bank A also instructs Bank B to pay $1,000,000 to the account of Beneficiary in Bank B. This case is covered by subsection (a)(2). Bank B may want to immediately withdraw this credit. For example, it might do so by instructing Bank A to debit the account and pay some third party. Payment by Bank A to Bank B of Bank A’s payment order occurs when the withdrawal is made. Suppose Bank B does not withdraw the credit. Since Bank B is the beneficiary’s bank, one of the effects of receipt of payment by Bank B is that acceptance of Bank A’s payment order automatically occurs at the time of payment. Section 4A-209(b)(2). Acceptance means that Bank B is obliged to pay $1,000,000 to Beneficiary. Section 4A-404(a). Subsection (a)(2) of Section 4A-403 states that payment does not occur until midnight if the credit is not withdrawn. This allows Bank B an opportunity to reject the order if it does not have time to withdraw the credit to its account and it is not willing to incur the liability to Beneficiary before it has use of the funds represented by the credit.
  3. Subsection (a)(3) applies to a case in which the sender (bank or nonbank) has a funded account in the receiving bank. If Sender has an account in Bank and issues a payment order to Bank, Bank can obtain payment from Sender by debiting the account of Sender, which pays its Section 4A-402 obligation to Bank when the debit is made.
  4. Subsection (b) deals with multilateral settlements made through a funds transfer system and is based on the CHIPS settlement system. In a funds transfer system such as CHIPS, which allows the various banks that transmit payment orders over the system to settle obligations at the end of each day, settlement is not based on individual payment orders. Each bank using the system engages in funds transfers with many other banks using the system. Settlement for any participant is based on the net credit or debit position of that participant with all other banks using the system. Subsection (b) is designed to make clear that the obligations of any sender are paid when the net position of that sender is settled in accordance with the rules of the funds transfer system. This provision is intended to invalidate any argument, based on common-law principles, that multilateral netting is not valid because mutuality of obligation is not present. Subsection (b) dispenses with any mutuality of obligation requirements. Subsection (c) applies to cases in which two banks send payment orders to each other during the day and settle with each other at the end of the day or at the end of some other period. It is similar to subsection (b) in that it recognizes that a sender’s obligation to pay a payment order is satisfied by a setoff. The obligations of each bank as sender to the other as receiving bank are obligations of the bank itself and not as representative of customers. These two sections are important in the case of insolvency of a bank. They make clear that liability under Section 4A-402 is based on the net position of the insolvent bank after setoff.
  5. Subsection (d) relates to the uncommon case in which the sender doesn’t have an account relationship with the receiving bank and doesn’t settle through a Federal Reserve Bank. An example would be a customer that pays over the counter for a payment order that the customer issues to the receiving bank. Payment would normally be by cash, check or bank obligation. When payment occurs is determined by law outside Article 4A.

355.4A-404. Obligation of beneficiary’s bank to pay and give notice to beneficiary.

  1. Subject to KRS 355.4A-211 (5), 355.4A-405 (4), and 355.4A-405 (5), if a beneficiary’s bank accepts a payment order, the bank is obliged to pay the amount of the order to the beneficiary of the order. Payment is due on the payment date of the order, but if acceptance occurs on the payment date after the close of the funds-transfer business day of the bank, payment is due on the next funds-transfer business day. If the bank refuses to pay after demand by the beneficiary and receipt of notice of particular circumstances that will give rise to consequential damages as a result of nonpayment, the beneficiary may recover damages resulting from the refusal to pay to the extent the bank had notice of the damages, unless the bank proves that it did not pay because of a reasonable doubt concerning the right of the beneficiary to payment.
  2. If a payment order accepted by the beneficiary’s bank instructs payment to an account of the beneficiary, the bank is obliged to notify the beneficiary of receipt of the order before midnight of the next funds-transfer business day following the payment date. If the payment order does not instruct payment to an account of the beneficiary, the bank is required to notify the beneficiary only if notice is required by the order. Notice may be given by first class mail or any other means reasonable in the circumstances. If the bank fails to give the required notice, the bank is obliged to pay interest to the beneficiary on the amount of the payment order from the day notice should have been given until the day the beneficiary learned of receipt of the payment order by the bank. No other damages are recoverable. Reasonable attorney’s fees are also recoverable if demand for interest is made and refused before an action is brought on the claim.
  3. The right of a beneficiary to receive payment and damages as stated in subsection (1) may not be varied by agreement or a funds-transfer system rule. The right of a beneficiary to be notified as stated in subsection (2) may be varied by agreement of the beneficiary or by a funds-transfer system rule if the beneficiary is notified of the rule before initiation of the funds transfer.

History. Enact. Acts 1992, ch. 116, § 52, effective July 14, 1992.

Official Comment

  1. The first sentence of subsection (a) states the time when the obligation of the beneficiary’s bank arises. The second and third sentences state when the beneficiary’s bank must make funds available to the beneficiary. They also state the measure of damages for failure, after demand, to comply. Since the Expedited Funds Availability Act, 12 U.S.C. 4001 et seq., also governs funds availability in a funds transfer, the second and third sentences of subsection (a) may be subject to preemption by that Act.
  2. Subsection (a) provides that the beneficiary of an accepted payment order may recover consequential damages if the beneficiary’s bank refuses to pay the order after demand by the beneficiary if the bank at that time had notice of the particular circumstances giving rise to the damages. Such damages are recoverable only to the extent the bank had “notice of the damages.” The quoted phrase requires that the bank have notice of the general type or nature of the damages that will be suffered as a result of the refusal to pay and their general magnitude. There is no requirement that the bank have notice of the exact or even the approximate amount of the damages, but if the amount of damages is extraordinary the bank is entitled to notice of that fact. For example, in Evra Corp. v. Swiss Bank Corp., 673 F.2d 951 (7th Cir. 1982), failure to complete a funds transfer of only $27,000 required to retain rights to a very favorable ship charter resulted in a claim for more than $2,000,000 of consequential damages. Since it is not reasonably foreseeable that a failure to make a relatively small payment will result in damages of this magnitude, notice is not sufficient if the beneficiary’s bank has notice only that the $27,000 is necessary to retain rights on a ship charter. The bank is entitled to notice that an exceptional amount of damages will result as well. For example, there would be adequate notice if the bank had been made aware that damages of $1,000,000 or more might result.
  3. Under the last clause of subsection (a) the beneficiary’s bank is not liable for damages if its refusal to pay was “because of a reasonable doubt concerning the right of the beneficiary to payment.” Normally there will not be any question about the right of the beneficiary to receive payment. Normally, the bank should be able to determine whether it has accepted the payment order and, if it has been accepted, the first sentence of subsection (a) states that the bank is obliged to pay. There may be uncommon cases, however, in which there is doubt whether acceptance occurred. For example, if acceptance is based on receipt of payment by the beneficiary’s bank under Section 4A-403 (a)(1) or (2), there may be cases in which the bank is not certain that payment has been received. There may also be cases in which there is doubt about whether the person demanding payment is the person identified in the payment order as beneficiary of the order.

    The last clause of subsection (a) does not apply to cases in which a funds transfer is being used to pay an obligation and a dispute arises between the originator and the beneficiary concerning whether the obligation is in fact owed. For example, the originator may try to prevent payment to the beneficiary by the beneficiary’s bank by alleging that the beneficiary is not entitled to payment because of fraud against the originator or a breach of contract relating to the obligation. The fraud or breach of contract claim of the originator may be grounds for recovery by the originator from the beneficiary after the beneficiary is paid, but it does not affect the obligation of the beneficiary’s bank to pay the beneficiary. Unless the payment order has been cancelled pursuant to Section 4A-211(c), there is no excuse for refusing to pay the beneficiary and, in a proper case, the refusal may result in consequential damages. Except in the case of a book transfer, in which the beneficiary’s bank is also the originator’s bank, the originator of a funds transfer cannot cancel a payment order to the beneficiary’s bank, with or without the consent of that bank, because the originator is not the sender of that order. Thus, the beneficiary’s bank may safely ignore any instruction by the originator to withhold payment to the beneficiary.

  4. Subsection (b) states the duty of the beneficiary’s bank to notify the beneficiary of receipt of the order. If acceptance occurs under Section 4A-209(b)(1) the beneficiary is normally notified. Thus, subsection (b) applies primarily to cases in which acceptance occurs under Section 4A-209(b)(2) or (3). Notice under subsection (b) is not required if the person entitled to the notice agrees or a funds transfer system rule provides that notice is not required and the beneficiary is given notice of the rule. In ACH transactions the normal practice is not to give notice to the beneficiary unless notice is requested by the beneficiary. This practice can be continued by adoption of a funds transfer system rule. Subsection (a) is not subject to variation by agreement or by a funds transfer system rule.

355.4A-405. Payment by beneficiary’s bank to beneficiary.

  1. If the beneficiary’s bank credits an account of the beneficiary of a payment order, payment of the bank’s obligation under KRS 355.4A-404 (1) occurs when and to the extent:
    1. The beneficiary is notified of the right to withdraw the credit;
    2. The bank lawfully applies the credit to a debt of the beneficiary; or
    3. Funds with respect to the order are otherwise made available to the beneficiary by the bank.
  2. If the beneficiary’s bank does not credit an account of the beneficiary of a payment order, the time when payment of the bank’s obligation under KRS 355.4A-404 (1) occurs is governed by principles of law that determine when an obligation is satisfied.
  3. Except as stated in subsections (4) and (5), if the beneficiary’s bank pays the beneficiary of a payment order under a condition to payment or agreement of the beneficiary giving the bank the right to recover payment from the beneficiary if the bank does not receive payment of the order, the condition to payment or agreement is not enforceable.
  4. A funds-transfer system rule may provide that payments made to beneficiaries of funds transfers made through the system are provisional until receipt of payment by the beneficiary’s bank of the payment order it accepted. A beneficiary’s bank that makes a payment that is provisional under the rule is entitled to refund from the beneficiary if:
    1. The rule requires that both the beneficiary and the originator be given notice of the provisional nature of the payment before the funds transfer is initiated;
    2. The beneficiary, the beneficiary’s bank, and the originator’s bank agreed to be bound by the rule; and
    3. The beneficiary’s bank did not receive payment of the payment order that it accepted. If the beneficiary is obliged to refund payment to the beneficiary’s bank, acceptance of the payment order by the beneficiary’s bank is nullified and no payment by the originator of the funds transfer to the beneficiary occurs under KRS 355.4A-406 .
  5. This subsection applies to a funds transfer that includes a payment order transmitted over a funds-transfer system that:
    1. Nets obligations multilaterally among participants; and
    2. Has in effect a loss-sharing agreement among participants for the purpose of providing funds necessary to complete settlement of the obligations of one (1) or more participants that do not meet their settlement obligations. If the beneficiary’s bank in the funds transfer accepts a payment order and the system fails to complete settlement pursuant to its rules with respect to any payment order in the funds transfer,
      1. The acceptance by the beneficiary’s bank is nullified and no person has any right or obligation based on the acceptance;
      2. The beneficiary’s bank is entitled to recover payment from the beneficiary;
      3. No payment by the originator to the beneficiary occurs under KRS 355.4A-406 ; and
      4. Subject to KRS 355.4A-402 (5), each sender in the funds transfer is excused from its obligation to pay its payment order under KRS 355.4A-402 (3) because the funds transfer has not been completed.

History. Enact. Acts 1992, ch. 116, § 53, effective July 14, 1992.

Official Comment

  1. This section defines when the beneficiary’s bank pays the beneficiary and when the obligation of the beneficiary’s bank under Section 4A-404 to pay the beneficiary is satisfied. In almost all cases the bank will credit an account of the beneficiary when it receives a payment order. In the typical case the beneficiary is paid when the beneficiary is given notice of the right to withdraw the credit. Subsection (a)(i). In some cases payment might be made to the beneficiary not by releasing funds to the beneficiary, but by applying the credit to a debt of the beneficiary. Subsection (a)(ii). In this case the beneficiary gets the benefit of the payment order because a debt of the beneficiary has been satisfied. The two principal cases in which payment will occur in this manner are setoff by the beneficiary’s bank and payment of the proceeds of the payment order to a garnishing creditor of the beneficiary. These cases are discussed in Comment 2 to Section 4A-502.
  2. If a beneficiary’s bank releases funds to the beneficiary before it receives payment from the sender of the payment order, it assumes the risk that the sender may not pay the sender’s order because of suspension of payments or other reason. Subsection (c). As stated in Comment 5 to Section 4A-209, the beneficiary’s bank can protect itself against this risk by delaying acceptance. But if the bank accepts the order it is obliged to pay the beneficiary. If the beneficiary’s bank has given the beneficiary notice of the right to withdraw a credit made to the beneficiary’s account, the beneficiary has received payment from the bank. Once payment has been made to the beneficiary with respect to an obligation incurred by the bank under Section 4A-404(a), the payment cannot be recovered by the beneficiary’s bank unless subsection (d) or (e) applies. Thus, a right to withdraw a credit cannot be revoked if the right to withdraw constituted payment of the bank’s obligation. This principle applies even if funds were released as a “loan” (see Comment 5 to Section 4A-209), or were released subject to a condition that they would be repaid in the event the bank does not receive payment from the sender of the payment order, or the beneficiary agreed to return the payment if the bank did not receive payment from the sender.
  3. Subsection (c) is subject to an exception stated in subsection (d) which is intended to apply to automated clearing house transfers. ACH transfers are made in batches. A beneficiary’s bank will normally accept, at the same time and as part of a single batch, payment orders with respect to many different originator’s banks. Comment 2 to Section 4A-206. The custom in ACH transactions is to release funds to the beneficiary early on the payment date even though settlement to the beneficiary’s bank does not occur until later in the day. The understanding is that payments to beneficiaries are provisional until the beneficiary’s bank receives settlement. This practice is similar to what happens when a depositary bank releases funds with respect to a check forwarded for collection. If the check is dishonored the bank is entitled to recover the funds from the customer. ACH transfers are widely perceived as check substitutes. Section 4A-405(d) allows the funds transfer system to adopt a rule making payments to beneficiaries provisional. If such a rule is adopted, a beneficiary’s bank that releases funds to the beneficiary will be able to recover the payment if it doesn’t receive payment of the payment order that it accepted. There are two requirements with respect to the funds transfer system rule. The beneficiary, the beneficiary’s bank and the originator’s bank must all agree to be bound by the rule and the rule must require that both the beneficiary and the originator be given notice of the provisional nature of the payment before the funds transfer is initiated. There is no requirement that the notice be given with respect to a particular funds transfer. Once notice of the provisional nature of the payment has been given, the notice is effective for all subsequent payment to or from the person to whom the notice was given. Subsection (d) provides only that the funds transfer system rule must require notice to the beneficiary and the originator. The beneficiary’s bank will know what the rule requires, but it has no way of knowing whether the originator’s bank complied with the rule. Subsection (d) does not require proof that the originator received notice. If the originator’s bank failed to give the required notice and the originator suffered as a result, the appropriate remedy is an action by the originator against the originator’s bank based on that failure. But the beneficiary’s bank will not be able to get the benefit of subsection (d) unless the beneficiary had notice of the provisional nature of the payment because subsection (d) requires an agreement by the beneficiary to be bound by the rule. Implicit in an agreement to be bound by a rule that makes a payment provisional is a requirement that notice be given of what the rule provides. The notice can be part of the agreement or separately given. For example, notice can be given by providing a copy of the system’s operating rules.

    With respect to ACH transfers made through a Federal Reserve Bank acting as an intermediary bank, the Federal Reserve Bank is obliged under Section 4A-402(b) to pay a beneficiary’s bank that accepts the payment order. Unlike Fedwire transfers, under current ACH practice a Federal Reserve Bank that processes a payment order does not obligate itself to pay if the originator’s bank fails to pay the Federal Reserve Bank. It is assumed that the Federal Reserve will use its right of preemption which is recognized in Section 4A-107 to disclaim the Section 4A-402(b) obligation in ACH transactions if it decides to retain the provisional payment rule.

  4. Subsection (e) is another exception to subsection (c). It refers to funds transfer systems having loss-sharing rules described in the subsection. CHIPS has proposed a rule that fits the description. Under the CHIPS loss-sharing rule the CHIPS banks will have agreed to contribute funds to allow the system to settle for payment orders sent over the system during the day in the event that one or more banks are unable to meet their settlement obligations. Subsection (e) applies only if CHIPS fails to settle despite the loss-sharing rule. Since funds under the loss-sharing rule will be instantly available to CHIPS and will be in an amount sufficient to cover any failure that can be reasonably anticipated, it is extremely unlikely that CHIPS would ever fail to settle. Thus, subsection (e) addresses an event that should never occur. If that event were to occur, all payment orders made over the system would be cancelled under the CHIPS rule. Thus, no bank would receive settlement, whether or not a failed bank was involved in a particular funds transfer. Subsection (e) provides that each funds transfer in which there is a payment order with respect to which there is a settlement failure is unwound. Acceptance by the beneficiary’s bank in each funds transfer is nullified. The consequences of nullification are that the beneficiary has no right to receive or retain payment by the beneficiary’s bank, no payment is made by the originator to the beneficiary and each sender in the funds transfer is, subject to Section 4A-402(e), not obliged to pay its payment order and is entitled to refund under Section 4A-402(d) if it has already paid.

Research References and Practice Aids

Kentucky Law Journal.

Bhala, The Inverted Pyramid of Wire Transfer Law, 82 Ky. L.J. 347 (1993-94).

355.4A-406. Payment by originator to beneficiary — Discharge of underlying obligation.

  1. Subject to KRS 355.4A-211 (5), 355.4A-405 (4), and 355.4A-405 (5), the originator of a funds transfer pays the beneficiary of the originator’s payment order:
    1. At the time a payment order for the benefit of the beneficiary is accepted by the beneficiary’s bank in the funds transfer; and
    2. In an amount equal to the amount of the order accepted by the beneficiary’s bank, but not more than the amount of the originator’s order.
  2. If payment under subsection (1) is made to satisfy an obligation, the obligation is discharged to the same extent discharge would result from payment to the beneficiary of the same amount in money, unless:
    1. The payment under subsection (1) was made by a means prohibited by the contract of the beneficiary with respect to the obligation;
    2. The beneficiary, within a reasonable time after receiving notice of receipt of the order by the beneficiary’s bank, notified the originator of the beneficiary’s refusal of the payment;
    3. Funds with respect to the order were not withdrawn by the beneficiary or applied to a debt of the beneficiary; and
    4. The beneficiary would suffer a loss that could reasonably have been avoided if payment had been made by a means complying with the contract. If payment by the originator does not result in discharge under this section, the originator is subrogated to the rights of the beneficiary to receive payment from the beneficiary’s bank under KRS 355.4A-404 (1).
  3. For the purpose of determining whether discharge of an obligation occurs under subsection (2), if the beneficiary’s bank accepts a payment order in an amount equal to the amount of the originator’s payment order less charges of one (1) or more receiving banks in the funds transfer, payment to the beneficiary is deemed to be in the amount of the originator’s order unless upon demand by the beneficiary the originator does not pay the beneficiary the amount of the deducted charges.
  4. Rights of the originator or of the beneficiary of a funds transfer under this section may be varied only by agreement of the originator and the beneficiary.

History. Enact. Acts 1992, ch. 116, § 54, effective July 14, 1992.

Official Comment

  1. Subsection (a) states the fundamental rule of Article 4A that payment by the originator to the beneficiary is accomplished by providing to the beneficiary the obligation of the beneficiary’s bank to pay. Since this obligation arises when the beneficiary’s bank accepts a payment order, the originator pays the beneficiary at the time of acceptance and in the amount of the payment order accepted.
  2. In a large percentage of funds transfers, the transfer is made to pay an obligation of the originator. Subsection (a) states that the beneficiary is paid by the originator when the beneficiary’s bank accepts a payment order for the benefit of the beneficiary. When that happens the effect under subsection (b) is to substitute the obligation of the beneficiary’s bank for the obligation of the originator. The effect is similar to that under Article 3 if a cashier’s check payable to the beneficiary had been taken by the beneficiary. Normally, payment by funds transfer is sought by the beneficiary because it puts money into the hands of the beneficiary more quickly. As a practical matter the beneficiary and the originator will nearly always agree to the funds transfer in advance. Under subsection (b) acceptance by the beneficiary’s bank will result in discharge of the obligation for which payment was made unless the beneficiary had made a contract with respect to the obligation which did not permit payment by the means used. Thus, if there is no contract of the beneficiary with respect to the means of payment of the obligation, acceptance by the beneficiary’s bank of a payment order to the account of the beneficiary can result in discharge.
  3. Suppose Beneficiary’s contract stated that payment of an obligation owed by Originator was to be made by a cashier’s check of Bank A. Instead Originator paid by a funds transfer to Beneficiary’s account in Bank B. Bank B accepted a payment order for the benefit of Beneficiary by immediately notifying Beneficiary that the funds were available for withdrawal. Before Beneficiary had a reasonable opportunity to withdraw the funds Bank B suspended payments. Under the unless clause of subsection (b) Beneficiary is not required to accept the payment as discharging the obligation owed by Originator to Beneficiary if Beneficiary’s contract means that Beneficiary was not required to accept payment by wire transfer. Beneficiary could refuse the funds transfer as payment of the obligation and could resort to rights under the underlying contract to enforce the obligation. The rationale is that Originator cannot impose the risk of Bank B’s insolvency on Beneficiary if Beneficiary had specified another means of payment that did not entail that risk. If Beneficiary is required to accept Originator’s payment, Beneficiary would suffer a loss that would not have occurred if payment had been made by a cashier’s check on Bank A, and Bank A has not suspended payments. In this case Originator will have to pay twice. It is obliged to pay the amount of its payment order to the bank that accepted it and has to pay the obligation it owes to Beneficiary which has not been discharged. Under the last sentence of subsection (b) Originator is subrogated to Beneficiary’s right to receive payment from Bank B under Section 4A-404(a).
  4. Suppose Beneficiary’s contract called for payment by a Fedwire transfer to Bank B, but the payment order accepted by Bank B was not a Fedwire transfer. Before the funds were withdrawn by Beneficiary, Bank B suspended payments. The sender of the payment order to Bank B paid the amount of the order to Bank B. In this case the payment order by Originator did not comply with Beneficiary’s contract, but the noncompliance did not result in a loss to Beneficiary as required by subsection (b)(4). A Fedwire transfer avoids the risk of insolvency of the sender of the payment order to Bank B, but it does not affect the risk that Bank B will suspend payments before withdrawal of the funds by Beneficiary. Thus, the unless clause of subsection (b) is not applicable and the obligation owed to Beneficiary is discharged.
  5. Charges of receiving banks in a funds transfer normally are nominal in relationship to the amount being paid by the originator to the beneficiary. Wire transfers are normally agreed to in advance and the parties may agree concerning how these charges are to be divided between the parties. Subsection (c) states a rule that applies in the absence of agreement. In some funds transfers charges of banks that execute payment orders are collected by deducting the charges from the amount of the payment order issued by the bank, i.e. the bank issues a payment order that is slightly less than the amount of the payment order that is being executed. The process is described in Comment 3 to Section 4A-302. The result in such a case is that the payment order accepted by the beneficiary’s bank will be slightly less than the amount of the originator’s order. Subsection (c) recognizes the principle that a beneficiary is entitled to full payment of a debt paid by wire transfer as a condition to discharge. On the other hand, subsection (c) prevents a beneficiary from denying the originator the benefit of the payment by asserting that discharge did not occur because deduction of bank charges resulted in less than full payment. The typical case is one in which the payment is made to exercise a valuable right such as an option which is unfavorable to the beneficiary. Subsection (c) allows discharge notwithstanding the deduction unless the originator fails to reimburse the beneficiary for the deducted charges after demand by the beneficiary.

Research References and Practice Aids

Kentucky Law Journal.

Bhala, The Inverted Pyramid of Wire Transfer Law, 82 Ky. L.J. 347 (1993-94).

Part 5. Miscellaneous Provisions

355.4A-501. Variation by agreement and effect of funds-transfer system rule.

  1. Except as otherwise provided in this article, the rights and obligations of a party to a funds transfer may be varied by agreement of the affected party.
  2. “Funds-transfer system rule” means a rule of an association of banks:
    1. Governing transmission of payment orders by means of a funds-transfer system of the association or rights and obligations with respect to those orders; or
    2. To the extent the rule governs rights and obligations between banks that are parties to a funds transfer in which a Federal Reserve Bank, acting as an intermediary bank, sends a payment order to the beneficiary’s bank. Except as otherwise provided in this article, a funds-transfer system rule governing rights and obligations between participating banks using the system may be effective even if the rule conflicts with this article and indirectly affects another party to the funds transfer who does not consent to the rule. A funds-transfer system rule may also govern rights and obligations of parties other than participating banks using the system to the extent stated in KRS 355.4A-404 (3), 355.4A-405 (4), and 355.4A-507 (3).

History. Enact. Acts 1992, ch. 116, § 55, effective July 14, 1992.

Official Comment

  1. This section is designed to give some flexibility to Article 4A. Funds transfer system rules govern rights and obligations between banks that use the system. They may cover a wide variety of matters such as form and content of payment orders, security procedures, cancellation rights and procedures, indemnity rights, compensation rules for delays in completion of a funds transfer, time and method of settlement, credit restrictions with respect to senders of payment orders and risk allocation with respect to suspension of payments by a participating bank. Funds transfer system rules can be very effective in supplementing the provisions of Article 4A and in filling gaps that may be present in Article 4A. To the extent they do not conflict with Article 4A there is no problem with respect to their effectiveness. In that case they merely supplement Article 4A. Section 4A-501 goes further. It states that unless the contrary is stated, funds transfer system rules can override provisions of Article 4A. Thus, rights and obligations of a sender bank and a receiving bank with respect to each other can be different from that stated in Article 4A to the extent a funds transfer system rule applies. Since funds transfer system rules are defined as those governing the relationship between participating banks, a rule can have have a direct effect only on participating banks. But a rule that affects the conduct of a participating bank may indirectly affect the rights of nonparticipants such as the originator or beneficiary of a funds transfer, and such a rule can be effective even though it may affect nonparticipants without their consent. For example, a rule might prevent execution of a payment order or might allow cancellation of a payment order with the result that a funds transfer is not completed or is delayed. But a rule purporting to define rights and obligations of nonparticipants in the system would not be effective to alter Article 4A rights because the rule is not within the definition of funds transfer system rule. Rights and obligations arising under Article 4A may also be varied by agreement of the affected parties, except to the extent Article 4A otherwise provides. Rights and obligations arising under Article 4A can also be changed by Federal Reserve regulations and operating circulars of Federal Reserve Banks. Section 4A-107.
  2. Subsection (b)(ii) refers to ACH transfers. Whether an ACH transfer is made through an automated clearing house of a Federal Reserve Bank or through an automated clearing house of another association of banks, the rights and obligations of the originator’s bank and the beneficiary’s bank are governed by uniform rules adopted by various associations of banks in various parts of the nation. With respect to transfers in which a Federal Reserve Bank acts as intermediary bank these rules may be incorporated, in whole or in part, in operating circulars of the Federal Reserve Bank. Even if not so incorporated these rules can still be binding on the association banks. If a transfer is made through a Federal Reserve Bank, the rules are effective under subsection (b)(ii). If the transfer is not made through a Federal Reserve Bank, the association rules are effective under subsection (b)(i).

Research References and Practice Aids

Kentucky Law Journal.

Bhala, The Inverted Pyramid of Wire Transfer Law, 82 Ky. L.J. 347 (1993-94).

355.4A-502. Creditor process served on receiving bank — Set-off by beneficiary’s bank.

  1. As used in this section, “creditor process” means levy, attachment, garnishment, notice of lien, sequestration, or similar process issued by or on behalf of a creditor or other claimant with respect to an account.
  2. This subsection applies to creditor process with respect to an authorized account of the sender of a payment order if the creditor process is served on the receiving bank. For the purpose of determining rights with respect to the creditor process, if the receiving bank accepts the payment order the balance in the authorized account is deemed to be reduced by the amount of the payment order to the extent the bank did not otherwise receive payment of the order, unless the creditor process is served at a time and in a manner affording the bank a reasonable opportunity to act on it before the bank accepts the payment order.
  3. If a beneficiary’s bank has received a payment order for payment to the beneficiary’s account in the bank, the following rules apply:
    1. The bank may credit the beneficiary’s account. The amount credited may be set off against an obligation owed by the beneficiary to the bank or may be applied to satisfy creditor process served on the bank with respect to the account.
    2. The bank may credit the beneficiary’s account and allow withdrawal of the amount credited unless creditor process with respect to the account is served at a time and in a manner affording the bank a reasonable opportunity to act to prevent withdrawal.
    3. If creditor process with respect to the beneficiary’s account has been served and the bank has had a reasonable opportunity to act on it, the bank may not reject the payment order except for a reason unrelated to the service of process.
  4. Creditor process with respect to a payment by the originator to the beneficiary pursuant to a funds transfer may be served only on the beneficiary’s bank with respect to the debt owed by that bank to the beneficiary. Any other bank served with the creditor process is not obliged to act with respect to the process.

History. Enact. Acts 1992, ch. 116, § 56, effective July 14, 1992.

Official Comment

  1. When a receiving bank accepts a payment order, the bank normally receives payment from the sender by debiting an authorized account of the sender. In accepting the sender’s order the bank may be relying on a credit balance in the account. If creditor process is served on the bank with respect to the account before the bank accepts the order but the bank employee responsible for the acceptance was not aware of the creditor process at the time the acceptance occurred, it is unjust to the bank to allow the creditor process to take the credit balance on which the bank may have relied. Subsection (b) allows the bank to obtain payment form the sender’s account in this case. Under that provision, the balance in the sender’s account to which the creditor process applies is deemed to be reduced by the amount of the payment order unless there was sufficient time for notice of the service of creditor process to be received by personnel of the bank responsible for the acceptance.
  2. Subsection (c) deals with payment orders issued to the beneficiary’s bank. The bank may credit the beneficiary’s account when the order is received, but under Section 4A-404(a) the bank incurs no obligation to pay the beneficiary until the order is accepted pursuant to Section 4A-209(b). Thus, before acceptance, the credit to the beneficiary’s account is provisional. But under Section 4A-209(b) acceptance occurs if the beneficiary’s bank pays the beneficiary pursuant to Section 4A-405(a). Under that provision, payment occurs if the credit to the beneficiary’s account is applied to a debt of the beneficiary. Subsection (c)(1) allows the bank to credit the beneficiary’s account with respect to a payment order and to accept the order by setting off the credit against an obligation owed to the bank or applying the credit to creditor process with respect to the account.

    Suppose a beneficiary’s bank receives a payment order for the benefit of a customer. Before the bank accepts the order, the bank learns that creditor process has been served on the bank with respect to the customer’s account. Normally there is no reason for a beneficiary’s bank to reject a payment order, but if the beneficiary’s account is garnished, the bank may be faced with a difficult choice. If it rejects the order, the garnishing creditor’s potential recovery of funds of the beneficiary is frustrated. It may be faced with a claim by the creditor that the rejection was a wrong to the creditor. If the bank accepts the order, the effect is to allow the creditor to seize funds of its customer, the beneficiary. Subsection (c)(3) gives the bank no choice in this case. It provides that it may not favor its customer over the creditor by rejecting the order. The beneficiary’s bank may rightfully reject only if there is an independent basis for rejection.

  3. Subsection (c)(2) is similar to subsection (b). Normally the beneficiary’s bank will release funds to the beneficiary shortly after acceptance or it will accept by releasing funds. Since the bank is bound by a garnishment order served before funds are released to the beneficiary, the bank might suffer a loss if funds were released without knowledge that a garnishment order had been served. Subsection (c)(ii) protects the bank if it did not have adequate notice of the garnishment when the funds were released.
  4. A creditor may want to reach funds involved in a funds transfer. The creditor may try to do so by serving process on the originator’s bank, an intermediary bank or the beneficiary’s bank. The purpose of subsection (d) is to guide the creditor and the court as to the proper method of reaching the funds involved in a funds transfer. A creditor of the originator can levy on the account of the originator in the originator’s bank before the funds transfer is initiated, but that levy is subject to the limitations stated in subsection (b). The creditor of the originator cannot reach any other funds because no property of the originator is being transferred. A creditor of the beneficiary cannot levy on property of the originator and until the funds transfer is completed by acceptance by the beneficiary’s bank of a payment order for the benefit of the beneficiary, the beneficiary has no property interest in the funds transfer which the beneficiary’s creditor can reach. A creditor of the beneficiary that wants to reach the funds to be received by the beneficiary must serve creditor process on the beneficiary’s bank to reach the obligation of the beneficiary’s bank to pay the beneficiary which arises upon acceptance by the beneficiary’s bank under Section 4A-404(a).
  5. “Creditor process” is defined in subsection (a) to cover a variety of devices by which a creditor of the holder of a bank account or a claimant to a bank account can seize the account. Procedure and nomenclature varies widely from state to state. The term used in Section 4A-502 is a generic term.

355.4A-503. Injunction or restraining order with respect to funds transfer.

For proper cause and in compliance with applicable law, a court may restrain:

  1. A person from issuing a payment order to initiate a funds transfer;
  2. An originator’s bank from executing the payment order of the originator; or
  3. The beneficiary’s bank from releasing funds to the beneficiary or the beneficiary from withdrawing the funds. A court may not otherwise restrain a person from issuing a payment order, paying or receiving payment of a payment order, or otherwise acting with respect to a funds transfer.

History. Enact. Acts 1992, ch. 116, § 57, effective July 14, 1992.

Official Comment

This section is related to Section 4A-502(d) and to Comment 4 to Section 4A-502. It is designed to prevent interruption of a funds transfer after it has been set in motion. The initiation of a funds transfer can be prevented by enjoining the originator or the originator’s bank from issuing a payment order. After the funds transfer is completed by acceptance of a payment order by the beneficiary’s bank, that bank can be enjoined from releasing funds to the beneficiary or the beneficiary can be enjoined from withdrawing the funds. No other injunction is permitted. In particular, intermediary banks are protected, and injunctions against the originator and the originator’s bank are limited to issuance of a payment order. Except for the beneficiary’s bank, nobody can be enjoined from paying a payment order, and no receiving bank can be enjoined from receiving payment from the sender of the order that it accepted.

355.4A-504. Order in which items and payment orders may be charged to account — Order of withdrawals from account.

  1. If a receiving bank has received more than one (1) payment order of the sender or one (1) or more payment orders and other items that are payable from the sender’s account, the bank may charge the sender’s account with respect to the various orders and items in any sequence.
  2. In determining whether a credit to an account has been withdrawn by the holder of the account or applied to a debt of the holder of the account, credits first made to the account are first withdrawn or applied.

History. Enact. Acts 1992, ch. 116, § 58, effective July 14, 1992.

Official Comment

  1. Subsection (a) concerns priority among various obligations that are to be paid from the same account. A customer may have written checks on its account with the receiving bank and may have issued one or more payment orders payable from the same account. If the account balance is not sufficient to cover all of the checks and payment orders, some checks may be dishonored and some payment orders may not be accepted. Although there is no concept of wrongful dishonor of a payment order in Article 4A in the absence of an agreement to honor by the receiving bank, some rights and obligations may depend on the amount in the customer’s account. Section 4A-209(b)(3) and Section 4A-210(b). Whether dishonor of a check is wrongful also may depend upon the balance in the customer’s account. Under subsection (a), the bank is not required to consider the competing items and payment orders in any particular order. Rather it may charge the customer’s account for the various items and orders in any order. Suppose there is $12,000 in the customer’s account. If a check for $5,000 is presented for payment and the bank receives a $10,000 payment order from the customer, the bank could dishonor the check and accept the payment order. Dishonor of the check is not wrongful because the account balance was less than the amount of the check after the bank charged the account $10,000 on account of the payment order. Or, the bank could pay the check and not execute the payment order because the amount of the order is not covered by the balance in the account.
  2. Subsection (b) follows Section 4-208(b) in using the first-in-first-out rule for determining the order in which credits to an account are withdrawn.

355.4A-505. Preclusion of objection to debit of customer’s account.

If a receiving bank has received payment from its customer with respect to a payment order issued in the name of the customer as sender and accepted by the bank, and the customer received notification reasonably identifying the order, the customer is precluded from asserting that the bank is not entitled to retain the payment unless the customer notifies the bank of the customer’s objection to the payment within one (1) year after the notification was received by the customer.

History. Enact. Acts 1992, ch. 116, § 59, effective July 14, 1992.

Official Comment

This section is in the nature of a statute of repose for objecting to debits made to the customer’s account. A receiving bank that executes payment orders of a customer may have received payment from the customer by debiting the customer’s account with respect to a payment order that the customer was not required to pay. For example, the payment order may not have been authorized or verified pursuant to Section 4A-202 or the funds transfer may not have been completed. In either case the receiving bank is obliged to refund the payment to the customer and this obligation to refund payment cannot be varied by agreement. Section 4A-204 and Section 4A-402. Refund may also be required if the receiving bank is not entitled to payment from the customer because the bank erroneously executed a payment order. Section 4A-303. A similar analysis applies to that case. Section 4A-402(d) and (f) require refund and the obligation to refund may not be varied by agreement. Under 4A-505, however, the obligation to refund may not be asserted by the customer if the customer has not objected to the debiting of the account within one year after the customer received notification of the debit.

355.4A-506. Rate of interest.

  1. If, under this article, a receiving bank is obliged to pay interest with respect to a payment order issued to the bank, the amount payable may be determined:
    1. By agreement of the sender and receiving bank; or
    2. By a funds-transfer system rule if the payment order is transmitted through a funds-transfer system.
  2. If the amount of interest is not determined by an agreement or rule as stated in subsection (1), the amount is calculated by multiplying the applicable Federal Funds rate by the amount on which interest is payable, and then multiplying the product by the number of days for which interest is payable. The applicable Federal Funds rate is the average of the Federal Funds rates published by the Federal Reserve Bank of New York for each of the days for which interest is payable divided by three hundred sixty (360). The Federal Funds rate for any day on which a published rate is not available is the same as the published rate for the next preceding day for which there is a published rate. If a receiving bank that accepted a payment order is required to refund payment to the sender of the order because the funds transfer was not completed, but the failure to complete was not due to any fault by the bank, the interest payable is reduced by a percentage equal to the reserve requirement on deposits of the receiving bank.

History. Enact. Acts 1992, ch. 116, § 60, effective July 14, 1992.

Official Comment

  1. A receiving bank is required to pay interest on the amount of a payment order received by the bank in a number of situations. Sometimes the interest is payable to the sender and in other cases it is payable to either the originator or the beneficiary of the funds transfer. The relevant provisions are Section 4A-204(a), Section 4A-209(b)(3), Section 4A-210(b), Section 4A-305(a), Section 4A-402(d) and Section 4A-404(b). The rate of interest may be governed by a funds transfer system rule or by agreement as stated in subsection (a). If subsection (a) doesn’t apply, the rate is determined under subsection (b). Subsection (b) is illustrated by the following example. A bank is obliged to pay interest on $1,000,000 for three days, July 3, July 4, and July 5. The published Fed Funds rate is .082 for July 3 and .081 for July 5. There is no published rate for July 4 because that day is not a banking day. The rate for July 3 applies to July 4. The applicable Fed Funds rate is .08167 (the average of .082, .082, and .081) divided by 360 which equals .0002268. The amount of interest payable is $1,000,000 X .0002268 X 3 = $680.40.
  2. In some cases, interest is payable in spite of the fact that there is no fault by the receiving bank. The last sentence of subsection (b) applies to those cases. For example, a funds transfer might not be completed because the beneficiary’s bank rejected the payment order issued to it by the originator’s bank or an intermediary bank. Section 4A-402(c) provides that the originator is not obliged to pay its payment order and Section 4A-402(d) provides that the originator’s bank must refund any payment received plus interest. The requirement to pay interest in this case is not based on fault by the originator’s bank. Rather, it is based on restitution. Since the originator’s bank had the use of the originator’s money, it is required to pay the originator for the value of that use. The value of that use is not determined by multiplying the interest rate by the refundable amount because the originator’s bank is required to deposit with the Federal Reserve a percentage of the bank’s deposits as a reserve requirement. Since that deposit does not bear interest, the bank had use of the refundable amount reduced by a percentage equal to the reserve requirement. If the reserve requirement is 12%, the amount of interest payable by the bank under the formula stated in subsection (b) is reduced by 12%.

355.4A-507. Choice of law.

  1. The following rules apply unless the affected parties otherwise agree or subsection (3) applies:
    1. The rights and obligations between the sender of a payment order and the receiving bank are governed by the law of the jurisdiction in which the receiving bank is located.
    2. The rights and obligations between the beneficiary’s bank and the beneficiary are governed by the law of the jurisdiction in which the beneficiary’s bank is located.
    3. The issue of when payment is made pursuant to a funds transfer by the originator to the beneficiary is governed by the law of the jurisdiction in which the beneficiary’s bank is located.
  2. If the parties described in each paragraph of subsection (1) have made an agreement selecting the law of a particular jurisdiction to govern rights and obligations between each other, the law of that jurisdiction governs those rights and obligations, whether or not the payment order or the funds transfer bears a reasonable relation to that jurisdiction.
  3. A funds-transfer system rule may select the law of a particular jurisdiction to govern:
    1. Rights and obligations between participating banks with respect to payment orders transmitted or processed through the system; or
    2. The rights and obligations of some or all parties to a funds transfer any part of which is carried out by means of the system.

      A choice of law made pursuant to clause (a) is binding on participating banks. A choice of law made pursuant to clause (b) is binding on the originator, other sender, or a receiving bank having notice that the funds-transfer system might be used in the funds transfer and of the choice of law by the system when the originator, other sender, or receiving bank issued or accepted a payment order. The beneficiary of a funds transfer is bound by the choice of law if, when the funds transfer is initiated, the beneficiary has notice that the funds-transfer system might be used in the funds transfer and of the choice of law by the system. The law of a jurisdiction selected pursuant to this subsection may govern, whether or not that law bears a reasonable relation to the matter in issue.

  4. In the event of inconsistency between an agreement under subsection (2) and a choice-of-law rule under subsection (3), the agreement under subsection (2) prevails.
  5. If a funds transfer is made by use of more than one funds-transfer system and there is inconsistency between choice-of-law rules of the systems, the matter in issue is governed by the law of the selected jurisdiction that has the most significant relationship to the matter in issue.

History. Enact. Acts 1992, ch. 116, § 61, effective July 14, 1992.

Official Comment

  1. Funds transfers are typically interstate or international in character. If part of a funds transfer is governed by Article 4A and another part is governed by other law, the rights and obligations of parties to the funds transfer may be unclear because there is no clear consensus in various jurisdictions concerning the juridical nature of the transaction. Unless all of a funds transfer is governed by a single law it may be very difficult to predict the result if something goes wrong in the transfer. Section 4A-507 deals with this problem. Subsection (b) allows parties to a funds transfer to make a choice-of-law agreement. Subsection (c) allows a funds transfer system to select the law of a particular jurisdiction to govern funds transfers carried out by means of the system. Subsection (a) states residual rules if no choice of law has occurred under subsection (b) or (c).
  2. Subsection (a) deals with three sets of relationships. Rights and obligations between the sender of a payment order and the receiving bank are governed by the law of the jurisdiction in which the receiving bank is located. If the receiving bank is the beneficiary’s bank the rights and obligations of the beneficiary are also governed by the law of the jurisdiction in which the receiving bank is located. Suppose Originator, located in Canada, sends a payment order to Originator’s Bank located in a state in which Article 4A has been enacted. The order is for payment to an account of Beneficiary in a bank in England. Under subsection (a)(1), the rights and obligations of Originator and Originator’s Bank toward each other are governed by Article 4A if an action is brought in a court in the Article 4A state. If an action is brought in a Canadian court, the conflict of laws issue will be determined by Canadian law which might or might not apply the law of the state in which Originator’s Bank is located. If that law is applied, the execution of Originator’s order will be governed by Article 4A, but with respect to the payment order of Originator’s Bank to the English bank, Article 4A may or may not be applied with respect to the rights and obligations between the two banks. The result may depend upon whether action is brought in a court in the state in which Originator’s Bank is located or in an English court. Article 4A is binding only on a court in a state that enacts it. It can have extraterritorial effect only to the extent courts of another jurisdiction are willing to apply it. Subsection (c) also bears on the issues discussed in this Comment.

    Under Section 4A-406 payment by the originator to the beneficiary of the funds transfer occurs when the beneficiary’s bank accepts a payment order for the benefit of the beneficiary. A jurisdiction in which Article 4A is not in effect may follow a different rule or it may not have a clear rule. Under Section 4A-507(a)(iii) the issue is governed by the law of the jurisdiction in which the beneficiary’s bank is located. Since the payment to the beneficiary is made through the beneficiary’s bank it is reasonable that the issue of when payment occurs be governed by the law of the jurisdiction in which the bank is located. Since it is difficult in many cases to determine where a beneficiary is located, the location of the beneficiary’s bank provides a more certain rule.

  3. Subsection (b) deals with choice-of-law agreements and it gives maximum freedom of choice. Since the law of funds transfers is not highly developed in the case law there may be a strong incentive to choose the law of a jurisdiction in which Article 4A is in effect because it provides a greater degree of certainty with respect to the rights of various parties. With respect to commercial transactions, it is often said that “[u]niformity and predictability based upon commercial convenience are the prime considerations in making the choice of governing law ….” R. Leflar, American Conflicts Law, § 185 (1977). Subsection (b) is derived in part from recently enacted choice-of-law rules in the States of New York and California. N.Y. Gen. Obligations Law 5-1401 (McKinney’s 1989 Supp.) and California Civil Code § 1646.5. This broad endorsement of freedom of contract is an enhancement of the approach taken by Restatement (Second) of Conflict of Laws § 187(b) (1971). The Restatement recognizes the basic right of freedom of contract, but the freedom granted the parties may be more limited than the freedom granted here. Under the formulation of the Restatement, if there is no substantial relationship to the jurisdiction whose law is selected and there is no “other” reasonable basis for the parties’ choice, then the selection of the parties need not be honored by a court. Further, if the choice is violative of a fundamental policy of a state which has a materially greater interest than the chosen state, the selection could be disregarded by a court. Those limitations are not found in subsection (b).
  4. Subsection (c) may be the most important provision in regard to creating uniformity of law in funds transfers. Most rights stated in Article 4A regard parties who are in privity of contract such as originator and beneficiary, sender and receiving bank, and beneficiary’s bank and beneficiary. Since they are in privity they can make a choice of law by agreement. But that is not always the case. For example, an intermediary bank that improperly executes a payment order is not in privity with either the originator or the beneficiary. The ability of a funds transfer system to make a choice of law by rule is a convenient way of dispensing with individual agreements and to cover cases in which agreements are not feasible. It is probable that funds transfer systems will adopt a governing law to increase the certainty of commercial transactions that are effected over such systems. A system rule might adopt the law of an Article 4A state to govern transfers on the system in order to provide a consistent, unitary, law governing all transfers made on the system. To the extent such system rules develop, individual choice-of-law agreements become unnecessary.

    Subsection (c) has broad application. A system choice of law applies not only to rights and obligations between banks that use the system, but may also apply to other parties to the funds transfer so long as some part of the transfer was carried out over the system. The originator and any other sender or receiving bank in the funds transfer is bound if at the time it issues or accepts a payment order it had notice that the funds transfer involved use of the system and that the system chose the law of a particular jurisdiction. Under Section 4A-107, the Federal Reserve by regulation could make a similar choice of law to govern funds transfers carried out by use of Federal Reserve Banks. Subsection (d) is a limitation on subsection (c). If parties have made a choice-of-law agreement that conflicts with a choice of law made under subsection (c), the agreement prevails.

  5. Subsection (e) addresses the case in which a funds transfer involves more than one funds transfer system and the systems adopt conflicting choice-of-law rules. The rule that has the most significant relationship to the matter at issue prevails. For example, each system should be able to make a choice of law governing payment orders transmitted over that system without regard to a choice of law made by another system.

Article 5. Letters of Credit

Compiler’s Notes.

The official comments in this article are copyrighted by the National Conference of Commissioners of Uniform State Laws and the American Law Institute, and are reproduced by permission.

355.5-101. Short title.

This article may be cited as Uniform Commercial Code — Letters of Credit.

History. Enact. Acts 1958, ch. 77, § 5-101, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 1, effective July 1, 2001.

Compiler’s Notes.

Section 188 of Acts 2000, ch. 408, effective July 1, 2001, read: “KRS 355.5-101 to 355.5-118 applies to a letter of credit that is issued on or after July 1, 2001. KRS 355.5-1-1 to 355-5-118 do not apply to a transaction, event, obligation, or duty arising out of or associated with a letter of credit that was issued before July 1, 2002.”

Section 189 of Acts 2000, ch. 408, effective July 1, 2002, read: “A transaction arising out of or associated with a letter of credit that was issued before July 1, 2001, and the rights, obligations, and interests flowing from that transaction are governed by any statute or other law amended or repealed by 2000 Ky. Acts ch. 408 as if repeal or amendment had not occurred and may be terminated, completed, consummated, or enforced under that statute or other law.”

Official Comment

The Official Comment to the original Section 5-101 was a remarkably brief inaugural address. Noting that letters of credit had not been the subject of statutory enactment and that the law concerning them had been developed in the cases, the Comment stated that Article 5 was intended “within its limited scope” to set an independent theoretical frame for the further development of letters of credit. That statement addressed accurately conditions as they existed when the statement was made, nearly half a century ago. Since Article 5 was originally drafted, the use of letters of credit has expanded and developed, and the case law concerning these developments is, in some respects, discordant.

Revision of Article 5 therefore has required reappraisal both of the statutory goals and of the extent to which particular statutory provisions further or adversely affect achievement of those goals.

The statutory goal of Article 5 was originally stated to be: (1) to set a substantive theoretical frame that describes the function and legal nature of letters of credit; and (2) to preserve procedural flexibility in order to accommodate further development of the efficient use of letters of credit. A letter of credit is an idiosyncratic form of undertaking that supports performance of an obligation incurred in a separate financial, mercantile, or other transaction or arrangement. The objectives of the original and revised Article 5 are best achieved (1) by defining the peculiar characteristics of a letter of credit that distinguish it and the legal consequences of its use from other forms of assurance such as secondary guarantees, performance bonds, and insurance policies, and from ordinary contracts, fiduciary engagements, and escrow arrangements; and (2) by preserving flexibility through variation by agreement in order to respond to and accommodate developments in custom and usage that are not inconsistent with the essential definitions and substantive mandates of the statute. No statute can, however, prescribe the manner in which such substantive rights and duties are to be enforced or imposed without risking stultification of wholesome developments in the letter of credit mechanism. Letter of credit law should remain responsive to commercial reality and in particular to the customs and expectations of the international banking and mercantile community. Courts should read the terms of this article in a manner consistent with these customs and expectations.

The subject matter in Article 5, letters of credit, may also be governed by an international convention that is now being drafted by UNCITRAL, the draft Convention on Independent Guarantees and Standby Letters of Credit. The Uniform Customs and Practice is an international body of trade practice that is commonly adopted by international and domestic letters of credit and as such is the “law of the transaction” by agreement of the parties. Article 5 is consistent with and was influenced by the rules in the existing version of the UCP. In addition to the UCP and the international convention, other bodies of law apply to letters of credit. For example, the federal bankruptcy law applies to letters of credit with respect to applicants and beneficiaries that are in bankruptcy; regulations of the Federal Reserve Board and the Comptroller of the Currency lay out requirements for banks that issue letters of credit and describe how letters of credit are to be treated for calculating asset risk and for the purpose of loan limitations. In addition there is an array of anti-boycott and other similar laws that may affect the issuance and performance of letters of credit. All of these laws are beyond the scope of Article 5, but in certain circumstances they will override Article 5.

355.5-102. Definitions.

  1. In this article:
    1. “Adviser” means a person who, at the request of the issuer, a confirmer, or another adviser, notifies or requests another adviser to notify the beneficiary that a letter of credit has been issued, confirmed, or amended.
    2. “Applicant” means a person at whose request or for whose account a letter of credit is issued. The term includes a person who requests an issuer to issue a letter of credit on behalf of another if the person making the request undertakes an obligation to reimburse the issuer.
    3. “Beneficiary” means a person who under the terms of a letter of credit is entitled to have its complying presentation honored. The term includes a person to whom drawing rights have been transferred under a transferable letter of credit.
    4. “Confirmer” means a nominated person who undertakes, at the request or with the consent of the issuer, to honor a presentation under a letter of credit issued by another.
    5. “Dishonor” of a letter of credit means failure timely to honor or to take an interim action, such as acceptance of a draft, that may be required by the letter of credit.
    6. “Document” means a draft or other demand, document of title, investment security, certificate, invoice, or other record, statement, or representation of fact, law, right, or opinion:
      1. Which is presented in a written or other medium permitted by the letter of credit or, unless prohibited by the letter of credit, by the standard practice referred to in KRS 355.5-108 (5); and
      2. Which is capable of being examined for compliance with the terms and conditions of the letter of credit. A document may not be oral.
    7. “Good faith” means honesty in fact in the conduct or transaction concerned.
    8. “Honor” of a letter of credit means performance of the issuer’s undertaking in the letter of credit to pay or deliver an item of value. Unless the letter of credit otherwise provides, “honor” occurs:
      1. Upon payment;
      2. If the letter of credit provides for acceptance, upon acceptance of a draft and, at maturity, its payment; or
      3. If the letter of credit provides for incurring a deferred obligation, upon incurring the obligation and, at maturity, its performance.
    9. “Issuer” means a bank or other person that issues a letter of credit, but does not include an individual who makes an engagement for personal, family, or household purposes.
    10. “Letter of credit” means a definite undertaking that satisfies the requirements of KRS 355.5-104 by an issuer to a beneficiary at the request or for the account of an applicant or, in the case of a financial institution, to itself or for its own account, to honor a documentary presentation by payment or delivery of an item of value.
    11. “Nominated person” means a person whom the issuer:
      1. Designates or authorizes to pay, accept, negotiate, or otherwise give value under a letter of credit; and
      2. Undertakes by agreement or custom and practice to reimburse.
    12. “Presentation” means delivery of a document to an issuer or nominated person for honor or giving of value under a letter of credit.
    13. “Presenter” means a person making a presentation as or on behalf of a beneficiary or nominated person.
    14. “Record” means information that is inscribed on a tangible medium, or that is stored in an electronic or other medium and is retrievable in perceivable form.
    15. “Successor of a beneficiary” means a person who succeeds to substantially all of the rights of a beneficiary by operation of law, including a corporation with or into which the beneficiary has been merged or consolidated, an administrator, executor, personal representative, trustee in bankruptcy, debtor in possession, liquidator, and receiver.
  2. Definitions in other articles in this chapter applying to this article and the sections in which they appear are:
  3. Article 1 of this chapter contains certain additional general definitions and principles of construction and interpretation applicable throughout this article.

“Accept” or “Acceptance”KRS 355.3-409 ; “Value”KRS 355.3-303 and 355.4-211 .

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History. Enact. Acts 1958, ch. 77, § 5-102, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 2, effective July 1, 2001.

Official Comment

  1. Since no one can be a confirmer unless that person is a nominated person as defined in Section 5-102(11), those who agree to “confirm” without the designation or authorization of the issuer are not confirmers under Article 5. Nonetheless, the undertakings to the beneficiary of such persons may be enforceable by the beneficiary as letters of credit issued by the “confirmer” for its own account or as guarantees or contracts outside of Article 5.
  2. The definition of “document” contemplates and facilitates the growing recognition of electronic and other nonpaper media as “documents,” however, for the time being, data in those media constitute documents only in certain circumstances. For example, a facsimile received by an issuer would be a document only if the letter of credit explicitly permitted it, if the standard practice authorized it and the letter did not prohibit it, or the agreement of the issuer and beneficiary permitted it. The fact that data transmitted in a nonpaper (unwritten) medium can be recorded on paper by a recipient’s computer printer, facsimile machine, or the like does not under current practice render the data so transmitted a “document.” A facsimile or S.W.I.F.T. message received directly by the issuer is in an electronic medium when it crosses the boundary of the issuer’s place of business. One wishing to make a presentation by facsimile (an electronic medium) will have to procure the explicit agreement of the issuer (assuming that the standard practice does not authorize it). Where electronic transmissions are authorized neither by the letter of credit nor by the practice, the beneficiary may transmit the data electronically to its agent who may be able to put it in written form and make a conforming presentation.
  3. “Good faith” continues in revised Article 5 to be defined as “honesty in fact.” “Observance of reasonable standards of fair dealing” has not been added to the definition. The narrower definition of “honesty in fact” reinforces the “independence principle” in the treatment of “fraud,” “strict compliance,” “preclusion,” and other tests affecting the performance of obligations that are unique to letters of credit. This narrower definition — which does not include “fair dealing” — is appropriate to the decision to honor or dishonor a presentation of documents specified in a letter of credit. The narrower definition is also appropriate for other parts of revised Article 5 where greater certainty of obligations is necessary and is consistent with the goals of speed and low cost. It is important that U.S. letters of credit have continuing vitality and competitiveness in international transactions.

    For example, it would be inconsistent with the “independence” principle if any of the following occurred: (i) the beneficiary’s failure to adhere to the standard of “fair dealing” in the underlying transaction or otherwise in presenting documents were to provide applicants and issuers with an “unfairness” defense to dishonor even when the documents complied with the terms of the letter of credit; (ii) the issuer’s obligation to honor in “strict compliance in accordance with standard practice” were changed to “reasonable compliance” by use of the “fair dealing” standard, or (iii) the preclusion against the issuer (Section 5-108(d)) were modified under the “fair dealing” standard to enable the issuer later to raise additional deficiencies in the presentation. The rights and obligations arising from presentation, honor, dishonor and reimbursement, are independent and strict, and thus “honesty in fact” is an appropriate standard.

    The contract between the applicant and beneficiary is not governed by Article 5, but by applicable contract law, such as Article 2 or the general law of contracts. “Good faith” in that contract is defined by other law, such as Section 2-103(1)(b) or Restatement of Contracts 2d, § 205, which incorporate the principle of “fair dealing” in most cases, or a State’s common law or other statutory provisions that may apply to that contract.

    The contract between the applicant and the issuer (sometimes called the “reimbursement” agreement) is governed in part by this article (e.g., Sections 5-108(i), 5-111(b), and 5-103(c)) and partly by other law (e.g., the general law of contracts). The definition of good faith in Section 5-102(a)(7) applies only to the extent that the reimbursement contract is governed by provisions in this article; for other purposes good faith is defined by other law.

  4. Payment and acceptance are familiar modes of honor. A third mode of honor, incurring an unconditional obligation, has legal effects similar to an acceptance of a time draft but does not technically constitute an acceptance. The practice of making letters of credit available by “deferred payment undertaking” as now provided in UCP 500 has grown up in other countries and spread to the United States. The definition of “honor” will accommodate that practice.
  5. The exclusion of consumers from the definition of “issuer” is to keep creditors from using a letter of credit in consumer transactions in which the consumer might be made the issuer and the creditor would be the beneficiary. If that transaction were recognized under Article 5, the effect would be to leave the consumer without defenses against the creditor. That outcome would violate the policy behind the Federal Trade Commission Rule in 16 CFR Part 433. In a consumer transaction, an individual cannot be an issuer where that person would otherwise be either the principal debtor or a guarantor.
  6. The label on a document is not conclusive; certain documents labelled “guarantees” in accordance with European (and occasionally, American) practice are letters of credit. On the other hand, even documents that are labelled “letter of credit” may not constitute letters of credit under the definition in Section 5-102(a). When a document labelled a letter of credit requires the issuer to pay not upon the presentation of documents, but upon the determination of an extrinsic fact such as applicant’s failure to perform a construction contract, and where that condition appears on its face to be fundamental and would, if ignored, leave no obligation to the issuer under the document labelled letter of credit, the issuer’s undertaking is not a letter of credit. It is probably some form of suretyship or other contractual arrangement and may be enforceable as such. See Sections 5-102(a)(x) and 5-103(d). Therefore, undertakings whose fundamental term requires an issuer to look beyond documents and beyond conventional reference to the clock, calendar, and practices concerning the form of various documents are not governed by Article 5. Although Section 5-108(g) recognizes that certain nondocumentary conditions can be included in a letter of credit without denying the undertaking the status of letter of credit, that section does not apply to cases where the nondocumentary condition is fundamental to the issuer’s obligation. The rules in Sections 5-102(a)(10), 5-103(d), and 5-108(g) approve the conclusion in Wichita Eagle & Beacon Publishing Co. v. Pacific Nat. Bank, 493 F.2d 1285 (9th Cir. 1974).

    The adjective “definite” is taken from the UCP. It approves cases that deny letter of credit status to documents that are unduly vague or incomplete. See, e.g., Transparent Products Corp. v. Paysaver Credit Union, 864 F.2d 60 (7th Cir. 1988). Note, however, that no particular phrase or label is necessary to establish a letter of credit. It is sufficient if the undertaking of the issuer shows that it is intended to be a letter of credit. In most cases the parties’ intention will be indicated by a label on the undertaking itself indicating that it is a “letter of credit,” but no such language is necessary.

    A financial institution may be both the issuer and the applicant or the issuer and the beneficiary. Such letters are sometimes issued by a bank in support of the bank’s own lease obligations or on behalf of one of its divisions as an applicant or to one of its divisions as beneficiary, such as an overseas branch. Because wide use of letters of credit in which the issuer and the applicant or the issuer and the beneficiary are the same would endanger the unique status of letters of credit, only financial institutions are authorized to issue them.

    In almost all cases the ultimate performance of the issuer under a letter of credit is the payment of money. In rare cases the issuer’s obligation is to deliver stock certificates or the like. The definition of letter of credit in Section 5-102(a)(10) contemplates those cases.

  7. Under the UCP any bank is a nominated bank where the letter of credit is “freely negotiable.” A letter of credit might also nominate by the following: “We hereby engage with the drawer, indorsers, and bona fide holders of drafts drawn under and in compliance with the terms of this credit that the same will be duly honored on due presentation” or “available with any bank by negotiation.” A restricted negotiation credit might be “available with x bank by negotiation” or the like.

    Several legal consequences may attach to the status of nominated person. First, when the issuer nominates a person, it is authorizing that person to pay or give value and is authorizing the beneficiary to make presentation to that person. Unless the letter of credit provides otherwise, the beneficiary need not present the documents to the issuer before the letter of credit expires; it need only present those documents to the nominated person. Secondly, a nominated person that gives value in good faith has a right to payment from the issuer despite fraud. Section 5-109(a)(1).

  8. A “record” must be in or capable of being converted to a perceivable form. For example, an electronic message recorded in a computer memory that could be printed from that memory could constitute a record. Similarly, a tape recording of an oral conversation could be a record.
  9. Absent a specific agreement to the contrary, documents of a beneficiary delivered to an issuer or nominated person are considered to be presented under the letter of credit to which they refer, and any payment or value given for them is considered to be made under that letter of credit. As the court held in Alaska Textile Co. v. Chase Manhattan Bank, N.A., 982 F.2d 813, 820 (2d Cir. 1992), it takes a “significant showing” to make the presentation of a beneficiary’s documents for “collection only” or otherwise outside letter of credit law and practice.
  10. Although a successor of a beneficiary is one who succeeds “by operation of law,” some of the successions contemplated by Section 5-102(a)(15) will have resulted from voluntary action of the beneficiary such as merger of a corporation. Any merger makes the successor corporation the “successor of a beneficiary” even though the transfer occurs partly by operation of law and partly by the voluntary action of the parties. The definition excludes certain transfers, where no part of the transfer is “by operation of law” — such as the sale of assets by one company to another.
  11. “Draft” in Article 5 does not have the same meaning it has in Article 3. For example, a document may be a draft under Article 5 even though it would not be a negotiable instrument, and therefore would not qualify as a draft under Section 3-104(e).

NOTES TO DECISIONS

1.Standby Letters of Credit.

Documents by which a bank promised to pay a customer’s debt in the event of default, upon provision of proper documentation, were “standby letters of credit,” and were valid credits, even if the amount promised by the bank exceeded 20% of its capital. Security Finance Group, Inc. v. Northern Kentucky Bank & Trust, Inc., 858 F.2d 304, 1988 U.S. App. LEXIS 12863 (6th Cir. Ky. 1988 ).

2.Beneficiaries.

Mechanic’s lienholder’s complaint to enforce its lien against a developer could not be amended to state a claim against the holder of a letter of credit issued on behalf of the developer because the lienholder was neither a beneficiary of the letter of credit, under KRS 355.5-102 (1)(c), nor was it named as a beneficiary under the letter’s terms, nor should the bank issuing the letter be required to assume the risk of the developer’s nonperformance of its contract with the lienholder. M. A. Walker Co. v. PBK Bank, 95 S.W.3d 70, 2002 Ky. App. LEXIS 2342 (Ky. Ct. App. 2002).

3.Letter of Credit.

Purchaser was entitled to draw on a letter of credit under KRS 355.5-102 (1)(j) and N.Y. U.C.C. Law § 5-102(10), and it complied with such by presenting a certain documents. A bank was not required to look beyond these documents to determine whether the purchaser’s statement that it complied with an amendment was accurate; if the purchaser improperly certified to the bank that it complied with the terms of the amendment, an owner was not precluded from bringing a breach of contract action under the amendment. Louisville Mall Assocs., LP v. Wood Ctr. Props., LLC, 361 S.W.3d 323, 2012 Ky. App. LEXIS 18 (Ky. Ct. App. 2012).

355.5-103. Scope.

  1. This article applies to letters of credit and to certain rights and obligations arising out of transactions involving letters of credit.
  2. The statement of a rule in this article does not by itself require, imply, or negate application of the same or a different rule to a situation not provided for, or to a person not specified, in this article.
  3. With the exception of this subsection, subsections (1) and (4) of this section, KRS 355.5-102 (1)(i) and (j), 355.5-106 (4), and 355.5-114 (4), and except to the extent prohibited in KRS 355.1-302 and 355.5-117 (4), the effect of this article may be varied by agreement or by a provision stated or incorporated by reference in an undertaking. A term in an agreement or undertaking generally excusing liability or generally limiting remedies for failure to perform obligations is not sufficient to vary obligations prescribed by this article.
  4. Rights and obligations of an issuer to a beneficiary or a nominated person under a letter of credit are independent of the existence, performance, or nonperformance of a contract or arrangement out of which the letter of credit arises or which underlies it, including contracts or arrangements between the issuer and the applicant and between the applicant and the beneficiary.

History. Enact. Acts 1958, ch. 77, § 5-103, effective July 1, 1960; 1996, ch. 130, § 112, effective January 1, 1997; repealed and reenact., Acts 2000, ch. 408, § 3, effective July 1, 2001; 2001, ch. 119, § 14, effective July 1, 2001; 2006, ch. 242, § 55, effective July 12, 2006.

Official Comment

  1. Sections 5-102(a)(10) and 5-103 are the principal limits on the scope of Article 5. Many undertakings in commerce and contract are similar, but not identical to the letter of credit. Principal among those are “secondary,” “accessory,” or “suretyship” guarantees. Although the word “guarantee” is sometimes used to describe an independent obligation like that of the issuer of a letter of credit (most often in the case of European bank undertakings but occasionally in the case of undertakings of American banks), in the United States the word “guarantee” is more typically used to describe a suretyship transaction in which the “guarantor” is only secondarily liable and has the right to assert the underlying debtor’s defenses. This article does not apply to secondary or accessory guarantees and it is important to recognize the distinction between letters of credit and those guarantees. It is often a defense to a secondary or accessory guarantor’s liability that the underlying debt has been discharged or that the debtor has other defenses to the underlying liability. In letter of credit law, on the other hand, the independence principle recognized throughout Article 5 states that the issuer’s liability is independent of the underlying obligation. That the beneficiary may have breached the underlying contract and thus have given a good defense on that contract to the applicant against the beneficiary is no defense for the issuer’s refusal to honor. Only staunch recognition of this principle by the issuers and the courts will give letters of credit the continuing vitality that arises from the certainty and speed of payment under letters of credit. To that end, it is important that the law not carry into letter of credit transactions rules that properly apply only to secondary guarantees or to other forms of engagement.
  2. Like all of the provisions of the Uniform Commercial Code, Article 5 is supplemented by Section 1-103 and, through it, by many rules of statutory and common law. Because this article is quite short and has no rules on many issues that will affect liability with respect to a letter of credit transaction, law beyond Article 5 will often determine rights and liabilities in letter of credit transactions. Even within letter of credit law, the article is far from comprehensive; it deals only with “certain” rights of the parties. Particularly with respect to the standards of performance that are set out in Section 5-108, it is appropriate for the parties and the courts to turn to customs and practice such as the Uniform Customs and Practice for Documentary Credits, currently published by the International Chamber of Commerce as I.C.C. Pub. No. 500 (hereafter UCP). Many letters of credit specifically adopt the UCP as applicable to the particular transaction. Where the UCP are adopted but conflict with Article 5 and except where variation is prohibited, the UCP terms are permissible contractual modifications under Sections 1-302 and 5-103(c). See Section 5-116(c). Normally Article 5 should not be considered to conflict with practice except when a rule explicitly stated in the UCP or other practice is different from a rule explicitly stated in Article 5.

    Except by choosing the law of a jurisdiction that has not adopted the Uniform Commercial Code, it is not possible entirely to escape the Uniform Commercial Code. Since incorporation of the UCP avoids only “conflicting” Article 5 rules, parties who do not wish to be governed by the nonconflicting provisions of Article 5 must normally either adopt the law of a jurisdiction other than a State of the United States or state explicitly the rule that is to govern. When rules of custom and practice are incorporated by reference, they are considered to be explicit terms of the agreement or undertaking.

    Neither the obligation of an issuer under Section 5-108 nor that of an adviser under Section 5-107 is an obligation of the kind that is invariable under Section 1-102(c). Section 5-103(c) and Comment 1 to Section 5-108 make it clear that the applicant and the issuer may agree to almost any provision establishing the obligations of the issuer to the applicant. The last sentence of subsection (c) limits the power of the issuer to achieve that result by a nonnegotiated disclaimer or limitation of remedy.

    What the issuer could achieve by an explicit agreement with its applicant or by a term that explicitly defines its duty, it cannot accomplish by a general disclaimer. The restriction on disclaimers in the last sentence of subsection (c) is based more on procedural than on substantive unfairness. Where, for example, the reimbursement agreement provides explicitly that the issuer need not examine any documents, the applicant understands the risk it has undertaken. A term in a reimbursement agreement which states generally that an issuer will not be liable unless it has acted in “bad faith” or committed “gross negligence” is ineffective under Section 5-103(c). On the other hand, less general terms such as terms that permit issuer reliance on an oral or electronic message believed in good faith to have been received from the applicant or terms that entitle an issuer to reimbursement when it honors a “substantially” though not “strictly” complying presentation, are effective. In each case the question is whether the disclaimer or limitation is sufficiently clear and explicit in reallocating a liability or risk that is allocated differently under a variable Article 5 provision.

    Of course, no term in a letter of credit, whether incorporated by reference to practice rules or stated specifically, can free an issuer from a conflicting contractual obligation to its applicant. If, for example, an issuer promised its applicant that it would pay only against an inspection certificate of a particular company but failed to require such a certificate in its letter of credit or made the requirement only a nondocumentary condition that had to be disregarded, the issuer might be obliged to pay the beneficiary even though its payment might violate its contract with its applicant.

  3. Parties should generally avoid modifying the definitions in Section 5-102. The effect of such an agreement is almost inevitably unclear. To say that something is a “guarantee” in the typical domestic transaction is to say that the parties intend that particular legal rules apply to it. By acknowledging that something is a guarantee, but asserting that it is to be treated as a “letter of credit,” the parties leave a court uncertain about where the rules on guarantees stop and those concerning letters of credit begin.
  4. Section 5-102(2) and (3) of Article 5 are omitted as unneeded; the omission does not change the law.

NOTES TO DECISIONS

1.Standby Letters of Credit.

Documents by which a bank promised to pay a customer’s debt in the event of default, upon provision of proper documentation, were “standby letters of credit,” and were valid credits, even if the amount promised by the bank exceeded 20% of its capital. Security Finance Group, Inc. v. Northern Kentucky Bank & Trust, Inc., 858 F.2d 304, 1988 U.S. App. LEXIS 12863 (6th Cir. Ky. 1988 ).

2.Supersedeas Bond.

The Kentucky Rules of Civil Procedure require a true surety relationship between an appellant and his surety for a supersedeas bond to be valid. By its language, CR 73.07 is applicable only in the context of suretyship. The purpose of the rule is to enforce the liability of the surety in a summary fashion. Such a procedure would be unavailable in the context of letters of credit in as much as the obligation to pay is triggered by the presentation of the appropriate documentation. Furthermore, the summary procedure is inappropriate in the context of letters of credit because it treats the non-party surety as liable for the obligation of its principal, whereas the obligation of an issuer of a letter of credit is independent of that of its customer. Perhaps most importantly, the letter of credit in this case expired by its own terms after one year. Since it is not unusual for a case to pend for more than a year before a decision by the court becomes final, particularly where a petition for rehearing is filed or a motion for discretionary review is submitted to the Supreme Court, the letter of credit in this case failed to insure that the judgment would be satisfied in full in the event it was affirmed by the Court after the date of its expiration. Taylor Bldg. Corp. v. Boutcher, 836 S.W.2d 455, 1992 Ky. App. LEXIS 186 (Ky. Ct. App. 1992).

3.Independence.

Purchaser was entitled to draw on a letter of credit under KRS 355.5-102 (1)(j) and N.Y. U.C.C. Law § 5-102(10), and it complied with such by presenting certain documents. A bank was not required to look beyond these documents to determine whether the purchaser’s statement that it complied with an amendment was accurate; if the purchaser improperly certified to the bank that it complied with the terms of the amendment, an owner was not precluded from bringing a breach of contract action under the amendment. Louisville Mall Assocs., LP v. Wood Ctr. Props., LLC, 361 S.W.3d 323, 2012 Ky. App. LEXIS 18 (Ky. Ct. App. 2012).

355.5-104. Formal requirements.

A letter of credit, confirmation, advice, transfer, amendment, or cancellation may be issued in any form that is a record and is authenticated:

  1. By a signature; or
  2. In accordance with the agreement of the parties or the standard practice referred to in KRS 355.5-108 (5).

History. Enact. Acts 1958, ch. 77, § 5-104, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 4, effective July 1, 2001.

Official Comment

  1. Neither Section 5-104 nor the definition of letter of credit in Section 5-102(a)(x) requires inclusion of all the terms that are normally contained in a letter of credit in order for an undertaking to be recognized as a letter of credit under Article 5. For example, a letter of credit will typically specify the amount available, the expiration date, the place where presentation should be made, and the documents that must be presented to entitle a person to honor. Undertakings that have the formalities required by Section 5-104 and meet the conditions specified in Section 5-102(a)(10) will be recognized as letters of credit even though they omit one or more of the items usually contained in a letter of credit.
  2. The authentication specified in this section is authentication only of the identity of the issuer, confirmer, or adviser.

    An authentication agreement may be by system rule, by standard practice, or by direct agreement between the parties. The reference to practice is intended to incorporate future developments in the UCP and other practice rules as well as those that may arise spontaneously in commercial practice.

  3. Many banking transactions, including the issuance of many letters of credit, are now conducted mostly by electronic means. For example, S.W.I.F.T. is currently used to transmit letters of credit from issuing to advising banks. The letter of credit text so transmitted may be printed at the advising bank, stamped “original” and provided to the beneficiary in that form. The printed document may then be used as a way of controlling and recording payments and of recording and authorizing assignments of proceeds or transfers of rights under the letter of credit. Nothing in this section should be construed to conflict with that practice.

    To be a record sufficient to serve as a letter of credit or other undertaking under this section, data must have a durability consistent with that function. Because consideration is not required for a binding letter of credit or similar undertaking (Section 5-105) yet those undertakings are to be strictly construed (Section 5-108), parties to a letter of credit transaction are especially dependent on the continued availability of the terms and conditions of the letter of credit or other undertaking. By declining to specify any particular medium in which the letter of credit must be established or communicated, Section 5-104 leaves room for future developments.

355.5-105. Consideration.

Consideration is not required to issue, amend, transfer, or cancel a letter of credit, advice, or confirmation.

History. Enact. Acts 1958, ch. 77, § 5-105, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 5, effective July 1, 2001.

Official Comment

It is not to be expected that any issuer will issue its letter of credit without some form of remuneration. But it is not expected that the beneficiary will know what the issuer’s remuneration was or whether in fact there was any identifiable remuneration in a given case. And it might be difficult for the beneficiary to prove the issuer’s remuneration. This section dispenses with this proof and is consistent with the position of Lord Mansfield in Pillans v. Van Mierop, 97 Eng.Rep. 1035 (K.B. 1765) in making consideration irrelevant.

355.5-106. Issuance, amendment, cancellation, and duration.

  1. A letter of credit is issued and becomes enforceable according to its terms against the issuer when the issuer sends or otherwise transmits it to the person requested to advise or to the beneficiary. A letter of credit is revocable only if it so provides.
  2. After a letter of credit is issued, rights and obligations of a beneficiary, applicant, confirmer, and issuer are not affected by an amendment or cancellation to which that person has not consented except to the extent the letter of credit provides that it is revocable or that the issuer may amend or cancel the letter of credit without that consent.
  3. If there is no stated expiration date or other provision that determines its duration, a letter of credit expires one (1) year after its stated date of issuance or, if none is stated, after the date on which it is issued.
  4. A letter of credit that states that it is perpetual expires five (5) years after its stated date of issuance, or if none is stated, after the date on which it is issued.

History. Enact. Acts 1958, ch. 77, § 5-106, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 6, effective July 1, 2001.

Official Comment

  1. This section adopts the position taken by several courts, namely that letters of credit that are silent as to revocability are irrevocable. See, e.g., Weyerhaeuser Co. v. First Nat. Bank, 27 UCC Rep.Serv. 777 (S.D. Iowa 1979); West Va. Hous. Dev. Fund v. Sroka, 415 F.Supp. 1107 (W.D.Pa.1976). This is the position of the current UCP (500). Given the usual commercial understanding and purpose of letters of credit, revocable letters of credit offer unhappy possibilities for misleading the parties who deal with them.
  2. A person can consent to an amendment by implication. For example, a beneficiary that tenders documents for honor that conform to an amended letter of credit but not to the original letter of credit has probably consented to the amendment. By the same token an applicant that has procured the issuance of a transferable letter of credit has consented to its transfer and to performance under the letter of credit by a person to whom the beneficiary’s rights are duly transferred. If some, but not all of the persons involved in a letter of credit transaction consent to performance that does not strictly conform to the original letter of credit, those persons assume the risk that other nonconsenting persons may insist on strict compliance with the original letter of credit. Under subsection (b) those not consenting are not bound. For example, an issuer might agree to amend its letter of credit or honor documents presented after the expiration date in the belief that the applicant has consented or will consent to the amendment or will waive presentation after the original expiration date. If that belief is mistaken, the issuer is bound to the beneficiary by the terms of the letter of credit as amended or waived, even though it may be unable to recover from the applicant.

    In general, the rights of a recognized transferee beneficiary cannot be altered without the transferee’s consent, but the same is not true of the rights of assignees of proceeds from the beneficiary. When the beneficiary makes a complete transfer of its interest that is effective under the terms for transfer established by the issuer, adviser, or other party controlling transfers, the beneficiary no longer has an interest in the letter of credit, and the transferee steps into the shoes of the beneficiary as the one with rights under the letter of credit. Section 5-102(a)(3). When there is a partial transfer, both the original beneficiary and the transferee beneficiary have an interest in performance of the letter of credit and each expects that its rights will not be altered by amendment unless it consents.

    The assignee of proceeds under a letter of credit from the beneficiary enjoys no such expectation. Notwithstanding an assignee’s notice to the issuer of the assignment of proceeds, the assignee is not a person protected by subsection (b). An assignee of proceeds should understand that its rights can be changed or completely extinguished by amendment or cancellation of the letter of credit. An assignee’s claim is precarious, for it depends entirely upon the continued existence of the letter of credit and upon the beneficiary’s preparation and presentation of documents that would entitle the beneficiary to honor under Section 5-108.

  3. The issuer’s right to cancel a revocable letter of credit does not free it from a duty to reimburse a nominated person who has honored, accepted, or undertaken a deferred obligation prior to receiving notice of the amendment or cancellation. Compare UCP Article 8.
  4. Although all letters of credit should specify the date on which the issuer’s engagement expires, the failure to specify an expiration date does not invalidate the letter of credit, or diminish or relieve the obligation of any party with respect to the letter of credit. A letter of credit that may be revoked or terminated at the discretion of the issuer by notice to the beneficiary is not “perpetual.”

355.5-107. Confirmer, nominated person, and adviser.

  1. A confirmer is directly obligated on a letter of credit and has the rights and obligations of an issuer to the extent of its confirmation. The confirmer also has rights against and obligations to the issuer as if the issuer were an applicant and the confirmer had issued the letter of credit at the request and for the account of the issuer.
  2. A nominated person who is not a confirmer is not obligated to honor or otherwise give value for a presentation.
  3. A person requested to advise may decline to act as an adviser. An adviser that is not a confirmer is not obligated to honor or give value for a presentation. An adviser undertakes to the issuer and to the beneficiary accurately to advise the terms of the letter of credit, confirmation, amendment, or advice received by that person and undertakes to the beneficiary to check the apparent authenticity of the request to advise. Even if the advice is inaccurate, the letter of credit, confirmation, or amendment is enforceable as issued.
  4. A person who notifies a transferee beneficiary of the terms of a letter of credit, confirmation, amendment, or advice has the rights and obligations of an adviser under subsection (3) of this section. The terms in the notice to the transferee beneficiary may differ from the terms in any notice to the transferor beneficiary to the extent permitted by the letter of credit, confirmation, amendment, or advice received by the person who so notifies.

History. Enact. Acts 1958, ch. 77, § 5-107, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 7, effective July 1, 2001.

Official Comment

  1. A confirmer has the rights and obligations identified in Section 5-108. Accordingly, unless the context otherwise requires, the terms “confirmer” and “confirmation” should be read into this article wherever the terms “issuer” and “letter of credit” appear.

    A confirmer that has paid in accordance with the terms and conditions of the letter of credit is entitled to reimbursement by the issuer even if the beneficiary committed fraud (see Section 5-109(a)(1)(ii)) and, in that sense, has greater rights against the issuer than the beneficiary has. To be entitled to reimbursement from the issuer under the typical confirmed letter of credit, the confirmer must submit conforming documents, but the confirmer’s presentation to the issuer need not be made before the expiration date of the letter of credit.

    A letter of credit confirmation has been analogized to a guarantee of issuer performance, to a parallel letter of credit issued by the confirmer for the account of the issuer or the letter of credit applicant or both, and to a back-to-back letter of credit in which the confirmer is a kind of beneficiary of the original issuer’s letter of credit. Like letter of credit undertakings, confirmations are both unique and flexible, so that no one of these analogies is perfect, but unless otherwise indicated in the letter of credit or confirmation, a confirmer should be viewed by the letter of credit issuer and the beneficiary as an issuer of a parallel letter of credit for the account of the original letter of credit issuer. Absent a direct agreement between the applicant and a confirmer, normally the obligations of a confirmer are to the issuer not the applicant, but the applicant might have a right to injunction against a confirmer under Section 5-109 or warranty claim under Section 5-110, and either might have claims against the other under Section 5-117.

  2. No one has a duty to advise until that person agrees to be an adviser or undertakes to act in accordance with the instructions of the issuer. Except where there is a prior agreement to serve or where the silence of the adviser would be an acceptance of an offer to contract, a person’s failure to respond to a request to advise a letter of credit does not in and of itself create any liability, nor does it establish a relationship of issuer and adviser between the two. Since there is no duty to advise a letter of credit in the absence of a prior agreement, there can be no duty to advise it timely or at any particular time. When the adviser manifests its agreement to advise by actually doing so (as is normally the case), the adviser cannot have violated any duty to advise in a timely way. This analysis is consistent with the result of Sound of Market Street v. Continental Bank International, 819 F.2d 384 (3d Cir.1987) which held that there is no such duty. This section takes no position on the reasoning of that case, but does not overrule the result. By advising or agreeing to advise a letter of credit, the adviser assumes a duty to the issuer and to the beneficiary accurately to report what it has received from the issuer, but, beyond determining the apparent authenticity of the letter, an adviser has no duty to investigate the accuracy of the message it has received from the issuer. “Checking” the apparent authenticity of the request to advise means only that the prospective adviser must attempt to authenticate the message (e.g., by “testing” the telex that comes from the purported issuer), and if it is unable to authenticate the message must report that fact to the issuer and, if it chooses to advise the message, to the beneficiary. By proper agreement, an adviser may disclaim its obligation under this section.
  3. An issuer may issue a letter of credit which the adviser may advise with different terms. The issuer may then believe that it has undertaken a certain engagement, yet the text in the hands of the beneficiary will contain different terms, and the beneficiary would not be entitled to honor if the documents it submitted did not comply with the terms of the letter of credit as originally issued. On the other hand, if the adviser also confirmed the letter of credit, then as a confirmer it will be independently liable on the letter of credit as advised and confirmed. If in that situation the beneficiary’s ultimate presentation entitled it to honor under the terms of the confirmation but not under those in the original letter of credit, the confirmer would have to honor but might not be entitled to reimbursement from the issuer.
  4. When the issuer nominates another person to “pay,” “negotiate,” or otherwise to take up the documents and give value, there can be confusion about the legal status of the nominated person. In rare cases the person might actually be an agent of the issuer and its act might be the act of the issuer itself. In most cases the nominated person is not an agent of the issuer and has no authority to act on the issuer’s behalf. Its “nomination” allows the beneficiary to present to it and earns it certain rights to payment under Section 5-109 that others do not enjoy. For example, when an issuer issues a “freely negotiable credit,” it contemplates that banks or others might take up documents under that credit and advance value against them, and it is agreeing to pay those persons but only if the presentation to the issuer made by the nominated person complies with the credit. Usually there will be no agreement to pay, negotiate, or to serve in any other capacity by the nominated person, therefore the nominated person will have the right to decline to take the documents. It may return them or agree merely to act as a forwarding agent for the documents but without giving value against them or taking any responsibility for their conformity to the letter of credit.

355.5-108. Issuer’s rights and obligations.

  1. Except as otherwise provided in KRS 355.5-109 , an issuer shall honor a presentation that, as determined by the standard practice referred to in subsection (5) of this section, appears on its face strictly to comply with the terms and conditions of the letter of credit. Except as otherwise provided in KRS 355.5-113 and unless otherwise agreed with the applicant, an issuer shall dishonor a presentation that does not appear so to comply.
  2. An issuer has a reasonable time after presentation, but not beyond the end of the seventh business day of the issuer after the day of its receipt of documents:
    1. To honor;
    2. If the letter of credit provides for honor to be completed more than seven (7) business days after presentation, to accept a draft or incur a deferred obligation; or
    3. To give notice to the presenter of discrepancies in the presentation.
  3. Except as otherwise provided in subsection (4) of this section, an issuer is precluded from asserting as a basis for dishonor any discrepancy if timely notice is not given, or any discrepancy not stated in the notice if timely notice is given.
  4. Failure to give the notice specified in subsection (2) of this section or to mention fraud, forgery, or expiration in the notice does not preclude the issuer from asserting as a basis for dishonor fraud or forgery as described in KRS 355.5-109 (1) or expiration of the letter of credit before presentation.
  5. An issuer shall observe standard practice of financial institutions that regularly issue letters of credit. Determination of the issuer’s observance of the standard practice is a matter of interpretation for the court. The court shall offer the parties a reasonable opportunity to present evidence of the standard practice.
  6. An issuer is not responsible for:
    1. The performance or nonperformance of the underlying contract, arrangement, or transaction;
    2. An act or omission of others; or
    3. Observance or knowledge of the usage of a particular trade other than the standard practice referred to in subsection (5) of this section.
  7. If an undertaking constituting a letter of credit under KRS 355.5-102 (1)(j) contains nondocumentary conditions, an issuer shall disregard the nondocumentary conditions and treat them as if they were not stated.
  8. An issuer that has dishonored a presentation shall return the documents or hold them at the disposal of, and send advice to that effect to, the presenter.
  9. An issuer that has honored a presentation as permitted or required by this article:
    1. Is entitled to be reimbursed by the applicant in immediately available funds not later than the date of its payment of funds;
    2. Takes the documents free of claims of the beneficiary or presenter;
    3. Is precluded from asserting a right of recourse on a draft under KRS 355.3-414 and 355.3-415 ;
    4. Except as otherwise provided in KRS 355.5-110 and 355.5-117 , is precluded from restitution of money paid or other value given by mistake to the extent the mistake concerns discrepancies in the documents or tender which are apparent on the face of the presentation; and
    5. Is discharged to the extent of its performance under the letter of credit unless the issuer honored a presentation in which a required signature of a beneficiary was forged.

History. Enact. Acts 1958, ch. 77, § 5-108, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 8, effective July 1, 2001.

Official Comment

  1. This section combines some of the duties previously included in Sections 5-114 and 5-109. Because a confirmer has the rights and duties of an issuer, this section applies equally to a confirmer and an issuer. See Section 5-107(a).

    The standard of strict compliance governs the issuer’s obligation to the beneficiary and to the applicant. By requiring that a “presentation” appear strictly to comply, the section requires not only that the documents themselves appear on their face strictly to comply, but also that the other terms of the letter of credit such as those dealing with the time and place of presentation are strictly complied with. Typically, a letter of credit will provide that presentation is timely if made to the issuer, confirmer, or any other nominated person prior to expiration of the letter of credit. Accordingly, a nominated person that has honored a demand or otherwise given value before expiration will have a right to reimbursement from the issuer even though presentation to the issuer is made after the expiration of the letter of credit. Conversely, where the beneficiary negotiates documents to one who is not a nominated person, the beneficiary or that person acting on behalf of the beneficiary must make presentation to a nominated person, confirmer, or issuer prior to the expiration date.

    This section does not impose a bifurcated standard under which an issuer’s right to reimbursement might be broader than a beneficiary’s right to honor. However, the explicit deference to standard practice in Section 5-108(a) and (e) and elsewhere expands issuers’ rights of reimbursement where that practice so provides. Also, issuers can and often do contract with their applicants for expanded rights of reimbursement. Where that is done, the beneficiary will have to meet a more stringent standard of compliance as to the issuer than the issuer will have to meet as to the applicant. Similarly, a nominated person may have reimbursement and other rights against the issuer based on this article, the UCP, bank-to-bank reimbursement rules, or other agreement or undertaking of the issuer. These rights may allow the nominated person to recover from the issuer even when the nominated person would have no right to obtain honor under the letter of credit.

    The section adopts strict compliance, rather than the standard that commentators have called “substantial compliance,” the standard arguably applied in Banco Español de Credito v. State Street Bank and Trust Company, 385 F.2d 230 (1st Cir.1967) and Flagship Cruises Ltd. v. New England Merchants Nat. Bank, 569 F.2d 699 (1st Cir.1978). Strict compliance does not mean slavish conformity to the terms of the letter of credit. For example, standard practice (what issuers do) may recognize certain presentations as complying that an unschooled layman would regard as discrepant. By adopting standard practice as a way of measuring strict compliance, this article indorses the conclusion of the court in New Braunfels Nat. Bank v. Odiorne, 780 S.W.2d 313 (Tex.Ct.App. 1989) (beneficiary could collect when draft requested payment on “Letter of Credit No. 86-122-5” and letter of credit specified “Letter of Credit No. 86-122-S” holding strict compliance does not demand oppressive perfectionism). The section also indorses the result in Tosco Corp. v. Federal Deposit Insurance Corp. 723 F.2d 1242 (6th Cir.1983). The letter of credit in that case called for “drafts Drawn under Bank of Clarksville Letter of Credit Number 105.” The draft presented stated “drawn under Bank of Clarksville, Clarksville, Tennessee letter of Credit No. 105.” The court correctly found that despite the change of upper case “L” to a lower case “l” and the use of the word “No.” instead of “Number,” and despite the addition of the words “Clarksville, Tennessee,” the presentation conformed. Similarly a document addressed by a foreign person to General Motors as “Jeneral Motors” would strictly conform in the absence of other defects.

    Identifying and determining compliance with standard practice are matters of interpretation for the court, not for the jury. As with similar rules in Sections 4A-202(c) and 2-302, it is hoped that there will be more consistency in the outcomes and speedier resolution of disputes if the responsibility for determining the nature and scope of standard practice is granted to the court, not to a jury. Granting the court authority to make these decisions will also encourage the salutary practice of courts’ granting summary judgment in circumstances where there are no significant factual disputes. The statute encourages outcomes such as American Coleman Co. v. Intrawest Bank, 887 F.2d 1382 (10th Cir.1989), where summary judgment was granted.

    In some circumstances standards may be established between the issuer and the applicant by agreement or by custom that would free the issuer from liability that it might otherwise have. For example, an applicant might agree that the issuer would have no duty whatsoever to examine documents on certain presentations (e.g., those below a certain dollar amount). Where the transaction depended upon the issuer’s payment in a very short time period (e.g., on the same day or within a few hours of presentation), the issuer and the applicant might agree to reduce the issuer’s responsibility for failure to discover discrepancies. By the same token, an agreement between the applicant and the issuer might permit the issuer to examine documents exclusively by electronic or electro-optical means. Neither those agreements nor others like them explicitly made by issuers and applicants violate the terms of Section 5-108(a) or (b) or Section 5-103(c).

  2. Section 5-108(a) balances the need of the issuer for time to examine the documents against the possibility that the examiner (at the urging of the applicant or for fear that it will not be reimbursed) will take excessive time to search for defects. What is a “reasonable time” is not extended to accommodate an issuer’s procuring a waiver from the applicant. See Article 14c of the UCP.

    Under both the UCC and the UCP the issuer has a reasonable time to honor or give notice. The outside limit of that time is measured in business days under the UCC and in banking days under the UCP, a difference that will rarely be significant. Neither business nor banking days are defined in Article 5, but a court may find useful analogies in Regulation CC, 12 CFR 229.2, in state law outside of the Uniform Commercial Code, and in Article 4.

    Examiners must note that the seven-day period is not a safe harbor. The time within which the issuer must give notice is the lesser of a reasonable time or seven business days. Where there are few documents (as, for example, with the mine run standby letter of credit), the reasonable time would be less than seven days. If more than a reasonable time is consumed in examination, no timely notice is possible. What is a “reasonable time” is to be determined by examining the behavior of those in the business of examining documents, mostly banks. Absent prior agreement of the issuer, one could not expect a bank issuer to examine documents while the beneficiary waited in the lobby if the normal practice was to give the documents to a person who had the opportunity to examine those together with many others in an orderly process. That the applicant has not yet paid the issuer or that the applicant’s account with the issuer is insufficient to cover the amount of the draft is not a basis for extension of the time period.

    This section does not preclude the issuer from contacting the applicant during its examination; however, the decision to honor rests with the issuer, and it has no duty to seek a waiver from the applicant or to notify the applicant of receipt of the documents. If the issuer dishonors a conforming presentation, the beneficiary will be entitled to the remedies under Section 5-111, irrespective of the applicant’s views.

    Even though the person to whom presentation is made cannot conduct a reasonable examination of documents within the time after presentation and before the expiration date, presentation establishes the parties’ rights. The beneficiary’s right to honor or the issuer’s right to dishonor arises upon presentation at the place provided in the letter of credit even though it might take the person to whom presentation has been made several days to determine whether honor or dishonor is the proper course. The issuer’s time for honor or giving notice of dishonor may be extended or shortened by a term in the letter of credit. The time for the issuer’s performance may be otherwise modified or waived in accordance with Section 5-106.

    The issuer’s time to inspect runs from the time of its “receipt of documents.” Documents are considered to be received only when they are received at the place specified for presentation by the issuer or other party to whom presentation is made.

    Failure of the issuer to act within the time permitted by subsection (b) constitutes dishonor. Because of the preclusion in subsection (c) and the liability that the issuer may incur under Section 5-111 for wrongful dishonor, the effect of such a silent dishonor may ultimately be the same as though the issuer had honored, i.e., it may owe damages in the amount drawn but unpaid under the letter of credit.

  3. The requirement that the issuer send notice of the discrepancies or be precluded from asserting discrepancies is new to Article 5. It is taken from the similar provision in the UCP and is intended to promote certainty and finality.

    The section thus substitutes a strict preclusion principle for the doctrines of waiver and estoppel that might otherwise apply under Section 1-103. It rejects the reasoning in Flagship Cruises Ltd. v. New England Merchants’ Nat. Bank, 569 F.2d 699 (1st Cir.1978) and Wing On Bank Ltd. v. American Nat. Bank & Trust Co., 457 F.2d 328 (5th Cir.1972) where the issuer was held to be estopped only if the beneficiary relied on the issuer’s failure to give notice.

    Assume, for example, that the beneficiary presented documents to the issuer shortly before the letter of credit expired, in circumstances in which the beneficiary could not have cured any discrepancy before expiration. Under the reasoning of Flagship and Wing On, the beneficiary’s inability to cure, even if it had received notice, would absolve the issuer of its failure to give notice. The virtue of the preclusion obligation adopted in this section is that it forecloses litigation about reliance and detriment.

    Even though issuers typically give notice of the discrepancy of tardy presentation when presentation is made after the expiration of a credit, they are not required to give that notice and the section permits them to raise late presentation as a defect despite their failure to give that notice.

  4. To act within a reasonable time, the issuer must normally give notice without delay after the examining party makes its decision. If the examiner decides to dishonor on the first day, it would be obliged to notify the beneficiary shortly thereafter, perhaps on the same business day. This rule accepts the reasoning in cases such as Datapoint Corp. v. M & I Bank, 665 F.Supp. 722 (W.D.Wis.1987) and Esso Petroleum Canada, Div. of Imperial Oil, Ltd. v. Security Pacific Bank, 710 F.Supp. 275 (D.Or.1989).

    The section deprives the examining party of the right simply to sit on a presentation that is made within seven days of expiration. The section requires the examiner to examine the documents and make a decision and, having made a decision to dishonor, to communicate promptly with the presenter. Nevertheless, a beneficiary who presents documents shortly before the expiration of a letter of credit runs the risk that it will never have the opportunity to cure any discrepancies.

  5. Confirmers, other nominated persons, and collecting banks acting for beneficiaries can be presenters and, when so, are entitled to the notice provided in subsection (b). Even nominated persons who have honored or given value against an earlier presentation of the beneficiary and are themselves seeking reimbursement or honor need notice of discrepancies in the hope that they may be able to procure complying documents. The issuer has the obligations imposed by this section whether the issuer’s performance is characterized as “reimbursement” of a nominated person or as “honor.”
  6. In many cases a letter of credit authorizes presentation by the beneficiary to someone other than the issuer. Sometimes that person is identified as a “payor” or “paying bank,” or as an “acceptor” or “accepting bank,” in other cases as a “negotiating bank,” and in other cases there will be no specific designation. The section does not impose any duties on a person other than the issuer or confirmer, however a nominated person or other person may have liability under this article or at common law if it fails to perform an express or implied agreement with the beneficiary.
  7. The issuer’s obligation to honor runs not only to the beneficiary but also to the applicant. It is possible that an applicant who has made a favorable contract with the beneficiary will be injured by the issuer’s wrongful dishonor. Except to the extent that the contract between the issuer and the applicant limits that liability, the issuer will have liability to the applicant for wrongful dishonor under Section 5-111 as a matter of contract law. A good faith extension of the time in Section 5-108(b) by agreement between the issuer and beneficiary binds the applicant even if the applicant is not consulted or does not consent to the extension.

    The issuer’s obligation to dishonor when there is no apparent compliance with the letter of credit runs only to the applicant. No other party to the transaction can complain if the applicant waives compliance with terms or conditions of the letter of credit or agrees to a less stringent standard for compliance than that supplied by this article. Except as otherwise agreed with the applicant, an issuer may dishonor a noncomplying presentation despite an applicant’s waiver.

    Waiver of discrepancies by an issuer or an applicant in one or more presentations does not waive similar discrepancies in a future presentation. Neither the issuer nor the beneficiary can reasonably rely upon honor over past waivers as a basis for concluding that a future defective presentation will justify honor. The reasoning of Courtaulds of North America Inc. v. North Carolina Nat. Bank, 528 F.2d 802 (4th Cir.1975) is accepted and that expressed in Schweibish v. Pontchartrain State Bank, 389 So.2d 731 (La.App.1980) and Titanium Metals Corp. v. Space Metals, Inc., 529 P.2d 431 (Utah 1974) is rejected.

  8. The standard practice referred to in subsection (e) includes (i) international practice set forth in or referenced by the Uniform Customs and Practice, (ii) other practice rules published by associations of financial institutions, and (iii) local and regional practice. It is possible that standard practice will vary from one place to another. Where there are conflicting practices, the parties should indicate which practice governs their rights. A practice may be overridden by agreement or course of dealing. See Section 1-205(d).
  9. The responsibility of the issuer under a letter of credit is to examine documents and to make a prompt decision to honor or dishonor based upon that examination. Nondocumentary conditions have no place in this regime and are better accommodated under contract or suretyship law and practice. In requiring that nondocumentary conditions in letters of credit be ignored as surplusage, Article 5 remains aligned with the UCP (see UCP 500 Article 13c), approves cases like Pringle-Associated Mortgage Corp. v. Southern National Bank, 571 F.2d 871, 874 (5th Cir.1978), and rejects the reasoning in cases such as Sherwood & Roberts, Inc. v. First Security Bank, 682 P.2d 149 (Mont. 1984).

    Subsection (g) recognizes that letters of credit sometimes contain nondocumentary terms or conditions. Conditions such as a term prohibiting “shipment on vessels more than 15 years old,” are to be disregarded and treated as surplusage. Similarly, a requirement that there be an award by a “duly appointed arbitrator” would not require the issuer to determine whether the arbitrator had been “duly appointed.” Likewise a term in a standby letter of credit that provided for differing forms of certification depending upon the particular type of default does not oblige the issuer independently to determine which kind of default has occurred. These conditions must be disregarded by the issuer. Where the nondocumentary conditions are central and fundamental to the issuer’s obligation (as for example a condition that would require the issuer to determine in fact whether the beneficiary had performed the underlying contract or whether the applicant had defaulted) their inclusion may remove the undertaking from the scope of Article 5 entirely. See Section 5-102(a)(10) and Comment 6 to Section 5-102.

    Subsection (g) would not permit the beneficiary or the issuer to disregard terms in the letter of credit such as place, time, and mode of presentation. The rule in subsection (g) is intended to prevent an issuer from deciding or even investigating extrinsic facts, but not from consulting the clock, the calendar, the relevant law and practice, or its own general knowledge of documentation or transactions of the type underlying a particular letter of credit.

    Even though nondocumentary conditions must be disregarded in determining compliance of a presentation (and thus in determining the issuer’s duty to the beneficiary), an issuer that has promised its applicant that it will honor only on the occurrence of those nondocumentary conditions may have liability to its applicant for disregarding the conditions.

  10. Subsection (f) condones an issuer’s ignorance of “any usage of a particular trade”; that trade is the trade of the applicant, beneficiary, or others who may be involved in the underlying transaction. The issuer is expected to know usage that is commonly encountered in the course of document examination. For example, an issuer should know the common usage with respect to documents in the maritime shipping trade but would not be expected to understand synonyms used in a particular trade for product descriptions appearing in a letter of credit or an invoice.
  11. Where the issuer’s performance is the delivery of an item of value other than money, the applicant’s reimbursement obligation would be to make the “item of value” available to the issuer.
  12. An issuer is entitled to reimbursement from the applicant after honor of a forged or fraudulent drawing if honor was permitted under Section 5-109(a).
  13. The last clause of Section 5-108(i)(5) deals with a special case in which the fraud is not committed by the beneficiary, but is committed by a stranger to the transaction who forges the beneficiary’s signature. If the issuer pays against documents on which a required signature of the beneficiary is forged, it remains liable to the true beneficiary.

355.5-109. Fraud and forgery.

  1. If a presentation is made that appears on its face strictly to comply with the terms and conditions of the letter of credit, but a required document is forged or materially fraudulent, or honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant:
    1. The issuer shall honor the presentation, if honor is demanded by:
      1. A nominated person who has given value in good faith and without notice of forgery or material fraud;
      2. A confirmer who has honored its confirmation in good faith;
      3. A holder in due course of a draft drawn under the letter of credit which was taken after acceptance by the issuer or nominated person; or
      4. An assignee of the issuer’s or nominated person’s deferred obligation that was taken for value and without notice of forgery or material fraud after the obligation was incurred by the issuer or nominated person; and
    2. The issuer, acting in good faith, may honor or dishonor the presentation in any other case.
  2. If an applicant claims that a required document is forged or materially fraudulent or that honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant, a court of competent jurisdiction may temporarily or permanently enjoin the issuer from honoring a presentation or grant similar relief against the issuer or other persons only if the court finds that:
    1. The relief is not prohibited under the law applicable to an accepted draft or deferred obligation incurred by the issuer;
    2. A beneficiary, issuer, or nominated person who may be adversely affected is adequately protected against loss that it may suffer because the relief is granted;
    3. All of the conditions to entitle a person to the relief under the law of this Commonwealth have been met; and
    4. On the basis of the information submitted to the court, the applicant is more likely than not to succeed under its claim of forgery or material fraud and the person demanding honor does not qualify for protection under subsection (1)(a) of this section.

History. Enact. Acts 1958, ch. 77, § 5-109, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 9, effective July 1, 2001.

Official Comment

  1. This recodification makes clear that fraud must be found either in the documents or must have been committed by the beneficiary on the issuer or applicant. See Cromwell v. Commerce & Energy Bank, 464 So.2d 721 (La. 1985).

    Secondly, it makes clear that fraud must be “material.” Necessarily courts must decide the breadth and width of “materiality.” The use of the word requires that the fraudulent aspect of a document be material to a purchaser of that document or that the fraudulent act be significant to the participants in the underlying transaction. Assume, for example, that the beneficiary has a contract to deliver 1,000 barrels of salad oil. Knowing that it has delivered only 998, the beneficiary nevertheless submits an invoice showing 1,000 barrels. If two barrels in a 1,000 barrel shipment would be an insubstantial and immaterial breach of the underlying contract, the beneficiary’s act, though possibly fraudulent, is not materially so and would not justify an injunction. Conversely, the knowing submission of those invoices upon delivery of only five barrels would be materially fraudulent. The courts must examine the underlying transaction when there is an allegation of material fraud, for only by examining that transaction can one determine whether a document is fraudulent or the beneficiary has committed fraud and, if so, whether the fraud was material.

    Material fraud by the beneficiary occurs only when the beneficiary has no colorable right to expect honor and where there is no basis in fact to support such a right to honor. The section indorses articulations such as those stated in Intraworld Indus. v. Girard Trust Bank, 336 A.2d 316 (Pa. 1975), Roman Ceramics Corp. v. People’s Nat. Bank, 714 F.2d 1207 (3d Cir. 1983), and similar decisions and embraces certain decisions under Section 5-114 that relied upon the phrase “fraud in the transaction.” Some of these decisions have been summarized as follows in Ground Air Transfer, Inc. v. Westate’s Airlines, Inc., 899 F.2d 1269, 1272-73 (1st Cir. 1990):

    We have said throughout that courts may not “normally” issue an injunction because of an important exception to the general “no injunction” rule. The exception, as we also explained in Itek, 730 F.2d at 24-25, concerns “fraud” so serious as to make it obviously pointless and unjust to permit the beneficiary to obtain the money. Where the circumstances “plainly” show that the underlying contract forbids the beneficiary to call a letter of credit, Itek, 730 F.2d at 24; where they show that the contract deprives the beneficiary of even a “colorable” right to do so, id., at 25; where the contract and circumstances reveal that the beneficiary’s demand for payment has “absolutely no basis in fact,” id.; see Dynamics Corp. of America, 356 F.Supp. at 999; where the beneficiary’s conduct has “so vitiated the entire transaction that the legitimate purposes of the independence of the issuer’s obligation would no longer be served,” Itek, 730 F.2d at 25 (quoting Roman Ceramics Corp. v. Peoples National Bank, 714 F.2d 1207, 1212 n.12, 1215 (3d Cir. 1983) (quoting Intraworld Indus., 336 A.2d at 324-25)); then a court may enjoin payment.

  2. Subsection (a)(2) makes clear that the issuer may honor in the face of the applicant’s claim of fraud. The subsection also makes clear what was not stated in former Section 5-114, that the issuer may dishonor and defend that dishonor by showing fraud or forgery of the kind stated in subsection (a). Because issuers may be liable for wrongful dishonor if they are unable to prove forgery or material fraud, presumably most issuers will choose to honor despite applicant’s claims of fraud or forgery unless the applicant procures an injunction. Merely because the issuer has a right to dishonor and to defend that dishonor by showing forgery or material fraud does not mean it has a duty to the applicant to dishonor. The applicant’s normal recourse is to procure an injunction, if the applicant is unable to procure an injunction, it will have a claim against the issuer only in the rare case in which it can show that the issuer did not honor in good faith.
  3. Whether a beneficiary can commit fraud by presenting a draft under a clean letter of credit (one calling only for a draft and no other documents) has been much debated. Under the current formulation it would be possible but difficult for there to be fraud in such a presentation. If the applicant were able to show that the beneficiary were committing material fraud on the applicant in the underlying transaction, then payment would facilitate a material fraud by the beneficiary on the applicant and honor could be enjoined. The courts should be skeptical of claims of fraud by one who has signed a “suicide” or clean credit and thus granted a beneficiary the right to draw by mere presentation of a draft.
  4. The standard for injunctive relief is high, and the burden remains on the applicant to show, by evidence and not by mere allegation, that such relief is warranted. Some courts have enjoined payments on letters of credit on insufficient showing by the applicant. For example, in Griffin Cos. v. First Nat. Bank, 374 N.W.2d 768 (Minn. App. 1985), the court enjoined payment under a standby letter of credit, basing its decision on plaintiff’s allegation, rather than competent evidence, of fraud.

    There are at least two ways to prohibit injunctions against honor under this section after acceptance of a draft by the issuer. First is to define honor (see Section 5-102(a)(8)) in the particular letter of credit to occur upon acceptance and without regard to later payment of the acceptance. Second is explicitly to agree that the applicant has no right to an injunction after acceptance — whether or not the acceptance constitutes honor.

  5. Although the statute deals principally with injunctions against honor, it also cautions against granting “similar relief” and the same principles apply when the applicant or issuer attempts to achieve the same legal outcome by injunction against presentation (see Ground Air Transfer, Inc. v. Westates Airlines, Inc., 899 F.2d 1269 (1st Cir. 1990)), interpleader, declaratory judgment, or attachment. These attempts should face the same obstacles that face efforts to enjoin the issuer from paying. Expanded use of any of these devices could threaten the independence principle just as much as injunctions against honor. For that reason courts should have the same hostility to them and place the same restrictions on their use as would be applied to injunctions against honor. Courts should not allow the “sacred cow of equity to trample the tender vines of letter of credit law.”
  6. Section 5-109(a)(1) also protects specified third parties against the risk of fraud. By issuing a letter of credit that nominates a person to negotiate or pay, the issuer (ultimately the applicant) induces that nominated person to give value and thereby assumes the risk that a draft drawn under the letter of credit will be transferred to one with a status like that of a holder in due course who deserves to be protected against a fraud defense.
  7. The “loss” to be protected against — by bond or otherwise under subsection (b)(2) — includes incidental damages. Among those are legal fees that might be incurred by the beneficiary or issuer in defending against an injunction action.

355.5-110. Warranties.

  1. If its presentation is honored, the beneficiary warrants:
    1. To the issuer, any other person to whom presentation is made, and the applicant that there is no fraud or forgery of the kind described in KRS 355.5-109 (1); and
    2. To the applicant that the drawing does not violate any agreement between the applicant and beneficiary or any other agreement intended by them to be augmented by the letter of credit.
  2. The warranties in subsection (1) of this section are in addition to warranties arising under Articles 3, 4, 7, and 8 of this chapter because of the presentation or transfer of documents covered by any of those articles.

History. Enact. Acts 1958, ch. 77, § 5-110, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 10, effective July 1, 2001.

Official Comment

  1. Since the warranties in subsection (a) are not given unless a letter of credit has been honored, no breach of warranty under this subsection can be a defense to dishonor by the issuer. Any defense must be based on Section 5-108 or 5-109 and not on this section. Also, breach of the warranties by the beneficiary in subsection (a) cannot excuse the applicant’s duty to reimburse.
  2. The warranty in Section 5-110(a)(2) assumes that payment under the letter of credit is final. It does not run to the issuer, only to the applicant. In most cases the applicant will have a direct cause of action for breach of the underlying contract. This warranty has primary application in standby letters of credit or other circumstances where the applicant is not a party to an underlying contract with the beneficiary. It is not a warranty that the statements made on the presentation of the documents presented are truthful nor is it a warranty that the documents strictly comply under Section 5-108(a). It is a warranty that the beneficiary has performed all the acts expressly and implicitly necessary under any underlying agreement to entitle the beneficiary to honor. If, for example, an underlying sales contract authorized the beneficiary to draw only upon “due performance” and the beneficiary drew even though it had breached the underlying contract by delivering defective goods, honor of its draw would break the warranty. By the same token, if the underlying contract authorized the beneficiary to draw only upon actual default or upon its or a third party’s determination of default by the applicant and if the beneficiary drew in violation of its authorization, then upon honor of its draw the warranty would be breached. In many cases, therefore, the documents presented to the issuer will contain inaccurate statements (concerning the goods delivered or concerning default or other matters), but the breach of warranty arises not because the statements are untrue but because the beneficiary’s drawing violated its express or implied obligations in the underlying transaction.
  3. The damages for breach of warranty are not specified in Section 5-111. Courts may find damage analogies in Section 2-714 in Article 2 and in warranty decisions under Articles 3 and 4.

    Unlike wrongful dishonor cases — where the damages usually equal the amount of the draw — the damages for breach of warranty will often be much less than the amount of the draw, sometimes zero. Assume a seller entitled to draw only on proper performance of its sales contract. Assume it breaches the sales contract in a way that gives the buyer a right to damages but no right to reject. The applicant’s damages for breach of the warranty in subsection (a)(2) are limited to the damages it could recover for breach of the contract of sale. Alternatively assume an underlying agreement that authorizes a beneficiary to draw only the “amount in default.” Assume a default of $200,000 and a draw of $500,000. The damages for breach of warranty would be no more than $300,000.

355.5-111. Remedies.

  1. If an issuer wrongfully dishonors or repudiates its obligation to pay money under a letter of credit before presentation, the beneficiary, successor, or nominated person presenting on its own behalf may recover from the issuer the amount that is the subject of the dishonor or repudiation. If the issuer’s obligation under the letter of credit is not for the payment of money, the claimant may obtain specific performance or, at the claimant’s election, recover an amount equal to the value of performance from the issuer. In either case, the claimant may also recover incidental but not consequential damages. The claimant is not obligated to take action to avoid damages that might be due from the issuer under this subsection. If, although not obligated to do so, the claimant avoids damages, the claimant’s recovery from the issuer must be reduced by the amount of damages avoided. The issuer has the burden of proving the amount of damages avoided. In the case of repudiation the claimant need not present any document.
  2. If an issuer wrongfully dishonors a draft or demand presented under a letter of credit or honors a draft or demand in breach of its obligation to the applicant, the applicant may recover damages resulting from the breach, including incidental but not consequential damages, less any amount saved as a result of the breach.
  3. If an adviser or nominated person other than a confirmer breaches an obligation under this article or an issuer breaches an obligation not covered in subsection (1) or (2) of this section, a person to whom the obligation is owed may recover damages resulting from the breach, including incidental but not consequential damages, less any amount saved as a result of the breach. To the extent of the confirmation, a confirmer has the liability of an issuer specified in this subsection and subsections (1) and (2) of this section.
  4. An issuer, nominated person, or adviser who is found liable under subsection (1), (2), or (3) of this section shall pay interest on the amount owed thereunder from the date of wrongful dishonor or other appropriate date.
  5. Reasonable attorney’s fees and other expenses of litigation must be awarded to the prevailing party in an action in which a remedy is sought under this article.
  6. Damages that would otherwise be payable by a party for breach of an obligation under this article may be liquidated by agreement or undertaking, but only in an amount or by a formula that is reasonable in light of the harm anticipated.

History. Enact. Acts 1958, ch. 77, § 5-111, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 11, effective July 1, 2001.

Official Comment

  1. The right to specific performance is new. The express limitation on the duty of the beneficiary to mitigate damages adopts the position of certain courts and commentators. Because the letter of credit depends upon speed and certainty of payment, it is important that the issuer not be given an incentive to dishonor. The issuer might have an incentive to dishonor if it could rely on the burden of mitigation falling on the beneficiary, (to sell goods and sue only for the difference between the price of the goods sold and the amount due under the letter of credit). Under the scheme contemplated by Section 5-111(a), the beneficiary would present the documents to the issuer. If the issuer wrongfully dishonored, the beneficiary would have no further duty to the issuer with respect to the goods covered by documents that the issuer dishonored and returned. The issuer thus takes the risk that the beneficiary will let the goods rot or be destroyed. Of course the beneficiary may have a duty of mitigation to the applicant arising from the underlying agreement, but the issuer would not have the right to assert that duty by way of defense or setoff. See Section 5-117(d). If the beneficiary sells the goods covered by dishonored documents or if the beneficiary sells a draft after acceptance but before dishonor by the issuer, the net amount so gained should be subtracted from the amount of the beneficiary’s damages — at least where the damage claim against the issuer equals or exceeds the damage suffered by the beneficiary. If, on the other hand, the beneficiary suffers damages in an underlying transaction in an amount that exceeds the amount of the wrongfully dishonored demand (e.g., where the letter of credit does not cover 100 percent of the underlying obligation), the damages avoided should not necessarily be deducted from the beneficiary’s claim against the issuer. In such a case, the damages would be the lesser of (i) the amount recoverable in the absence of mitigation (that is, the amount that is subject to the dishonor or repudiation plus any incidental damages) and (ii) the damages remaining after deduction for the amount of damages actually avoided.

    A beneficiary need not present documents as a condition of suit for anticipatory repudiation, but if a beneficiary could never have obtained documents necessary for a presentation conforming to the letter of credit, the beneficiary cannot recover for anticipatory repudiation of the letter of credit. Doelger v. Battery Park Bank, 201 A.D. 515, 194 N.Y.S. 582 (1922) and Decor by Nikkei Int’l, Inc. v. Federal Republic of Nigeria, 497 F.Supp. 893 (S.D.N.Y. 1980), aff’d, 647 F.2d 300 (2d Cir. 1981), cert. denied, 454 U.S. 1148 (1982). The last sentence of subsection (c) does not expand the liability of a confirmer to persons to whom the confirmer would not otherwise be liable under Section 5-107.

    Almost all letters of credit, including those that call for an acceptance, are “obligations to pay money” as that term is used in Section 5-111(a).

  2. What damages “result” from improper honor is for the courts to decide. Even though an issuer pays a beneficiary in violation of Section 5-108(a) or of its contract with the applicant, it may have no liability to an applicant. If the underlying contract has been fully performed, the applicant may not have been damaged by the issuer’s breach. Such a case would occur when A contracts for goods at $100 per ton, but, upon delivery, the market value of conforming goods has decreased to $25 per ton. If the issuer pays over discrepancies, there should be no recovery by A for the price differential if the issuer’s breach did not alter the applicant’s obligation under the underlying contract, i.e., to pay $100 per ton for goods now worth $25 per ton. On the other hand, if the applicant intends to resell the goods and must itself satisfy the strict compliance requirements under a second letter of credit in connection with its sale, the applicant may be damaged by the issuer’s payment despite discrepancies because the applicant itself may then be unable to procure honor on the letter of credit where it is the beneficiary, and may be unable to mitigate its damages by enforcing its rights against others in the underlying transaction. Note that an issuer found liable to its applicant may have recourse under Section 5-117 by subrogation to the applicant’s claim against the beneficiary or other persons.

    One who inaccurately advises a letter of credit breaches its obligation to the beneficiary, but may cause no damage. If the beneficiary knows the terms of the letter of credit and understands the advice to be inaccurate, the beneficiary will have suffered no damage as a result of the adviser’s breach.

  3. Since the confirmer has the rights and duties of an issuer, in general it has an issuer’s liability, see subsection (c). The confirmer is usually a confirming bank. A confirming bank often also plays the role of an adviser. If it breaks its obligation to the beneficiary, the confirming bank may have liability as an issuer or, depending upon the obligation that was broken, as an adviser. For example, a wrongful dishonor would give it liability as an issuer under Section 5-111(a). On the other hand a confirming bank that broke its obligation to advise the credit but did not commit wrongful dishonor would be treated under Section 5-111(c).
  4. Consequential damages for breach of obligations under this article are excluded in the belief that these damages can best be avoided by the beneficiary or the applicant and out of the fear that imposing consequential damages on issuers would raise the cost of the letter of credit to a level that might render it uneconomic. A fortiori punitive and exemplary damages are excluded, however, this section does not bar recovery of consequential or even punitive damages for breach of statutory or common law duties arising outside of this article.
  5. The section does not specify a rate of interest. It leaves the setting of the rate to the court. It would be appropriate for a court to use the rate that would normally apply in that court in other situations where interest is imposed by law.
  6. The court must award attorney’s fees to the prevailing party, whether that party is an applicant, a beneficiary, an issuer, a nominated person, or adviser. Since the issuer may be entitled to recover its legal fees and costs from the applicant under the reimbursement agreement, allowing the issuer to recover those fees from a losing beneficiary may also protect the applicant against undeserved losses. The party entitled to attorneys’ fees has been described as the “prevailing party.” Sometimes it will be unclear which party “prevailed,” for example, where there are multiple issues and one party wins on some and the other party wins on others. Determining which is the prevailing party is in the discretion of the court. Subsection (e) authorizes attorney’s fees in all actions where a remedy is sought “under this article.” It applies even when the remedy might be an injunction under Section 5-109 or when the claimed remedy is otherwise outside of Section 5-111. Neither an issuer nor a confirmer should be treated as a “losing” party when an injunction is granted to the applicant over the objection of the issuer or confirmer; accordingly neither should be liable for fees and expenses in that case.

    “Expenses of litigation” is intended to be broader than “costs.” For example, expense of litigation would include travel expenses of witnesses, fees for expert witnesses, and expenses associated with taking depositions.

  7. For the purposes of Section 5-111(f) “harm anticipated” must be anticipated at the time when the agreement that includes the liquidated damage clause is executed or at the time when the undertaking that includes the clause is issued. See Section 2A-504.

355.5-112. Transfer of letter of credit.

If a letter of credit is transferable, the issuer may refuse to recognize or carry out a transfer if:

  1. The transfer would violate applicable law; or
  2. The transferor or transferee has failed to comply with any requirement stated in the letter of credit or any other requirement relating to transfer imposed by the issuer which is within the standard practice referred to in KRS 355.5-108 (5) or is otherwise reasonable under the circumstances.

History. Enact. Acts 1958, ch. 77, § 5-112, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 12, effective July 1, 2001.

Official Comment

  1. In order to protect the applicant’s reliance on the designated beneficiary, letter of credit law traditionally has forbidden the beneficiary to convey to third parties its right to draw or demand payment under the letter of credit. Subsection (a) codifies that rule. The term “transfer” refers to the beneficiary’s conveyance of that right. Absent incorporation of the UCP (which make elaborate provision for partial transfer of a commercial letter of credit) or similar trade practice and absent other express indication in the letter of credit that the term is used to mean something else, a term in the letter of credit indicating that the beneficiary has the right to transfer should be taken to mean that the beneficiary may convey to a third party its right to draw or demand payment. Even in that case, the issuer or other person controlling the transfer may make the beneficiary’s right to transfer subject to conditions, such as timely notification, payment of a fee, delivery of the letter of credit to the issuer or other person controlling the transfer, or execution of appropriate forms to document the transfer. A nominated person who is not a confirmer has no obligation to recognize a transfer.

    The power to establish “requirements” does not include the right absolutely to refuse to recognize transfers under a transferable letter of credit. An issuer who wishes to retain the right to deny all transfers should not issue transferable letters of credit or should incorporate the UCP. By stating its requirements in the letter of credit an issuer may impose any requirement without regard to its conformity to practice or reasonableness. Transfer requirements of issuers and nominated persons must be made known to potential transferors and transferees to enable those parties to comply with the requirements. A common method of making such requirements known is to use a form that indicates the information that must be provided and the instructions that must be given to enable the issuer or nominated person to comply with a request to transfer.

  2. The issuance of a transferable letter of credit with the concurrence of the applicant is ipso facto an agreement by the issuer and applicant to permit a beneficiary to transfer its drawing right and permit a nominated person to recognize and carry out that transfer without further notice to them. In international commerce, transferable letters of credit are often issued under circumstances in which a nominated person or adviser is expected to facilitate the transfer from the original beneficiary to a transferee and to deal with that transferee. In those circumstances it is the responsibility of the nominated person or adviser to establish procedures satisfactory to protect itself against double presentation or dispute about the right to draw under the letter of credit. Commonly such a person will control the transfer by requiring that the original letter of credit be given to it or by causing a paper copy marked as an original to be issued where the original letter of credit was electronic. By keeping possession of the original letter of credit the nominated person or adviser can minimize or entirely exclude the possibility that the original beneficiary could properly procure payment from another bank. If the letter of credit requires presentation of the original letter of credit itself, no other payment could be procured. In addition to imposing whatever requirements it considers appropriate to protect itself against double payment the person that is facilitating the transfer has a right to charge an appropriate fee for its activity.

    “Transfer” of a letter of credit should be distinguished from “assignment of proceeds.” The former is analogous to a novation or a substitution of beneficiaries. It contemplates not merely payment to but also performance by the transferee. For example, under the typical terms of transfer for a commercial letter of credit, a transferee could comply with a letter of credit transferred to it by signing and presenting its own draft and invoice. An assignee of proceeds, on the other hand, is wholly dependent on the presentation of a draft and invoice signed by the beneficiary.

    By agreeing to the issuance of a transferable letter of credit, which is not qualified or limited, the applicant may lose control over the identity of the person whose performance will earn payment under the letter of credit.

355.5-113. Transfer by operation of law.

  1. A successor of a beneficiary may consent to amendments, sign and present documents, and receive payment or other items of value in the name of the beneficiary without disclosing its status as a successor.
  2. A successor of a beneficiary may consent to amendments, sign and present documents, and receive payment or other items of value in its own name as the disclosed successor of the beneficiary. Except as otherwise provided in subsection (5) of this section, an issuer shall recognize a disclosed successor of a beneficiary as beneficiary in full substitution for its predecessor upon compliance with the requirements for recognition by the issuer of a transfer of drawing rights by operation of law under the standard practice referred to in KRS 355.5-108 (5) or, in the absence of such a practice, compliance with other reasonable procedures sufficient to protect the issuer.
  3. An issuer is not obliged to determine whether a purported successor is a successor of a beneficiary or whether the signature of a purported successor is genuine or authorized.
  4. Honor of a purported successor’s apparently complying presentation under subsection (1) or (2) of this section has the consequences specified in KRS 355.5-108 (9) even if the purported successor is not the successor of a beneficiary. Documents signed in the name of the beneficiary or of a disclosed successor by a person who is neither the beneficiary nor the successor of the beneficiary are forged documents for the purposes of KRS 355.5-109 .
  5. An issuer whose rights of reimbursement are not covered by subsection (4) of this section or substantially similar law and any confirmer or nominated person may decline to recognize a presentation under subsection (2) of this section.
  6. A beneficiary whose name is changed after the issuance of a letter of credit has the same rights and obligations as a successor of a beneficiary under this section.

History. Enact. Acts 1958, ch. 77, § 5-113, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 13, effective July 1, 2001.

Official Comment

This section affirms the result in Pastor v. Nat. Republic Bank of Chicago, 76 Ill.2d 139, 390 N.E.2d 894 (Ill. 1979) and Federal Deposit Insurance Co. v. Bank of Boulder, 911 F.2d 1466 (10th Cir. 1990).

An issuer’s requirements for recognition of a successor’s status might include presentation of a certificate of merger, a court order appointing a bankruptcy trustee or receiver, a certificate of appointment as bankruptcy trustee, or the like. The issuer is entitled to rely upon such documents which on their face demonstrate that presentation is made by a successor of a beneficiary. It is not obliged to make an independent investigation to determine the fact of succession.

355.5-114. Assignment of proceeds.

  1. In this section, “proceeds of a letter of credit” means the cash, check, accepted draft, or other item of value paid or delivered upon honor or giving of value by the issuer or any nominated person under the letter of credit. The term does not include a beneficiary’s drawing rights or documents presented by the beneficiary.
  2. A beneficiary may assign its right to part or all of the proceeds of a letter of credit. The beneficiary may do so before presentation as a present assignment of its right to receive proceeds contingent upon its compliance with the terms and conditions of the letter of credit.
  3. An issuer or nominated person need not recognize an assignment of proceeds of a letter of credit until it consents to the assignment.
  4. An issuer or nominated person has no obligation to give or withhold its consent to an assignment of proceeds of a letter of credit, but consent may not be unreasonably withheld if the assignee possesses and exhibits the letter of credit and presentation of the letter of credit is a condition to honor.
  5. Rights of a transferee beneficiary or nominated person are independent of the beneficiary’s assignment of the proceeds of a letter of credit and are superior to the assignee’s right to the proceeds.
  6. Neither the rights recognized by this section between an assignee and an issuer, transferee beneficiary, or nominated person nor the issuer’s or nominated person’s payment of proceeds to an assignee or a third person affect the rights between the assignee and any person other than the issuer, transferee beneficiary, or nominated person. The mode of creating and perfecting a security interest in or granting an assignment of a beneficiary’s rights to proceeds is governed by Article 9 of this chapter or other law. Against persons other than the issuer, transferee beneficiary, or nominated person, the rights and obligations arising upon the creation of a security interest or other assignment of a beneficiary’s right to proceeds and its perfection are governed by Article 9 of this chapter or other law.

History. Enact. Acts 1958, ch. 77, § 5-114, effective July 1, 1960; 1986, ch. 118, § 7, effective July 1, 1987; 1996, ch. 130, § 181, effective January 1, 1997; repealed and reenact., Acts 2000, ch. 408, § 14, effective July 1, 2001.

Official Comment

  1. Subsection (b) expressly validates the beneficiary’s present assignment of letter of credit proceeds if made after the credit is established but before the proceeds are realized. This section adopts the prevailing usage — “assignment of proceeds”— to an assignee. That terminology carries with it no implication, however, that an assignee acquires no interest until the proceeds are paid by the issuer. For example, an “assignment of the right to proceeds” of a letter of credit for purposes of security that meets the requirements of Section 9-203(b) would constitute the present creation of a security interest in that right. This security interest can be perfected by possession (Section 9-107) if the letter of credit is in written form. Although subsection (a) explains the meaning of “‘proceeds’ of a letter of credit,” it should be emphasized that those proceeds also may be Article 9 proceeds of other collateral. For example, if a seller of inventory receives a letter of credit to support the account that arises upon the sale, payments made under the letter of credit are Article 9 proceeds of the inventory, account, and any document of title covering the inventory. Thus, the secured party who had a perfected security interest in that inventory, account, or document has a perfected security interest in the proceeds collected under the letter of credit, so long as they are identifiable cash proceeds (Section 9-315(a), (d)). This perfection is continuous, regardless of whether the secured party perfected a security interest in the right to letter of credit proceeds.
  2. An assignee’s rights to enforce an assignment of proceeds against an issuer and the priority of the assignee’s rights against a nominated person or transferee beneficiary are governed by Article 5. Those rights and that priority are stated in subsections (c), (d), and (e). Note also that Section 4-210 gives first priority to a collecting bank that has given value for a documentary draft.
  3. By requiring that an issuer or nominated person consent to the assignment of proceeds of a letter of credit, subsections (c) and (d) follow more closely recognized national and international letter of credit practices than did prior law. In most circumstances, it has always been advisable for the assignee to obtain the consent of the issuer in order better to safeguard its right to the proceeds. When notice of an assignment has been received, issuers normally have required signatures on a consent form. This practice is reflected in the revision. By unconditionally consenting to such an assignment, the issuer or nominated person becomes bound, subject to the rights of the superior parties specified in subsection (e), to pay to the assignee the assigned letter of credit proceeds that the issuer or nominated person would otherwise pay to the beneficiary or another assignee.

    Where the letter of credit must be presented as a condition to honor and the assignee holds and exhibits the letter of credit to the issuer or nominated person, the risk to the issuer or nominated person of having to pay twice is minimized. In such a situation, subsection (d) provides that the issuer or nominated person may not unreasonably withhold its consent to the assignment.

NOTES TO DECISIONS

1.Fraud.

The seller and beneficiary of two (2) standby letters of credit issued by the bank for the buyer did not commit fraud in its demand for payment of the letters of credit as contemplated by subsection (2) of this section, where there was some basis in fact in the seller’s claim for payment, and the purpose for the letters of credit was to protect the seller for goods shipped to the buyer in the event the latter failed to pay. Audio Systems, Inc. v. First Nat'l Bank, 753 S.W.2d 553, 1988 Ky. App. LEXIS 94 (Ky. Ct. App. 1988).

2.Standby Letters of Credit.

Documents by which a bank promised to pay a customer’s debt in the event of default, upon provision of proper documentation, were “standby letters of credit,” and were valid credits, even if the amount promised by the bank exceeded 20% of its capital. Security Finance Group, Inc. v. Northern Kentucky Bank & Trust, Inc., 858 F.2d 304, 1988 U.S. App. LEXIS 12863 (6th Cir. Ky. 1988 ).

355.5-115. Statute of limitations.

An action to enforce a right or obligation arising under this article must be commenced within one (1) year after the expiration date of the relevant letter of credit or one (1) year after the claim for relief accrues, whichever occurs later. A claim for relief accrues when the breach occurs, regardless of the aggrieved party’s lack of knowledge of the breach.

History. Enact. Acts 1958, ch. 77, § 5-115, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 15, effective July 1, 2001.

Official Comment

  1. This section is based upon Sections 4-111 and 2-725(2).
  2. This section applies to all claims for which there are remedies under Section 5-111 and to other claims made under this article, such as claims for breach of warranty under Section 5-110. Because it covers all claims under Section 5-111, the statute of limitations applies not only to wrongful dishonor claims against the issuer but also to claims between the issuer and the applicant arising from the reimbursement agreement. These might be for reimbursement (issuer v. applicant) or for breach of the reimbursement contract by wrongful honor (applicant v. issuer).
  3. The statute of limitations, like the rest of the statute, applies only to a letter of credit issued on or after the effective date and only to transactions, events, obligations, or duties arising out of or associated with such a letter. If a letter of credit was issued before the effective date and an obligation on that letter of credit was breached after the effective date, the complaining party could bring its suit within the time that would have been permitted prior to the adoption of Section 5-115 and would not be limited by the terms of Section 5-115.

355.5-116. Choice of law and forum.

  1. The liability of an issuer, nominated person, or adviser for action or omission is governed by the law of the jurisdiction chosen by an agreement in the form of a record signed or otherwise authenticated by the affected parties in the manner provided in KRS 355.5-104 or by a provision in the person’s letter of credit, confirmation, or other undertaking. The jurisdiction whose law is chosen need not bear any relation to the transaction.
  2. Except as otherwise provided in this subsection, the liability of an issuer, nominated person, or adviser is governed by any rules of custom or practice, such as the Uniform Customs and Practice for Documentary Credits, to which the letter of credit, confirmation, or other undertaking is expressly made subject. If:
    1. This article would govern the liability of an issuer, nominated person, or adviser under subsection (1) of this section;
    2. The relevant undertaking incorporates rules of custom or practice; and
    3. There is conflict between this article and those rules as applied to that undertaking, those rules govern except to the extent of any conflict with the nonvariable provisions specified in KRS 355.5-103 (3).
  3. If there is conflict between this article and Article 3, 4, 4A, or 9 of this chapter, this article governs.
  4. The forum for settling disputes arising out of an undertaking within this article may be chosen in the manner and with the binding effect that governing law may be chosen in accordance with subsection (1) of this section.

History. Enact. Acts 1958, ch. 77, § 5-116, effective July 1, 1960; 1986, ch. 118, § 8, effective July 1, 1987; repealed and reenact., Acts 2000, ch. 408, § 16, effective July 1, 2001.

Official Comment

  1. Although it would be possible for the parties to agree otherwise, the law normally chosen by agreement under subsection (a) and that provided in the absence of agreement under subsection (b) is the substantive law of a particular jurisdiction not including the choice of law principles of that jurisdiction. Thus, two parties, an issuer and an applicant, both located in Oklahoma might choose the law of New York. Unless they agree otherwise, the section anticipates that they wish the substantive law of New York to apply to their transaction and they do not intend that a New York choice of law principle might direct a court to Oklahoma law. By the same token, the liability of an issuer located in New York is governed by New York substantive law—in the absence of agreement—even in circumstances in which choice of law principles found in the common law of New York might direct one to the law of another State. Subsection (b) states the relevant choice of law principles and it should not be subordinated to some other choice of law rule. Within the States of the United States renvoi will not be a problem once every jurisdiction has enacted Section 5-116 because every jurisdiction will then have the same choice of law rule and in a particular case all choice of law rules will point to the same substantive law.

    Subsection (b) does not state a choice of law rule for the “liability of an applicant.” However, subsection (b) does state a choice of law rule for the liability of an issuer, nominated person, or adviser, and since some of the issues in suits by applicants against those persons involve the “liability of an issuer, nominated person, or adviser,” subsection (b) states the choice of law rule for those issues. Because an issuer may have liability to a confirmer both as an issuer (Section 5-108(a), Comment 5 to Section 5-108) and as an applicant (Section 5-107(a), Comment 1 to Section 5-107, Section 5-108(i)), subsection (b) may state the choice of law rule for some but not all of the issuer’s liability in a suit by a confirmer.

  2. Because the confirmer or other nominated person may choose different law from that chosen by the issuer or may be located in a different jurisdiction and fail to choose law, it is possible that a confirmer or nominated person may be obligated to pay (under their law) but will not be entitled to payment from the issuer (under its law). Similarly, the rights of an unreimbursed issuer, confirmer, or nominated person against a beneficiary under Section 5-109, 5-110, or 5-117, will not necessarily be governed by the same law that applies to the issuer’s or confirmer’s obligation upon presentation. Because the UCP and other practice are incorporated in most international letters of credit, disputes arising from different legal obligations to honor have not been frequent. Since Section 5-108 incorporates standard practice, these problems should be further minimized—at least to the extent that the same practice is and continues to be widely followed.
  3. This section does not permit what is now authorized by the nonuniform Section 5-102(4) in New York. Under the current law in New York a letter of credit that incorporates the UCP is not governed in any respect by Article 5. Under revised Section 5-116 letters of credit that incorporate the UCP or similar practice will still be subject to Article 5 in certain respects. First, incorporation of the UCP or other practice does not override the nonvariable terms of Article 5. Second, where there is no conflict between Article 5 and the relevant provision of the UCP or other practice, both apply. Third, practice provisions incorporated in a letter of credit will not be effective if they fail to comply with Section 5-103(c). Assume, for example, that a practice provision purported to free a party from any liability unless it were “grossly negligent” or that the practice generally limited the remedies that one party might have against another. Depending upon the circumstances, that disclaimer or limitation of liability might be ineffective because of Section 5-103(c).

    Even though Article 5 is generally consistent with UCP 500, it is not necessarily consistent with other rules or with versions of the UCP that may be adopted after Article 5’s revision, or with other practices that may develop. Rules of practice incorporated in the letter of credit or other undertaking are those in effect when the letter of credit or other undertaking is issued. Except in the unusual cases discussed in the immediately preceding paragraph, practice adopted in a letter of credit will override the rules of Article 5 and the parties to letter of credit transactions must be familiar with practice (such as future versions of the UCP) that is explicitly adopted in letters of credit.

  4. In several ways Article 5 conflicts with and overrides similar matters governed by Articles 3 and 4. For example, “draft” is more broadly defined in letter of credit practice than under Section 3-104. The time allowed for honor and the required notification of reasons for dishonor are different in letter of credit practice than in the handling of documentary and other drafts under Articles 3 and 4.
  5. Subsection (e) must be read in conjunction with existing law governing subject matter jurisdiction. If the local law restricts a court to certain subject matter jurisdiction not including letter of credit disputes, subsection (e) does not authorize parties to choose that forum. For example, the parties’ agreement under Section 5-116(e) would not confer jurisdiction on a probate court to decide a letter of credit case.

    If the parties choose a forum under subsection (e) and if—because of other law—that forum will not take jurisdiction, the parties’ agreement or undertaking should then be construed (for the purpose of forum selection) as though it did not contain a clause choosing a particular forum. That result is necessary to avoid sentencing the parties to eternal purgatory where neither the chosen State nor the State which would have jurisdiction but for the clause will take jurisdiction—the former in disregard of the clause and the latter in honor of the clause.

NOTES TO DECISIONS

1.Application.

Law of New York and the International Standby Practices 1998 International Chamber of Commerce Publication No. 590 were applied, pursuant to a choice of law provision in a letter of credit. The parties were allowed to designate which jurisdiction’s law to apply, pursuant to KRS 355.5-116 and N.Y. U.C.C. Law § 5-116(a). Louisville Mall Assocs., LP v. Wood Ctr. Props., LLC, 361 S.W.3d 323, 2012 Ky. App. LEXIS 18 (Ky. Ct. App. 2012).

355.5-117. Subrogation of issuer, applicant, and nominated person.

  1. An issuer that honors a beneficiary’s presentation is subrogated to the rights of the beneficiary to the same extent as if the issuer were a secondary obligor of the underlying obligation owed to the beneficiary and of the applicant to the same extent as if the issuer were the secondary obligor of the underlying obligation owed to the applicant.
  2. An applicant that reimburses an issuer is subrogated to the rights of the issuer against any beneficiary, presenter, or nominated person to the same extent as if the applicant were the secondary obligor of the obligations owed to the issuer and has the rights of subrogation of the issuer to the rights of the beneficiary stated in subsection (1) of this section.
  3. A nominated person who pays or gives value against a draft or demand presented under a letter of credit is subrogated to the rights of:
    1. The issuer against the applicant to the same extent as if the nominated person were a secondary obligor of the obligation owed to the issuer by the applicant;
    2. The beneficiary to the same extent as if the nominated person were a secondary obligor of the underlying obligation owed to the beneficiary; and
    3. The applicant to same extent as if the nominated person were a secondary obligor of the underlying obligation owed to the applicant.
  4. Notwithstanding any agreement or term to the contrary, the rights of subrogation stated in subsections (1) and (2) of this section do not arise until the issuer honors the letter of credit or otherwise pays and the rights in subsection (3) of this section do not arise until the nominated person pays or otherwise gives value. Until then, the issuer, nominated person, and the applicant do not derive under this section present or prospective rights forming the basis of a claim, defense, or excuse.

History. Enact. Acts 1958, ch. 77, § 5-117, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 17, effective July 1, 2001.

Official Comment

  1. By itself this section does not grant any right of subrogation. It grants only the right that would exist if the person seeking subrogation “were a secondary obligor.” (The term “secondary obligor” refers to a surety, guarantor, or other person against whom or whose property an obligee has recourse with respect to the obligation of a third party. See Restatement of the Law Third, Suretyship and Guaranty § 1 (1996).) If the secondary obligor would not have a right to subrogation in the circumstances in which one is claimed under this section, none is granted by this section. In effect, the section does no more than to remove an impediment that some courts have found to subrogation because they conclude that the issuer’s or other claimant’s rights are “independent” of the underlying obligation. If, for example, a secondary obligor would not have a subrogation right because its payment did not fully satisfy the underlying obligation, none would be available under this section. The section indorses the position of Judge Becker in Tudor Development Group, Inc. v. United States Fidelity and Guaranty, 968 F.2d 357 (3rd Cir. 1991).
  2. To preserve the independence of the letter of credit obligation and to insure that subrogation not be used as an offensive weapon by an issuer or others, the admonition in subsection (d) must be carefully observed. Only one who has completed its performance in a letter of credit transaction can have a right to subrogation. For example, an issuer may not dishonor and then defend its dishonor or assert a setoff on the ground that it is subrogated to another person’s rights. Nor may the issuer complain after honor that its subrogation rights have been impaired by any good faith dealings between the beneficiary and the applicant or any other person. Assume, for example, that the beneficiary under a standby letter of credit is a mortgagee. If the mortgagee were obliged to issue a release of the mortgage upon payment of the underlying debt (by the issuer under the letter of credit), that release might impair the issuer’s rights of subrogation, but the beneficiary would have no liability to the issuer for having granted that release.

355.5-118. Security interest of issuer or nominated person.

  1. An issuer or nominated person has a security interest in a document presented under a letter of credit to the extent that the issuer or nominated person honors or gives value for the presentation.
  2. So long as and to the extent that an issuer or nominated person has not been reimbursed or has not otherwise recovered the value given with respect to a security interest in a document under subsection (1) of this section, the security interest continues and is subject to Article 9 of this chapter, but:
    1. A security agreement is not necessary to make the security interest enforceable under KRS 355.9-203 (2)(c);
    2. If the document is presented in a medium other than a written or other tangible medium, the security interest is perfected; and
    3. If the document is presented in a written or other tangible medium and is not a certificated security, chattel paper, a document of title, an instrument, or a letter of credit, the security interest is perfected and has priority over a conflicting security interest in the document so long as the debtor does not have possession of the document.

History. Enact. Acts 2000, ch. 408, § 18, effective July 1, 2001.

Official Comment

  1. This section gives the issuer of a letter of credit or a nominated person thereunder an automatic perfected security interest in a “document” (as that term is defined in Section 5-102(a)(6)). The security interest arises only if the document is presented to the issuer or nominated person under the letter of credit and only to the extent of the value that is given. This security interest is analogous to that awarded to a collecting bank under Section 4-210. Subsection (b) contains special rules governing the security interest arising under this section. In all other respects, a security interest arising under this section is subject to Article 9. See Section 9-109. Thus, for example, a security interest arising under this section may give rise to a security interest in proceeds under Section 9-315.
  2. Subsection (b)(1) makes a security agreement unnecessary to the creation of a security interest under this section. Under subsection (b)(2), a security interest arising under this section is perfected if the document is presented in a medium other than a written or tangible medium. Documents that are written and that are not an otherwise-defined type of collateral under Article 9 (e.g., an invoice or inspection certificate) may be goods, in which an issuer or nominated person could perfect its security interest by possession. Because the definition of document in Section 5-102(a)(6) includes records (e.g., electronic records) that may not be goods, subsection (b)(2) provides for automatic perfection (i.e., without filing or possession).

    Under subsection (b)(3), if the document (i) is in a written or tangible medium, (ii) is not a certified security, chattel paper, a document of title, an instrument, or a letter of credit, and (iii) is not in the debtor’s possession, the security interest is perfected and has priority over a conflicting security interest. If the document is a type of tangible collateral that subsection (b)(3) excludes from its perfection and priority rules, the issuer or nominated person must comply with the normal method of perfection (e.g., possession of an instrument) and is subject to the applicable Article 9 priority rules. Documents to which subsection (b)(3) applies may be important to an issuer or nominated person. For example, a confirmer who pays the beneficiary must be assured that its rights to all documents are not impaired. It will find it necessary to present all of the required documents to the issuer in order to be reimbursed. Moreover, when a nominated person sends documents to an issuer in connection with the nominated person’s reimbursement, that activity is not a collection, enforcement, or disposition of collateral under Article 9.

    One purpose of this section is to protect an issuer or nominated person from claims of a beneficiary’s creditors. It is a fallback provision inasmuch as issuers and nominated persons frequently may obtain and perfect security interests under the usual Article 9 rules, and, in many cases, the documents will be owned by the issuer, nominated person, or applicant.

Article 6. Bulk Transfers

355.6-101. Short title. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 6-101, effective July 1, 1960) was repealed by Acts 1992, ch. 116, § 65, effective July 14, 1992.

355.6-102. “Bulk transfer” — Transfers of equipment — Enterprises subject to this article — Bulk transfers subject to this article. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 6-102; 1990, ch. 237, § 1, effective July 13, 1990) was repealed by Acts 1992, ch. 116, § 65, effective July 14, 1992.

355.6-103. Transfers excepted from this article. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 6-103; 1964, ch. 130, § 10) was repealed by Acts 1992, ch. 116, § 65, effective July 14, 1992.

355.6-104. Schedule of property, list of creditors. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 6-104; 1964, ch. 130, § 11; 1978, ch. 384, § 488, effective June 17, 1978) was repealed by Acts 1992, ch. 116, § 65, effective July 14, 1992.

355.6-105. Notice to creditors. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 6-105, effective July 1, 1960) was repealed by Acts 1992, ch. 116, § 65, effective July 14, 1992.

355.6-106. Application of the proceeds. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 6-106, effective July 1, 1960) was repealed by Acts 1992, ch. 116, § 65, effective July 14, 1992.

355.6-107. The notice. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 6-107; 1964, ch. 130, § 12) was repealed by Acts 1992, ch. 116, § 65, effective July 14, 1992.

355.6-108. Auction sales — “Auctioneer.” [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 6-108; 1964, ch. 130, § 13) was repealed by Acts 1992, ch. 116, § 65, effective July 14, 1992.

355.6-109. What creditors protected. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 6-109, effective July 1, 1960) was repealed by Acts 1992, ch. 116, § 65, effective July 14, 1992.

355.6-110. Subsequent transfers. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 6-110, effective July 1, 1960) was repealed by Acts 1994, ch. 279, § 6, effective July 15, 1994.

355.6-111. Limitation of actions and levies. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 6-111, effective July 1, 1960) was repealed by Acts 1992, ch. 116, § 65, effective July 14, 1992.

Article 7. Warehouse Receipts, Bills of Lading, and Other Documents of Title

Compiler’s Notes.

The official comments in this article are copyrighted by the National Conference of Commissioners of Uniform State Laws and the American Law Institute, and are reproduced by permission.

PREFATORY NOTE

Article 7 is the last of the articles of the Uniform Commercial Code to be revised. The genesis of this project is twofold: to provide a framework for the further development of electronic documents of title and to update the article for modern times in light of state, federal and international developments. Each section has been reviewed to determine its suitability given modern practice, the need for medium and gender neutrality, and modern statutory drafting.

To provide for electronic documents of title, several definitions in Article 1 were revised including “bearer,” “bill of lading,” “delivery,” “document of title,” “holder,” and “warehouse receipt.” The concept of an electronic document of title allows for commercial practice to determine whether records issued by bailees are “in the regular course of business or financing” and are “treated as adequately evidencing that the person in possession or control of the record is entitled to receive, control, hold, and dispose of the record and the goods the record covers.” Rev. Section 1-201(b)(16). Such records in electronic form are electronic documents of title and in tangible form are tangible documents of title. Conforming amendments to other Articles of the UCC are also necessary to fully integrate electronic documents of title into the UCC. Conforming amendments to other Articles of the UCC are contained in Appendix I.

Key to the integration of the electronic document of title scheme is the concept of “control” defined in Section 7-106. This definition is adapted from the Uniform Electronic Transactions Act § 16 on Transferrable Records and from Uniform Commercial Code § 9-105 concerning control of electronic chattel paper. Control of an electronic document of title is the conceptual equivalent to possession and indorsement of a tangible document of title. Of equal importance is the acknowledgment that parties may desire to substitute an electronic document of title for an already-issued paper document and vice versa. Section 7-105 sets forth the minimum requirements that need to be fulfilled in order to give effect to the substitute document issued in the alternate medium. To the extent possible, the rules for electronic documents of title are the same or as similar as possible to the rules for tangible documents of title. If a rule is meant to be limited to one medium or the other, that is clearly stated. Rules that reference documents of title, warehouse receipts, or bills of lading without a designation to “electronic” or “tangible” apply to documents of title in either medium. As with tangible negotiable documents of title, electronic negotiable documents of title may be negotiated and duly negotiated. Section 7-501.

Other changes that have been made are:

  1. New definitions of “carrier,” “good faith,” “record”, “sign” and “shipper” in Section 7-102.
  2. Deletion of references to tariffs or filed classifications given the deregulation of the affected industries. See e.g. section 7-103 and 7-309,
  3. Clarifying the rules regarding when a document is nonnegotiable. Section 7-104.
  4. Making clear when rules apply just to warehouse receipts or bills of lading, thus eliminating the need for former section 7-105.
  5. Clarifying that particular terms need not be included in order to have a valid warehouse receipt. Section 7-202.
  6. Broadening the ability of the warehouse to make an effective limitation of liability in its warehouse receipt or storage agreement in accord with commercial practice. Section 7-204.
  7. Allowing a warehouse to have a lien on goods covered by a storage agreement and clarifying the priority rules regarding the claim of a warehouse lien as against other interests. Section 7-209.
  8. Conforming language usage to modern shipping practice. Sections 7-301 and 7-302.
  9. Clarifying the extent of the carrier’s lien. Section 7-307.
  10. Adding references to Article 2A when appropriate. See e.g. Sections 7-503, 7-504, 7-509.
  11. Clarifying that the warranty made by negotiation or delivery of a document of title should apply only in the case of a voluntary transfer of possession or control of the document. Section 7-507.
  12. Providing greater flexibility to a court regarding adequate protection against loss when ordering delivery of the goods or issuance of a substitute document. Section 7-601.
  13. Providing conforming amendments to the other Articles of the Uniform Commercial Code to accommodate electronic documents of title.

Part 1. General

355.7-101. Short title.

This article may be cited as Uniform Commercial Code — Documents of Title.

History. Enact. Acts 1958, ch. 77, § 7-101, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 1, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-101.

Changes:

Revised for style only.

This Article is a revision of the 1962 Official Text with Comments as amended since 1962. The 1962 Official Text was a consolidation and revision of the Uniform Warehouse Receipts Act and the Uniform Bills of Lading Act, and embraced the provisions of the Uniform Sales Act relating to negotiation of documents of title.

This Article does not contain the substantive criminal provisions found in the Uniform Warehouse Receipts and Bills of Lading Acts. These criminal provisions are inappropriate to a Commercial Code, and for the most part duplicate portions of the ordinary criminal law relating to frauds. This revision deletes the former Section 7-105 that provided that courts could apply a rule from Parts 2 and 3 by analogy to a situation not explicitly covered in the provisions on warehouse receipts or bills of lading when it was appropriate. This is, of course, an unexceptional proposition and need not be stated explicitly in the statute. Thus former Section 7-105 has been deleted. Whether applying a rule by analogy to a situation is appropriate depends upon the facts of each case.

The Article does not attempt to define the tort liability of bailees, except to hold certain classes of bailees to a minimum standard of reasonable care. For important classes of bailees, liabilities in case of loss, damages or destruction, as well as other legal questions associated with particular documents of title, are governed by federal statutes, international treaties, and in some cases regulatory state laws, which supersede the provisions of this Article in case of inconsistency. See Section 7-103.

Research References and Practice Aids

Kentucky Law Journal.

Young, Scope, Purposes, and Functions of the Uniform Commercial Code, 48 Ky. L.J. 191 (1960).

Whiteside, Uniform Commercial Code — Major Changes in Sales Law, 49 Ky. L.J. 165 (1960).

355.7-102. Definitions and index of definitions.

  1. In this article, unless the context otherwise requires:
    1. “Bailee” means a person that by a warehouse receipt, bill of lading, or other document of title acknowledges possession of goods and contracts to deliver them;
    2. “Carrier” means a person that issues a bill of lading;
    3. “Consignee” means a person named in a bill of lading to which or to whose order the bill promises delivery;
    4. “Consignor” means a person named in a bill of lading as the person from which the goods have been received for shipment;
    5. “Delivery order” means a record that contains an order to deliver goods directed to a warehouse, carrier, or other person that in the ordinary course of business issues warehouse receipts or bills of lading;
    6. Reserved;
    7. “Goods” means all things that are treated as movable for the purposes of a contract for storage or transportation;
    8. “Issuer” means a bailee that issues a document of title or, in the case of an unaccepted delivery order, the person that orders the possessor of goods to deliver. The term includes a person for which an agent or employee purports to act in issuing a document if the agent or employee has real or apparent authority to issue documents, even if the issuer did not receive any goods, the goods were misdescribed, or in any other respect the agent or employee violated the issuer’s instructions;
    9. “Person entitled under the document” means the holder, in the case of a negotiable document of title, or the person to which delivery of the goods is to be made by the terms of, or pursuant to instructions in a record under, a nonnegotiable document of title;
    10. Reserved;
    11. “Sign” means, with present intent to authenticate or adopt a record:
      1. To execute or adopt a tangible symbol; or
      2. To attach to or logically associate with the record an electronic sound, symbol, or process;
    12. “Shipper” means a person that enters into a contract of transportation with a carrier; and
    13. “Warehouse” means a person engaged in the business of storing goods for hire.
  2. Definitions in other articles applying to this article and the sections in which they appear are:
    1. “Contract for sale,” KRS 355.2-106 ;
    2. “Lessee in ordinary course,” KRS 355.2A-103 ; and
    3. “‘Receipt’ of goods,” KRS 355.2-103 .
  3. In addition, Article 1 of KRS Chapter 355 contains general definitions and principles of construction and interpretation applicable throughout this article.

History. Enact. Acts 1958, ch. 77, § 7-102, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 2, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-102.

Changes:

New definitions of “carrier,” “good faith,” “record,” “sign,” and “shipper.” Other definitions revised to accommodate electronic mediums.

Purposes:

  1. “Bailee” is used in this Article as a blanket term to designate carriers, warehousemen and others who normally issue documents of title on the basis of goods which they have received. The definition does not, however, require actual possession of the goods. If a bailee acknowledges possession when it does not have possession, the bailee is bound by sections of this Article which declare the “bailee’s” obligations. (See definition of “Issuer” in this section and Sections 7-203 and 7-301 on liability in case of non-receipt.) A “carrier” is one type of bailee and is defined as a person that issues a bill of lading. A “shipper” is a person who enters into the contract of transportation with the carrier. The definitions of “bailee,” “consignee,” “consignor,” “goods”, and “issuer”, are unchanged in substance from prior law. “Document of title” is defined in Article 1, and may be in either tangible or electronic form.
  2. The definition of warehouse receipt contained in the general definitions section of this Act (Section 1-201) does not require that the issuing warehouse be “lawfully engaged” in business or for profit. The warehouse’s compliance with applicable state regulations such as the filing of a bond has no bearing on the substantive issues dealt with in this Article. Certainly the issuer’s violations of law should not diminish its responsibility on documents the issuer has put in commercial circulation. But it is still essential that the business be storing goods “for hire” (Section 1-201 and this section). A person does not become a warehouse by storing its own goods.
  3. When a delivery order has been accepted by the bailee it is for practical purposes indistinguishable from a warehouse receipt. Prior to such acceptance there is no basis for imposing obligations on the bailee other than the ordinary obligation of contract which the bailee may have assumed to the depositor of the goods. Delivery orders may be either electronic or tangible documents of title. See definition of “document of title” in Section 1-201.
  4. The obligation of good faith imposed by this Article and by Article 1, Section 1-304 includes the observance of reasonable commercial standards of fair dealing.
  5. The definitions of “record” and “sign” are included to facilitate electronic mediums. See comment 9 to Section 9-102 discussing “record” and the comment to amended Section 2-103 discussing “sign.”
  6. “Person entitled under the document” is moved from former Section 7-403.
  7. These definitions apply in this Article unless the context otherwise requires. The “context” is intended to refer to the context in which the defined term is used in the Uniform Commercial Code. The definition applies whenever the defined term is used unless the context in which the defined term is used in the statute indicates that the term was not used in its defined sense. See comment to Section 1-201.

Cross references:

Point 1: Sections 1-201, 7-203 and 7-301.

Point 2: Sections 1-201 and 7-203.

Point 3: Section 1-201.

Point 4: Section 1-304.

Point 5: Sections 9-102 and 2-103.

See general comment to document of title in Section 1-201.

Definitional cross references:

“Bill of lading”. Section 1-201. “Contract”. Section 1-201. “Contract for sale”. Section 2-106. “Delivery”. Section 1-201. “Document of title”. Section 1-201. “Person”. Section 1-201. “Purchase”. Section 1-201. “Receipt of goods”. Section 2-103. “Right”. Section 1-201. “Warehouse receipt”. Section 1-201.

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Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Warehousemen, § 332.00.

355.7-103. Relation of article to treaty or statute.

  1. This article is subject to any treaty or statute of the United States or a regulatory statute of this state to the extent the treaty, statute, or regulatory statute is applicable.
  2. This article does not repeal or modify any law prescribing the form or contents of a document of title or the services or facilities to be afforded by a bailee, or otherwise regulating a bailee’s businesses in respects not specifically treated in this article. However, violation of these laws does not affect the status of a document of title that otherwise complies with the definition of a document of title.
  3. This article modifies, limits, and supersedes the federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C. secs. 7001 et seq., but does not modify, limit, or supersede Section 101(c) of that Act, 15 U.S.C. sec. 7001(c) , or authorize electronic delivery of any of the notices described in Section 103(b) of that Act, 15 U.S.C. sec. 7003(b) .
  4. To the extent there is a conflict between the Uniform Electronic Transactions Act and this article, this article governs.

History. Enact. Acts 1958, ch. 77, § 7-103, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 3, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Sections 7-103 and 10-104.

Changes:

Deletion of references to tariffs and classifications; incorporation of former Section 10-104 into subsection (b), provide for intersection with federal and state law governing electronic transactions.

Purposes:

  1. To make clear what would of course be true without the Section, that applicable Federal law is paramount.
  2. To make clear also that regulatory state statutes (such as those fixing or authorizing a commission to fix rates and prescribe services, authorizing different charges for goods of different values, and limiting liability for loss to the declared value on which the charge was based) are not affected by the Article and are controlling on the matters which they cover unless preempted by federal law. The reference in former Section 7-103 to tariffs, classifications, and regulations filed or issued pursuant to regulatory state statutes has been deleted as inappropriate in the modern era of diminished regulation of carriers and warehouses. If a regulatory scheme requires a carrier or warehouse to issue a tariff or classification, that tariff or classification would be given effect via the state regulatory scheme that this Article recognizes as controlling. Permissive tariffs or classifications would not displace the provisions of this act, pursuant to this section, but may be given effect through the ability of parties to incorporate those terms by reference into their agreement.
  3. The document of title provisions of this act supplement the federal law and regulatory state law governing bailees. This Article focuses on the commercial importance and usage of documents of title. State ex. rel Public Service Commission v. Gunkelman & Sons, Inc., 219 N.W.2d 853 (N.D. 1974).
  4. Subsection (c) is included to make clear the interrelationship between the federal Electronic Signatures in Global and National Commerce Act and this article and the conforming amendments to other articles of the Uniform Commercial Code promulgated as part of the revision of this article. Section 102 of the federal act allows a State statute to modify, limit, or supersede the provisions of Section 101 of the federal act. See the comments to Revised Article 1, Section 1-108.
  5. Subsection (d) makes clear that once this article is in effect, its provisions regarding electronic commerce and regarding electronic documents of title control in the event there is a conflict with the provisions of the Uniform Electronic Transactions Act or other applicable state law governing electronic transactions.

Cross references:

Sections 1-108, 7-201, 7-202, 7-204, 7-206, 7-309, 7-401, 7-403.

Definitional cross reference:

“Bill of lading”. Section 1-201.

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355.7-104. Negotiable and nonnegotiable document of title.

  1. A document of title is negotiable if by its terms the goods are to be delivered to bearer or to the order of a named person.
  2. A document of title other than one described in subsection (1) of this section is nonnegotiable. A bill of lading that states that the goods are consigned to a named person is not made negotiable by a provision that the goods are to be delivered only against an order in a record signed by the same or another named person.
  3. A document of title is nonnegotiable if, at the time it is issued, the document has a conspicuous legend, however expressed, that it is nonnegotiable.

History. Enact. Acts 1958, ch. 77, § 7-104, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 4, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-104.

Changes:

Subsection (a) is revised to reflect modern style and trade practice. Subsection (b) is revised for style and medium neutrality. Subsection (c) is new.

Purposes of changes:

  1. This Article deals with a class of commercial paper representing commodities in storage or transportation. This “commodity paper” is to be distinguished from what might be called “money paper” dealt with in the Article of this Act on Commercial Paper (Article 3) and “investment paper” dealt with in the Article of this Act on Investment Securities (Article 8). The class of “commodity paper” is designated “document of title” following the terminology of the Uniform Sales Act Section 76. Section 1-201. The distinctions between negotiable and nonnegotiable documents in this section makes the most important subclassification employed in the Article, in that the holder of negotiable documents may acquire more rights than its transferor had (See Section 7-502). The former Section 7-104, which provided that a document of title was negotiable if it runs to a named person or assigns if such designation was recognized in overseas trade, has been deleted as not necessary in light of current commercial practice.

    A document of title is negotiable only if it satisfies this section. “Deliverable on proper indorsement and surrender of this receipt” will not render a document negotiable. Bailees often include such provisions as a means of insuring return of nonnegotiable receipts for record purposes. Such language may be regarded as insistence by the bailee upon a particular kind of receipt in connection with delivery of the goods. Subsection (a) makes it clear that a document is not negotiable which provides for delivery to order or bearer only if written instructions to that effect are given by a named person. Either tangible or electronic documents of title may be negotiable if the document meets the requirement of this section.

  2. Subsection (c) is derived from Section 3-104(d). Prior to issuance of the document of title, an issuer may stamp or otherwise provide by a notation on the document that it is nonnegotiable even if the document would otherwise comply with the requirement of subsection (a). Once issued as a negotiable document of title, the document cannot be changed from a negotiable document to a nonnegotiable document. A document of title that is nonnegotiable cannot be made negotiable by stamping or providing a notation that the document is negotiable. The only way to make a document of title negotiable is to comply with subsection (a). A negotiable document of title may fail to be duly negotiated if the negotiation does not comply with the requirements for “due negotiation” stated in Section 7-501.

Cross references:

Sections 7-501 and 7-502.

Definitional cross references:

“Bearer”. Section 1-201. “Bill of lading”. Section 1-201. “Delivery”. Section 1-201. “Document of title”. Section 1-201. “Person”. Section 1-201. “Sign”. Section 7-102. “Warehouse receipt”. Section 1-201.

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355.7-105. Reissuance in alternative medium.

  1. Upon request of a person entitled under an electronic document of title, the issuer of the electronic document may issue a tangible document of title as a substitute for the electronic document if:
    1. The person entitled under the electronic document surrenders control of the document to the issuer; and
    2. The tangible document when issued contains a statement that it is issued in substitution for the electronic document.
  2. Upon issuance of a tangible document of title in substitution for an electronic document of title in accordance with subsection (1) of this section:
    1. The electronic document ceases to have any effect or validity; and
    2. The person that procured issuance of the tangible document warrants to all subsequent persons entitled under the tangible document that the warrantor was a person entitled under the electronic document when the warrantor surrendered control of the electronic document to the issuer.
  3. Upon request of a person entitled under a tangible document of title, the issuer of the tangible document may issue an electronic document of title as a substitute for the tangible document if:
    1. The person entitled under the tangible document surrenders possession of the document to the issuer; and
    2. The electronic document when issued contains a statement that it is issued in substitution for the tangible document.
  4. Upon issuance of the electronic document of title in substitution for a tangible document of title in accordance with subsection (1) of this section:
    1. The tangible document ceases to have any effect or validity; and
    2. The person that procured issuance of the electronic document warrants to all subsequent persons entitled under the electronic document that the warrantor was a person entitled under the tangible document when the warrantor surrendered possession of the tangible document to the issuer.

History. Enact. Acts 1958, ch. 77, § 7-105, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 5, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

None.

Other relevant law:

UNCITRAL Draft Instrument on the Carriage of Goods by Sea Transport Law.

Purposes:

  1. This section allows for documents of title issued in one medium to be reissued in another medium. This section applies to both negotiable and nonnegotiable documents. This section sets forth minimum requirements for giving the reissued document effect and validity. The issuer is not required to issue a document in an alternative medium and if the issuer chooses to do so, it may impose additional requirements. Because a document of title imposes obligations on the issuer of the document, it is imperative for the issuer to be the one who issues the substitute document in order for the substitute document to be effective and valid.
  2. The request must be made to the issuer by the person entitled to enforce the document of title (Section 7-102(a)(9)) and that person must surrender possession or control of the original document to the issuer. The reissued document must have a notation that it has been issued as a substitute for the original document. These minimum requirements must be met in order to give the substitute document effect and validity. If these minimum requirements are not met for issuance of a substitute document of title, the original document of title continues to be effective and valid. Section 7-402. However, if the minimum requirements imposed by this section are met, in addition to any other requirements that the issuer may impose, the substitute document will be the document that is effective and valid.
  3. To protect parties who subsequently take the substitute document of title, the person who procured issuance of the substitute document warrants that it was a person entitled under the original document at the time it surrendered possession or control of the original document to the issuer. This warranty is modeled after the warranty found in Section 4-209.

Cross references:

Sections 7-106, 7-402 and 7-601.

Definitional cross references:

“Person entitled to enforce”. Section 7-102.

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355.7-106. Control of electronic document of title.

  1. A person has control of an electronic document of title if a system employed for evidencing the transfer of interests in the electronic document reliably establishes that person as the person to which the electronic document was issued or transferred.
  2. A system satisfies subsection (1) of this section, and a person is deemed to have control of an electronic document of title, if the document is created, stored, and assigned in such a manner that:
    1. A single authoritative copy of the document exists which is unique, identifiable, and, except as otherwise provided in paragraphs (d), (e), and (f) of this subsection, unalterable;
    2. The authoritative copy identifies the person asserting control as:
      1. The person to which the document was issued; or
      2. If the authoritative copy indicates that the document has been transferred, the person to which the document was most recently transferred;
    3. The authoritative copy is communicated to and maintained by the person asserting control or its designated custodian;
    4. Copies or amendments that add or change an identified assignee of the authoritative copy can be made only with the consent of the person asserting control;
    5. Each copy of the authoritative copy and any copy of a copy is readily identifiable as a copy that is not the authoritative copy; and
    6. Any amendment of the authoritative copy is readily identifiable as authorized or unauthorized.

History. Enact. Acts 2012, ch. 132, § 6, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Uniform Electronic Transactions Act Section 16.

Purposes:

  1. The section defines “control” for electronic documents of title and derives its rules from the Uniform Electronic Transactions Act § 16 on transferrable records. Unlike UETA § 16, however, a document of title may be reissued in an alternative medium pursuant to Section 7-105. At any point in time in which a document of title is in electronic form, the control concept of this section is relevant. As under UETA § 16, the control concept embodied in this section provides the legal framework for developing systems for electronic documents of title.
  2. Control of an electronic document of title substitutes for the concept of indorsement and possession in the tangible document of title context. See Section 7-501. A person with a tangible document of title delivers the document by voluntarily transferring possession and a person with an electronic document of title delivers the document by voluntarily transferring control. (Delivery is defined in Section 1-201).
  3. Subsection (a) sets forth the general rule that the “system employed for evidencing the transfer of interests in the electronic document reliably establishes that person as the person to which the electronic document was issued or transferred.” The key to having a system that satisfies this test is that identity of the person to which the document was issued or transferred must be reliably established. Of great importance to the functioning of the control concept is to be able to demonstrate, at any point in time, the person entitled under the electronic document. For example, a carrier may issue an electronic bill of lading by having the required information in a database that is encrypted and accessible by virtue of a password. If the computer system in which the required information is maintained identifies the person as the person to which the electronic bill of lading was issued or transferred, that person has control of the electronic document of title. That identification may be by virtue of passwords or other encryption methods. Registry systems may satisfy this test. For example, see the electronic warehouse receipt system established pursuant to 7 C.F.R. Part 735. This Article leaves to the market place the development of sufficient technologies and business practices that will meet the test.

    An electronic document of title is evidenced by a record consisting of information stored in an electronic medium. Section 1-201. For example, a record in a computer database could be an electronic document of title assuming that it otherwise meets the definition of document of title. To the extent that third parties wish to deal in paper mediums, Section 7-105 provides a mechanism for exiting the electronic environment by having the issuer reissue the document of title in a tangible medium. Thus if a person entitled to enforce an electronic document of title causes the information in the record to be printed onto paper without the issuer’s involvement in issuing the document of title pursuant to Section 7-105, that paper is not a document of title.

  4. Subsection (a) sets forth the general test for control. Subsection (b) sets forth a safe harbor test that if satisfied, results in control under the general test in subsection (a). The test in subsection (b) is also used in Section 9-105 although Section 9-105 does not include the general test of subsection (a). Under subsection (b), at any point in time, a party should be able to identify the single authoritative copy which is unique and identifiable as the authoritative copy. This does not mean that once created that the authoritative copy need be static and never moved or copied from its original location. To the extent that backup systems exist which result in multiple copies, the key to this idea is that at any point in time, the one authoritative copy needs to be unique and identifiable.

    Parties may not by contract provide that control exists. The test for control is a factual test that depends upon whether the general test in subsection (a) or the safe harbor in subsection (b) is satisfied.

  5. Article 7 has historically provided for rights under documents of title and rights of transferees of documents of title as those rights relate to the goods covered by the document. Third parties may possess or have control of documents of title. While misfeasance or negligence in failure to transfer or misdelivery of the document by those third parties may create serious issues, this Article has never dealt with those issues as it relates to tangible documents of title, preferring to leave those issues to the law of contracts, agency and tort law. In the electronic document of title regime, third party registry systems are just beginning to develop. It is very difficult to write rules regulating those third parties without some definitive sense of how the third party registry systems will be structured. Systems that are evolving to date tend to be “closed” systems in which all participants must sign on to the master agreement which provides for rights as against the registry system as well as rights among the members. In those closed systems, the document of title never leaves the system so the parties rely upon the master agreement as to rights against the registry for its failures in dealing with the document. This article contemplates that those “closed” systems will continue to evolve and that the control mechanism in this statute provides a method for the participants in the closed system to achieve the benefits of obtaining control allowed by this article.

    This article also contemplates that parties will evolve open systems where parties need not be subject to a master agreement. In an open system a party that is expecting to obtain rights through an electronic document may not be a party to the master agreement. To the extent that open systems evolve by use of the control concept contained in this section, the law of contracts, agency, and torts as it applies to the registry’s misfeasance or negligence concerning the transfer of control of the electronic document will allocate the risks and liabilities of the parties as that other law now does so for third parties who hold tangible documents and fail to deliver the documents.

Cross references:

Sections 7-105 and 7-501.

Definitional cross references:

“Delivery”. Section 1-201. “Document of title”. Section 1-201.

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Part 2. Warehouse Receipts: Special Provisions

355.7-201. Person that may issue a warehouse receipt — Storage under bond.

  1. A warehouse receipt may be issued by any warehouse.
  2. If goods, including distilled spirits and agricultural commodities, are stored under a statute requiring a bond against withdrawal or a license for the issuance of receipts in the nature of warehouse receipts, a receipt issued for the goods is deemed to be a warehouse receipt even if issued by a person that is the owner of the goods and is not a warehouse.

History. Enact. Acts 1958, ch. 77, § 7-201, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 7, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-201.

Changes:

Update for style only.

Purposes:

It is not intended by re-enactment of subsection (a) to repeal any provisions of special licensing or other statutes regulating who may become a warehouse. Limitations on the transfer of the receipts and criminal sanctions for violation of such limitations are not impaired. Section 7-103. Compare Section 7-401(4) on the liability of the issuer in such cases. Subsection (b) covers receipts issued by the owner for whiskey or other goods stored in bonded warehouses under such statutes as 26 U.S.C. Chapter 51.

Cross references:

Sections 7-103, 7-401.

Definitional cross references:

“Warehouse receipt”. Section 1-201. “Warehouse”. Section 7-102.

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NOTES TO DECISIONS

1.Goods Not in Possession of Issuer.

Where warehouse receipts showed on their face that whiskey was not in the possession of distillery whose president issued the receipts but in a bonded government warehouse owned by another, the purchaser had knowledge of facts which should have put him on inquiry and he was not a holder in due course. (decided under prior law) Old '76 Distillery Co. v. Wiechelman, 266 Ky. 533 , 99 S.W.2d 725, 1936 Ky. LEXIS 706 ( Ky. 1936 ).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

355.7-202. Form of warehouse receipt — Effect of omission.

  1. A warehouse receipt need not be in any particular form.
  2. Unless a warehouse receipt provides for each of the following, the warehouse is liable for damages caused to a person injured by its omission:
    1. The location of the warehouse facility where the goods are stored;
    2. The date of issue of the receipt;
    3. The unique identification code of the receipt;
    4. A statement whether the goods received will be delivered to the bearer, to a named person, or to a named person or its order;
    5. The rate of storage and handling charges, but if goods are stored under a field warehousing arrangement, a statement of that fact is sufficient on a nonnegotiable receipt;
    6. A description of the goods or the packages containing them;
    7. The signature of the warehouse or its agent;
    8. If the receipt is issued for goods that the warehouse owns, either solely, jointly, or in common with others, the fact of that ownership; and
    9. A statement of the amount of advances made and of liabilities incurred for which the warehouse claims a lien or security interest, but if the precise amount of advances made or of liabilities incurred is, at the time of the issue of the receipt, unknown to the warehouse or to its agent that issued the receipt, a statement of the fact that advances have been made or liabilities incurred and the purpose of the advances or liabilities is sufficient.
  3. A warehouse may insert in its receipt any terms that are not contrary to the Uniform Commercial Code and do not impair its obligation of delivery under KRS 355.7-403 or its duty of care under KRS 355.7-204 . Any contrary provisions are ineffective.

History. Enact. Acts 1958, ch. 77, § 7-202, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 8, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-202.

Changes:

Language is updated to accommodate electronic commerce and to reflect modern style.

Purposes:

  1. This section does not displace any particular legislation that requires other terms in a warehouse receipt or that may require a particular form of a warehouse receipt. This section does not require that a warehouse receipt be issued. A warehouse receipt that is issued need not contain any of the terms listed in subsection (b) in order to qualify as a warehouse receipt as long as the receipt falls within the definition of “warehouse receipt” in Article 1. Thus the title has been changed to eliminate the phrase “essential terms” as provided in prior law. The only consequence of a warehouse receipt not containing any term listed in subsection (b) is that a person injured by a term’s omission has a right as against the warehouse for harm caused by the omission. Cases, such as In re Celotex Corp., 134 B. R. 993 (Bankr. M.D. Fla. 1991), that held that in order to have a valid warehouse receipt all of the terms listed in this section must be contained in the receipt, are disapproved.
  2. The unique identification code referred to in subsection (b)(3) can include any combination of letters, number, signs, and/or symbols that provide a unique identification. Whether an electronic or tangible warehouse receipt contains a signature will be resolved with the definition of sign in Section 7-102.

Cross references:

Sections 7-103 and 7-401.

Definitional cross references:

“Bearer”. Section 1-201. “Delivery”. Section 1-201. “Goods”. Section 7-102. “Person”. Section 1-201. “Security interest”. Section 1-201. “Sign”. Section 7-102. “Term”. Section 1-201. “Warehouse receipt”. Section 1-201. “Warehouse”. Section 7-102.

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NOTES TO DECISIONS

1.Description of Goods.

Where automobiles in warehouse fitted the general description in the warehouse receipts, the description was sufficient although the motor and serial numbers in the description were not those of the automobiles in the warehouse. (decided under prior law) General Motors Acceptance Corp. v. Sharp Motor Sales Co., 233 Ky. 290 , 25 S.W.2d 405, 1930 Ky. LEXIS 542 ( Ky. 1930 ).

355.7-203. Liability for nonreceipt or misdescription.

A party to or purchaser for value in good faith of a document of title, other than a bill of lading, that relies upon the description of the goods in the document may recover from the issuer damages caused by the nonreceipt or misdescription of the goods, except to the extent that:

  1. The document conspicuously indicates that the issuer does not know whether all or part of the goods in fact were received or conform to the description, such as a case in which the description is in terms of marks or labels or kind, quantity, or condition, or the receipt or description is qualified by “contents, condition, and quality unknown,” “said to contain,” or words of similar import, if the indication is true; or
  2. The party or purchaser otherwise has notice of the nonreceipt or misdescription.

History. Enact. Acts 1958, ch. 77, § 7-203, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 9, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-203.

Changes:

Changes to this section are for style only.

Purposes of changes and new matter:

This section is a simplified restatement of existing law as to the method by which a bailee may avoid responsibility for the accuracy of descriptions which are made by or in reliance upon information furnished by the depositor. The issuer is liable on documents issued by an agent, contrary to instructions of its principal, without receiving goods. No disclaimer of the latter liability is permitted.

Cross references:

Section 7-301.

Definitional cross references:

“Conspicuous”. Section 1-201. “Document of title”. Section 1-201. “Goods”. Section 7-102. “Good Faith”. Section 1-201 [7-102]. “Issuer”. Section 7-102. “Notice”. Section 1-201. “Party”. Section 1-201. “Purchaser”. Section 1-201. “Receipt of goods”. Section 2-103. “Value”. Section 1-204.

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NOTES TO DECISIONS

1.Misdescription of Goods.

Where automobiles in warehouse fitted the general description in the warehouse receipts, the description was sufficient although the motor and serial numbers in the description were not those of the automobiles in the warehouse. (decided under prior law) General Motors Acceptance Corp. v. Sharp Motor Sales Co., 233 Ky. 290 , 25 S.W.2d 405, 1930 Ky. LEXIS 542 ( Ky. 1930 ).

355.7-204. Duty of care — Contractual limitation of warehouse’s liability.

  1. A warehouse is liable for damages for loss of or injury to the goods caused by its failure to exercise care with regard to the goods that a reasonably careful person would exercise under similar circumstances. However, unless otherwise agreed, the warehouse is not liable for damages that could not have been avoided by the exercise of that care.
  2. Damages may be limited by a term in the warehouse receipt or storage agreement limiting the amount of liability in case of loss or damage beyond which the warehouse is not liable. Such a limitation is not effective with respect to the warehouse’s liability for conversion to its own use. The warehouse’s liability, on request of the bailor in a record at the time of signing such storage agreement or within a reasonable time after receipt of the warehouse receipt, may be increased on part or all of the goods covered by the storage agreement or the warehouse receipt. In this event, increased rates may be charged based on an increased valuation of the goods.
  3. Reasonable provisions as to the time and manner of presenting claims and commencing actions based on the bailment may be included in the warehouse receipt or storage agreement.

History. Enact. Acts 1958, ch. 77, § 7-204, effective July 1, 1960; 1960, ch. 250, § 4, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 10, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-204.

Changes:

Updated to reflect modern, standard commercial practices.

Purposes of changes:

  1. Subsection (a) continues the rule without change from former Section 7-204 on the warehouse’s obligation to exercise reasonable care.
  2. Former Section 7-204(2) required that the term limiting damages do so by setting forth a specific liability per article or item or of a value per unit of weight. This requirement has been deleted as out of step with modern industry practice. Under subsection (b) a warehouse may limit its liability for damages for loss of or damage to the goods by a term in the warehouse receipt or storage agreement without the term constituting an impermissible disclaimer of the obligation of reasonable care. The parties cannot disclaim by contract the warehouse’s obligation of care. Section 1-302. For example, limitations based upon per unit of weight, per package, per occurrence, or per receipt as well as limitations based upon a multiple of the storage rate may be commercially appropriate. As subsection (d) makes clear, the states or the federal government may supplement this section with more rigid standards of responsibility for some or all bailees.
  3. Former Section 7-204(2) also provided that an increased rate cannot be charged if contrary to a tariff. That language has been deleted. If a tariff is required under state or federal law, pursuant to Section 7-103(a), the tariff would control over the rule of this section allowing an increased rate. The provisions of a non-mandatory tariff may be incorporated by reference in the parties’ agreement. See Comment 2 to Section 7-103. Subsection (c) deletes the reference to tariffs for the same reason that the reference has been omitted in subsection (b).
  4. As under former Section 7-204(2), subsection (b) provides that a limitation of damages is ineffective if the warehouse has converted the goods to its own use. A mere failure to redeliver the goods is not conversion to the warehouse’s own use. See  Adams v. Ryan & Christie Storage, Inc., 563 F. Supp. 409 (E.D. Pa. 1983) aff’d 725 F.2d 666 (3rd Cir. 1983). Cases such as  I.C.C. Metals Inc. v. Municipal Warehouse Co., 409 N.E. 2d 849 (N.Y. Ct. App. 1980) holding that mere failure to redeliver results in a presumption of conversion to the warehouse’s own use are disapproved. “Conversion to its own use” is narrower than the idea of conversion generally. Cases such as  Lipman v. Peterson, 575 P.2d 19 (Kan. 1978) holding to the contrary are disapproved.
  5. Storage agreements commonly establish the contractual relationship between warehouses and depositors who have an on-going relationship. The storage agreement may allow for the movement of goods into and out of a warehouse without the necessity of issuing or amending a warehouse receipt upon each entry or exit of goods from the warehouse.

Cross references:

Sections 1-302, 7-103, 7-309 and 7-403.

Definitional cross references:

“Goods”. Section 7-102. “Reasonable time”. Section 1-204. “Sign”. Section 7-102. “Term”. Section 1-201. “Value”. Section 1-204. “Warehouse receipt”. Section 1-201. “Warehouse”. Section 7-102.

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NOTES TO DECISIONS

1.Presumption of Negligence.

Where goods stored in the defendant’s warehouse by plaintiff were not all accounted for, in order to rebut the presumption created by the evidence of an unexplained loss it would be necessary that the defendant show that the loss resulted from a nonnegligent cause. D. H. Overmyer Co. v. Hirsch Bros. & Co., 459 S.W.2d 598, 1970 Ky. LEXIS 138 ( Ky. 1970 ).

2.Loss Resulting from Act of God.

A warehouseman was not responsible for loss resulting from an act of God, but he could not claim this defense where he was warned of the approaching calamity and failed to use ordinary care to protect the goods or remove them to a place of safety. (decided under prior law) Merchants Ice & Cold Storage Co. v. United Produce Co., 279 Ky. 519 , 131 S.W.2d 469, 1939 Ky. LEXIS 311 ( Ky. 1939 ).

3.Negligence After Flood Warning.

In the early stages of a flood where it could be reasonably anticipated no danger would occur, it was not negligence to fail to remove goods to a safe place, but where danger was announced and warning given of its approach and warehouseman had time to save goods by ordinary care, he was liable. (decided under prior law) Merchants Ice & Cold Storage Co. v. United Produce Co., 279 Ky. 519 , 131 S.W.2d 469, 1939 Ky. LEXIS 311 ( Ky. 1939 ).

Where meteorologists’ predictions justified belief that 1937 flood would not reach defendant’s warehouse, at least not before the following week, and warehouseman started removing goods from basement with an ordinary force, he was not negligent in not sooner removing goods or employing a larger force. (decided under prior law) Merchants Ice & Cold Storage Co. v. United Produce Co., 279 Ky. 519 , 131 S.W.2d 469, 1939 Ky. LEXIS 311 ( Ky. 1939 ).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

355.7-205. Title under warehouse receipt defeated in certain cases.

A buyer in the ordinary course of business of fungible goods sold and delivered by a warehouse that is also in the business of buying and selling such goods takes the goods free of any claim under a warehouse receipt even if the receipt is negotiable and has been duly negotiated.

History. Enact. Acts 1958, ch. 77, § 7-205, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 11, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-205.

Changes:

Changes for style only.

Purposes:

  1. The typical case covered by this section is that of the warehouse-dealer in grain, and the substantive question at issue is whether in case the warehouse becomes insolvent the receipt holders shall be able to trace and recover grain shipped to farmers and other purchasers from the elevator. This was possible under the old acts, although courts were eager to find estoppels to prevent it. The practical difficulty of tracing fungible grain means that the preservation of this theoretical right adds little to the commercial acceptability of negotiable grain receipts, which really circulate on the credit of the warehouse. Moreover, on default of the warehouse, the receipt holders at least share in what grain remains, whereas retaking the grain from a good faith cash purchaser reduces the purchaser completely to the status of general creditor in a situation where there was very little the purchaser could do to guard against the loss. Compare 15 U.S.C. Section 714p enacted in 1955.
  2. This provision applies to both negotiable and nonnegotiable warehouse receipts. The concept of due negotiation is provided for in 7-501. The definition of “buyer in ordinary course” is in Article 1 and provides, among other things, that a buyer must either have possession or a right to obtain the goods under Article 2 in order to be a buyer in ordinary course. This section requires actual delivery of the fungible goods to the buyer in ordinary course. Delivery requires voluntary transfer of possession of the fungible goods to the buyer. See amended Section 2-103. This section is not satisfied by the delivery of the document of title to the buyer in ordinary course.

Cross references:

Sections 2-403 and 9-320.

Definitional cross references:

“Buyer in ordinary course of business”. Section 1-201. “Delivery”. Section 1-201. “Duly negotiate”. Section 7-501. “Fungible” goods. Section 1-201. “Goods”. Section 7-102. “Value”. Section 1-204. “Warehouse receipt”. Section 1-201. “Warehouse”. Section 7-102.

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Research References and Practice Aids

Kentucky Law Journal.

Whiteside, Uniform Commercial Code — Major Changes in Sales Law, 49 Ky. L.J. 165 (1960).

355.7-206. Termination of storage at warehouse’s option.

  1. A warehouse, by giving notice to the person on whose account the goods are held and any other person known to claim an interest in the goods, may require payment of any charges and removal of the goods from the warehouse at the termination of the period of storage fixed by the document of title or, if a period is not fixed, within a stated period not less than thirty (30) days after the warehouse gives notice. If the goods are not removed before the date specified in the notice, the warehouse may sell them pursuant to KRS 355.7-210 .
  2. If a warehouse in good faith believes that goods are about to deteriorate or decline in value to less than the amount of its lien within the time provided in subsection (1) of this section and KRS 355.7-210 , the warehouse may specify in the notice given under subsection (1) of this section any reasonable shorter time for removal of the goods and, if the goods are not removed, may sell them at public sale held not less than one (1) week after a single advertisement or posting.
  3. If, as a result of a quality or condition of the goods of which the warehouse did not have notice at the time of deposit, the goods are a hazard to other property, the warehouse facilities, or other persons, the warehouse may sell the goods at public or private sale without advertisement or posting on reasonable notification to all persons known to claim an interest in the goods. If the warehouse, after a reasonable effort, is unable to sell the goods, it may dispose of them in any lawful manner and does not incur liability by reason of that disposition.
  4. A warehouse shall deliver the goods to any person entitled to them under this article upon due demand made at any time before sale or other disposition under this section.
  5. A warehouse may satisfy its lien from the proceeds of any sale or disposition under this section but shall hold the balance for delivery on the demand of any person to which the warehouse would have been bound to deliver the goods.

History. Enact. Acts 1958, ch. 77, § 7-206, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 12, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-206.

Changes:

Changes for style.

Purposes of changes:

  1. This section provides for three situations in which the warehouse may terminate storage for reasons other than enforcement of its lien as permitted by Section 7-210. Most warehousing is for an indefinite term, the bailor being entitled to delivery on reasonable demand. It is necessary to define the warehouse’s power to terminate the bailment, since it would be commercially intolerable to allow warehouses to order removal of the goods on short notice. The thirty day period provided where the document does not carry its own period of termination corresponds to commercial practice of computing rates on a monthly basis. The right to terminate under subsection (a) includes a right to require payment of “any charges”, but does not depend on the existence of unpaid charges.
  2. In permitting expeditious disposition of perishable and hazardous goods the pre-Code Uniform Warehouse Receipts Act, Section 34, made no distinction between cases where the warehouse knowingly undertook to store such goods and cases where the goods were discovered to be of that character subsequent to storage. The former situation presents no such emergency as justifies the summary power of removal and sale. Subsections (b) and (c) distinguish between the two situations. The reason of this section should apply if the goods become hazardous during the course of storage. The process for selling the goods described in Section 7-210 governs the sale of goods under this section except as provided in subsections (b) and (c) for the situations described in those subsections respectively.
  3. Protection of its lien is the only interest which the warehouse has to justify summary sale of perishable goods which are not hazardous. This same interest must be recognized when the stored goods, although not perishable, decline in market value to a point which threatens the warehouse’s security.
  4. The right to order removal of stored goods is subject to provisions of the public warehousing laws of some states forbidding warehouses from discriminating among customers. Nor does the section relieve the warehouse of any obligation under the state laws to secure the approval of a public official before disposing of deteriorating goods. Such regulatory statutes and the regulations under them remain in force and operative. Section 7-103.

Cross references:

Sections 7-103 and 7-403.

Definitional cross references:

“Delivery”. Section 1-201. “Document of title”. Section 1-102. “Good faith”. Section 1-201 [7-102]. “Goods”. Section 7-102. “Notice”. Section 1-202. “Notification”. Section 1-202. “Person”. Section 1-201. “Reasonable time”. Section 1-205. “Value”. Section 1-204. “Warehouse”. Section 7-102.

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355.7-207. Goods must be kept separate — Fungible goods.

  1. Unless the warehouse receipt provides otherwise, a warehouse shall keep separate the goods covered by each receipt so as to permit at all times identification and delivery of those goods. However, different lots of fungible goods may be commingled.
  2. If different lots of fungible goods are commingled, the goods are owned in common by the persons entitled thereto and the warehouse is severally liable to each owner for that owner’s share. If, because of overissue, a mass of fungible goods is insufficient to meet all the receipts the warehouse has issued against it, the persons entitled include all holders to which overissued receipts have been duly negotiated.

History. Enact. Acts 1958, ch. 77, § 7-207, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 13, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-207.

Changes:

Changes for style only.

Purposes of changes:

No change of substance is made from former Section 7-207. Holders to whom overissued receipts have been duly negotiated shall share in a mass of fungible goods. Where individual ownership interests are merged into claims on a common fund, as is necessarily the case with fungible goods, there is no policy reason for discriminating between successive purchasers of similar claims.

Definitional cross references:

“Delivery”. Section 1-201. “Duly negotiate”. Section 7-501. “Fungible goods”. Section 1-201. “Goods”. Section 7-102. “Holder”. Section 1-201. “Person”. Section 1-201. “Warehouse receipt”. Section 1-201. “Warehouse”. Section 7-102.

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355.7-208. Altered warehouse receipts.

If a blank in a negotiable tangible warehouse receipt has been filled in without authority, a good faith purchaser for value and without notice of the lack of authority may treat the insertion as authorized. Any other unauthorized alteration leaves any tangible or electronic warehouse receipt enforceable against the issuer according to its original tenor.

History. Enact. Acts 1958, ch. 77, § 7-208, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 14, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-208.

Changes:

To accommodate electronic documents of title.

Purposes of changes:

  1. The execution of tangible warehouse receipts in blank is a dangerous practice. As between the issuer and an innocent purchaser the risks should clearly fall on the former. The purchaser must have purchased the tangible negotiable warehouse receipt in good faith and for value to be protected under the rule of the first sentence which is a limited exception to the general rule in the second sentence. Electronic document of title systems should have protection against unauthorized access and unauthorized changes. See 7-106. Thus the protection for good faith purchasers found in the first sentence is not necessary in the context of electronic documents.
  2. Under the second sentence of this section, an unauthorized alteration whether made with or without fraudulent intent does not relieve the issuer of its liability on the warehouse receipt as originally executed. The unauthorized alteration itself is of course ineffective against the warehouse. The rule stated in the second sentence applies to both tangible and electronic warehouse receipts.

Definitional cross references:

“Good faith”. Section 1-201 [7-102]. “Issuer”. Section 7-102. “Notice”. Section 1-202. “Purchaser”. Section 1-201. “Value”. Section 1-204. “Warehouse receipt”. Section 1-201.

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355.7-209. Lien of warehouse.

  1. A warehouse has a lien against the bailor on the goods covered by a warehouse receipt or storage agreement or on the proceeds thereof in its possession for charges for storage or transportation, including demurrage and terminal charges, insurance, labor, or other charges, present or future, in relation to the goods, and for expenses necessary for preservation of the goods or reasonably incurred in their sale pursuant to law. If the person on whose account the goods are held is liable for similar charges or expenses in relation to other goods whenever deposited and it is stated in the warehouse receipt or storage agreement that a lien is claimed for charges and expenses in relation to other goods, the warehouse also has a lien against the goods covered by the warehouse receipt or storage agreement or on the proceeds thereof in its possession for those charges and expenses, whether or not the other goods have been delivered by the warehouse. However, as against a person to which a negotiable warehouse receipt is duly negotiated, a warehouse’s lien is limited to charges in an amount or at a rate specified in the warehouse receipt or, if no charges are so specified, to a reasonable charge for storage of the specific goods covered by the receipt subsequent to the date of the receipt.
  2. The warehouse may also reserve a security interest under Article 9 of this chapter against the bailor for the maximum amount specified on the receipt for charges other than those specified in subsection (1) of this section, such as for money advanced and interest. A security interest is governed by Article 9 of this chapter.
  3. A warehouse’s lien for charges and expenses under subsection (1) of this section or a security interest under subsection (2) of this section is also effective against any person that so entrusted the bailor with possession of the goods that a pledge of them by the bailor to a good faith purchaser for value would have been valid. However, the lien or security interest is not effective against a person that before issuance of a document of title had a legal interest or a perfected security interest in the goods and that did not:
    1. Deliver or entrust the goods or any document covering the goods to the bailor or the bailor’s nominee with actual or apparent authority to ship, store, or sell; or with power to obtain delivery under KRS 355.7-403 ; or with power of disposition under KRS 355.2A-304 (2), 355.2A-305 (2), 355.7-403 , or 355.9-320 or other statute or rule of law; or
    2. Acquiesce in the procurement by the bailor or its nominee of any document.
  4. A warehouse’s lien on household goods for charges and expenses in relation to the goods under subsection (1) of this section is also effective against all persons if the depositor was the legal possessor of the goods at the time of deposit. In this subsection, “household goods” means furniture, furnishings, or personal effects used by the depositor in a dwelling.
  5. A warehouse loses its lien on any goods that it voluntarily delivers or unjustifiably refuses to deliver.

History. Enact. Acts 1958, ch. 77, § 7-209, effective July 1, 1960; 1986, ch. 118, § 9, effective July 1, 1987; repealed and reenact., Acts 2012, ch. 132, § 15, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Sections 7-209 and 7-503.

Changes:

Expanded to recognize warehouse lien when a warehouse receipt is not issued but goods are covered by a storage agreement

Purposes of changes:

  1. Subsection (a) defines the warehouse’s statutory lien. Other than allowing a warehouse to claim a lien under this section when there is a storage agreement and not a warehouse receipt, this section remains unchanged in substance from former Section 7-209(1). Under the first sentence, a specific lien attaches automatically without express notation on the receipt or storage agreement with regard to goods stored under the receipt or the storage agreement. That lien is limited to the usual charges arising out of a storage transaction.
  2. Subsection (b) provides for a security interest based upon agreement. Such a security interest arises out of relations between the parties other than bailment for storage or transportation, as where the bailee assumes the role of financier or performs a manufacturing operation, extending credit in reliance upon the goods covered by the receipt. Such a security interest is not a statutory lien. Compare Sections 9-109 and 9-333. It is governed in all respects by Article 9, except that subsection (b) requires that the receipt specify a maximum amount and limits the security interest to the amount specified. A warehouse could also take a security interest to secure its charges for storage and the other expenses listed in subsection (a) to protect these claims upon the loss of the statutory possessory warehouse lien if the warehouse loses possession of the goods as provided in subsection (e).
  3. Subsections (a) and (b) validate the lien and security interest “against the bailor.” Under basic principles of derivative rights as provided in Section 7-504, the warehouse lien is also valid as against parties who obtain their rights from the bailor except as otherwise provided in subsection (a), third sentence, or subsection (c).
  4. As under previous law, this section creates a statutory possessory lien in favor of the warehouse on the goods stored with the warehouse or on the proceeds of the goods. The warehouse loses its lien if it loses possession of the goods or the proceeds. Subsection (e).
  5. Where goods have been stored under a non-negotiable warehouse receipt and are sold by the person to whom the receipt has been issued, frequently the goods are not withdrawn by the new owner. The obligations of the seller of the goods in this situation are set forth in Section 2-503(4) on tender of delivery and include procurement of an acknowledgment by the bailee of the buyer’s right to possession of the goods. If a new receipt is requested, such an acknowledgment can be withheld until storage charges have been paid or provided for. The statutory lien for charges on the goods sold, granted by the first sentence of subsection (a), continues valid unless the bailee gives it up. See Section 7-403. But once a new receipt is issued to the buyer, the buyer becomes “the person on whose account the goods are held” under the second sentence of subsection (a); unless the buyer undertakes liability for charges in relation to other goods stored by the seller, there is no general lien against the buyer for such charges. Of course, the bailee may preserve the general lien in such a case either by an arrangement by which the buyer “is liable for” such charges, or by reserving a security interest under subsection (b).
  6. A possessory warehouse lien arises as provided under subsection (a) if the parties to the bailment have a storage agreement or a warehouse receipt is issued. In the modern warehouse, the bailor and the bailee may enter into a master contract governing the bailment with the bailee and bailor keeping track of the goods stored pursuant to the master contract by notation on their respective books and records and the parties send notification via electronic communication as to what goods are covered by the master contract. Warehouse receipts are not issued. See Comment 4 to Section 7-204. There is no particular form for a warehouse receipt and failure to contain any of the terms listed in Section 7-202 does not deprive the warehouse of its lien that arises under subsection (a). See the comment to Section 7-202.

Example 1: Bailor stored goods with a warehouse and the warehouse issued a warehouse receipt. A lien against those goods arose as set forth in subsection (a), the first sentence, for the charges for storage and the other expenses of those goods. The warehouse may enforce its lien under Section 7-210 as against the bailor. Whether the warehouse receipt is negotiable or nonnegotiable is not important to the warehouse’s rights as against the bailor.

Under the second sentence, by notation on the receipt or storage agreement, the lien can be made a general lien extending to like charges in relation to other goods. Both the specific lien and general lien are as to goods in the possession of the warehouse and extend to proceeds from the goods as long as the proceeds are in the possession of the warehouse. The same rules apply whether the receipt is negotiable or non-negotiable.

Example 2: Bailor stored goods (lot A) with a warehouse and the warehouse issued a warehouse receipt for those goods. In the warehouse receipt it is stated that the warehouse will also have a lien on goods covered by the warehouse receipt for storage charges and the other expenses for any other goods that are stored with the warehouse by the bailor. The statement about the lien on other goods does not specify an amount or a rate. Bailor then stored other goods (lot B) with the warehouse. Under subsection (a), first sentence, the warehouse has a lien on the specific goods (lot A) covered by the warehouse receipt. Under subsection (a), second sentence, the warehouse has a lien on the goods in lot A for the storage charges and the other expenses arising from the goods in lot B. That lien is enforceable as against the bailor regardless of whether the receipt is negotiable or nonnegotiable.

Under the third sentence, if the warehouse receipt is negotiable, the lien as against a holder of that receipt by due negotiation is limited to the amount or rate specified on the receipt for the specific lien or the general lien, or, if none is specified, to a reasonable charge for storage of the specific goods covered by the receipt for storage after the date of the receipt.

Example 3: Same facts as Example 1 except that the warehouse receipt is negotiable and has been duly negotiated (Section 7-501) to a person other than the bailor. Under the last sentence of subsection (a), the warehouse may enforce its lien against the bailor’s goods stored in the warehouse as against the person to whom the negotiable warehouse receipt has been duly negotiated. Section 7-502. That lien is limited to the charges or rates specified in the receipt or a reasonable charge for storage as stated in the last sentence of subsection (a).

Example 4: Same facts as Example 2 except that the warehouse receipt is negotiable and has been duly negotiated (Section 7-501) to a person other than the bailor. Under the last sentence of subsection (a), the lien on lot A goods for the storage charges and the other expenses arising from storage of lot B goods is not enforceable as against the person to whom the receipt has been duly negotiated. Without a statement of a specified amount or rate for the general lien, the warehouse’s general lien is not enforceable as against the person to whom the negotiable document has been duly negotiated. However, the warehouse lien for charges and expenses related to storage of lot A goods is still enforceable as against the person to whom the receipt was duly negotiated.

Example 5. Same facts as Examples 2 and 4 except the warehouse had stated on the negotiable warehouse receipt a specified amount or rate for the general lien on other goods (lot B). Under the last sentence of subsection (a), the general lien on lot A goods for the storage charges and the other expenses arising from storage of lot B goods is enforceable as against the person to whom the receipt has been duly negotiated.

Example 6: Bailor stores goods with a warehouse and the warehouse issues a warehouse receipt that states that the warehouse is taking a security interest in the bailed goods for charges of storage, expenses, for money advanced, for manufacturing services rendered, and all other obligations that the bailor may owe the warehouse. That is a security interest covered in all respects by Article 9. Subsection (b). As allowed by this section, a warehouse may rely upon its statutory possessory lien to protect its charges for storage and the other expenses related to storage. For those storage charges covered by the statutory possessory lien, the warehouse is not required to use a security interest under subsection (b).

Example 7: Bailor stores goods with a warehouse and the warehouse issues a nonnegotiable warehouse receipt that also claims a general lien in other goods stored with the warehouse. A lien on the bailed goods for the charges for storage and the other expenses arises under subsection (a). Bailor notifies the warehouse that the goods have been sold to Buyer and the bailee acknowledges that fact to the Buyer. Section 2-503. The warehouse lien for storage of those goods is effective against Buyer for both the specific lien and the general lien. Section 7-504.

Example 8: Bailor stores goods with a warehouse and the warehouse issues a nonnegotiable warehouse receipt. A lien on the bailed goods for the charges for storage and the other expenses arises under subsection (a). Bailor grants a security interest in the goods while the goods are in the warehouse’s possession to Secured Party (SP) who properly perfects a security interest in the goods. See Revised 9-312(d). The warehouse lien is superior in priority over SP’s security interest. See Revised 9-203(b)(2) (debtor can grant a security interest to the extent of debtor’s rights in the collateral).

Example 9: Bailor stores goods with a warehouse and the warehouse issues a negotiable warehouse receipt. A lien on the bailed goods for the charges for storage and the other expenses arises under subsection (a). Bailor grants a security interest in the negotiable document to SP. SP properly perfects its interest in the negotiable document by taking possession through a “due negotiation.” Revised 9-312(c). SP’s security interest is subordinate to the warehouse lien. Section 7-209(a), third sentence. Given that bailor’s rights are subject to the warehouse lien, the bailor cannot grant to the SP greater rights than the bailor has under Section 9-203(b)(2), perfection of the security interest in the negotiable document and the goods covered by the document through SP’s filing of a financing statement should not give a different result.

As against third parties who have interests in the goods prior to the storage with the warehouse, subsection (c) continues the rule under the prior uniform statutory provision that to validate the lien or security interest of the warehouse, the owner must have entrusted the goods to the depositor, and that the circumstances must be such that a pledge by the depositor to a good faith purchaser for value would have been valid. Thus the owner’s interest will not be subjected to a lien or security interest arising out of a deposit of its goods by a thief. The warehouse may be protected because of the actual, implied or apparent authority of the depositor, because of a Factor’s Act, or because of other circumstances which would protect a bona fide pledgee, unless those circumstances are denied effect under the second sentence of subsection (c). The language of Section 7-503 is brought into subsection (c) for purposes of clarity. The comments to Section 7-503 are helpful in interpreting delivery, entrustment or acquiescence.

Where the third party is the holder of a security interest, obtained prior to the issuance of a negotiable warehouse receipt, the rights of the warehouse depend on the priority given to a hypothetical bona fide pledgee by Article 9, particularly Section 9-322. Thus the special priority granted to statutory liens by Section 9-333 does not apply to liens under subsection (a) of this section, since subsection (c), second sentence, “expressly provides otherwise” within the meaning of Section 9-333.

As to household goods, however, subsection (d) makes the warehouse’s lien “for charges and expenses in relation to the goods” effective against all persons if the depositor was the legal possessor. The purpose of the exception is to permit the warehouse to accept household goods for storage in sole reliance on the value of the goods themselves, especially in situations of family emergency.

Example 10: Bailor grants a perfected security interest in the goods to SP prior to storage of the goods with the warehouse. Bailor then stores goods with the warehouse and the warehouse issues a warehouse receipt for the goods. A warehouse lien on the bailed goods for the charges for storage or other expenses arises under subsection (a). The warehouse lien is not effective as against SP unless SP entrusted the goods to the bailor with actual or apparent authority to ship store, or sell the goods or with power of disposition under subsection (c)(1) or acquiesced in the bailor’s procurement of a document of title under subsection (c)(2). This result obtains whether the receipt is negotiable or nonnegotiable.

Example 11: Sheriff who had lawfully repossessed household goods in an eviction action stored the goods with a warehouse. A lien on the bailed goods arises under subsection (a). The lien is effective as against the owner of the goods. Subsection (d).

Cross references:

Point 1: Sections 7-501 and 7-502.

Point 2: Sections 9-109 and 9-333.

Point 3: Sections 2-503, 7-503, 7-504, 9-203, 9-312, and 9-322.

Point 4: Sections 2-503, 7-501, 7-502, 7-504, 9-312, 9-331, 9-333, 9-401.

Point 5: Sections 2-503 and 7-403.

Point 6: Sections 7-202 and 7-204.

Definitional cross references:

“Deliver”. Section 1-201. “Document of Title”. Section 1-201. “Goods”. Section 7-102. “Money”. Section 1-201. “Person”. Section 1-201. “Purchaser”. Section 1-201. “Right”. Section 1-201. “Security interest”. Section 1-201 “Value”. Section 1-204. “Warehouse receipt”. Section 1-201. “Warehouse”. Section 7-102.

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Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Warehousemen, § 332.00.

355.7-210. Enforcement of warehouse’s lien.

  1. Except as otherwise provided in subsection (2) of this section, a warehouse’s lien may be enforced by public or private sale of the goods, in bulk or in packages, at any time or place and on any terms that are commercially reasonable, after notifying all persons known to claim an interest in the goods. The notification shall include a statement of the amount due, the nature of the proposed sale, and the time and place of any public sale. The fact that a better price could have been obtained by a sale at a different time or in a different method from that selected by the warehouse is not of itself sufficient to establish that the sale was not made in a commercially reasonable manner. The warehouse has sold in a commercially reasonable manner if the warehouse sells the goods in the usual manner in any recognized market therefor, sells at the price current in that market at the time of the sale, or has otherwise sold in conformity with commercially reasonable practices among dealers in the type of goods sold. A sale of more goods than apparently necessary to be offered to ensure satisfaction of the obligation is not commercially reasonable, except in cases covered by the preceding sentence.
  2. A warehouse’s lien on goods, other than goods stored by a merchant in the course of its business, may be enforced only if the following requirements are satisfied:
    1. All persons known to claim an interest in the goods shall be notified;
    2. The notification shall include an itemized statement of the claim, a description of the goods subject to the lien, a demand for payment within a specified time not less than ten (10) days after receipt of the notification, and a conspicuous statement that unless the claim is paid within that time the goods will be advertised for sale and sold by auction at a specified time and place;
    3. The sale shall conform to the terms of the notification;
    4. The sale shall be held at the nearest suitable place to where the goods are held or stored; and
    5. After the expiration of the time given in the notification, an advertisement of the sale shall be published once a week for two (2) weeks consecutively in a newspaper of general circulation where the sale is to be held. The advertisement shall include a description of the goods, the name of the person on whose account the goods are being held, and the time and place of the sale. The sale shall take place at least fifteen (15) days after the first publication. If there is no newspaper of general circulation where the sale is to be held, the advertisement shall be posted at least ten (10) days before the sale in not less than six (6) conspicuous places in the neighborhood of the proposed sale.
  3. Before any sale pursuant to this section, any person claiming a right in the goods may pay the amount necessary to satisfy the lien and the reasonable expenses incurred in complying with this section. In that event, the goods may not be sold but shall be retained by the warehouse subject to the terms of the receipt and this article.
  4. A warehouse may buy at any public sale held pursuant to this section.
  5. A purchaser in good faith of goods sold to enforce a warehouse’s lien takes the goods free of any rights of persons against which the lien was valid, despite the warehouse’s noncompliance with this section.
  6. A warehouse may satisfy its lien from the proceeds of any sale pursuant to this section but shall hold the balance, if any, for delivery on demand to any person to which the warehouse would have been bound to deliver the goods.
  7. The rights provided by this section are in addition to all other rights allowed by law to a creditor against a debtor.
  8. If a lien is on goods stored by a merchant in the course of its business, the lien may be enforced in accordance with subsection (1) or (2) of this section.
  9. A warehouse is liable for damages caused by failure to comply with the requirements for sale under this section and, in case of willful violation, is liable for conversion.

History. Enact. Acts 1958, ch. 77, § 7-210; 1964, ch. 130, § 14, effective July 1, 1964; repealed and reenact., Acts 2012, ch. 132, § 16, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-210.

Changes:

Update to accommodate electronic commerce and for style.

Purposes of changes:

  1. Subsection (a) makes “commercial reasonableness” the standard for foreclosure proceedings in all cases except non-commercial storage with a warehouse. The latter category embraces principally storage of household goods by private owners; and for such cases the detailed provisions as to notification, publication and public sale are retained in subsection (b) with one change. The requirement in former Section 7-210(2)(b) that the notification must be sent in person or by registered or certified mail has been deleted. Notification may be sent by any reasonable means as provided in Section 1-202. The swifter, more flexible procedure of subsection (a) is appropriate to commercial storage. Compare seller’s power of resale on breach by buyer under the provisions of the Article on Sales (Section 2-706). Commercial reasonableness is a flexible concept that allows for a wide variety of actions to satisfy the rule of this section, including electronic means of posting and sale.
  2. The provisions of subsections (d) and (e) permitting the bailee to bid at public sales and confirming the title of purchasers at foreclosure sales are designed to secure more bidding and better prices and remain unchanged from former Section 7-210.
  3. A warehouses may have recourse to an interpleader action in appropriate circumstances. See Section 7-603.
  4. If a warehouse has both a warehouse lien and a security interest, the warehouse may enforce both the lien and the security interest simultaneously by using the procedures of Article 9. Section 7-210 adopts as its touchstone “commercial reasonableness” for the enforcement of a warehouse lien. Following the procedures of Article 9 satisfies “commercial reasonableness.”

Cross references:

Sections 2-706, 7-403, 7-603 and Part 6 of Article 9.

Definitional cross references:

“Bill of lading”. Section 1-201. “Conspicuous”. Section 1-201. “Creditor”. Section 1-201. “Delivery” Section 1-201. “Document of Title”. Section 1-201. “Document”. Section 7-102. “Good faith”. Section 1-201 [7-102]. “Goods”. Section 7-102. “Notification”. Section 1-202. “Notifies”. Section 1-202. “Person”. Section 1-201. “Purchaser”. Section 1-201. “Rights”. Section 1-201. “Term”. Section 1-201. “Warehouse”. Section 7-102.

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NOTES TO DECISIONS

1.Notice of Sale.

Where warehouseman testified he mailed notice of sale of goods stored for lien ten (10) days prior to sale, it overcame presumption that it was not mailed which was created by owner’s testimony that he did not receive it, and the sale was valid, since law did not require that owner actually receive notice but that warehouseman mail owner notice. (decided under prior law) Mrs. W. R. Klappert Moving & Storage Warehouse v. Muehlenkamp, 256 Ky. 506 , 76 S.W.2d 597, 1934 Ky. LEXIS 439 ( Ky. 1934 ).

Sale on the 22nd after first publication of notice on the 8th was in compliance with law requiring sale within 15 days after first publication. (decided under prior law) Scott v. A. Arnold & Sons Transfer & Storage Co., 273 Ky. 163 , 116 S.W.2d 296, 1938 Ky. LEXIS 609 ( Ky. 1938 ).

2.Sale Without Notice.

A sale without any notice to holder of warehouse receipts was void where warehouseman had knowledge sale was without notice. (decided under prior law) Bogle's Adm'r v. Thompson, 230 Ky. 538 , 20 S.W.2d 173, 1929 Ky. LEXIS 117 ( Ky. 1929 ).

3.Description.

Warehouseman was not required to describe contents of locked chest to render sale valid. (decided under prior law) Scott v. A. Arnold & Sons Transfer & Storage Co., 273 Ky. 163 , 116 S.W.2d 296, 1938 Ky. LEXIS 609 ( Ky. 1938 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Warehousemen, § 332.00.

Part 3. Bills of Lading: Special Provisions

355.7-301. Liability for nonreceipt or misdescription — “Said to contain” — “Shipper’s weight, load and count” — Improper handling.

  1. A consignee of a nonnegotiable bill of lading which has given value in good faith, or a holder to which a negotiable bill has been duly negotiated, relying upon the description of the goods in the bill or upon the date shown in the bill, may recover from the issuer damages caused by the misdating of the bill or the nonreceipt or misdescription of the goods, except to the extent that the document of title indicates that the issuer does not know whether any part or all of the goods in fact were received or conform to the description, such as in a case in which the description is in terms of marks or labels or kind, quantity, or condition or the receipt or description is qualified by “contents or condition of contents of packages unknown,” “said to contain,” “shipper’s weight, load and count,” or words of similar import, if that indication is true.
  2. If goods are loaded by the issuer of the bill of lading, the issuer shall count the packages of goods if shipped in packages and ascertain the kind and quantity if shipped in bulk and words such as “shipper’s weight, load and count,” or words of similar import indicating that the description was made by the shipper are ineffective except as to goods concealed by packages.
  3. If bulk goods are loaded by a shipper that makes available to the issuer of the bill of lading adequate facilities for weighing those goods, the issuer shall ascertain the kind and quantity within a reasonable time after receiving the shipper’s request in a record to do so. In that case, “shipper’s weight” or words of similar import are ineffective.
  4. The issuer, by including in the bill of lading the words “shipper’s weight, load and count,” or words of similar import, may indicate that the goods were loaded by the shipper, and, if that statement is true, the issuer is not liable for damages caused by the improper loading. However, omission of such words does not imply liability for damages caused by improper loading.
  5. A shipper guarantees to the issuer the accuracy at the time of shipment of the description, marks, labels, number, kind, quantity, condition, and weight, as furnished by the shipper, and the shipper shall indemnify the issuer against damage caused by inaccuracies in those particulars. This right of the issuer to that indemnity does not limit its responsibility or liability under the contract of carriage to any person other than the shipper.

History. Enact. Acts 1958, ch. 77, § 7-301, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 17, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-301.

Changes:

Changes for clarity, style and to recognize deregulation in the transportation industry.

Purposes of changes:

  1. This section continues the rules from former Section 7-301 with one substantive change. The obligations of the issuer of the bill of lading under former subsections (2) and (3) were limited to issuers who were common carriers. Subsections (b) and (c) apply the same rules to all issuers not just common carriers. This section is compatible with the policies stated in the federal Bills of Lading Act, 49 U.S.C. § 80113 (2000).
  2. The language of the pre-Code Uniform Bills of Lading Act suggested that a carrier is ordinarily liable for damage caused by improper loading, but may relieve itself of liability by disclosing on the bill that shipper actually loaded. A more accurate statement of the law is that the carrier is not liable for losses caused by act or default of the shipper, which would include improper loading. D. H. Overmyer Co. v. Nelson Brantley Glass Go., 168 S.E.2d 176 (Ga. Ct. App. 1969). There was some question whether under pre-Code law a carrier was liable even to a good faith purchaser of a negotiable bill for such losses, if the shipper’s faulty loading in fact caused the loss. Subsection (d) permits the carrier to bar, by disclosure of shipper’s loading, liability to a good faith purchaser. There is no implication that decisions such as Modern Tool Corp. v. Pennsylvania R. Co., 100 F.Supp. 595 (D.N.J.1951), are disapproved.
  3. This section is a restatement of existing law as to the method by which a bailee may avoid responsibility for the accuracy of descriptions which are made by or in reliance upon information furnished by the depositor or shipper. The wording in this section—“contents or condition of contents of packages unknown” or “shipper’s weight, load and count”—to indicate that the shipper loaded the goods or that the carrier does not know the description, condition, or contents of the loaded packages continues to be appropriate as commonly understood in the transportation industry. The reasons for this wording are as important in 2002 as when the prior section initially was approved. The issuer is liable on documents issued by an agent, contrary to instructions of his principal, without receiving goods. No disclaimer of this liability is permitted since it is not a matter either of the care of the goods or their description.
  4. The shipper’s erroneous report to the carrier concerning the goods may cause damage to the carrier. Subsection (e) therefore provides appropriate indemnity.
  5. The word “freight” in the former Section 7-301 has been changed to “goods” to conform to international and domestic land transport usage in which “freight” means the price paid for carriage of the goods and not the goods themselves. Hence, changing the word “freight” to the word “goods” is a clarifying change that fits both international and domestic practice.

Cross references:

Sections 7-203, 7-309 and 7-501.

Definitional cross references:

“Bill of lading”. Section 1-201. “Consignee”. Section 7-102. “Document of Title”. Section 1-201. “Duly negotiate”. Section 7-501. “Good faith”. Section 1-201 [7-102]. “Goods”. Section 7-102. “Holder”. Section 1-201. “Issuer”. Section 7-102. “Notice”. Section 1-201. “Party”. Section 1-201. “Purchaser”. Section 1-201. “Receipt of goods”. Section 2-103. “Value”. Section 1-201.

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355.7-302. Through bills of lading and similar documents of title.

  1. The issuer of a through bill of lading or other document of title embodying an undertaking to be performed in part by a person acting as its agent or by a performing carrier is liable to any person entitled to recover on the document for any breach by the other person or the performing carrier of its obligation under the document. However, to the extent that the bill covers an undertaking to be performed overseas or in territory not contiguous to the continental United States or an undertaking including matters other than transportation, this liability for breach by the other person or the performing carrier may be varied by agreement of the parties.
  2. If goods covered by a through bill of lading or other document of title embodying an undertaking to be performed in part by a person other than the issuer are received by that person, the person is subject, with respect to its own performance while the goods are in its possession, to the obligation of the issuer. The person’s obligation is discharged by delivery of the goods to another person pursuant to the document and does not include liability for breach by any other person or by the issuer.
  3. The issuer of a through bill of lading or other document of title described in subsection (1) of this section is entitled to recover from the performing carrier, or other person in possession of the goods when the breach of the obligation under the document occurred:
    1. The amount it may be required to pay to any person entitled to recover on the document for the breach, as may be evidenced by any receipt, judgment, or transcript of judgment; and
    2. The amount of any expense reasonably incurred by the issuer in defending any action commenced by any person entitled to recover on the document for the breach.

History. Enact. Acts 1958, ch. 77, § 7-302, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 18, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-302.

Changes:

To conform to current terminology and for style.

Purposes:

  1. This section continues the rules from former Section 7-302 without substantive change. The term “performing carrier” is substituted for the term “connecting carrier” to conform the terminology of this section with terminology used in recent UNCITRAL and OAS proposals concerning transportation and through bills of lading. This change in terminology is not substantive. This section is compatible with liability on carriers under federal law. See 49 U.S.C. §§ 11706, 14706 and 15906.

    The purpose of this section is to subject the initial carrier under a through bill to suit for breach of the contract of carriage by any performing carrier and to make it clear that any such performing carrier holds the goods on terms which are defined by the document of title even though such performing carrier did not issue the document. Since the performing carrier does hold the goods on the terms of the document, it must honor a proper demand for delivery or a diversion order just as the original bailee would have to. Similarly it has the benefits of the excuses for non-delivery and limitations of liability provided for the original bailee who issued the bill. Unlike the original bailee-issuer, the performing carrier’s responsibility is limited to the period while the goods are in its possession. The section does not impose any obligation to issue through bills.

  2. The reference to documents other than through bills looks to the possibility that multi-purpose documents may come into use, e.g., combination warehouse receipts and bills of lading. As electronic documents of title come into common usage, storage documents (e.g. warehouse receipts) and transportation documents (e.g. bills of lading) may merge seamlessly into one electronic document that can serve both the storage and transportation segments of the movement of goods.
  3. Under subsection (a) the issuer of a through bill of lading may become liable for the fault of another person. Subsection (c) gives the issuer appropriate rights of recourse.
  4. Despite the broad language of subsection (a), Section 7-302 is subject to preemption by federal laws and treaties. Section 7-103. The precise scope of federal preemption in the transportation sector is a question determined under federal law.

Cross references:

Section 7-103.

Definitional cross references:

“Agreement”. Section 1-201. “Bailee”. Section 7-102. “Bill of lading”. Section 1-201. “Delivery”. Section 1-201. “Document of title”. Section 1-201. “Goods”. Section 7-102. “Issuer”. Section 7-102. “Party”. Section 1-201. “Person”. Section 1-201.

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355.7-303. Diversion — Reconsignment — Change of instructions.

  1. Unless the bill of lading otherwise provides, a carrier may deliver the goods to a person or destination other than that stated in the bill or may otherwise dispose of the goods, without liability for misdelivery, on instructions from:
    1. The holder of a negotiable bill;
    2. The consignor on a nonnegotiable bill even if the consignee has given contrary instructions;
    3. The consignee on a nonnegotiable bill in the absence of contrary instructions from the consignor, if the goods have arrived at the billed destination or if the consignee is in possession of the tangible bill or in control of the electronic bill; or
    4. The consignee on a nonnegotiable bill, if the consignee is entitled as against the consignor to dispose of the goods.
  2. Unless instructions described in subsection (1) of this section are included in a negotiable bill of lading, a person to which the bill is duly negotiated may hold the bailee according to the original terms.

History. Enact. Acts 1958, ch. 77, § 7-303, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 19, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-303.

Changes:

To accommodate electronic documents and for style.

Purposes:

  1. Diversion is a very common commercial practice which defeats delivery to the consignee originally named in a bill of lading. This section continues former Section 7-303’s safe harbor rules for carriers in situations involving diversion and adapts those rules to electronic documents of title. This section works compatibly with Section 2-705. Carriers may as a business matter be willing to accept instructions from consignees in which case the carrier will be liable for misdelivery if the consignee was not the owner or otherwise empowered to dispose of the goods under subsection (a)(4). The section imposes no duty on carriers to undertake diversion. The carrier is of course subject to the provisions of mandatory filed tariffs as provided in Section 7-103.
  2. It should be noted that the section provides only an immunity for carriers against liability for “misdelivery.” It does not, for example, defeat the title to the goods which the consignee-buyer may have acquired from the consignor-seller upon delivery of the goods to the carrier under a non-negotiable bill of lading. Thus if the carrier, upon instructions from the consignor, returns the goods to the consignor, the consignee may recover the goods from the consignor or the consignor’s insolvent estate. However, under certain circumstances, the consignee’s title may be defeated by diversion of the goods in transit to a different consignee. The rights that arise between the consignor-seller and the consignee-buyer out of a contract for the sale of goods are governed by Article 2.

Cross references:

Point 1: Sections 2-705 and 7-103.

Point 2: Article 2, Sections 7-403 and 7-504(3).

Definitional cross references:

“Bailee”. Section 7-102. “Bill of lading”. Section 1-201. “Carrier”. Section 7-102. “Consignee”. Section 7-102. “Consignor”. Section 7-102. “Delivery”. Section 1-201. “Goods”. Section 7-102. “Holder”. Section 1-201. “Notice”. Section 1-201. “Person”. Section 1-201. “Purchaser”. Section 1-201. “Term”. Section 1-201.

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355.7-304. Tangible bills of lading in a set.

  1. Except as customary in international transportation, a tangible bill of lading may not be issued in a set of parts. The issuer is liable for damages caused by violation of this subsection.
  2. If a tangible bill of lading is lawfully issued in a set of parts, each of which contains an identification code and is expressed to be valid only if the goods have not been delivered against any other part, the whole of the parts constitutes one (1) bill.
  3. If a tangible negotiable bill of lading is lawfully issued in a set of parts and different parts are negotiated to different persons, the title of the holder to which the first due negotiation is made prevails as to both the document of title and the goods even if any later holder may have received the goods from the carrier in good faith and discharged the carrier’s obligation by surrendering its part.
  4. A person that negotiates or transfers a single part of a tangible bill of lading issued in a set is liable to holders of that part as if it were the whole set.
  5. The bailee is obliged to deliver in accordance with Part 4 of this article against the first presented part of a tangible bill of lading lawfully issued in a set. Delivery in this manner discharges the bailee’s obligation on the whole bill.

History. Enact. Acts 1958, ch. 77, § 7-304, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 20, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-304.

Changes:

To limit bills in a set to tangible bills of lading and to use terminology more consistent with modern usage.

Purposes of changes:

  1. Tangible bills of lading in a set are still used in some nations in international trade. Consequently, a tangible bill of lading part of a set could be at issue in a lawsuit that might come within Article 7. The statement of the legal effect of a lawfully issued set is in accord with existing commercial law relating to maritime and other international tangible bills of lading. This law has been codified in the Hague and Warsaw Conventions and in the Carriage of Goods by Sea Act, the provisions of which would ordinarily govern in situations where bills in a set are recognized by this Article. Tangible bills of lading in a set are prohibited in domestic trade.
  2. Electronic bills of lading in domestic or international trade will not be issued in a set given the requirements of control necessary to deliver the bill to another person. An electronic bill of lading will be a single, authoritative copy. Section 7-106. Hence, this section differentiates between electronic bills of lading and tangible bills of lading. This section does not prohibit electronic data messages about goods in transit because these electronic data messages are not the issued bill of lading. Electronic data messages contain information for the carrier’s management and handling of the cargo but this information for the carrier’s use is not the issued bill of lading.

Cross references:

Sections 7-103, 7-303 and 7-106.

Definitional cross references:

“Bailee”. Section 7-102. “Bill of lading”. Section 1-201. “Delivery”. Section 1-201. “Document of title”. Section 1-201. “Duly negotiate”. Section 7-501. “Good faith”. Section 1-201 [7-102]. “Goods”. Section 7-102. “Holder”. Section 1-201. “Issuer”. Section 7-102. “Person”. Section 1-201. “Receipt of goods”. Section 2-103.

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355.7-305. Destination bills.

  1. Instead of issuing a bill of lading to the consignor at the place of shipment, a carrier, at the request of the consignor, may procure the bill to be issued at destination or at any other place designated in the request.
  2. Upon request of any person entitled as against a carrier to control the goods while in transit and on surrender of possession or control of any outstanding bill of lading or other receipt covering the goods, the issuer, subject to KRS 355.7-105 , may procure a substitute bill to be issued at any place designated in the request.

History. Enact. Acts 1958, ch. 77, § 7-305, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 21, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-305.

Changes:

To accommodate electronic bills of lading and for style.

Purposes:

  1. Subsection (a) continues the rules of former Section 7-305(1) without substantive change. This proposal is designed to facilitate the use of order bills in connection with fast shipments. Use of order bills on high speed shipments is impeded by the fact that the goods may arrive at destination before the documents, so that no one is ready to take delivery from the carrier. This is especially inconvenient for carriers by truck and air, who do not have terminal facilities where shipments can be held to await the consignee’s appearance. Order bills would be useful to take advantage of bank collection. This may be preferable to C.O.D. shipment in which the carrier, e.g. a truck driver, is the collecting and remitting agent. Financing of shipments under this plan would be handled as follows: seller at San Francisco delivers the goods to an airline with instructions to issue a bill in New York to a named bank. Seller receives a receipt embodying this undertaking to issue a destination bill. Airline wires its New York freight agent to issue the bill as instructed by the seller. Seller wires the New York bank a draft on buyer. New York bank indorses the bill to buyer when the buyer honors the draft. Normally seller would act through its own bank in San Francisco, which would extend credit in reliance on the airline’s contract to deliver a bill to the order of its New York correspondent. This section is entirely permissive; it imposes no duty to issue such bills. Whether a performing carrier will act as issuing agent is left to agreement between carriers.
  2. Subsection (b) continues the rule from former Section 7-305(2) with accommodation for electronic bills of lading. If the substitute bill changes from an electronic to a tangible medium or vice versa, the issuance of the substitute bill must comply with Section 7-105 to give the substitute bill validity and effect.

Cross reference:

Section 7-105.

Definitional cross references:

“Bill of lading”. Section 1-201. “Consignor”. Section 7-102. “Goods”. Section 7-102. “Issuer”. Section 7-102. “Receipt of goods”. Section 2-103.

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355.7-306. Altered bills of lading.

An unauthorized alteration or filling in of a blank in a bill of lading leaves the bill enforceable according to its original tenor.

History. Enact. Acts 1958, ch. 77, § 7-306, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 22, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-306.

Changes:

None.

Purposes of changes:

An unauthorized alteration or filling in of a blank, whether made with or without fraudulent intent, does not relieve the issuer of its liability on the document as originally executed. This section applies to both tangible and electronic bills of lading, applying the same rule to both types of bills of lading. The control concept of Section 7-106 requires that any changes to the electronic document of title be readily identifiable as authorized or unauthorized. Section 7-306 should be compared to Section 7-208 where a different rule applies to the unauthorized filling in of a blank for tangible warehouse receipts.

Cross reference:

Sections 7-106 and 7-208.

Definitional cross references:

“Bill of lading”. Section 1-201. “Issuer”. Section 7-102.

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355.7-307. Lien of carrier.

  1. A carrier has a lien on the goods covered by a bill of lading or on the proceeds thereof in its possession for charges after the date of the carrier’s receipt of the goods for storage or transportation, including demurrage and terminal charges, and for expenses necessary for preservation of the goods incident to their transportation or reasonably incurred in their sale pursuant to law. However, against a purchaser for value of a negotiable bill of lading, a carrier’s lien is limited to charges stated in the bill or the applicable tariffs or, if no charges are stated, a reasonable charge.
  2. A lien for charges and expenses under subsection (1) of this section on goods that the carrier was required by law to receive for transportation is effective against the consignor or any person entitled to the goods unless the carrier had notice that the consignor lacked authority to subject the goods to those charges and expenses. Any other lien under subsection (1) of this section is effective against the consignor and any person that permitted the bailor to have control or possession of the goods unless the carrier had notice that the bailor lacked authority.
  3. A carrier loses its lien on any goods that it voluntarily delivers or unjustifiably refuses to deliver.

History. Enact. Acts 1958, ch. 77, § 7-307, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 23, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-307.

Changes:

Expanded to cover proceeds of the goods transported.

Purposes of changes:

  1. The section is intended to give carriers a specific statutory lien for charges and expenses similar to that given to warehouses by the first sentence of Section 7-209(a) and extends that lien to the proceeds of the goods as long as the carrier has possession of the proceeds. But because carriers do not commonly claim a lien for charges in relation to other goods or lend money on the security of goods in their hands, provisions for a general lien or a security interest similar to those in Section 7-209(a) and (b) are omitted. Carriers may utilize Article 9 to obtain a security interest and become a secured party or a carrier may agree to limit its lien rights in a transportation agreement with the shipper. As the lien given by this section is specific, and the storage or transportation often preserves or increases the value of the goods, subsection (b) validates the lien against anyone who permitted the bailor to have possession of the goods. Where the carrier is required to receive the goods for transportation, the owner’s interest may be subjected to charges and expenses arising out of deposit of his goods by a thief. The crucial mental element is the carrier’s knowledge or reason to know of the bailor’s lack of authority. If the carrier does not know or have reason to know of the bailor’s lack of authority, the carrier has a lien under this section against any person so long as the conditions of subsection (b) are satisfied. In light of the crucial mental element, Sections 7-307 and 9-333 combine to give priority to a carrier’s lien over security interests in the goods. In this regard, the judicial decision in In re Sharon Steel Corp., 25 U.C.C. Rep.2d 503, 176 B.R. 384 (W.D. Pa. 1995) is correct and is the controlling precedent.
  2. The reference to charges in this section means charges relating to the bailment relationship for transportation. Charges does not mean that the bill of lading must state a specific rate or a specific amount. However, failure to state a specific rate or a specific amount has legal consequences under the second sentence of subsection (a).
  3. The carrier’s specific lien under this section is a possessory lien. See subsection (c). Part 3 of Article 7 does not require any particular form for a bill of lading. The carrier’s lien arises when the carrier has issued a bill of lading.

Cross references:

Point 1: Sections 7-209, 9-109 and 9-333.

Point 3. Sections 7-202 and 7-209.

Definitional cross references:

“Bill of lading”. Section 1-201. “Carrier”. Section 7-102. “Consignor”. Section 7-102. “Delivery”. Section 1-201. “Goods”. Section 7-102. “Person”. Section 1-201. “Purchaser”. Section 1-201. “Value”. Section 1-204.

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355.7-308. Enforcement of carrier’s lien.

  1. A carrier’s lien on goods may be enforced by public or private sale of the goods, in bulk or in packages, at any time or place and on any terms that are commercially reasonable, after notifying all persons known to claim an interest in the goods. The notification shall include a statement of the amount due, the nature of the proposed sale, and the time and place of any public sale. The fact that a better price could have been obtained by a sale at a different time or in a different method from that selected by the carrier is not of itself sufficient to establish that the sale was not made in a commercially reasonable manner. The carrier has sold goods in a commercially reasonable manner if the carrier sells the goods in the usual manner in any recognized market therefor, sells at the price current in that market at the time of the sale, or has otherwise sold in conformity with commercially reasonable practices among dealers in the type of goods sold. A sale of more goods than apparently necessary to be offered to ensure satisfaction of the obligation is not commercially reasonable, except in cases covered by the preceding sentence.
  2. Before any sale pursuant to this section, any person claiming a right in the goods may pay the amount necessary to satisfy the lien and the reasonable expenses incurred in complying with this section. In that event, the goods may not be sold but shall be retained by the carrier, subject to the terms of the bill of lading and this article.
  3. A carrier may buy at any public sale pursuant to this section.
  4. A purchaser in good faith of goods sold to enforce a carrier’s lien takes the goods free of any rights of persons against which the lien was valid, despite the carrier’s noncompliance with this section.
  5. A carrier may satisfy its lien from the proceeds of any sale pursuant to this section but shall hold the balance, if any, for delivery on demand to any person to which the carrier would have been bound to deliver the goods.
  6. The rights provided by this section are in addition to all other rights allowed by law to a creditor against a debtor.
  7. A carrier’s lien may be enforced pursuant to either subsection (1) of this section or the procedure set forth in KRS 355.7-210 (2).
  8. A carrier is liable for damages caused by failure to comply with the requirements for sale under this section and, in case of willful violation, is liable for conversion.

History. Enact. Acts 1958, ch. 77, § 7-308, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 24, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-308.

Changes:

To conform language to modern usage and for style.

Purposes of changes:

This section is intended to give the carrier an enforcement procedure of its lien coextensive with that given the warehouse in cases other than those covering noncommercial storage by the warehouse. See Section 7-210 and comments.

Cross reference:

Section 7-210.

Definitional cross references:

“Bill of lading”. Section 1-201. “Carrier”. Section 7-102. “Creditor”. Section 1-201. “Delivery”. Section 1-201. “Good faith”. Section 1-201 [7-102]. “Goods”. Section 7-102. “Notification”. Section 1-202. “Notifies”. Section 1-202. “Person”. Section 1-201. “Purchaser”. Section 1-201. “Rights”. Section 1-201. “Term”. Section 1-201.

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355.7-309. Duty of care — Contractual limitation of carrier’s liability.

  1. A carrier that issues a bill of lading, whether negotiable or nonnegotiable, shall exercise the degree of care in relation to the goods which a reasonably careful person would exercise under similar circumstances. This subsection does not affect any statute, regulation, or rule of law that imposes liability upon a common carrier for damages not caused by its negligence.
  2. Damages may be limited by a term in the bill of lading or in a transportation agreement that the carrier’s liability may not exceed a value stated in the bill or transportation agreement if the carrier’s rates are dependent upon value and the consignor is afforded an opportunity to declare a higher value and the consignor is advised of the opportunity. However, such a limitation is not effective with respect to the carrier’s liability for conversion to its own use.
  3. Reasonable provisions as to the time and manner of presenting claims and commencing actions based on the shipment may be included in a bill of lading or a transportation agreement.

History. Enact. Acts 1958, ch. 77, § 7-309, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 25, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-309.

Changes:

References to tariffs eliminated because of deregulation, adding reference to transportation agreements, and for style.

Purposes of changes:

  1. A bill of lading may also serve as the contract between the carrier and the bailor. Parties in their contract should be able to limit the amount of damages for breach of that contract including breach of the duty to take reasonable care of the goods. The parties cannot disclaim by contract the carrier’s obligation of care. Section 1-302.

    Federal statutes and treaties for air, maritime and rail transport may alter the standard of care. These federal statutes and treaties preempt this section when applicable. Section 7-103. Subsection (a) does not impair any rule of law imposing the liability of an insurer on a common carrier in intrastate commerce. Subsection (b), however, applies to the common carrier’s liability as an insurer as well as to liability based on negligence. Subsection (b) allows the term limiting damages to appear either in the bill of lading or in the parties’ transportation agreement. Compare 7-204(b). Subsection (c) allows the parties to agree to provisions regarding time and manner of presenting claims or commencing actions if the provisions are either in the bill of lading or the transportation agreement. Compare 7-204(c). Transportation agreements are commonly used to establish agreed terms between carriers and shippers that have an on-going relationship.

  2. References to public tariffs in former Section 7-309(2) and (3) have been deleted in light of the modern era of deregulation. See Comment 2 to Section 7-103. If a tariff is required under state or federal law, pursuant to Section 7-103(a), the tariff would control over the rule of this section. As governed by contract law, parties may incorporate by reference the limits on the amount of damages or the reasonable provisions as to the time and manner of presenting claims set forth in applicable tariffs, e.g. a maximum unit value beyond which goods are not taken or a disclaimer of responsibility for undeclared articles of extraordinary value.
  3. As under former Section 7-309(2), subsection (b) provides that a limitation of damages is ineffective if the carrier has converted the goods to its own use. A mere failure to redeliver the goods is not conversion to the carrier’s own use. “Conversion to its own use” is narrower than the idea of conversion generally. Art Masters Associates, Ltd. v. United Parcel Service, 77 N.Y.2d 200, 567 N.E.2d 226 (1990); See, Kemper Ins. Co. v. Fed. Ex. Corp., 252 F.3d 509 (1st Cir), cert. denied 534 U.S. 1020 (2001) (opinion interpreting federal law).
  4. As used in this section, damages may include damages arising from delay in delivery. Delivery dates and times are often specified in the parties’ contract. See Section 7-403.

Cross references:

Sections 1-302, 7-103, 7-204, 7-403.

Definitional cross references:

“Action”. Section 1-201. “Bill of lading”. Section 1-201. “Carrier”. Section 7-102. “Consignor”. Section 7-102. “Document of Title”. Section 1-102. “Goods”. Section 7-102. “Value”. Section 1-204.

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Part 4. Warehouse Receipts and Bills of Lading: General Obligations

355.7-401. Irregularities in issue of receipt or bill or conduct of issuer.

The obligations imposed by this article on an issuer apply to a document of title even if:

  1. The document does not comply with the requirements of this article or of any other statute, rule, or regulation regarding its issue, form, or content;
  2. The issuer violated laws regulating the conduct of its business;
  3. The goods covered by the document were owned by the bailee when the document was issued; or
  4. The person issuing the document is not a warehouse but the document purports to be a warehouse receipt.

History. Enact. Acts 1958, ch. 77, § 7-401, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 26, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-401.

Changes:

Changes for style only.

Purposes of changes and new matter:

The bailee’s liability on its document despite non-receipt or misdescription of the goods is affirmed in Sections 7-203 and 7-301. The purpose of this section is to make it clear that regardless of irregularities a document which falls within the definition of document of title imposes on the issuer the obligations stated in this Article. For example, a bailee will not be permitted to avoid its obligation to deliver the goods (Section 7-403) or its obligation of due care with respect to them (Sections 7-204 and 7-309) by taking the position that no valid “document” was issued because it failed to file a statutory bond or did not pay stamp taxes or did not disclose the place of storage in the document. Tate v. Action Moving & Storage, Inc., 383 S.E.2d 229 (N.C. App. 1989), rev. denied 389 S.E.2d 104 (N.C. 1990). Sanctions against violations of statutory or administrative duties with respect to documents should be limited to revocation of license or other measures prescribed by the regulation imposing the duty. See Section 7-103.

Cross references:

Sections 7-103, 7-203, 7-204, 7-301, 7-309.

Definitional cross references:

“Bailee”. Section 7-102. “Document of title”. Section 1-201. “Goods”. Section 7-102. “Issuer”. Section 7-102. “Person”. Section 1-201. “Warehouse receipt”. Section 1-201. “Warehouse”. Section 7-102.

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355.7-402. Duplicate document of title — Overissue.

A duplicate or any other document of title purporting to cover goods already represented by an outstanding document of the same issuer does not confer any right in the goods, except as provided in the case of tangible bills of lading in a set of parts, overissue of documents for fungible goods, substitutes for lost, stolen, or destroyed documents, or substitute documents issued pursuant to KRS 355.7-105 . The issuer is liable for damages caused by its overissue or failure to identify a duplicate document by a conspicuous notation.

History. Enact. Acts 1958, ch. 77, § 7-402, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 27, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-402.

Changes:

Changes to accommodate electronic documents.

Purposes of changes:

  1. This section treats a duplicate which is not properly identified as a duplicate like any other overissue of documents: a purchaser of such a document acquires no title but only a cause of action for damages against the person that made the deception possible, except in the cases noted in the section. But parts of a tangible bill lawfully issued in a set of parts are not “overissue” (Section 7-304). Of course, if the issuer has clearly indicated that a document is a duplicate so that no one can be deceived by it, and in fact the duplicate is a correct copy of the original, the issuer is not liable for preparing and delivering such a duplicate copy.

    Section 7-105 allows documents of title to be reissued in another medium. Re-issuance of a document in an alternative medium under Section 7-105 requires that the original document be surrendered to the issuer in order to make the substitute document the effective document. If the substitute document is not issued in compliance with section 7-105, then the document should be treated as a duplicate under this section.

  2. The section applies to nonnegotiable documents to the extent of providing an action for damages for one who acquires an unmarked duplicate from a transferor who knew the facts and would therefore have had no cause of action against the issuer of the duplicate. Ordinarily the transferee of a nonnegotiable document acquires only the rights of its transferor.
  3. Overissue is defined so as to exclude the common situation where two valid documents of different issuers are outstanding for the same goods at the same time. Thus freight forwarders commonly issue bills of lading to their customers for small shipments to be combined into carload shipments for which the railroad will issue a bill of lading to the forwarder. So also a warehouse receipt may be outstanding against goods, and the holder of the receipt may issue delivery orders against the same goods. In these cases dealings with the subsequently issued documents may be effective to transfer title; e.g. negotiation of a delivery order will effectively transfer title in the ordinary case where no dishonesty has occurred and the goods are available to satisfy the orders. Section 7-503 provides for cases of conflict between documents of different issuers.

Cross references:

Point 1: Sections 7-105, 7-207, 7-304, and 7-601.

Point 3: Section 7-503.

Definitional cross references:

“Bill of lading”. Section 1-201. “Conspicuous”. Section 1-201. “Document of title”. Section 1-201. “Fungible goods”. Section 1-201. “Goods”. Section 7-102. “Issuer”. Section 7-102. “Right”. Section 1-201.

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355.7-403. Obligation of bailee to deliver — Excuse.

  1. A bailee shall deliver the goods to a person entitled under a document of title if the person complies with subsections (2) and (3) of this section, unless and to the extent that the bailee establishes any of the following:
    1. Delivery of the goods to a person whose receipt was rightful as against the claimant;
    2. Damage to or delay, loss, or destruction of the goods for which the bailee is not liable;
    3. Previous sale or other disposition of the goods in lawful enforcement of a lien or on a warehouse’s lawful termination of storage;
    4. The exercise by a seller of its right to stop delivery pursuant to KRS 355.2-705 or by a lessor of its right to stop delivery pursuant to KRS 355.2A-526 ;
    5. A diversion, reconsignment, or other disposition pursuant to KRS 355.7-303 ;
    6. Release, satisfaction, or any other fact affording a personal defense against the claimant; or
    7. Any other lawful excuse.
  2. A person claiming goods covered by a document of title shall satisfy the bailee’s lien if the bailee so requests or the bailee is prohibited by law from delivering the goods until the charges are paid.
  3. Unless a person claiming the goods is one against which the document of title does not confer a right under KRS 355.7-503 (1):
    1. The person claiming under a document shall surrender possession or control of any outstanding negotiable document covering the goods for cancellation or indication of partial deliveries; and
    2. The bailee shall cancel the document or conspicuously indicate in the document the partial delivery or be liable to any person to which the document is duly negotiated.

History. Enact. Acts 1958, ch. 77, § 7-403, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 28, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-403.

Changes:

Definition in former Section 7-403(4) moved to Section 7-102; bracketed language in former Section 7-403(1)(b) deleted; added cross reference to Section 2A-526; changes for style.

Purposes of changes:

  1. The present section, following former Section 7-403, is constructed on the basis of stating what previous deliveries or other circumstances operate to excuse the bailee’s normal obligation on the document. Accordingly, “justified” deliveries under the pre-Code uniform acts now find their place as “excuse” under subsection (a).
  2. The principal case covered by subsection (a)(1) is delivery to a person whose title is paramount to the rights represented by the document. For example, if a thief deposits stolen goods in a warehouse facility and takes a negotiable receipt, the warehouse is not liable on the receipt if it has surrendered the goods to the true owner, even though the receipt is held by a good faith purchaser. See Section 7-503(a). However, if the owner entrusted the goods to a person with power of disposition, and that person deposited the goods and took a negotiable document, the owner receiving delivery would not be rightful as against a holder to whom the negotiable document was duly negotiated, and delivery to the owner would not give the bailee a defense against such a holder. See Sections 7-502(a)(2), 7-503(a)(1).
  3. Subsection (a)(2) amounts to a cross reference to all the tort law that determines the varying responsibilities and standards of care applicable to commercial bailees. A restatement of this tort law would be beyond the scope of this Act. Much of the applicable law as to responsibility of bailees for the preservation of the goods and limitation of liability in case of loss has been codified for particular classes of bailees in interstate and foreign commerce by federal legislation and treaty and for intrastate carriers and other bailees by the regulatory state laws preserved by Section 7-103. In the absence of governing legislation the common law will prevail subject to the minimum standard of reasonable care prescribed by Sections 7-204 and 7-309 of this Article.

    The bracketed language found in former Section 7-403(1)(b) has been deleted thereby leaving the allocations of the burden of going forward with the evidence and the burden of proof to the procedural law of the various states.

    Subsection (a)(4) contains a cross reference to both the seller’s and the lessor’s rights to stop delivery under Article 2 and Article 2A respectively.

  4. As under former Section 7-403, there is no requirement that a request for delivery must be accompanied by a formal tender of the amount of the charges due. Rather, the bailee must request payment of the amount of its lien when asked to deliver, and only in case this request is refused is it justified in declining to deliver because of nonpayment of charges. Where delivery without payment is forbidden by law, the request is treated as implicit. Such a prohibition reflects a policy of uniformity to prevent discrimination by failure to request payment in particular cases. Subsection (b) must be read in conjunction with the priorities given to the warehouse lien and the carrier lien under Section 7-209 and 7-307, respectively. If the parties are in dispute about whether the request for payment of the lien is legally proper, the bailee may have recourse to interpleader. See Section 7-603.
  5. Subsection (c) states the obvious duty of a bailee to take up a negotiable document or note partial deliveries conspicuously thereon, and the result of failure in that duty. It is subject to only one exception, that stated in subsection (a)(1) of this section and in Section 7-503(a). Subsection (c) is limited to cases of delivery to a claimant; it has no application, for example, where goods held under a negotiable document are lawfully sold to enforce the bailee’s lien.
  6. When courts are considering subsection (a)(7), “any other lawful excuse,” among others, refers to compliance with court orders under Sections 7-601, 7-602 and 7-603.

Cross references:

Point 2: Sections 7-502 and 7-503.

Point 3: Sections 2-705, 2A-526, 7-103, 7-204, and 7-309 and 10-103.

Point 4: Sections 7-209, 7-307 and 7-603.

Point 5: Section 7-503(1).

Point 6: Sections 7-601, 7-602, and 7-603.

Definitional cross references:

“Bailee”. Section 7-102. “Conspicuous”. Section 1-201. “Delivery”. Section 1-201. “Document of title”. Section 1-201. “Duly negotiate”. Section 7-501. “Goods”. Section 7-102. “Lessor”. Section 2A-103. “Person”. Section 1-201. “Receipt of goods”. Section 1-203. “Right”. Section 1-201. “Terms”. Section 1-201. “Warehouse”. Section 7-102.

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355.7-404. No liability for good faith delivery pursuant to document of title.

A bailee that in good faith has received goods and delivered or otherwise disposed of the goods according to the terms of a document of title or pursuant to this article is not liable for the goods even if:

  1. The person from which the bailee received the goods did not have authority to procure the document or to dispose of the goods; or
  2. The person to which the bailee delivered the goods did not have authority to receive the goods.

History. Enact. Acts 1958, ch. 77, § 7-404, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 29, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-404.

Changes:

Changes reflect the definition of good faith in Section 1-201 [7-102] and for style.

Purposes of changes:

This section uses the test of good faith, as defined in Section 1-201 [7-102], to continue the policy of former Section 7-404. Good faith now means “honesty in fact and the observance of reasonable commercial standards of fair dealing.” The section states explicitly that the common law rule of “innocent conversion” by unauthorized “intermeddling” with another’s property is inapplicable to the operations of commercial carriers and warehousemen that in good faith perform obligations that they have assumed and that generally they are under a legal compulsion to assume. The section applies to delivery to a fraudulent holder of a valid document as well as to delivery to the holder of an invalid document. Of course, in appropriate circumstances, a bailee may use interpleader or other dispute resolution process. See Section 7-603.

Cross references:

Section 7-603.

Definitional cross references:

“Bailee”. Section 7-102. “Delivery”. Section 1-201. “Document of title”. Section 1-201. “Good faith”. Section 1-201 [7-102]. “Goods”. Section 7-102. “Person”. Section 1-201. “Receipt of goods”. Section 2-103. “Term”. Section 1-201.

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Part 5. Warehouse Receipts and Bills of Lading: Negotiation and Transfer

355.7-501. Form of negotiation and requirements of due negotiation.

  1. The following rules apply to a negotiable tangible document of title:
    1. If the document’s original terms run to the order of a named person, the document is negotiated by the named person’s indorsement and delivery. After the named person’s indorsement in blank or to bearer, any person may negotiate the document by delivery alone.
    2. If the document’s original terms run to bearer, it is negotiated by delivery alone.
    3. If the document’s original terms run to the order of a named person and it is delivered to the named person, the effect is the same as if the document had been negotiated.
    4. Negotiation of the document after it has been indorsed to a named person requires indorsement by the named person as well as delivery.
    5. A document is duly negotiated if it is negotiated in the manner stated in this subsection to a holder that purchases it in good faith, without notice of any defense against or claim to it on the part of any person, and for value, unless it is established that the negotiation is not in the regular course of business or financing or involves receiving the document in settlement or payment of a monetary obligation.
  2. The following rules apply to a negotiable electronic document of title:
    1. If the document’s original terms run to the order of a named person or to bearer, the document is negotiated by delivery of the document to another person. Indorsement by the named person is not required to negotiate the document.
    2. If the document’s original terms run to the order of a named person and the named person has control of the document, the effect is the same as if the document had been negotiated.
    3. A document is duly negotiated if it is negotiated in the manner stated in this subsection to a holder that purchases it in good faith, without notice of any defense against or claim to it on the part of any person, and for value, unless it is established that the negotiation is not in the regular course of business or financing or involves taking delivery of the document in settlement or payment of a monetary obligation.
  3. Indorsement of a nonnegotiable document of title neither makes it negotiable nor adds to the transferee’s rights.
  4. The naming in a negotiable bill of lading of a person to be notified of the arrival of the goods does not limit the negotiability of the bill or constitute notice to a purchaser of the bill of any interest of that person in the goods.

History. Enact. Acts 1958, ch. 77, § 7-501, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 30, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-501.

Changes:

To accommodate negotiable electronic documents of title.

Purposes of changes:

  1. Subsection (a) has been limited to tangible negotiable documents of title but otherwise remains unchanged in substance from the rules in former Section 7-501. Subsection (b) is new and applies to negotiable electronic documents of title. Delivery of a negotiable electronic document is through voluntary transfer of control. Section 1-201 definition of “delivery.” The control concept as applied to negotiable electronic documents of title is the substitute for both possession and indorsement as applied to negotiable tangible documents of title. Section 7-106.

    Article 7 does not separately define the term “duly negotiated.” However, the elements of “duly negotiated” are set forth in subsection (a)(5) for tangible documents and (b)(3) for electronic documents. As under former Section 7-501, in order to effect a “due negotiation” the negotiation must be in the “regular course of business or financing” in order to transfer greater rights than those held by the person negotiating. The foundation of the mercantile doctrine of good faith purchase for value has always been, as shown by the case situations, the furtherance and protection of the regular course of trade. The reason for allowing a person, in bad faith or in error, to convey away rights which are not its own has from the beginning been to make possible the speedy handling of that great run of commercial transactions which are patently usual and normal.

    There are two aspects to the usual and normal course of mercantile dealings, namely, the person making the transfer and the nature of the transaction itself. The first question which arises is: Is the transferor a person with whom it is reasonable to deal as having full powers? In regard to documents of title the only holder whose possession or control appears, commercially, to be in order is almost invariably a person in the trade. No commercial purpose is served by allowing a tramp or a professor to “duly negotiate” an order bill of lading for hides or cotton not their own, and since such a transfer is obviously not in the regular course of business, it is excluded from the scope of the protection of subsections (a)(5) or (b)(3).

    The second question posed by the “regular course” qualification is: Is the transaction one which is normally proper to pass full rights without inquiry, even though the transferor itself may not have such rights to pass, and even though the transferor may be acting in breach of duty? In raising this question the “regular course” criterion has the further advantage of limiting, the effective wrongful disposition to transactions whose protection will really further trade. Obviously, the snapping up of goods for quick resale at a price suspiciously below the market deserves no protection as a matter of policy: it is also clearly outside the range of regular course.

    Any notice on the document sufficient to put a merchant on inquiry as to the “regular course” quality of the transaction will frustrate a “due negotiation”. Thus irregularity of the document or unexplained staleness of a bill of lading may appropriately be recognized as negating a negotiation in “regular” course.

    A pre-existing claim constitutes value, and “due negotiation” does not require “new value.” A usual and ordinary transaction in which documents are received as security for credit previously extended may be in “regular” course, even though there is a demand for additional collateral because the creditor “deems himself insecure.” But the matter has moved out of the regular course of financing if the debtor is thought to be insolvent, the credit previously extended is in effect cancelled, and the creditor snatches a plank in the shipwreck under the guise of a demand for additional collateral. Where a money debt is “paid” in commodity paper, any question of “regular” course disappears, as the case is explicitly excepted from “due negotiation”.

  2. Negotiation under this section may be made by any holder no matter how the holder acquired possession or control of the document.
  3. Subsections (a)(3) and (b)(2) make explicit a matter upon which the intent of the pre-Code law was clear but the language somewhat obscure: a negotiation results from a delivery to a banker or buyer to whose order the document has been taken by the person making the bailment. There is no presumption of irregularity in such a negotiation; it may very well be in “regular course.”
  4. This Article does not contain any provision creating a presumption of due negotiation to, and full rights in, a holder of a document of title akin to that created by Uniform Commercial Code Article 3. But the reason of the provisions of this Act (Section 1-307) on the prima facie authenticity and accuracy of third party documents, joins with the reason of the present section to work such a presumption in favor of any person who has power to make a due negotiation. It would not make sense for this Act to authorize a purchaser to indulge the presumption of regularity if the courts were not also called upon to do so. Allocations of the burden of going forward with the evidence and the burden of proof are left to the procedural law of the various states.
  5. Subsections (c) and (d) are unchanged from prior law and apply to both tangible and electronic documents of title.

Cross references:

Sections 1-307, 7-502 and 7-503.

Definitional cross references:

“Bearer”. Section 1-201. “Control”. Section 7-106. “Delivery”. Section 1-201. “Document of title”. Section 1-201. “Good faith”. Section 1-201 [7-102]. “Holder”. Section 1-201. “Notice”. Section 1-202. “Person”. Section 1-201. “Purchase”. Section 1-201. “Rights”. Section 1-201. “Term”. Section 1-201. “Value”. Section 1-204.

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NOTES TO DECISIONS

1.Indorsement in Blank.

Bona fide purchaser for much less than the value of goods covered by warehouse receipt took title where holder indorsed receipts in blank and put them in a vault to which his bookkeeper had access and the bookkeeper sold the receipts. (decided under prior law) Flexner v. Meyer's Ex'x, 191 Ky. 133 , 229 S.W. 99, 1921 Ky. LEXIS 271 ( Ky. 1921 ).

2.Fraudulent Negotiation by Corporate Officer.

Purchaser bought with knowledge of facts which should have put him on inquiry where president of distillery issued warehouse receipts which showed on their face that the whiskey which receipts were supposed to cover was stored in a bonded government warehouse owned by another. (decided under prior law) Old '76 Distillery Co. v. Wiechelman, 266 Ky. 533 , 99 S.W.2d 725, 1936 Ky. LEXIS 706 ( Ky. 1936 ).

355.7-502. Rights acquired by due negotiation.

  1. Subject to KRS 355.7-205 and 355.7-503 , a holder to which a negotiable document of title has been duly negotiated acquires thereby:
    1. Title to the document;
    2. Title to the goods;
    3. All rights accruing under the law of agency or estoppel, including rights to goods delivered to the bailee after the document was issued; and
    4. The direct obligation of the issuer to hold or deliver the goods according to the terms of the document free of any defense or claim by the issuer except those arising under the terms of the document or under this article. In the case of a delivery order, the bailee’s obligation accrues only upon the bailee’s acceptance of the delivery order and the obligation acquired by the holder is that the issuer and any indorser will procure the acceptance of the bailee.
  2. Subject to KRS 355.7-503 , title and rights acquired by due negotiation are not defeated by any stoppage of the goods represented by the document of title or by surrender of the goods by the bailee and are not impaired even if:
    1. The due negotiation or any prior due negotiation constituted a breach of duty;
    2. Any person has been deprived of possession of a negotiable tangible document or control of a negotiable electronic document by misrepresentation, fraud, accident, mistake, duress, loss, theft, or conversion; or
    3. A previous sale or other transfer of the goods or document has been made to a third person.

History. Enact. Acts 1958, ch. 77, § 7-502, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 31, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-502.

Changes:

To accommodate electronic documents of title and for style.

Purposes of changes:

  1. This section applies to both tangible and electronic documents of title. The elements of duly negotiated, which constitutes a due negotiation, are set forth in Section 7-501. The several necessary qualifications of the broad principle that the holder of a document acquired in a due negotiation is the owner of the document and the goods have been brought together in the next section (Section 7-503).
  2. Subsection (a)(3) covers the case of “feeding” of a duly negotiated document by subsequent delivery to the bailee of such goods as the document falsely purported to cover; the bailee in such case is estopped as against the holder of the document.
  3. The explicit statement in subsection (a)(4) of the bailee’s direct obligation to the holder precludes the defense that the document in question was “spent” after the carrier had delivered the goods to a previous holder. But the holder is subject to such defenses as non-negligent destruction even though not apparent on the document. The sentence on delivery orders applies only to delivery orders in negotiable form which have been duly negotiated. On delivery orders, see also Section 7-503(b) and Comment.
  4. Subsection (b) continues the law which gave full effect to the issuance or due negotiation of a negotiable document. The subsection adds nothing to the effect of the rules stated in subsection (a), but it has been included since such explicit reference was provided under former Section 7-502 to preserve the right of a purchaser by due negotiation. The listing is not exhaustive. The language “any stoppage” is included lest an inference be drawn that a stoppage of the goods before or after transit might cut off or otherwise impair the purchaser’s rights.

Cross references:

Sections 7-103, 7-205, 7-403, 7-501, and 7-503.

Definitional cross references:

“Bailee”. Section 7-102. “Control”. Section 7-106. “Delivery”. Section 1-201. “Delivery order”. Section 7-102. “Document of title”. Section 1-201. “Duly negotiate”. Section 7-501. “Fungible”. Section 1-201. “Goods”. Section 7-102. “Holder”. Section 1-201. “Issuer”. Section 7-102. “Person”. Section 1-201. “Rights”. Section 1-201. “Term”. Section 1-201. “Warehouse receipt”. Section 1-201.

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NOTES TO DECISIONS

1.Negotiation of Receipt Indorsed in Blank.

Bona fide purchaser for much less than the value of goods covered by warehouse receipt took title where holder indorsed receipts in blank and put them in a vault to which his bookkeeper had access and the bookkeeper sold the receipts. (decided under prior law) Flexner v. Meyer's Ex'x, 191 Ky. 133 , 229 S.W. 99, 1921 Ky. LEXIS 271 ( Ky. 1921 ).

355.7-503. Document of title to goods defeated in certain cases.

  1. A document of title confers no right in goods against a person that before issuance of the document had a legal interest or a perfected security interest in the goods and that did not:
    1. Deliver or entrust the goods or any document covering the goods to the bailor or the bailor’s nominee with actual or apparent authority to ship, store, or sell; with power to obtain delivery under KRS 355.7-403 ; or with power of disposition under KRS 355.2-403 , 355.2A-304 (2), 355.2A-305 (2), or 355.9-320 or other statute or rule of law; or
    2. Acquiesce in the procurement by the bailor or its nominee of any document.
  2. Title to goods based upon an unaccepted delivery order is subject to the rights of any person to which a negotiable warehouse receipt or bill of lading covering the goods has been duly negotiated. That title may be defeated under KRS 355.7-504 to the same extent as the rights of the issuer or a transferee from the issuer.
  3. Title to goods based upon a bill of lading issued to a freight forwarder is subject to the rights of any person to which a bill issued by the freight forwarder is duly negotiated. However, delivery by the carrier in accordance with Part 4 of this article pursuant to its own bill of lading discharges the carrier’s obligation to deliver.

History. Enact. Acts 1958, ch. 77, § 7-503, effective July 1, 1960; 2000, ch. 408, § 168, effective July 1, 2001; repealed and reenact., Acts 2012, ch. 132, § 32, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-503.

Changes:

Changes to cross-reference to Article 2A and for style.

Purposes of changes:

  1. In general it may be said that the title of a purchaser by due negotiation prevails over almost any interest in the goods which existed prior to the procurement of the document of title if the possession of the goods by the person obtaining the document derived from any action by the prior claimant which introduced the goods into the stream of commerce or carried them along that stream. A thief of the goods cannot indeed by shipping or storing them to the thief’s own order acquire power to transfer them to a good faith purchaser. Nor can a tenant or mortgagor defeat any rights of a landlord or mortgagee which have been perfected under the local law merely by wrongfully shipping or storing a portion of the crop or other goods. However, “acquiescence” by the landlord or mortgagee does not require active consent under subsection (a)(2) and knowledge of the likelihood of storage or shipment with no objection or effort to control it is sufficient to defeat the landlord’s or the mortgagee’s rights as against one who takes by due negotiation of a negotiable document. In re Sharon Steel, 176 B.R. 384 (Bankr. W.D. Pa. 1995); In re R.V. Segars Co, 54 B.R. 170 (Bankr. S.C. 1985); In re Jamestown Elevators, Inc., 49 B.R. 661 (Bankr. N.D. 1985).

    On the other hand, where goods are delivered to a factor for sale, even though the factor has made no advances and is limited in its duty to sell for cash, the goods are “entrusted” to the factor “with actual ... authority ... to sell” under subsection (a)(1), and if the factor procures a negotiable document of title it can transfer the owner’s interest to a purchaser by due negotiation. Further, where the factor is in the business of selling, goods entrusted to it simply for safekeeping or storage may be entrusted under circumstances which give the factor “apparent authority to ship, store or sell” under subsection (a)(1), or power of disposition under Section 2-403, 2A-304(2), 2A-305(2), 7-205, 9-320, or 9-321(c) or under a statute such as the earlier Factors Acts, or under a rule of law giving effect to apparent ownership. See Section 1-103.

    Persons having an interest in goods also frequently deliver or entrust them to agents or servants other than factors for the purpose of shipping or warehousing or under circumstances reasonably contemplating such action. This Act is clear that such persons assume full risk that the agent to whom the goods are so delivered may ship or store in breach of duty, take a document to the agent’s own order and then proceed to misappropriate the negotiable document of title that embodies the goods. This Act makes no distinction between possession or mere custody in such situations and finds no exception in the case of larceny by a bailee or the like. The safeguard in such situations lies in the requirement that a due negotiation can occur only “in the regular course of business or financing” and that the purchase be in good faith and without notice. See Section 7-501. Documents of title have no market among the commercially inexperienced and the commercially experienced do not take them without inquiry from persons known to be truck drivers or petty clerks even though such persons purport to be operating in their own names.

    Again, where the seller allows a buyer to receive goods under a contract for sale, though as a “conditional delivery” or under “cash sale” terms and on explicit agreement for immediate payment, the buyer thereby acquires power to defeat the seller’s interest by transfer of the goods to certain good faith purchasers. See Section 2-403. Both in policy and under the language of subsection (a)(1) that same power must be extended to accomplish the same result if the buyer procures a negotiable document of title to the goods and duly negotiates it.

    This comment 1 should be considered in interpreting delivery, entrustment or acquiescence in application of Section 7-209(c).

  2. Under subsection (a) a delivery order issued by a person having no right in or power over the goods is ineffective unless the owner acts as provided in subsection (a)(1) or (2). Thus the rights of a transferee of a non-negotiable warehouse receipt can be defeated by a delivery order subsequently issued by the transferor only if the transferee “delivers or entrusts” to the “person procuring” the delivery order or “acquiesces” in that person’s procurement. Similarly, a second delivery order issued by the same issuer for the same goods will ordinarily be subject to the first, both under this section and under Section 7-402. After a delivery order is validly issued but before it is accepted, it may nevertheless be defeated under subsection (b) in much the same way that the rights of a transferee may be defeated under Section 7-504. For example, a buyer in ordinary course from the issuer may defeat the rights of the holder of a prior delivery order if the bailee receives notification of the buyer’s rights before notification of the holder’s rights. Section 7-504(b)(2). But an accepted delivery order has the same effect as a document issued by the bailee.
  3. Under subsection (c) a bill of lading issued to a freight forwarder is subordinated to the freight forwarder’s document of title, since the bill on its face gives notice of the fact that a freight forwarder is in the picture and the freight forwarder has in all probability issued a document of title. But the carrier is protected in following the terms of its own bill of lading.

Cross references:

Point 1: Sections 1-103, 2-403, 2A-304(2), 2A-305(2), 7-205, 7-209, 7-501, 9-320, 9-321(c), and 9-331.

Point 2: Sections 7-402 and 7-504.

Point 3: Sections 7-402, 7-403 and 7-404.

Definitional cross references:

“Bill of lading”. Section 1-201. “Contract for sale”. Section 2-106. “Delivery”. Section 1-201. “Delivery order”. Section 7-102. “Document of title”. Section 1-201. “Duly negotiate”. Section 7-501. “Goods”. Section 7-102. “Person”. Section 1-201. “Right”. Section 1-201. “Warehouse receipt”. Section 1-201.

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NOTES TO DECISIONS

1.Good Faith Purchaser.

The holder of a warehouse receipt, in effect, being the person designated by the warehouse receipt as the one to whom delivery was to be made, stood in the shoes of a good faith purchaser for value. Lofton v. Mooney, 452 S.W.2d 617, 1970 Ky. LEXIS 370 ( Ky. 1970 ).

2.Priority of Rights.

Where the plaintiff’s lien was obtained long after the bank had acquired a legal security interest in stored grain by the issuance to it of a valid warehouse receipt, the bank’s rights were superior to those of the plaintiff. Lofton v. Mooney, 452 S.W.2d 617, 1970 Ky. LEXIS 370 ( Ky. 1970 ).

355.7-504. Rights acquired in the absence of due negotiation — Effect of diversion — Stoppage of delivery.

  1. A transferee of a document of title, whether negotiable or nonnegotiable, to which the document has been delivered but not duly negotiated, acquires the title and rights that its transferor had or had actual authority to convey.
  2. In the case of a nonnegotiable document of title, until but not after the bailee receives notice of the transfer, the rights of the transferee may be defeated:
    1. By those creditors of the transferor that could treat the transfer as void under KRS 355.2-402 or 355.2A-308 ;
    2. By a buyer from the transferor in ordinary course of business if the bailee has delivered the goods to the buyer or received notification of the buyer’s rights;
    3. By a lessee from the transferor in ordinary course of business if the bailee has delivered the goods to the lessee or received notification of the lessee’s rights; or
    4. As against the bailee, by good faith dealings of the bailee with the transferor.
  3. A diversion or other change of shipping instructions by the consignor in a nonnegotiable bill of lading which causes the bailee not to deliver the goods to the consignee defeats the consignee’s title to the goods if the goods have been delivered to a buyer in ordinary course of business or a lessee in ordinary course of business and in any event defeats the consignee’s rights against the bailee.
  4. Delivery of the goods pursuant to a nonnegotiable document of title may be stopped by a seller under KRS 355.2-705 or a lessor under KRS 355.2A-526 , subject to the requirements of due notification in those sections. A bailee honoring the seller’s or lessor’s instructions is entitled to be indemnified by the seller or lessor against any resulting loss or expense.

History. Enact. Acts 1958, ch. 77, § 7-504, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 33, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-504.

Changes:

To include cross-references to Article 2A and for style.

Purposes of changes and new matter:

  1. Under the general principles controlling negotiable documents, it is clear that in the absence of due negotiation a transferor cannot convey greater rights than the transferor has, even when the negotiation is formally perfect. This section recognizes the transferor’s power to transfer rights which the transferor has or has “actual authority to convey.” Thus, where a negotiable document of title is being transferred the operation of the principle of estoppel is not recognized, as contrasted with situations involving the transfer of the goods themselves. (Compare Section 2-403 on good faith purchase of goods.) This section applies to both tangible and electronic documents of title.

    A necessary part of the price for the protection of regular dealings with negotiable documents of title is an insistence that no dealing which is in any way irregular shall be recognized as a good faith purchase of the document or of any rights pertaining to it. So, where the transfer of a negotiable document fails as a negotiation because a requisite indorsement is forged or otherwise missing, the purchaser in good faith and for value may be in the anomalous position of having less rights, in part, than if the purchaser had purchased the goods themselves. True, the purchaser’s rights are not subject to defeat by attachment of the goods or surrender of them to the purchaser’s transferor (contrast subsection (b)); but on the other hand, the purchaser cannot acquire enforceable rights to control or receive the goods over the bailee’s objection merely by giving notice to the bailee. Similarly, a consignee who makes payment to its consignor against a straight bill of lading can thereby acquire the position of a good faith purchaser of goods under provisions of the Article of this Act on Sales (Section 2-403), whereas the same payment made in good faith against an unendorsed order bill would not have such effect. The appropriate remedy of a purchaser in such a situation is to regularize its status by compelling indorsement of the document (see Section 7-506).

  2. As in the case of transfer—as opposed to “due negotiation”—of negotiable documents, subsection (a) empowers the transferor of a nonnegotiable document to transfer only such rights as the transferor has or has “actual authority” to convey. In contrast to situations involving the goods themselves the operation of estoppel or agency principles is not here recognized to enable the transferor to convey greater rights than the transferor actually has. Subsection (b) makes it clear, however, that the transferee of a nonnegotiable document may acquire rights greater in some respects than those of his transferor by giving notice of the transfer to the bailee. New subsection (b)(3) provides for the rights of a lessee in the ordinary course.

    Subsection (b)(2) & (3) require delivery of the goods. Delivery of the goods means the voluntary transfer of physical possession of the goods. See amended 2-103.

  3. Subsection (c) is in part a reiteration of the carrier’s immunity from liability if it honors instructions of the consignor to divert, but there is added a provision protecting the title of the substituted consignee if the latter is a buyer in ordinary course of business. A typical situation would be where a manufacturer, having shipped a lot of standardized goods to A on nonnegotiable bill of lading, diverts the goods to customer B who pays for them. Under pre-Code passage-of-title-by-appropriation doctrine A might reclaim the goods from B. However, no consideration of commercial policy supports this involvement of an innocent third party in the default of the manufacturer on his contract to A; and the common commercial practice of diverting goods in transit suggests a trade understanding in accordance with this subsection. The same result should obtain if the substituted consignee is a lessee in ordinary course. The extent of the lessee’s interest in the goods is less than a buyer’s interest in the goods. However, as against the first consignee and the lessee in ordinary course as the substituted consignee, the lessee’s rights in the goods as granted under the lease are superior to the first consignee’s rights.
  4. Subsection (d) gives the carrier an express right to indemnity where the carrier honors a seller’s request to stop delivery.
  5. Section 1-202 gives the bailee protection, if due diligence is exercised where the bailee’s organization has not had time to act on a notification.

Cross references:

Point 1: Sections 2-403 and 7-506.

Point 2: Sections 2-403 and 2A-304.

Point 3: Sections 7-303, 7-403(a)(5) and 7-404.

Point 4: Sections 2-705 and 7-403(a)(4).

Point 5: Section 1-202.

Definitional cross references:

“Bailee”. Section 7-102. “Bill of lading”. Section 1-201. “Buyer in ordinary course of business”. Section 1-201. “Consignee”. Section 7-102. “Consignor”. Section 7-102. “Creditor”. Section 1-201. “Delivery”. Section 1-201. “Document of Title”. Section 1-201. “Duly negotiate”. Section 7-501. “Good faith”. Section 1-201 [7-102]. “Goods”. Section 7-102. “Honor”. Section 1-201. “Lessee in ordinary course” Section 2A-103. “Notification”. Section 1-201. “Purchaser”. Section 1-201. “Rights”. Section 1-201.

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NOTES TO DECISIONS

1.Applicability.

The statute had no application to a situation in which the holder of a warehouse receipt was the original holder and not a transferee. Lofton v. Mooney, 452 S.W.2d 617, 1970 Ky. LEXIS 370 ( Ky. 1970 ).

355.7-505. Indorser not guarantor for other parties.

The indorsement of a tangible document of title issued by a bailee does not make the indorser liable for any default by the bailee or previous indorsers.

History. Enact. Acts 1958, ch. 77, § 7-505, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 34, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-505.

Changes:

Limited to tangible documents of title.

Purposes of changes:

This section is limited to tangible documents of title as the concept of indorsement is irrelevant to electronic documents of title. Electronic documents of title will be transferred by delivery of control. Section 7-106. The indorsement of a tangible document of title is generally understood to be directed towards perfecting the transferee’s rights rather than towards assuming additional obligations. The language of the present section, however, does not preclude the one case in which an indorsement given for value guarantees future action, namely, that in which the bailee has not yet become liable upon the document at the time of the indorsement. Under such circumstances the indorser, of course, engages that appropriate honor of the document by the bailee will occur. See Section 7-502(a)(4) as to negotiable delivery orders. However, even in such a case, once the bailee attorns to the transferee, the indorser’s obligation has been fulfilled and the policy of this section excludes any continuing obligation on the part of the indorser for the bailee’s ultimate actual performance.

Cross references:

Sections 7-106 and 7-502.

Definitional cross references:

“Bailee”. Section 7-102. “Document of title”. Section 1-201. “Party”. Section 1-201.

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355.7-506. Delivery without indorsement: right to compel indorsement.

The transferee of a negotiable tangible document of title has a specifically enforceable right to have its transferor supply any necessary indorsement, but the transfer becomes a negotiation only as of the time the indorsement is supplied.

History. Enact. Acts 1958, ch. 77, § 7-506, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 35, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-506.

Changes:

Limited to tangible documents of title.

Purposes of changes:

  1. This section is limited to tangible documents of title as the concept of indorsement is irrelevant to electronic documents of title. Electronic documents of title will be transferred by delivery of control. Section 7-106. From a commercial point of view the intention to transfer a tangible negotiable document of title which requires an indorsement for its transfer, is incompatible with an intention to withhold such indorsement and so defeat the effective use of the document. Further, the preceding section and the Comment thereto make it clear that an indorsement generally imposes no responsibility on the indorser.
  2. Although this section provides that delivery of a tangible document of title without the necessary indorsement is effective as a transfer, the transferee, of course, has not regularized its position until such indorsement is supplied. Until this is done the transferee cannot claim rights under due negotiation within the requirements of this Article (Section 7-501(a)(5)) on “due negotiation”. Similarly, despite the transfer to the transferee of the transferor’s title, the transferee cannot demand the goods from the bailee until the negotiation has been completed and the document is in proper form for surrender. See Section 7-403(c).

Cross references:

Point 1: Sections 7-106 and 7-505.

Point 2: Sections 7-501(a)(5) and 7-403(c).

Definitional cross references:

“Document of title”. Section 1-201. “Rights”. Section 1-201.

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355.7-507. Warranties on negotiation or delivery of document of title.

If a person negotiates or delivers a document of title for value, otherwise than as a mere intermediary under KRS 355.7-508 , unless otherwise agreed, the transferor warrants to its immediate purchaser only in addition to any warranty made in selling or leasing the goods that:

  1. The document is genuine;
  2. The transferor does not have knowledge of any fact that would impair the document’s validity or worth; and
  3. The negotiation or delivery is rightful and fully effective with respect to the title to the document and the goods it represents.

History. Enact. Acts 1958, ch. 77, § 7-507, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 36, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-507.

Changes:

Substitution of the word “delivery” for the word “transfer,” reference leasing transactions and style.

Purposes of changes:

  1. Delivery of goods by use of a document of title does not limit or displace the ordinary obligations of a seller or lessor as to any warranties regarding the goods that arises under other law. If the transfer of documents attends or follows the making of a contract for the sale or lease of goods, the general obligations on warranties as to the goods (Sections 2-312 through 2-318 and Sections 2A-210 through 2A-316) are brought to bear as well as the special warranties under this section.
  2. The limited warranties of a delivering or collecting intermediary, including a collecting bank, are stated in Section 7-508.

Cross references:

Point 1: Sections 2-312 through 2-318 and 2A-310-through 2A-316.

Point 2: Section 7-508.

Definitional cross references:

“Delivery”. Section 1-201 “Document of title”. Section 1-201. “Genuine”. Section 1-201. “Goods”. Section 7-102. “Person”. Section 1-201. “Purchaser”. Section 1-201. “Value”. Section 1-204.

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355.7-508. Warranties of collecting bank as to documents of title.

A collecting bank or other intermediary known to be entrusted with documents of title on behalf of another or with collection of a draft or other claim against delivery of documents warrants by the delivery of the documents only its own good faith and authority even if the collecting bank or other intermediary has purchased or made advances against the claim or draft to be collected.

History. Enact. Acts 1958, ch. 77, § 7-508, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 37, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-508.

Changes:

Changes for style only.

Purposes:

  1. To state the limited warranties given with respect to the documents accompanying a documentary draft.
  2. In warranting its authority a collecting bank or other intermediary only warrants its authority from its transferor. See Section 4-203. It does not warrant the genuineness or effectiveness of the document. Compare Section 7-507.
  3. Other duties and rights of banks handling documentary drafts for collection are stated in Article 4, Part 5. On the meaning of draft, see Section 4-104 and Section 5-102, comment 11.

Cross references:

Sections 4-104, 4-203, 4-501 through 4-504, 5-102, and 7-507.

Definitional cross references:

“Collecting bank”. Section 4-105. “Delivery”. Section 1-201. “Document of title”. Section 1-102. “Documentary draft”. Section 4-104. “Intermediary bank” Section 4-105. “Good faith”. Section 1-201 [7-102].

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355.7-509. Adequate compliance with commercial contract.

Whether a document of title is adequate to fulfill the obligations of a contract for sale, a contract for lease, or the conditions of a letter of credit is determined by Article 2, 2A, or 5 of this chapter.

History. Enact. Acts 1958, ch. 77, § 7-509, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 38, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-509.

Changes:

To reference Article 2A.

Purposes:

To cross-refer to the Articles of this Act which deal with the substantive issues of the type of document of title required under the contract entered into by the parties.

Cross references:

Articles 2, 2A and 5.

Definitional cross references:

“Contract for sale”. Section 2-106. “Document of title”. Section 1-201. “Lease”. Section 2A-103.

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Part 6. Warehouse Receipts and Bills of Lading: Miscellaneous Provisions

355.7-601. Lost, stolen, or destroyed documents of title.

  1. If a document of title is lost, stolen, or destroyed, a court may order delivery of the goods or issuance of a substitute document and the bailee may without liability to any person comply with the order. If the document was negotiable, a court shall not order delivery of the goods or issuance of a substitute document without the claimant’s posting security unless it finds that any person that may suffer loss as a result of nonsurrender of possession or control of the document is adequately protected against the loss. If the document was nonnegotiable, the court may require security. The court may also order payment of the bailee’s reasonable costs and attorney’s fees in any action under this subsection.
  2. A bailee that without court order delivers goods to a person claiming under a missing negotiable document of title is liable to any person injured thereby. If the delivery is not in good faith, the bailee is liable for conversion. Delivery in good faith is not conversion if the claimant posts security with the bailee in an amount at least double the value of the goods at the time of posting to indemnify any person injured by the delivery which files a notice of claim within one (1) year after the delivery.

History. Enact. Acts 1958, ch. 77, § 7-601, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 39, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-601.

Changes:

To accommodate electronic documents; to provide flexibility to courts similar to the flexibility in Section 3-309; to update to the modern era of deregulation; and for style.

Purposes of changes:

  1. Subsection (a) authorizes courts to order compulsory delivery of the goods or compulsory issuance of a substitute document. Compare Section 7-402. Using language similar to that found in Section 3-309, courts are given discretion as to what is adequate protection when the lost, stolen or destroyed document was negotiable or whether security should be required when the lost, stolen or destroyed document was nonnegotiable. In determining whether a party is adequately protected against loss in the case of a negotiable document, the court should consider the likelihood that the party will suffer a loss. The court is also given discretion as to the bailee’s costs and attorney fees. The rights and obligations of a bailee under this section depend upon whether the document of title is lost, stolen or destroyed and is in addition to the ability of the bailee to bring an action for interpleader. See Section 7-603.
  2. Courts have the authority under this section to order a substitute document for either tangible or electronic documents. If the substitute document will be in a different medium than the original document, the court should fashion its order in light of the requirements of Section 7-105.
  3. Subsection (b) follows prior Section 7-601 in recognizing the legality of the well established commercial practice of bailees making delivery in good faith when they are satisfied that the claimant is the person entitled under a missing (i.e. lost, stolen, or destroyed) negotiable document. Acting without a court order, the bailee remains liable on the original negotiable document and, to avoid conversion liability, the bailee may insist that the claimant provide an indemnity bond. Cf. Section 7-403.
  4. Claimants on non-negotiable instruments are permitted to avail themselves of the subsection (a) procedure because straight (non-negotiable) bills of lading sometimes contain provisions that the goods shall not be delivered except upon production of the bill. If the carrier should choose to insist upon production of the bill, the consignee should have some means of compelling delivery on satisfactory proof of entitlement. Without a court order, a bailee may deliver, subject to Section 7-403, to a person claiming goods under a non-negotiable document that the same person claims is lost, stolen, or destroyed.
  5. The bailee’s lien should be protected when a court orders delivery of the goods pursuant to this section.

Cross references:

Point 1: Sections 3-309, 7-402 and 7-603.

Point 2: Section 7-105.

Point 3: Section 7-403.

Point 4: Section 7-403.

Point 5: Sections 7-209 and 7-307.

Definitional cross references:

“Bailee”. Section 7-102. “Delivery”. Section 1-201. “Document of title”. Section 1-201. “Good faith”. Section 1-201 [7-102]. “Goods”. Section 7-102. “Person”. Section 1-201.

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355.7-602. Judicial process against goods covered by negotiable document of title.

Unless a document of title was originally issued upon delivery of the goods by a person that did not have power to dispose of them, a lien does not attach by virtue of any judicial process to goods in the possession of a bailee for which a negotiable document of title is outstanding unless possession or control of the document is first surrendered to the bailee or the document’s negotiation is enjoined. The bailee may not be compelled to deliver the goods pursuant to process until possession or control of the document is surrendered to the bailee or to the court. A purchaser of the document for value without notice of the process or injunction takes free of the lien imposed by judicial process.

History. Enact. Acts 1958, ch. 77, § 7-602, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 40, effective July 12, 2012.

Official Comment

Prior uniform statutory provisions:

Former Section 7-602.

Changes:

Changes to accommodate electronic documents of title and for style.

Purposes of changes:

  1. The purpose of the section is to protect the bailee from conflicting claims of the document of title holder and the judgment creditors of the person who deposited the goods. The rights of the former prevail unless, in effect, the judgment creditors immobilize the negotiable document of title through the surrender of possession of a tangible document or control of an electronic document. However, if the document of title was issued upon deposit of the goods by a person who had no power to dispose of the goods so that the document is ineffective to pass title, judgment liens are valid to the extent of the debtor’s interest in the goods.
  2. The last sentence covers the possibility that the holder of a document who has been enjoined from negotiating it will violate the injunction by negotiating to an innocent purchaser for value. In such case the lien will be defeated.

Cross references:

Sections 7-106 and 7-501 through 7-503.

Definitional cross references:

“Bailee”. Section 7-102. “Delivery”. Section 1-201. “Document of title”. Section 1-201. “Goods”. Section 7-102. “Notice”. Section 1-202. “Person”. Section 1-201. “Purchase”. Section 1-201. “Value”. Section 1-204.

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355.7-603. Conflicting claims — Interpleader.

If more than one (1) person claims title to or possession of the goods, the bailee is excused from delivery until the bailee has a reasonable time to ascertain the validity of the adverse claims or to commence an action for interpleader. The bailee may assert an interpleader either in defending an action for nondelivery of the goods or by original action.

History. Enact. Acts 1958, ch. 77, § 7-603, effective July 1, 1960; repealed and reenact., Acts 2012, ch. 132, § 41, effective July 12, 2012.

Official Comment

Prior uniform statutory provision:

Former Section 7-603.

Changes:

Changes for style only.

Purposes of changes:

  1. The section enables a bailee faced with conflicting claims to the goods to compel the claimants to litigate their claims with each other rather than with the bailee. The bailee is protected from legal liability when the bailee complies with court orders from the interpleader. See e.g. Northwestern National Sales, Inc. v. Commercial Cold Storage, Inc., 162 Ga. App. 741, 293 S.E.2d. 30 (1982).
  2. This section allows the bailee to bring an interpleader action but does not provide an exclusive basis for allowing interpleader. If either state or federal procedural rules allow an interpleader in other situations, the bailee may commence an interpleader under those rules. Even in an interpleader to which this section applies, the state or federal process of interpleader applies to the bailee’s action for interpleader. For example, state or federal interpleader statutes or rules may permit a bailee to protect its lien or to seek attorney’s fees and costs in the interpleader action.

Cross references:

Point 1: Section 7-403.

Definitional cross references:

“Action”. Section 1-201. “Bailee”. Section 7-102. “Delivery”. Section 1-201. “Goods”. Section 7-102. “Person”. Section 1-201. “Reasonable time”. Section 1-205.

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355.7-703. Applicability.

This article, as effective on July 12, 2012:

  1. Applies to a document of title that is issued or a bailment that arises on or after July 12, 2012;
  2. Does not apply to a document of title that is issued or a bailment that arises before July 12, 2012, even if the document of title or bailment would be subject to this article, as effective on July 12, 2012, if the document of title had been issued or bailment had arisen after July 12, 2012; and
  3. Does not apply to a right of action that has accrued before July 12, 2012.

History. Enact. Acts 2012, ch. 132, § 42, effective July 12, 2012.

355.7-704. Savings clause.

A document of title issued or a bailment that arises before July 12, 2012, and the rights, obligations, and interests flowing from that document or bailment are governed by any statute or other rule amended or repealed by 2012 Ky. Acts ch. 132 as if amendment or repeal had not occurred and may be terminated, completed, consummated, or enforced under that statute or other rule.

History. Enact. Acts 2012, ch. 132, § 43, effective July 12, 2012.

Official Comment

A state should repeal its prior version of Uniform Commercial Code Article 7 on documents of title and Uniform Commercial Code section 10-204. The substance of Section 10-104 has been incorporated into Section 7-103(b).

Article 8. Investment Securities

Compiler’s Notes.

The official comments in this article are copyrighted by the National Conference of Commissioners of Uniform State Laws and the American Law Institute, and are reproduced by permission.

Part 1. Short Title and General Matters

355.8-101. Short title.

This article may be cited as Uniform Commercial Code — Investment Securities.

History. Enact. Acts 1958, ch. 77, § 8-101, effective July 1, 1960; repealed and reenact. Acts 1996, ch. 130, § 114, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-101, effective July 1, 1960) was repealed and reenacted by Acts 1996, ch. 130, § 114, effective January 1, 1997.

Section 183 of Acts 1996, ch. 130 read:

“(1) This Act does not affect an action or proceeding commenced before this act takes effect.

“(2) If a security interest in a security is perfected at the date this Act takes effect [January 1, 1997], and the action by which the security was perfected would suffice to perfect a security interest under this Act, no further action is required to continue perfection. If a security interest in a security is perfected at the date this Act takes effect but the action by which the security interest was perfected would not suffice to perfect a security interest under this Act, the security interest remains prefected for a period of four months after the effective date and continues perfected thereafter if appropriate action to perfect under this Act is taken within that period. If a security interest is perfected at the date this Act takes effect and the security interest can be perfected by filing under this Act, a financing statement signed by the secured party instead of the debtor may be filed within that period to continue perfection or thereafter to perfect.”

355.8-102. Definitions.

  1. In this article:
    1. “Adverse claim” means a claim that a claimant has a property interest in a financial asset and that it is a violation of the rights of the claimant for another person to hold, transfer, or deal with the financial asset;
    2. “Bearer form,” as applied to a certificated security, means a form in which the security is payable to the bearer of the security certificate according to its terms but not by reason of an indorsement;
    3. “Broker” means a person defined as a broker or dealer under the federal securities laws, but without excluding a bank acting in that capacity;
    4. “Certificated security” means a security that is represented by a certificate;
    5. “Clearing corporation” means:
      1. A person that is registered as a “clearing agency” under the federal securities laws;
      2. A federal reserve bank; or
      3. Any other person that provides clearance or settlement services with respect to financial assets that would require it to register as a clearing agency under the federal securities laws but for an exclusion or exemption from the registration requirement, if its activities as a clearing corporation, including promulgation of rules, are subject to regulation by a federal or state governmental authority;
    6. “Communicate” means to:
      1. Send a signed writing; or
      2. Transmit information by any mechanism agreed upon by the persons transmitting and receiving the information;
    7. “Entitlement holder” means a person identified in the records of a securities intermediary as the person having a security entitlement against the securities intermediary. If a person acquires a security entitlement by virtue of KRS 355.8-501 (2)(b) or (c), that person is the entitlement holder;
    8. “Entitlement order” means a notification communicated to a securities intermediary directing transfer or redemption of a financial asset to which the entitlement holder has a security entitlement;
    9. “Financial asset,” except as otherwise provided in KRS 355.8-103 , means:
      1. A security;
      2. An obligation of a person or a share, participation, or other interest in a person or in property or an enterprise of a person, which is, or is of a type, dealt in or traded on financial markets, or which is recognized in any area in which it is issued or dealt in as a medium for investment; or
      3. Any property that is held by a securities intermediary for another person in a securities account if the securities intermediary has expressly agreed with the other person that the property is to be treated as a financial asset under this article. As context requires, the term means either the interest itself or the means by which a person’s claim to it is evidenced, including a certificated or uncertificated security, a security certificate, or a security entitlement;
    10. (Reserved)
    11. “Indorsement” means a signature that alone or accompanied by other words is made on a security certificate in registered form or on a separate document for the purpose of assigning, transferring, or redeeming the security or granting a power to assign, transfer, or redeem it;
    12. “Instruction” means a notification communicated to the issuer of an uncertificated security which directs that the transfer of the security be registered or that the security be redeemed;
    13. “Registered form,” as applied to a certificated security, means a form in which:
      1. The security certificate specifies a person entitled to the security; and
      2. A transfer of the security may be registered upon books maintained for that purpose by or on behalf of the issuer, or the security certificate so states;
    14. “Securities intermediary” means:
      1. A clearing corporation; or
      2. A person, including a bank or broker, that in the ordinary course of its business maintains securities accounts for others and is acting in that capacity;
    15. “Security,” except as otherwise provided in KRS 355.8-103 , means an obligation of an issuer or a share, participation, or other interest in an issuer or in property or an enterprise of an issuer:
      1. Which is represented by a security certificate in bearer or registered form, or the transfer of which may be registered upon books maintained for that purpose by or on behalf of the issuer;
      2. Which is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations; and
      3. Which:
        1. Is, or is of a type, dealt in or traded on securities exchanges or securities markets; or
        2. Is a medium for investment and by its terms expressly provides that it is a security governed by this article;
    16. “Security certificate” means a certificate representing a security;
    17. “Security entitlement” means the rights and property interest of an entitlement holder with respect to a financial asset specified in Part 5 of this article; and
    18. “Uncertificated security” means a security that is not represented by a certificate.
  2. Other definitions applying to this article and the sections in which they appear are:
    1. “Appropriate person.” KRS 355.8-107 ;
    2. “Control.” KRS 355.8-106 ;
    3. “Delivery.” KRS 355.8-301 ;
    4. “Investment company security.” KRS 355.8-103 ;
    5. “Issuer.” KRS 355.8-201 ;
    6. “Overissue.” KRS 355.8-210 ;
    7. “Protected purchaser.” KRS 355.8-303 ; and
    8. “Securities account.” KRS 355.8-501 .
  3. In addition, Article 1 of this chapter contains general definitions and principles of construction and interpretation applicable throughout this article.
  4. The characterization of a person, business, or transaction for purposes of this article does not determine the characterization of the person, business, or transaction for purposes of any other law, regulation, or rule.

History. Enact. Acts 1958, ch. 77, § 8-102; 1964, ch. 130, § 15; 1972, ch. 314, § 1; 1986, ch. 118, § 10, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 115, effective January 1, 1997; 2006, ch. 242, § 56, effective July 12, 2006.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-102; 1964, ch. 130, § 15; 1972, ch. 314, § 1; 1986, ch. 118, § 10, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 115, effective January 1, 1997.

Official Comment

  1. “Adverse Claim.” The definition of the term “adverse claim” has two components. First, the term refers only to property interests. Second, the term means not merely that a person has a property interest in a financial asset but that it is a violation of the claimant’s property interest for the other person to hold or transfer the security or other financial asset.

    The term adverse claim is not, of course, limited to ownership rights, but extends to other property interests established by other law. A security interest, for example, would be an adverse claim with respect to a transferee from the debtor since any effort by the second party to enforce the security interest against the property would be an interference with the transferee’s interest.

    The definition of adverse claim in the prior version of Article 8 might have been read to suggest that any wrongful action concerning a security, even a simple breach of contract, gave rise to an adverse claim. Insofar as such cases as Fallon v. Wall Street Clearing Corp., 586 N.Y.S.2d 953, 182 A.D.2d 245, (1992) and Pentech Intl. v. Wall St. Clearing Co., 983 F.2d 441 (2d Cir. 1993), were based on that view, they are rejected by the new definition which explicitly limits the term adverse claim to property interests. Suppose, for example, that A contract to sell or deliver securities to B, but fails to do so and instead sells or pledges the securities to C. B, the promisee, has an action against A for breach of contract, but absent unusual circumstances the action for breach would not give rise to a property interest in the securities. Accordingly, B does not have an adverse claim. An adverse claim might, however, be based upon principles of equitable remedies that give rise to property claims. It would, for example, cover a right established by other law to rescind a transaction in which securities were transferred. Suppose, for example, that A holds securities and is induced by B’s fraud to transfer them to B. Under the law of contract of restitution, A may have a right to rescind the transfer, which gives A a property claim to the securities. If so, A has an adverse claim to the securities in B’s hands. By contrast, if B had committed no fraud, but had merely committed a breach of contract in connection with the transfer from A to B, A may have only a right to damages for breach, not a right to rescind. In that case, A would not have an adverse claim to the securities in B’s hands.

  2. “Bearer form.” The definition of “bearer form” has remained substantially unchanged since the early drafts of the original version of Article 8. The requirement that the certificate be payable to bearer by its terms rather than by an indorsement has the effect of preventing instruments governed by other law, such as chattel paper or Article 3 negotiable instruments, from being inadvertently swept into the Article 8 definition of security merely by virtue of blank indorsements. Although the other elements of the definition of security in Section 8-102(a)(14) probably suffice for that purpose in any event, the language used in the prior version of Article 8 has been retained.
  3. “Broker.” Broker is defined by reference to the definitions of broker and dealer in the federal securities laws. The only difference is that banks, which are excluded from the federal securities law definition, are included in the Article 8 definition when they perform functions that would bring them within the federal securities law definition if it did not have the cause excluding banks. The definition covers both those who act as agents (“brokers” in securities parlance) and those who act as principals (“dealers” in securities parlance). Since the definition refers to persons “defined” as brokers or dealers under the federal securities law, rather than to persons required to “register” as brokers or dealers under the federal securities law, it covers not only registered brokers and dealers but also those exempt from the registration requirement, such as purely intrastate brokers. The only substantive rules that turn on the defined term broker are one provision of the section on warranties, Section 8-108(i), and the special perfection rule in Article 9 for security interests granted by brokers, Section 9-309(10).
  4. “Certificated security.” The term “certificated security” means a security that is represented by a security certificate.
  5. “Clearing corporation.” The definition of clearing corporation limits its application to entities that are subject to a rigorous regulatory framework. Accordingly, the definition includes only federal reserve banks, persons who are registered as “clearing agencies” under the federal securities laws (which impose a comprehensive system of regulation of the activities and rules of clearing agencies), and other entities subject to a comparable system of regulatory oversight.
  6. “Communicate.” The term “communicate” assures that the Article 8 rules will be sufficiently flexible adapt to changes in information technology. Sending a signed writing always suffices as a communication, but the parties can agree that a different means of transmitting information is to be used. Agreement is defined in Section 1-201(3) as “the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade of course of performance.” Thus, use of an information transmission method might be found to be authorized by agreement, even though the parties have not explicitly so specified in formal agreement. The term communicate is used in Sections 8-102(a)(7) (definition of entitlement order), 8-102(a)(11) (definition of instruction), and 8-403 (demand that issuer not register transfer).
  7. “Entitlement holder.” This term designates those who hold financial assets through intermediaries in the indirect holding system. Because many of the rules of Part 5 impose duties on securities intermediaries in favor of entitlement holders, the definition of entitlement holder is, in most cases, limited to the person specifically designated as such on the records of the intermediary. The last sentence of the definition covers the relatively unusual cases where a person may acquire a security entitlement under Section 8-501 even though the person may not be specifically designated as an entitlement holder on the records of the securities intermediary.

    A person may have an interest in a security entitlement, and may even have the right to give entitlement orders to the securities intermediary with respect to it, even though the person is not the entitlement holder. For example, a person who holds securities through a securities account in its own name may have given discretionary trading authority to another person, such as an investment adviser. Similarly, the control provisions in Section 8-106 and the related provisions in Article 9 are designed to facilitate transactions in which a person who holds securities through a securities account uses them as collateral in an arrangement where the securities intermediary has agreed that if the secured party so directs the intermediary will dispose of the position. In such arrangements, the debtor remains the entitlement holder but has agreed that the secured party can initiate entitlement orders. Moreover, an entitlement holder may be acting for another person as a nominee, agent, trustee, or in another capacity. Unless the entitlement holder is itself acting as a securities intermediary for the other person, in which case the other person would be an entitlement holder with respect to the securities entitlement, the relationship between an entitlement holder and another person for whose benefit the entitlement holder holds a securities entitlement is governed by law.

  8. “Entitlement orders.” The term is defined as a notification communicated to a securities intermediary directing transfer or redemption of the financial asset to which an entitlement holder has a security entitlement. The term is used in the rules for the indirect holding system in a fashion analogous to the use of the terms “indorsement” and “instruction” in the rules for the direct holding. If a person directly holds a certificated security in registered form and wishes to transfer it, the means of transfer is an indorsement. If a person directly holds an uncertificated security and wishes to transfer it, the means of transfer is an instruction. If a person holds a security entitlement, the means of disposition is an entitlement order. As noted in Comment 7, an entitlement order need not be initiated by the entitlement holder in order to be effective, so long as the entitlement holder has authorized the other party to initiate entitlement orders. See Section 8-107(b).
  9. “Financial asset.” The definition of “financial asset,” in conjunction with the definition of “security account” in Section 8-501, sets the scope of the indirect holding system rules of Part 5 of Revised Article 8. The Part 5 rules apply not only to securities held through intermediaries, but also to other financial assets held through intermediaries. The term financial asset is defined to include not only securities but also a broader category of obligations, shares, participations, and interests.

    Having separate definitions of security and financial asset makes it possible to separate the question of the proper scope of the traditional Article 8 rules from the question of the proper scope of the new indirect holding system rules. Some forms of financial assets should be covered by the indirect holding system rules of Part 5, but not by the rules of Parts 2, 3, and 4. The term financial asset is used to cover such property. Because the term security entitlement is defined in terms of financial assets rather than securities, the rules concerning security entitlements set out in Part 5 of Article 8 in Revised Article 9 apply to the broader class of financial assets.

    The fact that something does or could fall within the definition of financial assets does not, without more, trigger Article 8 coverage. The indirect holding system rules of Revised Article 8 apply only if the financial asset is in fact held in a securities account, so that the interest of the person who holds the financial asset through the securities account is a security entitlement. Thus, question of the scope of the indirect holding system rules cannot be framed as “Is such-and-such a ‘financial asset’ under Article 8?” Rather, one must analyze whether relationship between an institution and a person on whose behalf the institution holds an asset falls within the scope of the term securities account as defined in Section 8-501. That question turns in large measure on whether it makes sense to apply the Part 5 rules to the relationship.

    The term financial asset is used to refer both to the underlying asset and the particular means by which ownership is evidenced. Thus, with respect to a certificated security, the term financial asset may, as context requires, refer either to the interest or obligation of the issuer or to the security certificate representing that interest or obligation. Similarly, if a person holds a security or other financial asset through a securities account, the term financial asset may, as context requires, refer either to the underlying asset or to the person’s security entitlement.

  10. “Good faith.” Section 1-203 provides that “Every contract or duty within [the Uniform Commercial Code] imposes an obligation of good faith in its performance or enforcement.” Section 1-201(b)(20) defines “good faith” as “honesty in fact and the observance of reasonable commercial standards of fair dealing.” The reference to commercial standards makes clear that assessments of conduct are to be made in light of the commercial setting. The substantive rules of Article 8 have been drafted to take account of the commercial circumstances of the securities holding and processing system. For example, Section 8-115 provides that a securities intermediary acting on an effective entitlement order, or a broker or other agent acting as a conduit in a securities transaction, is not liable to an adverse claimant, unless the claimant obtained legal process or the intermediary acted in collusion with the wrongdoer. This, and other similar provisions, see Sections 8-404 and 8-503(e), do not depend on notice of adverse claims, because it would impair rather than advance the interest of investors in having a sound and efficient securities clearance and settlement system to require intermediaries to investigate the propriety of the transactions they are processing. The good faith obligation does not supplant the standards of conduct established in provisions of this kind.

    In Revised Article 8, the definition of good faith is not germane to the question whether a purchaser takes free from adverse claims. The rules on such questions as whether a purchaser who takes in suspicious circumstances is disqualified from protected purchaser status are treated not as an aspect of good faith but directly in the rules of Section 8-105 on notice of adverse claims.

  11. “Indorsement” is defined as a signature made on a security certificate or separate document for purposes of transferring or redeeming the security. The definition is adapted from the language of Section 8-308(1) of the prior version and from the definition of indorsement in the Negotiable Instruments Article, see Section 3-204(a). The definition of indorsement does not include the requirement that the signature be made by an appropriate person or be authorized. Those questions are treated in the separate substantive provision on whether the indorsement is effective, rather than in the definition of indorsement. See Section 8-107.
  12. “Instruction” is defined as a notification communicated to the issuer of an uncertificated security directing that transfer be registered or that the security be redeemed. Instructions are the analog for uncertificated securities of indorsements of certificated securities.
  13. “Registered form.” The definition of “registered form” is substantially the same as in the prior version of Article 8. Like the definition of bearer form, it serves primarily to distinguish Article 8 securities from instruments governed by other law, such as Article 3.
  14. “Securities intermediary.” A “securities intermediary” is a person that in the ordinary course of its business maintains securities accounts for others and is acting in that capacity. The most common examples of securities intermediaries would be clearing corporations holding securities for their participants, banks acting as securities custodians, and brokers holding securities on behalf of their customers. Clearing corporations are listed separately as a category of securities intermediary in subparagraph (i) even though in most circumstances they would fall within the general definition in subparagraph (ii). The reason is to simplify the analysis of arrangements such as the NSCC-DTC system in which NSCC performs the comparison, clearance, and netting functions while DTC acts as the depository. Because NSCC is a registered clearing agency under the federal securities laws, it is a clearing corporation and hence a securities intermediary under Article 8, regardless of whether it is at any particular time or in any particular aspect of its operations holding securities on behalf of its participants.

    The terms securities intermediary and broker have different meanings. Broker means a person engaged in the business of buying and selling securities, as agent for others or as principal. Securities intermediary means a person maintaining securities accounts for others. A stockbroker, in the colloquial sense, may or may not be acting as a securities intermediary.

    The definition of securities intermediary includes the requirement that the person in question is “acting to the capacity” of maintaining securities accounts for others. This is to take account of the fact that a particular entity, such as a bank, may act in many different capacities in securities transactions. A bank may act as a transfer agent for issuers, as a securities custodian for institutional investors and private investors, as a dealer in government securities, as a lender taking securities as collateral, and as a provider of general payment and collection services that might be used in connection with securities transactions. A bank that maintains securities accounts for its customers would be a securities intermediary with respect to those accounts; but if it takes a pledge of securities from a borrower to secure a loan, it is not thereby acting as a securities intermediary with respect to the pledge securities, since it holds them for its own account rather than for a customer. In other circumstances, those two functions might be combined. For example, if the bank is a government securities dealer it may maintain securities accounts for customers and also provide the customers with margin credit to purchase or carry the securities, in much the same way that broker provide margin loans to their customer.

  15. “Security.” The definition of “security” has three components. First, there is the subparagraph (i) test that the interest or obligation be fully transferable, in the sense that the issuer either maintains transfer books or the obligation or interest is represented by a certificate in bearer or registered form. Second, there is the subparagraph (ii) test that the interest or obligation be divisible, that is, one of a class or series, as distinguished from individual obligations of the sort governed by the ordinary contract law or by Article 3. Third, there is the subparagraph (iii) functional test, which generally turns on whether the interest or obligation is, or is of a type, dealt in or traded on securities markets or securities exchanges. There is, however, an “opt-in” provision in subparagraph (iii) which permits the issuer of any interest or obligation that is “a medium of investment” to specify that it is a security governed by Article 8.

    The divisibility test of subparagraph (ii) applies to the security — that is, the underlying intangible interest not the means by which that interest is evidenced. Thus, securities issued in book-entry only form meet the divisibility test because the underlying intangible interest is divisible via the mechanism of the indirect holding system. This is so even though the clearing corporation is the only eligible direct holder of the security.

    The third component, the functional test in subparagraph (iii), provides flexibility while ensuring that the Article 8 rules do not apply to interests or obligations in circumstances so unconnected with the securities markets that parties are unlikely to have thought of the possibility that Article 8 might apply. Subparagraph (iii)(A) covers interests or obligations that either are dealt in or traded on securities exchanges or securities markets, or are of a type dealt in or traded on securities exchanges or securities markets. The “is dealt in or traded on” phrase eliminates problems in the characterization of new forms of securities which are to be traded in the markets, even though no similar type has previously been dealt in or traded in the markets. Subparagraph (iii)(B) covers the broader category of media for investment, but it applies only if the terms of the interest or obligation specify that it is an Article 8 security. This opt-in provision allows for deliberate expansion of the scope of Article 8.

    Section 8-103 contains additional rules on the treatment of particular interests as securities or financial assets.

  16. “Security certificate.” The term “security” refers to the underlying asset, e.g., 1000 shares of common stock of Acme, Inc. The term “security certificate” refers to the paper certificates that have traditionally been used to embody the underlying intangible interest.
  17. “Security entitlement” means the rights and property interest of a person who holds securities or other financial assets through a securities intermediary. A security entitlement is both a package of personal rights against the securities intermediary and an interest in the property held by the securities intermediary. A security entitlement is not, however, a specific property interest in any financial asset held by the securities intermediary or by the clearing corporation through which the securities intermediary holds the financial asset. See Section 8-104(c) and 8-503. The formal definition of security entitlement set out in subsection (a)(17) of this section is a cross-reference to the rules of Part 5. In a sense, then, the entirety of Part 5 is the definition of security entitlement. The Part 5 rules specify the rights and property interest that comprise a security entitlement.
  18. “Uncertificated security.” The term “uncertificated security” means a security that is not represented by a security certificate. For uncertificated securities, there is no need to draw any distinction between the underlying asset and the means by which a direct holder’s interest in that asset is evidenced. Compare “certificated security” and “security certificate.”

Definitional Cross References:

“Agreement”. Section 1-201(b)(3). “Bank”. Section 1-201(b)(4). “Person”. Section 1-201(b)(27). “Send”. Section 1-201(b)(36). “Signed”. Section 1-201(b)(37). “Writing”. Section 1-201(b)(43).

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NOTES TO DECISIONS

1.Transfers.

An indorsement is neither a necessary nor a sufficient condition for the transfer of an interest in an investment security. Meshew v. Whitlock, 9 S.W.3d 581, 1999 Ky. App. LEXIS 156 (Ky. Ct. App. 1999).

Chapter 7 trustee was allowed to avoid a banking company’s action transferring $190,629 out of a debtor’s account to partially offset a debt the debtor owed the company because the company did not have a properly and continuously perfected security interest in the funds, as required by KRS 355.9-312 (2)(a). The funds were paid to the banking company shortly before the debtor declared bankruptcy, when certificates of deposit the company purchased for the debtor from other banks matured, and under that scenario the debtor was an “entitlement holder,” as that term was defined by KRS 355.8-102 (1)(g) and the banking company was a “securities intermediary,” as that term was defined by § 355.8-102 (1)(n)(2). Flener v. Alexander (In re Alexander), 429 B.R. 876, 2010 Bankr. LEXIS 1705 (Bankr. W.D. Ky. 2010 ), aff'd, 2010 U.S. Dist. LEXIS 132300 (W.D. Ky. Dec. 13, 2010).

2.Closely-held Corporate Stock.

The fact that the closely-held corporate stock had never been issued was insignificant in finding that it met the definition of “security” in this section. (decided under prior law) Smith v. Baker, 715 S.W.2d 890, 1986 Ky. App. LEXIS 1146 (Ky. Ct. App. 1986).

Even though trading of closely-held corporate stock is rare, and none may occur on an open market, the stock is a “security” under the definition of this section, in that the stock certificates represent an investment and can be traded by a broker. (decided under prior law) Smith v. Baker, 715 S.W.2d 890, 1986 Ky. App. LEXIS 1146 (Ky. Ct. App. 1986).

The closely-held corporate stock fell within the definition of a “security” in this section; therefore, former statute of frauds section, KRS 355.8-319 applied to the buy-sell agreement between the corporate parties (but see now KRS 355.8-113 ). (decided under prior law) Smith v. Baker, 715 S.W.2d 890, 1986 Ky. App. LEXIS 1146 (Ky. Ct. App. 1986).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

355.8-103. Rules for determining whether certain obligations and interests are securities or financial assets.

  1. A share or similar equity interest issued by a corporation, business trust, joint stock company, or similar entity is a security.
  2. An “investment company security” is a security. “Investment company security” means a share or similar equity interest issued by an entity that is registered as an investment company under the federal investment company laws, an interest in a unit investment trust that is so registered, or a face-amount certificate issued by a face-amount certificate company that is so registered. Investment company security does not include an insurance policy or endowment policy or annuity contract issued by an insurance company.
  3. An interest in a partnership or limited liability company is not a security unless it is dealt in or traded on securities exchanges or in securities markets, its terms expressly provide that it is a security governed by this article, or it is an investment company security. However, an interest in a partnership or limited liability company is a financial asset if it is held in a securities account.
  4. A writing that is a security certificate is governed by this article and not by Article 3 of this chapter, even though it also meets the requirements of that article. However, a negotiable instrument governed by Article 3 of this chapter is a financial asset if it is held in a securities account.
  5. An option or similar obligation issued by a clearing corporation to its participants is not a security, but is a financial asset.
  6. A commodity contract, as defined in KRS 355.9-102 (1)(o), is not a security or a financial asset.
  7. A document of title, as defined in KRS 355.1-201 (2)(p), is not a financial asset unless KRS 355.8-102 (1)(i)3. applies.

History. Enact. Acts 1958, ch. 77, § 8-103, effective July 1, 1960; 1986, ch. 118, § 11, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 116, effective January 1, 1997; 2000, ch. 408, § 169, effective July 1, 2001; 2012, ch. 132, § 59, effective July 12, 2012.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-103, effective July 1, 1960; 1986, ch. 118, § 11, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 116, effective January 1, 1997.

Official Comment

  1. This section contains rules that supplement the definitions of “financial asset” and “security” in Section 8-102. The Section 8-102 definitions are worded in general terms, because they must be sufficiently comprehensive and flexible to cover the wide variety of investment products that now exist or may develop. The rules in this section are intended to foreclose interpretive issues concerning the application of the general definitions to several specific investment products. No implication is made about the application of the Section 8-102 definitions to investment products not covered by this section.
  2. Subsection (a) establishes an unconditional rule that ordinary corporate stock is a security. That is so whether or not the particular issue is dealt in or traded or securities exchanges or in securities exchanges or in securities markets. Thus, shares of closely held are Article 8 securities.
  3. Subsection (b) establishes that the Article 8 term “security” includes the various forms of the investment vehicles offered to the public by investment companies registered as such under the federal Investment Company Act of 1940, as amended. This clarification is prompted principally by the fact that the typical transaction in shares of open-end investment companies is an issuance of redemption, rather than a transfer of shares from one person to another as is the case with ordinary corporate stock. For similar reasons, the definitions of indorsement, instruction, and entitlement order in Section 8-102 refer to “redemptions” as well as “transfers,” to ensure that the Article 8 rules on such matters as signature guaranties, Section 8-306, assurances, Sections 8-402 and 8-507, and effectiveness, Section 8-107, apply to directions to redeem mutual fund shares. The exclusion of insurance products is needed because some insurance company separate accounts are registered under the Investment Company Act of 1940, but these are not traded under the usual Article 8 mechanics.
  4. Subsection (c) is designed to foreclose interpretive questions that might otherwise be raised by the application of the “of a type” language of Section 8-102(a)(15)(iii) to partnership interests. Subsection (c) establishes the general rule that partnership interests or shares of limited liability companies are not Article 8 securities unless they are in fact dealt in or traded on securities exchanges or in securities markets. The issuer, however, may explicitly “opt-in” by specifying that the interests or shares are securities governed by Article 8. Partnership interests or shares of limited liability companies are included by the broader term “financial asset.” Thus, they are held through a securities account, the indirect holding system rules of Part 5 apply, and the interest of a person who hold them through such an account in a security entitlement.
  5. Subsection (d) deals with the line between Article negotiable instruments and Article 8 investment securities. It continues the rule of the prior version of Article 8 that a writing that meets the Article 8 definition is covered by Article 8 rather than Article 3, even though it also meets the definition of negotiable instrument. However, subsection (d) provides that an Article 3 negotiable instrument is a “financial asset” so that the indirect holding system rules applies if the instrument is held through a securities intermediary. This facilitates making items such as money market instruments eligible for deposit in clearing corporations.
  6. Subsection (e) is included to clarify the treatment of investment products such as traded stock options, which are treated as financial assets but not securities. Thus, the indirect holding system rules of Part 5 apply, but the direct holding system rules of Parts 2, 3, and 4 do not.
  7. Subsection (f) excludes commodity contracts from all of Article 8. However, the Article 9 rules on security interest in investment property do apply to security interests in commodity positions. See Section 9-102 and Comment 6 thereto. “Commodity contract” is defined in Section 9-102(a)(15).

Definitional Cross References:

“Clearing corporation”. Section 8-102(a)(5). “Commodity contract”. Section 9-1029a)(15). “Financial asset”. Section 8-102(a)(9). “Security”. Section 8-102(a)(15). “Security certificate”. Section 8-102(a)(16).

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355.8-104. Acquisition of security or financial asset or interest therein.

  1. A person acquires a security or an interest therein, under this article, if:
    1. The person is a purchaser to whom a security is delivered pursuant to KRS 355.8-301 ; or
    2. The person acquires a security entitlement to the security pursuant to KRS 355.8-501 .
  2. A person acquires a financial asset, other than a security, or an interest therein, under this article, if the person acquires a security entitlement to the financial asset.
  3. A person who acquires a security entitlement to a security or other financial asset has the rights specified in Part 5 of this article, but is a purchaser of any security, security entitlement, or other financial asset held by the securities intermediary only to the extent provided in KRS 355.8-503 .
  4. Unless the context shows that a different meaning is intended, a person who is required by other law, regulation, rule, or agreement to transfer, deliver, present, surrender, exchange, or otherwise put in the possession of another person a security or financial asset satisfies that requirement by causing the other person to acquire an interest in the security or financial asset pursuant to subsection (1) or (2) of this section.

History. Enact. Acts 1958, ch. 77, § 8-104, effective July 1, 1960; 1986, ch. 118, § 12, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 117, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-104, effective July 1, 1960; 1986, ch. 118, § 12, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 117, effective January 1, 1997.

Official Comment

  1. This section lists the ways in which interests in securities and other financial assets are acquired under Article 8. In that sense, it describes the scope of Article 8. Subsection (a) describes the two ways that a person may acquire a security or interest therein under this Article: (1) By delivery (Section 8-301), and (2) by acquiring a security entitlement. Each of these methods is described in detail in the relevant substantive provisions of this Article. Part 3, beginning with the definition of “delivery” in Section 8-301, describes how interests in securities are acquired in the direct holding system. Part 5, beginning with the rules of Section 8-501 on how security entitlements are acquired, describes how interests in securities are acquired in the indirect holding system.

    Subsection (b) specifies how a person may acquire an interest under Article 8 in a financial asset other than a security. This Article deals with financial assets other than securities only insofar as they are held in the indirect holding system. For example, a bankers’ acceptance falls within the definition of “financial asset,” so if it is held through a securities account the entitlement holder’s right to it is a security entitlement governed by Part 5. The bankers’ acceptance itself, however, is a negotiable instrument governed by Article 3, not by Article 8. Thus, the provisions of Parts 2, 3, and 4 of this Article that deal with the rights of direct holders of securities are not applicable. Article 3, not Article 8, specifies how one acquires a direct interest in a bankers’ acceptance. If a bankers’ acceptance is delivered to a clearing corporation to be held for the account of the clearing corporation’s participants, the clearing corporation becomes the holder of the bankers’ acceptance under the Article 3 rules specifying how negotiable instruments are transferred. The rights of the clearing corporation’s participants, however, are governed by Part 5 of this Article.

  2. The distinction in usage in Article 8 between the term “security” (and its correlatives “security certificate” and “uncertificated security”) on the one hand, and “security entitlement” on the other, corresponds to the distinction between the direct and indirect holding systems. For example, with respect to certificated securities that can be held either directly or through intermediaries, obtaining possession of a security certificate and acquiring a security entitlement are both means of holding the underlying security. For many other purposes, there is no need to draw a distinction between the means of holding. For purposes of commercial law analysis, however, the form of holding may make a difference. Where an item of property can be held in different ways, the rules on how one deals with it, including how one transfers it or how one grants a security interest in it, differ depending on the form of holding.

    Although a security entitlement is means of holding the underlying security or other financial asset, a person who has a security entitlement does not have any direct claim to a specific asset in the possession of the securities intermediary. Subsection (c) provides explicitly that a person who acquires a security entitlement is a “purchaser” of any security, security entitlement, or other financial asset held by the securities intermediary only in the sense that under Section 8-503 a security entitlement is treated as a sui generis form of property interest.

  3. Subsection (d) is designed to ensure that parties will retain their expected legal rights and duties under Revised Article 8. One of the major changes made by the revision is that the rules for the indirect holding system are stated in terms of the “security entitlements” held by investors, rather than speaking of them as holding direct interests in securities. Subsection (d) is designed as a translation rule to eliminate problems of co-ordination of terminology, and facilitate the continued use of systems for the efficient handling of securities and financial assets through securities intermediaries and clearing corporations. The efficiencies of a securities intermediary or clearing corporation are, in part, dependent on the ability to transfer securities credited to securities accounts in the intermediary or clearing corporation to the account of an issuer, its agent, or other person by book entry in a manner that permits exchanges, redemptions, conversions, and other transactions (which may be governed by pre-existing or new agreements, constitutional documents, or other instruments) to occur and to avoid the need to withdraw from immobilization in an intermediary or clearing corporation physical securities in order to deliver them for such purposes. Existing corporate charters, indentures, and like documents may require the “presentation,” “surrender,” “delivery,” or “transfer” of securities or security certificates for purposes of exchange, redemption, conversion, or other reason. Likewise, documents may use a wide variety of terminology to describe, in the context for example of a tender or exchange offer, the means of putting the offeror or the issuer or its agent in possession of the security. Subsection (d) takes the place of provisions of prior law which could be used to reach the legal conclusion that book-entry transfers are equivalent to physical delivery to the person to whose account the book entry is credited.

Definitional Cross References:

“Delivery”. Section 8-301. “Financial asset”. Section 8-102(a)(9). “Person”. Section 1-201(30). “Purchaser”. Section 1-20133) & 8-116. “Security”. Section 8-102(a)(15). “Security entitlement”. Section 8-102(a)(17).

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355.8-105. Notice of adverse claim.

  1. A person has notice of an adverse claim if:
    1. The person knows of the adverse claim;
    2. The person is aware of facts sufficient to indicate that there is a significant probability that the adverse claim exists and deliberately avoids information that would establish the existence of the adverse claim; or
    3. The person has a duty, imposed by statute or regulation, to investigate whether an adverse claim exists, and the investigation so required would establish the existence of the adverse claim.
  2. Having knowledge that a financial asset or interest therein is or has been transferred by a representative imposes no duty of inquiry into the rightfulness of a transaction and is not notice of an adverse claim. However, a person who knows that a representative has transferred a financial asset or interest therein in a transaction that is, or whose proceeds are being used, for the individual benefit of the representative or otherwise in breach of duty has notice of an adverse claim.
  3. An act or event that creates a right to immediate performance of the principal obligation represented by a security certificate or sets a date on or after which the certificate is to be presented or surrendered for redemption or exchange does not itself constitute notice of an adverse claim except in the case of a transfer more than:
    1. One (1) year after a date set for presentment or surrender for redemption or exchange; or
    2. Six (6) months after a date set for payment of money against presentation or surrender of the certificate, if money was available for payment on that date.
  4. A purchaser of a certificated security has notice of an adverse claim if the security certificate:
    1. Whether in bearer or registered form, has been indorsed “for collection” or “for surrender” or for some other purpose not involving transfer; or
    2. Is in bearer form and has on it an unambiguous statement that it is the property of a person other than the transferor, but the mere writing of a name on the certificate is not such a statement.
  5. Filing of a financing statement under Article 9 of this chapter is not notice of an adverse claim to a financial asset.

History. Enact. Acts 1958, ch. 77, § 8-105, effective July 1, 1960; 1986, ch. 118, § 13, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 118, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-105, effective July 1, 1960; 1986, ch. 118, § 13, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 118, effective January 1, 1997.

Official Comment

  1. The rules specifying whether adverse claims can be asserted against persons who acquire securities or security entitlements, Sections 8-303, 8-502, and 8-510, provide that one is protected against an adverse claim only if one takes without notice of the claim. This section defines notice of an adverse claim.

    The general Article 1 definition of “notice” in Section 1-201(25) — which provides that a person has notice of a fact if “from all the facts and circumstances known to him or her at the time in question he or she has reason to know that it exists” — does not apply to the interpretation of “notice of adverse claims.” The Section 1-201(25) definition of “notice” does, however, apply to usages of that term and its cognates in Article 8 in contexts other than notice of adverse claims.

  2. This section must be interpreted in light of the definition of “adverse claim” in Section 8-102(a)(1). “Adverse claim” does not include all circumstances in which a third party has a property interest in securities, but only those situations where a security is transferred in violation of the claimant’s property interest. Therefor, awareness that someone other than the transferor has a property interest is not notice of an adverse claim. The transferee must be aware that the transfer violates the other party’s property interest. If A holds securities in which B has some form of property interest, and A transfers the securities to C, C may know that B has an interest, but infer that A is acting in accordance with A’s obligations to B. The mere fact that C knew that B had a property interest does not mean that C had notice of an adverse claim. Whether C had notice of an adverse claim depends on whether C had sufficient awareness that A was acting in violation of B’s property rights. The rule in subsection (b) is a particularization of this general principle.
  3. Paragraph (a)(1) provides that a person has notice of an adverse claim if the person has knowledge of the adverse claim. Knowledge is defined in Section 1-201(25) as actual knowledge.
  4. Paragraph (a)(2) provides that a person has notice of an adverse claim if the person is aware of a significant probability that an adverse claim exists and deliberately avoids information that might establish the existence of the adverse claim. This is intended to codify the “willful blindness” test that has been applied in such cases. See May v. Chapman, 16 M. & W. 355, 153 Eng. Rep. 1225 (1847); Goodman v. Simonds, 61 U.S. 343 (1857).

    The first prong of the “willful blindness” test of paragraph (a)(2) turns on whether the person is aware facts sufficient to indicate that there is a significant probability that an adverse claim exists. The “awareness” aspect necessarily turns on the actor’s state of mind. Whether facts known to a person make the person aware of a “significant probability” that an adverse claim exists turns on facts about the world and the conclusions that would be drawn from those facts, taking account of the experience and position of the person in question. A particular set of facts might indicate a significant probability of an adverse claim to a professional with considerable experience in the usual methods and procedures by which securities transactions are conducted, even though the same facts would not indicate a significant probability of an adverse claim to a nonprofessional.

    The second prong of the willful blindness test of paragraph (a)(2) turns on whether the person “deliberately avoids information” that would establish the existence of the adverse claim. The test is the character of the person’s response to the information the person has. The question is whether the person deliberately failed to seek further information because of concern that suspicions would be confirmed.

    Application of the “deliberate avoidance” test to a transaction by an organization focuses on the knowledge and the actions of the individual or individuals conducting the transaction on behalf of the organization. Thus, an organization that purchases a security is not willfully blind to an adverse claim unless the officers or agents who conducted that purchase transaction are willfully blind to the adverse claim. Under the two prongs of the willful blindness test, the individual or individuals conducting a transaction must know of facts indicating a substantial probability that the adverse claim exists and deliberately fail to seek further information that might confirm or refute the indication. For this purpose, information known to individuals within an organization who are not conducting or aware of a transaction, but not forwarded to the individuals conducting the transaction, is not pertinent in determining whether the individuals conducting the transaction had knowledge of a substantial probability of the existence of the adverse claim. Cf. Section 1-201(27). An organization may also “deliberately avoid information” if it acts to preclude or inhibit transmission of pertinent information to those individuals responsible for the conduct of purchase transactions.

  5. Paragraph (a)(3) provides that a person has notice of an adverse claim if the person would have learned of the adverse claim by conducting an investigation that is required by other statute or regulation. This rule applies only if there is some other statute or regulation that explicitly requires persons dealing with securities to conduct some investigation. The federal securities laws require that brokers and banks, in certain specified circumstances, check with a stolen securities registry to determine whether securities offered for sale or pledge have been reported as stolen. If securities that were listed as stolen in the registry are taken by an institution that failed to comply with requirement to check the registry, the institution would be held to have notice of the fact that they were stolen under paragraph (a)(3). Accordingly, the institution could not qualify as a protected purchaser under Section 8-303. The same result has been reached under the prior version of Article 8. See First Nat’l Bank of Cicero v. Lewco Securities, 860 F.2d 1407 (7th Cir. 1988).
  6. Subsection (b) provides explicitly for some situations involving purchase from one described or identifiable as a representative. Knowledge of the existence of the representative relation is not enough in itself to constitute “notice of an adverse claim” that would disqualify the purchaser from protected purchaser status. A purchaser may take a security on the inference that the representative is acting properly. Knowledge that a security is being transferred to an individual account of the representative or that the proceeds of the transaction will be paid into that account is not sufficient to constitute “notice of an adverse claim,” but knowledge that the proceeds will be applied to the personal indebtedness of the representative is. See State Bank of Binghamton v. Bache, 162 Misc. 128, 293 N.Y.S. 667 (1937).
  7. Subsection (c) specifies whether a purchaser of a “stale” security is charged with notice of adverse claims, and therefor disqualified from protected purchaser status under Section 8-303. The fact of “staleness” is viewed as notice of certain defects after the lapse of stated periods, but the maturity of the security does not operate automatically to affect holders’ rights. The periods of time here stated are shorter than those appearing in the provisions of this article on staleness as notice of defects or defenses of an issuer (Section 8-203) since a purchaser who takes a security after funds or other securities are available for its redemption has more reason to suspect claims of ownership than issuer’s defenses. An owner will normally turn in a security rather than transfer it at such a time. Of itself, a default never constitutes notice of a possible adverse claim. To provide otherwise would not tend to drive defaulted securities home and would serve only to disrupt current financial markets where many defaulted securities are actively traded. Unpaid or overdue coupons attached to a bond do not bring it within the operation of this subsection, though they may be relevant under the general test of notice of adverse claims in subsection (a).
  8. Subsection (d) provides the owner of a certificated security with a means of protection while a security certificate is being sent in for redemption or exchange. The owner may endorse it “for collection” or “for surrender,” and this constitutes notice of the owner’s claims, under subsection (d).

Definitional Cross References:

“Adverse claim”. Section 8-102(a)(1). “Bearer form”. Section 8-102(a)(2). “Certificated security”. Section 8-102(a)(4). “Financial asset”. Section 8-102(a)(9). “Knowledge”. Section 1-201(25). “Person”. Section 1-201(30). “Purchaser”. Sections 1-201(33) & 8-116. “Registered form”. Section 8-102(a)(13). “Representative”. Section 1-201(35). “Security certificate”. Section 8-102(a)(16).

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355.8-106. Control.

  1. A purchaser has “control” of a certificated security in bearer form if the certificated security is delivered to the purchaser.
  2. A purchaser has “control” of a certificated security in registered form if the certificated security is delivered to the purchaser, and:
    1. The certificate is indorsed to the purchaser or in blank by an effective indorsement; or
    2. The certificate is registered in the name of the purchaser, upon original issue or registration of transfer by the issuer.
  3. A purchaser has “control” of an uncertificated security if:
    1. The uncertificated security is delivered to the purchaser; or
    2. The issuer has agreed that it will comply with instructions originated by the purchaser without further consent by the registered owner.
  4. A purchaser has “control” of a security entitlement if:
    1. The purchaser becomes the entitlement holder;
    2. The securities intermediary has agreed that it will comply with entitlement orders originated by the purchaser without further consent by the entitlement holder; or
    3. Another person has control of the security entitlement on behalf of the purchaser or, having previously acquired control of the security entitlement, acknowledges that it has control on behalf of the purchaser.
  5. If an interest in a security entitlement is granted by the entitlement holder to the entitlement holder’s own securities intermediary, the securities intermediary has control.
  6. A purchaser who has satisfied the requirements of subsection (3) or (4) of this section has control, even if the registered owner in the case of subsection (3) of this section or the entitlement holder in the case of subsection (4) of this section retains the right to make substitutions for the uncertificated security or security entitlement, to originate instructions or entitlement orders to the issuer or securities intermediary, or otherwise to deal with the uncertificated security or security entitlement.
  7. An issuer or a securities intermediary may not enter into an agreement of the kind described in subsection (3)(b) or (4)(b) of this section without the consent of the registered owner or entitlement holder, but an issuer or a securities intermediary is not required to enter into such an agreement even though the registered owner or entitlement holder so directs. An issuer or securities intermediary that has entered into such an agreement is not required to confirm the existence of the agreement to another party unless requested to do so by the registered owner or entitlement holder.

History. Enact. Acts 1958, ch. 77, § 8-106, effective July 1, 1960; 1986, ch. 118, § 14, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 119, effective January 1, 1997; 2000, ch. 408, § 170, effective July 1, 2001.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-106, effective July 1, 1960; 1986, ch. 118, § 14, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 119, effective January 1, 1997.

Official Comment

  1. The concept of “control” plays a key role in various provisions dealing with the rights of purchasers, including secured parties. See Sections 8-303 (protected purchasers); 8-503(e) (purchasers from securities intermediaries); 8-510 (purchasers of security entitlements from entitlement holders); 9-314 (perfection of security interests); 9-328 (priorities among conflicting security interests).

    Obtaining “control” means that the purchaser has taken whatever steps are necessary, given the manner in which the securities are held, to place itself in a position where it can have the securities sold, without further action by the owner.

  2. Subsection (a) provides that a purchaser obtains “control” with respect to a certificated security in bearer form by taking “delivery,” as defined in Section 8-301. Subsection (b) provides that a purchaser obtains “control” with respect to a certificated security in registered form by taking “delivery,” as defined in Section 8-301, provided that the security certificate has been indorsed to the purchaser or in blank. Section 8-301 provides that delivery of a certificated security occurs when the purchaser obtains possession of the security certificate, or when an agent for the purchaser (other than a securities intermediary) either acquires possession or acknowledges that the agent holds for the purchaser.
  3. Subsection (c) specifies the means by which a purchaser can obtain control over uncertificated securities which the transferor holds directly. Two mechanisms are possible.

    Under subsection (c)(1), securities can be “delivered” to a purchaser. Section 8-301(b) provides that “delivery” of an uncertificated security occurs when the purchaser becomes the registered holder. So far as the issuer is concerned, the purchaser would then be entitled to exercise all rights of ownership. See Section 8-207. As between the parties to a purchase transaction, however, the rights of the purchaser are determined by their contract. Cf. Section 9-202. Arrangements covered by this paragraph are analogous to arrangements in which bearer certificates are delivered to a secured party — so far as the issuer or any other parties are concerned, the secured party appears to be the outright owner, although it is in fact holding as collateral property that belongs to the debtor.

    Under subsection (c)(2), a purchaser has control if the issuer has agreed to act on the instructions of the purchaser, even though the owner remains listed as the registered owner. The issuer, of course, would be acting wrongfully against the registered owner if it entered into such an agreement without the consent of the registered owner. Subsection (g) makes this point explicit. The subsection (c)(2) provision makes it possible for issuers to offer a service akin to the registered pledge device of the 1978 version of Article 8, without mandating that all issuers offer that service.

  4. Subsection (d) specifies the means by which a purchaser can obtain control of a security entitlement. Three mechanisms are possible, analogous to those provided in subsection (c) for uncertificated securities. Under subsection (d)(1), a purchaser has control if it is the entitlement holder. This subsection would apply whether the purchaser holds through the same intermediary that the debtor used, or has the securities position transferred to its own intermediary. Subsection (d)(2) provides that a purchaser has control if the securities intermediary has agreed to act on entitlement orders originated by the purchaser if no further consent by the entitlement holder is required. Under subsection (d)(2), control may be achieved even though the original entitlement holder remains as the entitlement holder. Finally, a purchaser may obtain control under subsection (d)(3) if another person has control and the person acknowledges that it has control on the purchaser’s behalf. Control under subsection (d)(3) parallels the delivery of certificated securities and uncertificated securities under Section 8-301. Of course, the acknowledging person cannot be the debtor.

    This section specifies only the minimum requirements that such an arrangement must meet to confer “control”; the details of the arrangement can be specified by agreement. The arrangement might cover all of the positions in a particular account or subaccount, or only specified positions. There is no requirement that the control party’s right to give entitlement orders be exclusive. The arrangement might provide that only the control party can give entitlement orders, or that either the entitlement holder or the control party can give entitlement orders. See subsection (f).

    The following examples illustrate the application of subsection (d):

    Example 1. Debtor grants Alpha Bank a security interest in a security entitlement that includes 1000 shares of XYZ Co. stock that Debtor holds through an account with Able & Co. Alpha also has an account with Able. Debtor instructs Able to transfer the shares to Alpha, and Able does so by crediting the shares to Alpha’s account. Alpha has control of the 1000 shares under subsection (d)(1). Although Debtor may have become the beneficial owner of the new securities entitlement, as between Debtor and Alpha, Able has agreed to act on Alpha’s entitlement orders because, as between Able and Alpha, Alpha has become the entitlement holder. See Section 8-506.

    Example 2. Debtor grants Alpha Bank a security interest in a security entitlement that includes 1000 shares of XYZ Co. stock that Debtor holds through an account with Able & Co. Alpha does not have an account with Able. Alpha uses Beta as its securities custodian. Debtor instructs Able to transfer the shares to Beta, for the account of Alpha, and Able does so. Alpha has control of the 1000 shares under subsection (d)(1). As in Example 1, although Debtor may have become the beneficial owner of the new securities entitlement, as between Debtor and Alpha, Beta has agreed to act on Alpha’s entitlement orders because, as between Beta and Alpha, Alpha has become the entitlement holder.

    Example 3. Debtor grants Alpha Bank a security interest in a security entitlement that includes 1000 shares of XYZ Co. stock that Debtor holds through an account with Able & Co. Debtor, Able, and Alpha enter into an agreement under which Debtor will continue to receive dividends and distributions, and will continue to have the right to direct dispositions, but Alpha also has the right to direct dispositions. Alpha has control of the 1000 shares under subsection (d)(2).

    Example 4. Able & Co., a securities dealer, grants Alpha Bank a security interest in a security entitlement that includes 1000 shares of XYZ Co. stock that Able holds through an account with Clearing Corporation. Able causes Clearing Corporation to transfer the shares into Alpha’s account at Clearing Corporation. As in Example 1, Alpha has control of the 1000 shares under subsection (d)(1).

    Example 5. Able & Co., a securities dealer, grants Alpha Bank a security interest in a security entitlement that includes 1000 shares of XYZ Co. stock that Able holds through an account with Clearing Corporation. Alpha does not have an account with Clearing Corporation. It holds its securities through Beta Bank, which does have an account with Clearing Corporation. Able causes Clearing Corporation to transfer the shares into Beta’s account at Clearing Corporation. Beta credits the position to Alpha’s account with Beta Beta. As in Example 2, Alpha has control of the 1000 shares under subsection (d)(1).

    Example 6. Able & Co., a securities dealer, grants Alpha Bank a security interest in a security entitlement that includes 1000 shares of XYZ Co. stock that Able holds through an account with Clearing Corporation. Able causes Clearing Corporation to transfer the shares into a pledge account, pursuant to an agreement under which Able will continue to receive dividends, distributions, and the like, but Alpha has the right to direct dispositions. As in Example 3, Alpha has control of the 1000 shares under subsection (d)(2).

    Example 7. Able & Co., a securities dealer, grants Alpha Bank a security interest in a security entitlement that includes 1000 shares of XYZ Co. stock that Able holds through an account with Clearing Corporation. Able, Alpha, and Clearing Corporation enter into an agreement under which Clearing Corporation will act on instructions from Alpha with respect to the XYZ Co. stock carried in Able’s account, but Able will continue to receive dividends, distributions, and the like, and will also have the right to direct dispositions. As in Example 3, Alpha has control of the 1000 shares under subsection (d)(2).

    Example 8. Able & Co., a securities dealer, holds a wide range of securities through its account at Clearing Corporation. Able enters into an arrangement with Alpha Bank pursuant to which Alpha provides financing to Able secured by securities identified as the collateral on lists provided by Able to Alpha on a daily or other periodic basis. Able, Alpha, and Clearing Corporation enter into an agreement under which Clearing Corporation agrees that if at any time Alpha directs Clearing Corporation to do so, Clearing Corporation will transfer any securities from Able’s account at Alpha’s instructions. Because Clearing Corporation has agreed to act on Alpha’s instructions with respect to any securities carried in Able’s account, at the moment that Alpha’s security interest attaches to securities listed by Able, Alpha obtains control of those securities under subsection (d)(2). There is no requirement that Clearing Corporation be informed of which securities Able has pledged to Alpha.

    Example 9. Debtor grants Alpha Bank a security interest in a security entitlement that includes 1000 shares of XYZ Co. stock that Debtor holds through an account with Able & Co. Beta Bank agrees with Alpha to act as Alpha’s collateral agent with respect to the security entitlement. Debtor, Able, and Beta enter into an agreement under which Debtor will continue to receive dividends and distributions, and will continue to have the right to direct dispositions, but Beta also has the right to direct dispositions. Because Able has agreed that it will comply with entitlement orders originated by Beta without further consent by Debtor, Beta has control of the security entitlement (see Example 3). Because Beta has control on behalf of Alpha, Alpha also has control under subsection (d)(3). It is not necessary for Able to enter into an agreement directly with Alpha or for Able to be aware of Beta’s agency relationship with Alpha.

  5. For a purchaser to have “control” under subsection (c)(2) or (d)(2), it is essential that the issuer or securities intermediary, as the case may be, actually be a party to the agreement. If a debtor gives a secured party a power of attorney authorizing the secured party to act in the name of the debtor, but the issuer or securities intermediary does not specifically agree to this arrangement, the secured party does not have “control” within the meaning of subsection (c)(2) or (d)(2) because the issuer or securities intermediary is not a party to the agreement. The secured party does not have control under subsection (c)(1) or (d)(1) because, although the power of attorney might give the secured party authority to act on the debtor’s behalf as an agent, the secured party has not actually become the registered owner or entitlement holder.
  6. Subsection (e) provides that if an interest in a security entitlement is granted by an entitlement holder to the securities intermediary through which the security entitlement is maintained, the securities intermediary has control. A common transaction covered by this provision is a margin loan from a broker to its customer.
  7. The term “control” is used in a particular defined sense. The requirements for obtaining control are set out in this section. The concept is not to be interpreted by reference to similar concepts in other bodies of law. In particular, the requirements for “possession” derived from the common law of pledge are not to be used as a basis for interpreting subsection (c)(2) or (d)(2). Those provisions are designed to supplant the concepts of “constructive possession” and the like. A principal purpose of the “control” concept is to eliminate the uncertainty and confusion that results from attempting to apply common law possession concepts to modern securities holding practices.

    The key to the control concept is that the purchaser has the ability to have the securities sold or transferred without further action by the transferor. There is no requirement that the powers held by the purchaser be exclusive. For example, in a secured lending arrangement, if the secured party wishes, it can allow the debtor to retain the right to make substitutions, to direct the disposition of the uncertificated security or security entitlement, or otherwise to give instructions or entitlement orders. (As explained in Section 8-102, Comment 8, an entitlement order includes a direction under Section 8-508 to the securities intermediary to transfer a financial asset to the account of the entitlement holder at another financial intermediary or to cause the financial asset to be transferred to the entitlement holder in the direct holding system (e.g., by delivery of a securities certificate registered in the name of the former entitlement holder).) Subsection (f) is included to make clear the general point stated in subsections (c) and (d) that the test of control is whether the purchaser has obtained the requisite power, not whether the debtor has retained other powers. There is no implication that retention by the debtor of powers other than those mentioned in subsection (f) is inconsistent with the purchaser having control. Nor is there a requirement that the purchaser’s powers be unconditional, provided that further consent of the entitlement holder is not a condition.

    Example 10. Debtor grants to Alpha Bank and to Beta Bank a security interest in a security entitlement that includes 1000 shares of XYZ Co. stock that Debtor holds through an account with Able & Co. By agreement among the parties, Alpha’s security interest is senior and Beta’s is junior. Able agrees to act on the entitlement orders of either Alpha or Beta. Alpha and Beta each has control under subsection (d)(2). Moreover, Beta has control notwithstanding a term of Able’s agreement to the effect that Able’s obligation to act on Beta’s entitlement orders is conditioned on Alpha’s consent. The crucial distinction is that Able’s agreement to act on Beta’s entitlement orders is not conditioned on Debtor’s further consent.

    Example 11. Debtor grants to Alpha Bank a security interest in a security entitlement that includes 1000 shares of XYZ Co. stock that Debtor holds through an account with Able & Co. Able agrees to act on the entitlement orders of Alpha, but Alpha’s right to give entitlement orders to the securities intermediary is conditioned on the Debtor’s default. Alternatively, Alpha’s right to give entitlement orders is conditioned upon Alpha’s statement to Able that Debtor is in default. Because Able’s agreement to act on Alpha’s entitlement orders is not conditioned on Debtor’s further consent, Alpha has control of the securities entitlement under either alternative.

    In many situations, it will be better practice for both the securities intermediary and the purchaser to insist that any conditions relating in any way to the entitlement holder be effective only as between the purchaser and the entitlement holder. That practice would avoid the risk that the securities intermediary could be caught between conflicting assertions of the entitlement holder and the purchaser as to whether the conditions in fact have been met. Nonetheless, the existence of unfulfilled conditions effective against the intermediary would not preclude the purchaser from having control.

Definitional Cross References:

“Bearer form”. Section 8-102(a)(2). “Certificated security”. Section 8-102(a)(4). “Delivery”. Section 8-301. “Effective”. Section 8-107. “Entitlement holder”. Section 8-102(a)(7). “Entitlement order”. Section 8-102(a)(8). “Indorsement”. Section 8-102(a)(11). “Instruction”. Section 8-102(a)(12). “Purchaser”. Section 1-201(33) & 8-116. “Registered form”. Section 8-102(a)(13). “Securities intermediary”. Section 8-102(a)(14). “Security entitlement”. Section 8-102(a)(17). “Uncertificated security”. Section 8-102(a)(18).

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355.8-107. Whether indorsement, instruction, or entitlement order is effective.

  1. “Appropriate person” means:
    1. With respect to an indorsement, the person specified by a security certificate or by an effective special indorsement to be entitled to the security;
    2. With respect to an instruction, the registered owner of an uncertificated security;
    3. With respect to an entitlement order, the entitlement holder;
    4. If the person designated in paragraph (a), (b), or (c) of this subsection is deceased, the designated person’s successor taking under other law or the designated person’s personal representative acting for the estate of the decedent; or
    5. If the person designated in paragraph (a), (b), or (c) of this subsection lacks capacity, the designated person’s guardian, conservator, or other similar representative who has power under other law to transfer the security or financial asset.
  2. An indorsement, instruction, or entitlement order is effective if:
    1. It is made by the appropriate person;
    2. It is made by a person who has power under the law of agency to transfer the security or financial asset on behalf of the appropriate person, including, in the case of an instruction or entitlement order, a person who has control under KRS 355.8-106 (3)(b) or (4)(b); or
    3. The appropriate person has ratified it or is otherwise precluded from asserting its ineffectiveness.
  3. An indorsement, instruction, or entitlement order made by a representative is effective even if:
    1. The representative has failed to comply with a controlling instrument or with the law of the state having jurisdiction of the representative relationship, including any law requiring the representative to obtain court approval of the transaction; or
    2. The representative’s action in making the indorsement, instruction, or entitlement order or using the proceeds of the transaction is otherwise a breach of duty.
  4. If a security is registered in the name of or specially indorsed to a person described as a representative, or if a securities account is maintained in the name of a person described as a representative, an indorsement, instruction, or entitlement order made by the person is effective even though the person is no longer serving in the described capacity.
  5. Effectiveness of an indorsement, instruction, or entitlement order is determined as of the date the indorsement, instruction, or entitlement order is made, and an indorsement, instruction, or entitlement order does not become ineffective by reason of any later change of circumstances.

History. Enact. Acts 1964, ch. 130, § 16; 1986, ch. 118, § 15, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 120, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1964, ch. 130, § 16; 1986, ch. 118, § 15, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 120, effective January 1, 1997.

Official Comment

  1. This section defines two concepts, “appropriate person” and “effective.” Effectiveness is a broader concept than appropriate person. For example, if a security or securities account is registered in the name of Mary Roe, Mary Roe is the “appropriate person,” but an indorsement, instruction, or entitlement order made by John Doe is “effective” if, under agency or other law, Mary Roe is precluded from denying Doe’s authority. Treating these two concepts separately facilitates statement of the rules of Article 8 that state the legal effect of an indorsement, instruction, or entitlement order. For example, a securities intermediary is protected against liability if it acts on an effective entitlement order, but has a duty to comply with an entitlement order only if it is originated by an appropriate person. See Sections 8-115 and 8-507.

    One important application of the “effectiveness” concept is in the direct holding system rules on the rights of purchasers. A purchaser of a certificated security in registered form can qualify as a protected purchaser who takes free from adverse claims under Section 8-303 only if the purchaser obtains “control.” Section 8-106 provides that a purchaser of a certificated security in registered form obtains control if there has been an “effective” indorsement.

  2. Subsection (a) provides that the term “appropriate person” covers two categories: (1) the person who is actually designated as the person entitled to the security or security entitlement, and (2) the successor or legal representative of that person if that person has died or otherwise lacks capacity. Other law determines who has power to transfer a security on behalf of a person who lacks capacity. For example, if securities are registered in the name of more than one person and one of the designated persons dies, whether the survivor is the appropriate person depends on the form of tenancy. If the two were registered joint tenants with right of survivorship, the survivor would have that power under other law and thus would be the “appropriate person.” If securities are registered in the name of an individual and the individual dies, the law of decedents’ estates determines who has power to transfer the decedent’s securities. That would ordinarily be the executor or administrator, but if a “small estate statute” permits a widow to transfer a decedent’s securities without administration proceedings, she would be the appropriate person. If the registration of a security or a securities account contains a designation of a death beneficiary under the Uniform Transfer on Death Security Registration Act or comparable legislation, the designated beneficiary would, under that law, have power to transfer upon the person’s death and so would be the appropriate person. Article 8 does not contain a list of such representatives, because any list is likely to become outdated by developments in other law.
  3. Subsection (b) sets out the general rule that an indorsement, instruction, or entitlement order is effective if it is made by the appropriate person or by a person who has power to transfer under agency law or if the appropriate person is precluded from denying its effectiveness. The control rules in Section 8-106 provide for arrangements where a person who holds securities through a securities intermediary, or holds uncertificated securities directly, enters into a control agreement giving the secured party the right to initiate entitlement orders of instructions. Paragraph 2 of subsection (b) states explicitly that an entitlement order or instruction initiated by a person who has obtained such a control agreement is “effective.”

    Subsections (c), (d), and (e) supplement the general rule of subsection (b) on effectiveness. The term “representative,” used in subsections (c) and (d), is defined in Section 1-201(35).

  4. Subsection (c) provides that an indorsement, instruction, or entitlement order made by a representative is effective even though the representative’s action is a violation of duties. The following example illustrates this subsection:

    Example 1. Certificated securities are registered in the name of John Doe. Doe dies and Mary Roe is appointed executor. Roe indorses the security certificate and transfers it to a purchaser in a transaction that is a violation of her duties as executor.

    Roe’s indorsement is effective, because Roe is the appropriate person under subsection (a)(4). This is so even though Roe’s transfer violated her obligations as executor. The policies of free transferability of securities that underlie Article 8 dictate that neither a purchaser to whom Roe transfers the securities nor the issuer who registers transfer should be required to investigate the terms of the will to determine whether Roe is acting properly. Although Roe’s indorsement is effective under this section, her breach of duty may be such that her beneficiary has an adverse claim to the securities that Roe transferred. The question whether that adverse claim can be asserted against purchasers is governed not by this section but by Section 8-303. Under Section 8-404, the issuer has no duties to an adverse claimant unless the claimant obtains legal process enjoining the issuer from registering transfer.

  5. Subsection (d) deals with cases where a security or a securities account is registered in the name of a person specifically designated as a representative. The following example illustrates this subsection:

    Example 2. Certificated securities are registered in the name of “John Jones, trustee of the Smith Family Trust.” John Jones is removed as trustee and Martha Moe is appointed successor trustee. The securities, however, are not reregistered, but remain registered in the name of “John Jones, trustee of the Smith Family Trust.” Jones indorses the security certificate and transfers it to a purchaser.

    Subsection (d) provides that an indorsement by John Jones as trustee is effective even though Jones is no longer serving in that capacity. Since the securities were registered in the name of “John Jones, trustee of the Smith Family Trust,” a purchaser, or the issuer when called upon to register transfer, should be entitled to assume without further inquiry that Jones has the power to act as trustee for the Smith Family Trust.

    Note that subsection (d) does not apply to a case where the security or securities account is registered in the name of principal rather than the representative as such. The following example illustrates this point:

    Example 3. Certificated securities are registered in the name of John Doe. John Doe dies and Mary Roe is appointed executor. The securities are not reregistered in the name of Mary Roe as executor. Later, Mary Roe is removed as executor and Martha Moe is appointed as her successor. After being removed, Mary Roe indorses the security certificate that is registered in the name of John Doe and transfers it to a purchaser.

    Mary Roe’s indorsement is not made effective by subsection (d), because the securities were not registered in the name of Mary Roe as representative. A purchaser or the issuer registering transfer should be required to determine whether Roe has power to act for John Doe. Purchasers and issuers can protect themselves in such cases by requiring signature guaranties. See Section 8-306.

  6. Subsection (e) provides that the effectiveness of an indorsement, instruction, or entitlement order is determined as of the date it is made. The following example illustrates this subsection:

    Example 4. Certificated securities are registered in the name of John Doe. John Doe dies and Mary Roe is appointed executor. Mary Roe indorses the security certificate that is registered in the name of John Doe and transfers it to a purchaser. After the indorsement and transfer, but before the security certificate is presented to the issuer for registration of transfer, Mary Roe is removed as executor and Martha Moe is appointed as her successor.

    Mary Roe’s indorsement is effective, because at the time Roe indorsed she was the appropriate person under subsection (a)(4). Her later removal as executor does not render the indorsement ineffective. Accordingly, the issuer would not be liable for registering the transfer. See Section 8-404.

Definitional Cross References:

“Entitlement order”. Section 8-102(a)(8). “Financial asset”. Section 8-102(a)(9). “Indorsement”. Section 8-102(a)(11). “Instruction”. Section 8-102(a)(12). “Representative”. Section 1-201(35). “Securities account”. Section 8-501. “Security”. Section 8-102(a)(15). “Security certificate”. Section 8-102(a)(16). “Security entitlement”. Section 8-102(a)(17). “Uncertificated security”. Section 8-102(a)(18).

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355.8-108. Warranties in direct holding.

  1. A person who transfers a certificated security to a purchaser for value warrants to the purchaser, and an indorser, if the transfer is by indorsement, warrants to any subsequent purchaser, that:
    1. The certificate is genuine and has not been materially altered;
    2. The transferor or indorser does not know of any fact that might impair the validity of the security;
    3. There is no adverse claim to the security;
    4. The transfer does not violate any restriction on transfer;
    5. If the transfer is by indorsement, the indorsement is made by an appropriate person, or if the indorsement is by an agent, the agent has actual authority to act on behalf of the appropriate person; and
    6. The transfer is otherwise effective and rightful.
  2. A person who originates an instruction for registration of transfer of an uncertificated security to a purchaser for value warrants to the purchaser that:
    1. The instruction is made by an appropriate person, or if the instruction is by an agent, the agent has actual authority to act on behalf of the appropriate person;
    2. The security is valid;
    3. There is no adverse claim to the security; and
    4. At the time the instruction is presented to the issuer:
      1. The purchaser will be entitled to the registration of transfer;
      2. The transfer will be registered by the issuer free from all liens, security interests, restrictions, and claims other than those specified in the instruction;
      3. The transfer will not violate any restriction on transfer; and
      4. The requested transfer will otherwise be effective and rightful.
  3. A person who transfers an uncertificated security to a purchaser for value and does not originate an instruction in connection with the transfer warrants that:
    1. The uncertificated security is valid;
    2. There is no adverse claim to the security;
    3. The transfer does not violate any restriction on transfer; and
    4. The transfer is otherwise effective and rightful.
  4. A person who indorses a security certificate warrants to the issuer that:
    1. There is no adverse claim to the security; and
    2. The indorsement is effective.
  5. A person who originates an instruction for registration of transfer of an uncertificated security warrants to the issuer that:
    1. The instruction is effective; and
    2. At the time the instruction is presented to the issuer the purchaser will be entitled to the registration of transfer.
  6. A person who presents a certificated security for registration of transfer or for payment or exchange warrants to the issuer that the person is entitled to the registration, payment, or exchange, but a purchaser for value and without notice of adverse claims to whom transfer is registered warrants only that the person has no knowledge of any unauthorized signature in a necessary indorsement.
  7. If a person acts as agent of another in delivering a certificated security to a purchaser, the identity of the principal was known to the person to whom the certificate was delivered, and the certificate delivered by the agent was received by the agent from the principal or received by the agent from another person at the direction of the principal, the person delivering the security certificate warrants only that the delivering person has authority to act for the principal and does not know of any adverse claim to the certificated security.
  8. A secured party who redelivers a security certificate received, or after payment and on order of the debtor delivers the security certificate to another person, makes only the warranties of an agent under subsection (7) of this section.
  9. Except as otherwise provided in subsection (7) of this section, a broker acting for a customer makes to the issuer and a purchaser the warranties provided in subsections (1) to (6) of this section. A broker that delivers a security certificate to its customer, or causes its customer to be registered as the owner of an uncertificated security, makes to the customer the warranties provided in subsection (1) or (2) of this section, and has the rights and privileges of a purchaser under this section. The warranties of and in favor of the broker acting as an agent are in addition to applicable warranties given by and in favor of the customer.

History. Enact. Acts 1986, ch. 118, § 16, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 121, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1986, ch. 118, § 16, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 121, effective January 1, 1997.

Official Comment

  1. Subsections (a), (b), and (c) deal with warranties by security transferors to purchasers. Subsections (d) and (e) deal with warranties by security transferors to issuers. Subsection (f) deals with presentment warranties.
  2. Subsection (a) specifies the warranties made by a person who transfers a certificated security to a purchaser for value. Paragraphs (3), (4), and (5) make explicit several key points that are implicit in the general warranty of paragraph (6) that the transfer is effective and rightful. Subsection (b) sets forth the warranties made to a purchaser for value by one who originates an instruction. These warranties are quite similar to those made by one transferring a certificated security, subsection (a), the principal difference being the absolute warranty of validity. If upon receipt of the instruction the issuer should dispute the validity of the security, the burden of proving validity is upon the transferor. Subsection (c) provides for the limited circumstances in which an uncertificated security could be transferred without an instruction, see Section 8-301(b)(2). Subsections (d) and (e) give the issuer the benefit of the warranties of an indorser or originator on those matters not within the issuer’s knowledge.
  3. Subsection (f) limits the warranties made by a purchaser for value without notice whose presentation of a security certificate is defective in some way but to whom the issuer does register transfer. The effect is to deny the issuer a remedy against such a person unless at the time of presentment the person had knowledge of an unauthorized signature in a necessary indorsement. The issuer can protect itself by refusing to make the transfer or, if it registers the transfer before it discovers the defect, by pursuing its remedy against a signature guarantor.
  4. Subsection (g) eliminates all substantive warranties in the relatively unusual case of a delivery of certificated security by an agent of a disclosed principal where the agent delivers the exact certificate that it received from or for the principal. Subsection (h) limits the warranties given by a secured party who redelivers a certificate. Subsection (i) specifies the warranties of brokers in the more common scenarios.
  5. Under Section 1-102(a)(3) the warranty provisions apply “unless otherwise agreed” and the parties may enter into express agreements to allocate the risks of possible defects. Usual estoppel principles apply with respect to transfers of both certificated and uncertificated securities whenever the purchaser has knowledge of the defect, and these warranties will not be breached in such a case.

Definitional Cross References:

“Adverse claim”. Section 8-102(a)(1). “Appropriate person”. Section 8-107. “Broker”. Section 8-102(a)(3). “Certificated security”. Section 8-102(a)(4). “Indorsement”. Section 8-102(a)(11). “Instruction”. Section 8-102(a)(12). “Issuer”. Section 8-201. “Person”. Section 1-201(30). “Purchaser”. Sections 1-201(33) & 8-116. “Secured party”. Section 9-102(a)(72). “Security”. Section 8-102(a)(15). “Security certificate”. Section 8-102(a)(16). “Uncertificated security”. Section 8-102(a)(18). “Value”. Sections 1-201(44) & 8-116.

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355.8-109. Warranties in indirect holding.

  1. A person who originates an entitlement order to a securities intermediary warrants to the securities intermediary that:
    1. The entitlement order is made by an appropriate person, or if the entitlement order is by an agent, the agent has actual authority to act on behalf of the appropriate person; and
    2. There is no adverse claim to the security entitlement.
  2. A person who delivers a security certificate to a securities intermediary for credit to a securities account or originates an instruction with respect to an uncertificated security directing that the uncertificated security be credited to a securities account makes to the securities intermediary the warranties specified in KRS 355.8-108 (1) or (2).
  3. If a securities intermediary delivers a security certificate to its entitlement holder or causes its entitlement holder to be registered as the owner of an uncertificated security, the securities intermediary makes to the entitlement holder the warranties specified in KRS 355.8-108 (1) or (2).

History. Enact. Acts 1996, ch. 130, § 122, effective January 1, 1997.

Official Comment

  1. Subsection (a) provides that a person who originates an entitlement order warrants to the securities intermediary that the order is authorized, and warrants the absence of adverse claims. Subsection (b) specifies the warranties that are given when a person who holds securities directly has the holding converted into indirect form. A person who delivers a certificate to a securities intermediary or originates an instruction for an uncertificated security gives to the securities intermediary the transfer warranties under Section 8-108. If the securities intermediary in turns delivers the certificate to a higher level securities intermediary, it gives the same warranties.
  2. Subsection (c) states the warranties that a securities intermediary gives when a customer who has been holding securities in an account with the securities intermediary requests that certificates be delivered or that uncertificated securities be registered in the customer’s name. The warranties are the same as those that brokers make with respect to securities that the brokers sell to or buy on behalf of the customers. See Section 8-108(i).
  3. As with the Section 8-108 warranties, the warranties specified in this section may be modified by agreement under Section 1-102(a)(3).

Definitional Cross References:

“Adverse claim”. Section 8-102(a)(1). “Appropriate person”. Section 8-107. “Entitlement holder”. Section 8-102 (a)(7). “Entitlement order”. Section 8-102(a)(8). “Instruction”. Section 8-102(a)(12). “Person”. Section 1-201(30). “Securities account”. Section 8-501. “Securities intermediary”. Section 8-102 (a)(14). “Security certificate”. Section 8-102(a)(16). “Uncertificated security”. Section 8-102(a)(18).

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355.8-110. Applicability — Choice of law.

  1. The local law of the issuer’s jurisdiction, as specified in subsection (4) of this section, governs:
    1. The validity of a security;
    2. The rights and duties of the issuer with respect to registration of transfer;
    3. The effectiveness of registration of transfer by the issuer;
    4. Whether the issuer owes any duties to an adverse claimant to a security; and
    5. Whether an adverse claim can be asserted against a person to whom transfer of a certificated or uncertificated security is registered or a person who obtains control of an uncertificated security.
  2. The local law of the securities intermediary’s jurisdiction, as specified in subsection (5) of this section, governs:
    1. Acquisition of a security entitlement from the securities intermediary;
    2. The rights and duties of the securities intermediary and entitlement holder arising out of a security entitlement;
    3. Whether the securities intermediary owes any duties to an adverse claimant to a security entitlement; and
    4. Whether an adverse claim can be asserted against a person who acquires a security entitlement from the securities intermediary or a person who purchases a security entitlement or interest therein from an entitlement holder.
  3. The local law of the jurisdiction in which a security certificate is located at the time of delivery governs whether an adverse claim can be asserted against a person to whom the security certificate is delivered.
  4. “Issuer’s jurisdiction” means the jurisdiction under which the issuer of the security is organized or, if permitted by the law of that jurisdiction, the law of another jurisdiction specified by the issuer. An issuer organized under the law of this Commonwealth may specify the law of another jurisdiction as the law governing the matters specified in subsection (1)(b) to (e) of this section.
  5. The following rules determine a “securities intermediary’s jurisdiction” for purposes of this section:
    1. If an agreement between the securities intermediary and its entitlement holder governing the securities account expressly provides that a particular jurisdiction is the securities intermediary’s jurisdiction for purposes of this part of this article, this article, or Article 9 of this chapter, that jurisdiction is the securities intermediary’s jurisdiction.
    2. If paragraph (a) of this subsection does not apply and an agreement between the securities intermediary and its entitlement holder governing the securities account expressly provides that the agreement is governed by the law of a particular jurisdiction, that jurisdiction is the securities intermediary’s jurisdiction.
    3. If neither paragraph (a) nor paragraph (b) applies and an agreement between the securities intermediary and its entitlement holder governing the securities account expressly provides that the securities account is maintained at an office in a particular jurisdiction, that jurisdiction is the securities intermediary’s jurisdiction.
    4. If none of the preceding paragraphs of this subsection applies, the securities intermediary’s jurisdiction is the jurisdiction in which the office identified in an account statement as the office serving the entitlement holder’s account is located.
    5. If none of the preceding paragraphs of this subsection applies, the securities intermediary’s jurisdiction is the jurisdiction in which the chief executive office of the securities intermediary is located.
  6. A securities intermediary’s jurisdiction is not determined by the physical location of certificates representing financial assets, or by the jurisdiction in which is organized the issuer of the financial asset with respect to which an entitlement holder has a security entitlement, or by the location of facilities for data processing or other record keeping concerning the account.

History. Enact. Acts 1996, ch. 130, § 123, effective January 1, 1997; 2000, ch. 408, § 171, effective July 1, 2001; 2001, ch. 119, § 15, effective July 1, 2001.

Official Comment

  1. This section deals with applicability and choice of law issues concerning Article 8. The distinction between the direct and indirect holding systems plays a significant role in determining the governing law. An investor in the direct holding system is registered on the books of the issuer and/or has possession of a security certificate. Accordingly, the jurisdiction of incorporation of the issuer or location of the certificate determine the applicable law. By contrast, an investor in the indirect holding system has a security entitlement, which is a bundle of rights against the securities intermediary with respect to a security, rather than a direct interest in the underlying security. Accordingly, in the rules for the indirect holding system, the jurisdiction of incorporation of the issuer of the underlying security or the location of any certificates that might be held by the intermediary or a higher tier intermediary, do not determine the applicable law.

    The phrase “local law” refers to the law of a jurisdiction other than its conflict of laws rules. See Restatement (Second) of Conflict of Laws Section 4.

  2. Subsection (a) provides that the law of an issuer’s jurisdiction governs certain issues where the substantive rules of Article 8 determine the issuer’s rights and duties. Paragraph (1) of subsection (a) provides that the law of the issuer’s jurisdiction governs the validity of the security. This ensures that a single body of law will govern the questions addressed in Part 2 of Article 8, concerning the circumstances in which an issuer can and cannot assert invalidity as a defense against purchasers. Similarly, paragraphs (2), (3), and (4) of subsection (a) ensure that the issuer will be able to look to a single body of law on the questions addressed in Part 4 of Article 8, concerning the issuer’s duties and liabilities with respect to registration of transfer.

    Paragraph (5) of subsection (a) applies the law of an issuer’s jurisdiction to the question whether an adverse claim can be asserted against a purchaser to whom transfer has been registered, or who has obtained control over an uncertificated security. Although this issue deals with the rights of persons other than the issuer, the law of the issuer’s jurisdiction applies because the purchasers to whom the provision applies are those whose protection against adverse claims depends on the fact that their interests have been recorded on the books of the issuer.

    The principal policy reflected in the choice of law rules in subsection (a) is that an issuer and others should be able to look to a single body of law on the matters specified in subsection (a), rather than having to look to the law of all of the different jurisdictions in which security holders may reside. The choice of law policies reflected in this subsection do not require that the body of law governing all of the matters specified in subsection (a) be that of the jurisdiction in which the issuer is incorporated. Thus, subsection (d) provides that the term “issuer’s jurisdiction” means the jurisdiction in which the issuer is organized, or, if permitted by that law, the law of another jurisdiction selected by the issuer. Subsection (d) also provides that issuers organized under the law of a State which adopts this Article may make such a selection, except as to the validity issue specified in paragraph (1). The question whether an issuer can assert the defense of invalidity may implicate significant policies of the issuer’s jurisdiction of incorporation. See, e.g., Section 8-202 and Comments thereto.

    Although subsection (a) provides that the issuer’s rights and duties concerning registration of transfer are governed by the law of the issuer’s jurisdiction, other matters related to registration of transfer, such as appointment of a guardian for a registered owner or the existence of agency relationships, might be governed by another jurisdiction’s law. Neither this section nor Section 1-105 deals with what law governs the appointment of the administrator or executor; that question is determined under generally applicable choice of law rules.

  3. Subsection (b) provides that the law of the securities intermediary’s jurisdiction governs the issues concerning the indirect holding system that are dealt with in Article 8. Paragraphs (1) and (2) cover the matters dealt with in the Article 8 rules defining the concept of security entitlement and specifying the duties of securities intermediaries. Paragraph (3) provides that the law of the security intermediary’s jurisdiction determines whether the intermediary owes any duties to an adverse claimant. Paragraph (4) provides that the law of the security intermediary’s jurisdiction determines whether adverse claims can be asserted against entitlement holders and others.

    Subsection (e) determines what is a “securities intermediary’s jurisdiction.” The policy of subsection (b) is to ensure that a securities intermediary and all of its entitlement holders can look to a single, readily-identifiable body of law to determine their rights and duties. Accordingly, subsection (e) sets out a sequential series of tests to facilitate identification of that body of law. Paragraph (1) of subsection (e) permits specification of the securities intermediary’s jurisdiction by agreement. In the absence of such a specification, the law chosen by the parties to govern the securities account determines the securities intermediary’s jurisdiction. See paragraph (2). Because the policy of this section is to enable parties to determine, in advance and with certainty, what law will apply to transactions governed by this Article, the validation of the parties’ selection of governing law by agreement is not conditioned upon a determination that the jurisdiction whose law is chosen bear a “reasonable relation” to the transaction. See Section 4A-507; compare Section 1-105(1). That is also true with respect to the similar provisions in subsection (d) of this section and in Section 9-305. The remaining paragraphs in subsection (e) contain additional default rules for determining the securities intermediary’s jurisdiction.

    Subsection (f) makes explicit a point that is implicit in the Article 8 description of a security entitlement as a bundle of rights against the intermediary with respect to a security or other financial asset, rather than as a direct interest in the underlying security or other financial asset. The governing law for relationships in the indirect holding system is not determined by such matters as the jurisdiction of incorporation of the issuer of the securities held through the intermediary, or the location of any physical certificates held by the intermediary or a higher tier intermediary.

  4. Subsection (c) provides a choice of law rule for adverse claim issues that may arise in connection with delivery of security certificates in the direct holding system. It applies the law of the place of delivery. If a certificated security issued by an Idaho corporation is sold, and the sale is settled by physical delivery of the certificate from Seller to Buyer in New York, under subsection (c), New York law determines whether Buyer takes free from adverse claims. The domicile of Seller, Buyer, and any adverse claimant is irrelevant.
  5. The following examples illustrate how a court in a jurisdiction which has enacted this section would determine the governing law:

    Example 1. John Doe, a resident of Kansas, maintains a securities account with Able & Co. Able is incorporated in Delaware. Its chief executive offices are located in Illinois. The office where Doe transacts business with Able is located in Missouri. The agreement between Doe and Able specifies that Illinois is the securities intermediary’s (Able’s) jurisdiction. Through the account, Doe holds securities of a Colorado corporation, which Able holds through Clearing Corporation. The rules of Clearing Corporation provide that the rights and duties of Clearing Corporation and its participants are governed by New York law. Subsection (a) specifies that a controversy concerning the rights and duties as between the issuer and Clearing Corporation is governed by Colorado law. Subsections (b) and (e) specify that a controversy concerning the rights and duties as between the Clearing Corporation and Able is governed by New York law, and that a controversy concerning the rights and duties as between Able and Doe is governed by Illinois law.

    Example 2. Same facts as to Doe and Able as in example 1. Through the account, Doe holds securities of a Senegalese corporation, which Able holds through Clearing Corporation. Clearing Corporation’s operations are located in Belgium, and its rules and agreements with its participants provide that they are governed by Belgian law. Clearing Corporation holds the securities through a custodial account at the Paris branch office of Global Bank, which is organized under English law. The agreement between Clearing Corporation and Global Bank provides that it is governed by French law. Subsection (a) specifies that a controversy concerning the rights and duties as between the issuer and Global Bank is governed by Senegalese law. Subsections (b) and (e) specify that a controversy concerning the rights and duties as between Global Bank and Clearing Corporation is governed by French law, that a controversy concerning the rights and duties as between Clearing Corporation and Able is governed by Belgian law, and that a controversy concerning the rights and duties as between Able and Doe is governed by Illinois law.

  6. To the extent that this section does not specify the governing law, general choice of law rules apply. For example, suppose that in either of the examples in the preceding Comment, Doe enters into an agreement with Roe, also a resident of Kansas, in which Doe agrees to transfer all of his interests in the securities held through Able to Roe. Article 8 does not deal with whether such an agreement is enforceable or whether it gives Roe some interest in Doe’s security entitlement. This section specifies what jurisdiction’s law governs the issues that are dealt with in Article 8. Article 8, however, does specify that securities intermediaries have only limited duties with respect to adverse claims. See Section 8-115. Subsection (b)(3) of this section provides that Illinois law governs whether Able owes any duties to an adverse claimant. Thus, if Illinois has adopted Revised Article 8, Section 8-115 as enacted in Illinois determines whether Roe has any rights against Able.
  7. The choice of law provisions concerning security interests in securities and security entitlements are set out in Section 9-305.

Definitional Cross References:

“Adverse claim”. Section 8-102(a)(1). “Agreement”. Section 1-201(a)(3). “Certificated security”. Section 8-102(a)(4). “Entitlement holder”. Section 8-102(a)(7). “Financial asset”. Section 8-102(a)(9). “Issuer”. Section 8-201. “Person”. Section 1-201(30). “Purchase”. Section 1-201(32). “Securities intermediary”. Section 8-102(a)(14). “Security”. Section 8-102(a)(15). “Security certificate”. Section 8-102(a)(16). “Security entitlement”. Section 8-102(a)(17). “Uncertificated security”. Section 8-102(a)(18).

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355.8-111. Clearing corporation rules.

A rule adopted by a clearing corporation governing rights and obligations among the clearing corporation and its participants in the clearing corporation is effective even if the rule conflicts with provisions of this article and affects another party who does not consent to the rule.

History. Enact. Acts 1996, ch. 130, § 124, effective January 1, 1997.

Official Comment

  1. The experience of the past few decades shows that securities holding and settlement practices may develop rapidly, and in unforeseeable directions. Accordingly, it is desirable that the rules of Article 8 be adaptable both to ensure that commercial law can conform to changing practices and to ensure that commercial law does not operate as an obstacle to developments in securities practice. Even if practices were unchanging, it would not be possible in a general statute to specify in detail the rules needed to provide certainty in the operations of the clearance and settlement system.

    The provisions of this Article and Article 1 on the effect of agreements provide considerable flexibility in the specification of the details of the rights and obligations of participants in the securities holding system by agreement. See Sections 8-504 through 8-509, and Section 1-102(a)(3) and (4). Given the magnitude of the exposures involved in securities transactions, however, it may not be possible for the parties in developing practices to rely solely on private agreements, particularly with respect to matters that might affect others, such as creditors. For example, in order to be fully effective, rules of clearing corporations on the finality or reversibility of securities settlements must not only bind the participants in the clearing corporation but also be effective against their creditors. Section 8-111 provides that clearing corporation rules are effective even if they indirectly affect third parties, such as creditors of a participant. This provision does not, however, permit rules to be adopted that would govern the rights and obligations of third parties other than as a consequence of rules that specify the rights and obligations of the clearing corporation and its participants.

  2. The definition of clearing corporation in Section 8-102 covers only federal reserve banks, entities registered as clearing agencies under the federal securities laws, and others subject to comparable regulation. The rules of registered clearing agencies are subject to regulatory oversight under the federal securities laws.

Definitional Cross References:

“Clearing corporation”. Section 8-102(a)(5).

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355.8-112. Creditor’s legal process.

  1. The interest of a debtor in a certificated security may be reached by a creditor only by actual seizure of the security certificate by the officer making the attachment or levy, except as otherwise provided in subsection (4) of this section. However, a certificated security for which the certificate has been surrendered to the issuer may be reached by a creditor by legal process upon the issuer.
  2. The interest of a debtor in an uncertificated security may be reached by a creditor only by legal process upon the issuer at its chief executive office in the United States, except as otherwise provided in subsection (4) of this section.
  3. The interest of a debtor in a security entitlement may be reached by a creditor only by legal process upon the securities intermediary with whom the debtor’s securities account is maintained, except as otherwise provided in subsection (4) of this section.
  4. The interest of a debtor in a certificated security for which the certificate is in the possession of a secured party, or in an uncertificated security registered in the name of a secured party, or a security entitlement maintained in the name of a secured party, may be reached by a creditor by legal process upon the secured party.
  5. A creditor whose debtor is the owner of a certificated security, uncertificated security, or security entitlement is entitled to aid from a court of competent jurisdiction, by injunction or otherwise, in reaching the certificated security, uncertificated security, or security entitlement or in satisfying the claim by means allowed at law or in equity in regard to property that cannot readily be reached by other legal process.

History. Enact. Acts 1996, ch. 130, § 125, effective January 1, 1997.

Official Comment

  1. In dealing with certificated securities the instrument itself is the vital thing, and therefor a valid levy cannot be made unless all possibility of the certificate’s wrongfully finding its way into a transferee’s hands has been removed. This can be accomplished only when the certificate is in the possession of a public officer, the issuer, or an independent third party. A debtor who has been enjoined can still transfer the security in contempt of court. See Overlock v. Jerome-Portland Copper Mining Co., 29 Ariz. 560, 243 P. 400 (1926). Therefor, although injunctive relief is provided in subsection (e) so that creditors may use this method to gain control of the certificated security, the security certificate itself must be reached to constitute a proper levy whenever the debtor has possession.
  2. Subsection (b) provides that when the security is uncertificated and registered in the debtor’s name, the debtor’s interest can be reached only by legal process upon the issuer. The most logical place to serve the issuer would be the place where the transfer records are maintained, but that location might be difficult to identify, especially when the separate elements of a computer network might be situated in different places. The chief executive office is selected as the appropriate place by analogy to Section 9-307(b)(3). See Comment 2 to that section. This section indicates only how attachment is to be made, not when it is legally justified. For that reason there is no conflict between this section and Shaffer v. Heitner, 433 U.S. 186 (1977).
  3. Subsection (c) provides that a security entitlement can be reached only by legal process upon the debtor’s security intermediary. Process is effective only if directed to the debtor’s own security intermediary. If Debtor holds securities through Broker, and Broker in turn holds through Clearing Corporation, Debtor’s property interest is a security entitlement against Broker. Accordingly, Debtor’s creditor cannot reach Debtor’s interest by legal process directed to the Clearing Corporation. See also Section 8-115.
  4. Subsection (d) provides that when a certificated security, an uncertificated security, or a security entitlement is controlled by a secured party, the debtor’s interest can be reached by legal process upon the secured party. This section does not attempt to provide for rights as between the creditor and the secured party, as, for example, whether or when the secured party must liquidate the security.

Definitional Cross References:

“Certificated security”. Section 8-102(a)(4). “Issuer”. Section 8-201. “Secured party”. Section 9-102(a)(72). “Securities intermediary”. Section 8-102(a)(14). “Security certificate”. Section 8-102(a)(16). “Security entitlement”. Section 8-102(a)(17). “Uncertificated security”. Section 8-102(a)(18).

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355.8-113. Statute of frauds inapplicable.

A contract or modification of a contract for the sale or purchase of a security is enforceable whether or not there is a writing signed or record authenticated by a party against whom enforcement is sought, even if the contract or modification is not capable of performance within one (1) year of its making.

History. Enact. Acts 1996, ch. 130, § 126, effective January 1, 1997.

Official Comment

This section provides that the statute of frauds does not apply to contracts for the sale of securities, reversing prior law which had a special statute of frauds in Section 8-319 (1978). With the increasing use of electronic means of communication, the statute of frauds is unsuited to the realities of the securities business. For securities transactions, whatever benefits a statute of frauds may play in filtering out fraudulent claims are outweighed by the obstacles it places in the development of modern commercial practices in the securities business.

Definitional Cross References:

“Action”. Section 1-201(a)(1). “Contract”. Section 1-201(11). “Writing”. Section 1-201(46).

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355.8-114. Evidentiary rules concerning certificated securities.

The following rules apply in an action on a certificated security against the issuer:

  1. Unless specifically denied in the pleadings, each signature on a security certificate or in a necessary indorsement is admitted.
  2. If the effectiveness of a signature is put in issue, the burden of establishing effectiveness is on the party claiming under the signature, but the signature is presumed to be genuine or authorized.
  3. If signatures on a security certificate are admitted or established, production of the certificate entitles a holder to recover on it unless the defendant establishes a defense or a defect going to the validity of the security.
  4. If it is shown that a defense or defect exists, the plaintiff has the burden of establishing that the plaintiff or some person under whom the plaintiff claims is a person against whom the defense or defect cannot be asserted.

History. Enact. Acts 1996, ch. 130, § 127, effective January 1, 1997.

Official Comment

This section adapts the rules of negotiable instruments law concerning procedure in actions on instruments, see Section 3-308, to actions on certificated securities governed by this Article. An “action on a security” includes any action or proceeding brought against the issuer to enforce a right or interest that is part of the security, such as an action to collect principal or interest or a dividend, or to establish a right to vote or to receive a new security under an exchange offer or plan of reorganization. This section applies only to certificated securities; actions on uncertificated securities are governed by general evidentiary principles

Definitional Cross References:

“Action”. Section 1-201(a)(1). “Burden of establishing”. Section 1-201(8). “Certificated security”. Section 8-102(a)(4). “Indorsement”. Section 8-102(a)(11). “Issuer”. Section 8-201. “Presumed”. Section 1-201(31) “Security”. Section 8-102(a)(15). “Security certificate”. Section 8-102(a)(16).

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355.8-115. Securities intermediary and others not liable to adverse claimant.

A securities intermediary that has transferred a financial asset pursuant to an effective entitlement order, or a broker or other agent or bailee that has dealt with a financial asset at the direction of its customer or principal, is not liable to a person having an adverse claim to the financial asset, unless the securities intermediary, or broker or other agent or bailee:

  1. Took the action after it had been served with an injunction, restraining order, or other legal process enjoining it from doing so, issued by a court of competent jurisdiction, and had a reasonable opportunity to act on the injunction, restraining order, or other legal process; or
  2. Acted in collusion with the wrongdoer in violating the rights of the adverse claimant; or
  3. In the case of a security certificate that has been stolen, acted with notice of the adverse claim.

History. Enact. Acts 1996, ch. 130, § 128, effective January 1, 1997.

Official Comment

  1. Other provisions of Article 8 protect certain purchasers against adverse claims, both for the direct holding system and the indirect holding system. See Sections 8-303 and 8-502. This section deals with the related question of the possible liability of a person who acted as the “conduit” for a securities transaction. It covers both securities intermediaries - the “conduits” in the indirect holding system - and brokers or other agents or bailees - the “conduits” in the direct holding system. The following examples illustrate its operation:

    Example 1. John Doe is a customer of the brokerage firm of Able & Co. Doe delivers to Able a certificate for 100 shares of XYZ Co. common stock, registered in Doe’s name and properly indorsed, and asks the firm to sell it for him. Able does so. Later, John Doe’s spouse Mary Doe brings an action against Able asserting that Able’s action was wrongful against her because the XYZ Co. stock was marital property in which she had an interest, and John Doe was acting wrongfully against her in transferring the securities.

    Example 2. Mary Roe is a customer of the brokerage firm of Baker & Co. and holds her securities through a securities account with Baker. Roe instructs Baker to sell 100 shares of XYZ Co. common stock that she carried in her account. Baker does so. Later, Mary Roe’s spouse John Roe brings an action against Baker asserting that Baker’s action was wrongful against him because the XYZ Co. stock was marital property in which he had an interest, and Mary Roe was acting wrongfully against him in transferring the securities.

    Under common law conversion principles, Mary Doe might be able to assert that Able & Co. is liable to her in Example 1 for exercising dominion over property inconsistent with her rights in it. On that or some similar theory John Roe might assert that Baker is liable to him in Example 2. Section 8-115 protects both Able and Baker from liability.

  2. The policy of this section is similar to that of many other rules of law that protect agents and bailees from liability as innocent converters. If a thief steals property and ships it by mail, express service, or carrier, to another person, the recipient of the property does not obtain good title, even though the recipient may have given value to the thief and had no notice or knowledge that the property was stolen. Accordingly, the true owner can recover the property from the recipient or obtain damages in a conversion or similar action. An action against the postal service, express company, or carrier presents entirely different policy considerations. Accordingly, general tort law protects agents or bailees who act on the instructions of their principals or bailors. See Restatement (Second) of Torts G.S. 235. See also UCC Section 7-404.
  3. Except as provided in paragraph (a)(3), this section applies even though the securities intermediary, or the broker or other agent or bailee, had notice or knowledge that another person asserts a claim to the securities. Consider the following examples:

    Example 3. Same facts as in Example 1, except that before John Doe brought the XYZ Co. security certificate to Able for sale, Mary Doe telephoned or wrote to the firm asserting that she had an interest in all of John Doe’s securities and demanding that they not trade for him.

    Example 4. Same facts as in Example 2, except that before Mary Roe gave an entitlement order to Baker to sell the XYZ Co. securities from her account, John Roe telephoned or wrote to the firm asserting that he had an interest in all of Mary Roe’s securities and demanding that they not trade for her.

    Section 8-115 protects Able and Baker from liability. The protections of Section 8-115 do not depend on the presence or absence of notice of adverse claims. It is essential to the securities settlement system that brokers and securities intermediaries be able to act promptly on the directions of their customers. Even though a firm has notice that someone asserts a claim to a customer’s securities or security entitlements, the firm should not be placed in the position of having to make a legal judgment about the validity of the claim at the risk of liability either to its customer or to the third party for guessing wrong. Under this section, the broker or securities intermediary is privileged to act on the instructions of its customer or entitlement holder, unless it has been served with a restraining order or other legal process enjoining it from doing so. This is already the law in many jurisdictions. For example a section of the New York Banking Law provides that banks need not recognize any adverse claim to funds or securities on deposit with them unless they have been served with legal process. N.Y. Banking Law G.S. 134. Other sections of the UCC embody a similar policy. See Sections 3-602 and 5-114(2)(b).

    Paragraph (1) of this section refers only to a court order enjoining the securities intermediary or the broker or other agent or bailee from acting at the instructions of the customer. It does not apply to cases where the adverse claimant tells the intermediary or broker that the customer has been enjoined, or shows the intermediary or broker a copy of a court order binding the customer.

    Paragraph (3) takes a different approach in one limited class of cases, those where a customer sells stolen certificated securities through a securities firm. Here the policies that lead to protection of securities firms against assertions of other sorts of claims must be weighed against the desirability of having securities firms guard against the disposition of stolen securities. Accordingly, paragraph (3) denies protection to a broker, custodian, or other agent or bailee who receives a stolen security certificate from its customer, if the broker, custodian, or other agent or bailee had notice of adverse claims. The circumstances that give notice of adverse claims are specified in Section 8-105. The result is that brokers, custodians, and other agents and bailees face the same liability for selling stolen certificated securities that purchasers face for buying them.

  4. As applied to securities intermediaries, this section embodies one of the fundamental principles of the Article 8 indirect holding system rules - that a securities intermediary owes duties only to its own entitlement holders. The following examples illustrate the operation of this section in the multi-tiered indirect holding system:

    Example 5. Able & Co., a broker-dealer, holds 50,000 shares of XYZ Co. stock in its account at Clearing Corporation. Able acquired the XYZ shares from another firm, Baker & Co., in a transaction that Baker contends was tainted by fraud, giving Baker a right to rescind the transaction and recover the XYZ shares from Able. Baker sends notice to Clearing Corporation stating that Baker has a claim to the 50,000 shares of XYZ Co. in Able’s account. Able then initiates an entitlement order directing Clearing Corporation to transfer the 50,000 shares of XYZ Co. to another firm in settlement of a trade. Under Section 8-115, Clearing Corporation is privileged to comply with Able’s entitlement order, without fear of liability to Baker. This is so even though Clearing Corporation has notice of Baker’s claim, unless Baker obtains a court order enjoining Clearing Corporation from acting on Able’s entitlement order.

    Example 6. Able & Co., a broker-dealer, holds 50,000 shares of XYZ Co. stock in its account at Clearing Corporation. Able initiates an entitlement order directing Clearing Corporation to transfer the 50,000 shares of XYZ Co. to another firm in settlement of a trade. That trade was made by Able for its own account, and the proceeds were devoted to its own use. Able becomes insolvent, and it is discovered that Able has a shortfall in the shares of XYZ Co. stock that it should have been carrying for its customers. Able’s customers bring an action against Clearing Corporation asserting that Clearing Corporation acted wrongfully in transferring the XYZ shares on Able’s order because those were shares that should have been held by Able for its customers. Under Section 8-115, Clearing Corporation is not liable to Able’s customers, because Clearing Corporation acted on an effective entitlement order of its own entitlement holder, Able. Clearing Corporation’s protection against liability does not depend on the presence or absence of notice or knowledge of the claim by Clearing Corporation.

  5. If the conduct of a securities intermediary or a broker or other agent or bailee rises to a level of complicity in the wrongdoing of its customer or principal, the policies that favor protection against liability do not apply. Accordingly, paragraph (2) provides that the protections of this section do not apply if the securities intermediary or broker or other agent or bailee acted in collusion with the customer or principal in violating of the rights of another person. The collusion test is intended to adopt a standard akin to the tort rules that determine whether a person is liable as an aider or abettor for the tortious conduct of a third party. See Restatement (Second) of Torts G.S. 876.

    Knowledge that the action of the customer is wrongful is a necessary but not sufficient condition of the collusion test. The aspect of the role of securities intermediaries and brokers that Article 8 deals with is the clerical or ministerial role of implementing and recording the securities transactions that their customers conduct. Faithful performance of this role consists of following the instructions of the customer. It is not the role of the record-keeper to police whether the transactions recorded are appropriate, so mere awareness that the customer may be acting wrongfully does not itself constitute collusion. That, of course, does not insulate an intermediary or broker from responsibility in egregious cases where its action goes beyond the ordinary standards of the business of implementing and recording transactions, and reaches a level of affirmative misconduct in assisting the customer in the commission of a wrong.

Definitional Cross References:

“Broker”. Section 8-102(a)(3). “Effective”. Section 8-107. “Entitlement order”. Section 8-102(a)(8). “Financial asset”. Section 8-102(a)(9). “Securities intermediary”. Section 8-102(a)(14). “Security certificate”. Section 8-102(a)(16).

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355.8-116. Securities intermediary as purchaser for value.

A securities intermediary that receives a financial asset and establishes a security entitlement to the financial asset in favor of an entitlement holder is a purchaser for value of the financial asset. A securities intermediary that acquires a security entitlement to a financial asset from another securities intermediary acquires the security entitlement for value if the securities intermediary acquiring the security entitlement establishes a security entitlement to the financial asset in favor of an entitlement holder.

History. Enact. Acts 1996, ch. 130, § 129, effective January 1, 1997.

Official Comment

  1. This section is intended to make explicit two points that, while implicit in other provisions, are of sufficient importance to the operation of the indirect holding system that they warrant explicit statement. First, it makes clear that a securities intermediary that receives a financial asset and establishes a security entitlement in respect thereof in favor of an entitlement holder is a ‘purchaser’ of the financial asset that the securities intermediary received. Second, it makes clear that by establishing a security entitlement in favor of an entitlement holder a securities intermediary gives value for any corresponding financial asset that the securities intermediary receives or acquires from another party, whether the intermediary holds directly or indirectly.

    In many cases a securities intermediary that receives a financial asset will also be transferring value to the person from whom the financial asset was received. That, however, is not always the case. Payment may occur through a different system than settlement of the securities side of the transaction, or the securities might be transferred without a corresponding payment, as when a person moves an account from one securities intermediary to another. Even though the securities intermediary does not give value to the transferor, it does give value by incurring obligations to its own entitlement holder. Although the general definition of value in Section 1-201(44)(d) should be interpreted to cover the point, this section is included to make this point explicit.

  2. The following examples illustrate the effect of this section:

    Example 1. Buyer buys 1000 shares of XYZ Co. common stock through Buyer’s broker Able & Co. to be held in Buyer’s securities account. In settlement of the trade, the selling broker delivers to Able a security certificate in street name, indorsed in blank, for 1000 shares XYZ Co. stock, which Able holds in its vault. Able credits Buyer’s account for securities in that amount. Section 8-116 specifies that Able is a purchaser of the XYZ Co. stock certificate, and gave value for it. Thus, Able can obtain the benefit of Section 8-303, which protects purchasers for value, if it satisfies the other requirements of that section.

    Example 2. Buyer buys 1000 shares XYZ Co. common stock through Buyer’s broker Able & Co. to be held in Buyer’s securities account. The trade is settled by crediting 1000 shares XYZ Co. stock to Able’s account at Clearing Corporation. Able credits Buyer’s account for securities in that amount. When Clearing Corporation credits Able’s account, Able acquires a security entitlement under Section 8-501. Section 8-116 specifies that Able acquired this security entitlement for value. Thus, Able can obtain the benefit of Section 8-502, which protects persons who acquire security entitlements for value, if it satisfies the other requirements of that section.

    Example 3. Thief steals a certificated bearer bond from Owner. Thief sends the certificate to his broker Able & Co. to be held in his securities account, and Able credits Thief’s account for the bond. Section 8-116 specifies that Able is a purchaser of the bond and gave value for it. Thus, Able can obtain the benefit of Section 8-303, which protects purchasers for value, if it satisfies the other requirements of that section.

Definitional Cross References:

“Entitlement holder”. Section 8-102(a)(7). “Financial asset”. Section 8-102(a)(9). “Securities intermediary”. Section 8-102(a)(14). “Security entitlement”. Section 8-102(a)(17).

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Part 2. Issue and Issuer

355.8-201. “Issuer.”

  1. With respect to an obligation on or a defense to a security, an “issuer” includes a person that:
    1. Places or authorizes the placing of its name on a security certificate, other than as authenticating trustee, registrar, transfer agent, or the like, to evidence a share, participation, or other interest in its property or in an enterprise, or to evidence its duty to perform an obligation represented by the certificate;
    2. Creates a share, participation, or other interest in its property or in an enterprise, or undertakes an obligation, that is an uncertificated security;
    3. Directly or indirectly creates a fractional interest in its rights or property, if the fractional interest is represented by a security certificate; or
    4. Becomes responsible for, or in place of, another person described as an issuer in this section.
  2. With respect to an obligation on or defense to a security, a guarantor is an issuer to the extent of its guaranty, whether or not its obligation is noted on a security certificate.
  3. With respect to a registration of a transfer, issuer means a person on whose behalf transfer books are maintained.

History. Enact. Acts 1958, ch. 77, § 8-201, effective July 1, 1960; 1986, ch. 118, § 17, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 130, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-201, effective July 1, 1960; 1986, ch. 118, § 17, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 130, effective January 1, 1997.

Official Comment

  1. The definition of “issuer” in this section functions primarily to describe the persons whose defenses may be cut off under the rules in Part 2. In large measure it simply tracks the language of the definition of security in Section 8-102(a)(15).
  2. Subsection (b) distinguishes the obligations of a guarantor as issuer from those of the principal obligor. However, it does not exempt the guarantor from the impact of subsection (d) of Section 8-202. Whether or not the obligation of the guarantor is noted on the security is immaterial. Typically, guarantors are parent corporations, or stand in some similar relationship to the principal obligor. If that relationship existed at the time the security was originally issued the guaranty would probably have been noted on the security. However, if the relationship arose afterward, e.g., through a purchase of stock or properties, or through merger or consolidation, probably the notation would not have been made. Nonetheless, the holder of the security is entitled to the benefit of the obligation of the guarantor.
  3. Subsection (c) narrows the definition of “issuer” for purposes of Part 4 of this Article (registration of transfer). It is supplemented by Section 8-407.

Definitional Cross References:

“Person”. Section 1-201(30). “Security”. Section 8-102(a)(15). “Security certificate”. Section 8-102(a)(16). “Uncertificated security”. Section 8-102(a)(18).

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355.8-202. Issuer’s responsibility and defenses — Notice of defect of defense.

  1. Even against a purchaser for value and without notice, the terms of a certificated security include terms stated on the certificate and terms made part of the security by reference on the certificate to another instrument, indenture, or document or to a constitution, statute, ordinance, rule, regulation, order, or the like, to the extent the terms referred to do not conflict with terms stated on the certificate. A reference under this subsection does not of itself charge a purchaser for value with notice of a defect going to the validity of the security, even if the certificate expressly states that a person accepting it admits notice. The terms of an uncertificated security include those stated in any instrument, indenture, or document or in a constitution, statute, ordinance, rule, regulation, order, or the like, pursuant to which the security is issued.
  2. The following rules apply if an issuer asserts that a security is not valid:
    1. A security other than one issued by a government or governmental subdivision, agency, or instrumentality, even though issued with a defect going to its validity, is valid in the hands of a purchaser for value and without notice of the particular defect unless the defect involves a violation of a constitutional provision. In that case, the security is valid in the hands of a purchaser for value and without notice of the defect, other than one who takes by original issue.
    2. Paragraph (a) of this subsection applies to an issuer that is a government or governmental subdivision, agency, or instrumentality only if there has been substantial compliance with the legal requirements governing the issue or the issuer has received a substantial consideration for the issue as a whole or for the particular security and a stated purpose of the issue is one for which the issuer has power to borrow money or issue the security.
  3. Except as otherwise provided in KRS 355.8-205 , lack of genuineness of a certificated security is a complete defense, even against a purchaser for value and without notice.
  4. All other defenses of the issuer of a security, including nondelivery and conditional delivery of a certificated security, are ineffective against a purchaser for value who has taken the certificated security without notice of the particular defense.
  5. This section does not affect the right of a party to cancel a contract for a security “when, as and if issued” or “when distributed” in the event of a material change in the character of the security that is the subject of the contract or in the plan or arrangement pursuant to which the security is to be issued or distributed.
  6. If a security is held by a securities intermediary against whom an entitlement holder has a security entitlement with respect to the security, the issuer may not assert any defense that the issuer could not assert if the entitlement holder held the security directly.

History. Enact. Acts 1958, ch. 77, § 8-202, effective July 1, 1960; 1986, ch. 118, § 18, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 131, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-202, effective July 1, 1960; 1986, ch. 118, § 18, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 131, effective January 1, 1997.

Official Comment

  1. In this Article the rights of the purchaser for value without notice are divided into two aspects, those against the issuer, and those against other claimants to the security. Part 2 of this Article, and especially this section, deal with rights against the issuer.

    Subsection (a) states, in accordance with the prevailing case law, the right of the issuer (who prepares the text of the security) to include terms incorporated by adequate reference to an extrinsic source, so long as the terms so incorporated do not conflict with the stated terms. Thus, the standard practice of referring in a bond or debenture to the trust indenture under which it is issued without spelling out its necessarily complex and lengthy provisions is approved. Every stock certificate refers in some manner to the charter or articles of incorporation of the issuer. At least where there is more than one class of stock authorized applicable corporation codes specifically require a statement or summary as to preferences, voting powers, and the like. References to constitutions, statutes, ordinances, rules, regulations or orders are not so common, except in the obligations of governments or governmental agencies or units; but where appropriate they fit into the rule here stated.

    Courts have generally held that an issuer is estopped from denying representations made in the text of a security. Delaware-New Jersey Ferry Co. v. Leeds, 21 Del.Ch. 279, 186 A. 913 (1936). Nor is a defect in form or the invalidity of a security normally available to the issuer as a defense. Bonini v. Family Theatre Corporation, 327 Pa. 273, 194 A. 498 (1937); First National Bank of Fairbanks v. Alaska Airmotive, 119 F.2d 267 (C.C.A.Alaska 1941).

  2. The rule in subsection (a) requiring that the terms of a security be noted or referred to on the certificate is based on practices and expectations in the direct holding system for certificated securities. This rule does not express a general rule or policy that the terms of a security are effective only if they are communicated to beneficial owners in some particular fashion. Rather, subsection (a) is based on the principle that a purchaser who does obtain a certificate is entitled to assume that the terms of the security have been noted or referred to on the certificate. That policy does not come into play in a securities holding system in which purchasers do not take delivery of certificates.

    The provisions of subsection (a) concerning notation of terms on security certificates are necessary only because paper certificates play such an important role for certificated securities that a purchaser should be protected against assertion of any defenses or rights that are not noted on the certificate. No similar problem exists with respect to uncertificated securities. The last sentence of subsection (a) is, strictly speaking, unnecessary, since it only recognizes the fact that the terms of an uncertificated security are determined by whatever other law or agreement governs the security. It is included only to preclude any inference that uncertificated securities are subject to any requirement analogous to the requirement of notation of terms on security certificates.

    The rule of subsection (a) applies to the indirect holding system only in the sense that if a certificated security has been delivered to the clearing corporation or other securities intermediary, the terms of the security should be noted or referred to on the certificate. If the security is uncertificated, that principle does not apply even at the issuer-clearing corporation level. The beneficial owners who hold securities through the clearing corporation are bound by the terms of the security, even though they do not actually see the certificate. Since entitlement holders in an indirect holding system have not taken delivery of certificates, the policy of subsection (a) does not apply.

  3. The penultimate sentence of subsection (a) and all of subsection (b) embody the concept that it is the duty of the issuer, not of the purchaser, to make sure that the security complies with the law governing its issue. The penultimate sentence of subsection (a) makes clear that the issuer cannot, by incorporating a reference to a statute or other document, charge the purchaser with notice of the security’s invalidity. Subsection (b) gives to a purchaser for value without notice of the defect the right to enforce the security against the issuer despite the presence of a defect that otherwise would render the security invalid. There are three circumstances in which a purchaser does not gain such rights: First, if the defect involves a violation of constitutional provisions, these rights accrue only to a subsequent purchaser, that is, one who takes other than by original issue. This Article leaves to the law of each particular State the rights of a purchaser on original issue of a security with a constitutional defect. No negative implication is intended by the explicit grant of rights to a subsequent purchaser.

    Second, governmental issuers are distinguished in subsection (b) from other issuers as a matter of public policy, and additional safeguards are imposed before governmental issues are validated. Governmental issuers are estopped from asserting defenses only if there has been substantial compliance with the legal requirements governing the issue or if substantial consideration has been received and a stated purpose of the issue is one for which the issuer has power to borrow money or issue the security. The purpose of the substantial compliance requirement is to make certain that a mere technicality as, e.g., in the manner of publishing election notices, shall not be a ground for depriving an innocent purchaser of rights in the security. The policy is here adopted of such cases as Tommie v. City of Gadsden, 229 Ala. 521, 158 So. 763 (1935), in which minor discrepancies in the form of the election ballot used were overlooked and the bonds were declared valid since there had been substantial compliance with the statute.

    A long and well established line of federal cases recognizes the principle of estoppel in favor of purchasers for value without notices where municipalities issue bonds containing recitals of compliance with governing constitutional and statutory provisions, made by the municipal authorities entrusted with determining such compliance. Chaffee County v. Potter, 142 U.S. 355 (1892); Town of Oregon v. Jennings, 119 U.S. 74 (1886); Gunnison County Commissioners v. Rollins, 173 U.S. 255 (1898). This rule has been qualified, however, by requiring that the municipality have power to issue the security. Anthony v. County of Jasper, 101 U.S. 693 (1879); Town of South Ottawa v. Perkins, 94 U.S. 260 (1876). This section follows the case law trend, simplifying the rule by setting up two conditions for an estoppel against a governmental issuer: (1) Substantial consideration given, and (2) power in the issuer to borrow money or issue the security for the stated purpose. As a practical matter the problem of policing governmental issuers has been alleviated by the present practice of requiring legal opinions as to the validity of the issue. The bulk of the case law on this point is nearly 100 years old and it may be assumed that the question now seldom arises.

    Section 8-210, regarding overissue, provides the third exception to the rule that an innocent purchase for value takes a valid security despite the presence of a defect that would otherwise give rise to invalidity. See that section and its Comment for further explanation.

  4. Subsection (e) is included to make clear that this section does not affect the presently recognized right of either party to a “when, as, and if” or “when distributed” contract to cancel the contract on substantial change.
  5. Subsection (f) has been added because the introduction of the security entitlement concept requires some adaptation of the Part 2 rules, particularly those that distinguish between purchasers who take by original issue and subsequent purchasers. The basic concept of Part 2 is to apply to investment securities the principle of negotiable instruments law that an obligor is precluded from asserting most defenses against purchasers for value without notice. Section 8-202 describes in some detail which defenses issuers can raise against purchasers for value and subsequent purchasers for value. Because these rules were drafted with the direct holding system in mind, some interpretive problems might be presented in applying them to the indirect holding. For example, if a municipality issues a bond in book-entry only form, the only direct “purchaser” of that bond would be the clearing corporation. The policy of precluding the issuer from asserting defenses is, however, equally applicable. Subsection (f) is designed to ensure that the defense preclusion rules developed for the direct holding system will also apply to the indirect holding system.

Definitional Cross References:

“Certificated security”. Section 8-102(a)(4). “Notice”. Section 1-201(25). “Purchaser”. Sections 1-201(33) & 8-116. “Security”. Section 8-102(a)(15). “Uncertificated security”. Section 8-102(a)(18). “Value”. Sections 1-201(44) & 8-116.

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NOTES TO DECISIONS

1.Defect Going to Validity of Security.

Whiskey warehouse receipts fraudulently issued by president and indorsed in name of distillery which was no longer in business and which showed on face whiskey was stored in bonded government warehouse and not in distillery’s possession should have put purchasers on inquiry; thus, they were not holders in due course. (decided under prior law) Old '76 Distillery Co. v. Wiechelman, 266 Ky. 533 , 99 S.W.2d 725, 1936 Ky. LEXIS 706 ( Ky. 1936 ).

2.Brokers.

Broker’s knowledge that an agent had issued some checks for which he did not have money on deposit did not constitute knowledge or put broker on notice that agent was not absolute owner of bonds received by agent in his principal’s surety business and which agent pledged to broker as collateral security for agent’s individual loan. (decided under prior law) Citizens' Trust & Guaranty Co. v. Hays, 167 Ky. 560 , 180 S.W. 811, 1915 Ky. LEXIS 870 ( Ky. 1915 ).

All parties between thief who took bonds and company from whom they were stolen were treated as agents or brokers and delivery to them respectively was “conditional or for a special purpose only and not for the purpose of transferring the property in the instrument” and they were but conduits between thief and company who repurchased the bonds under a general order to the agents or brokers to buy its bonds on the open market for its sinking fund where none of the agents or brokers had been given notice of the bonds having been stolen. (decided under prior law) Kentucky Rock Asphalt Co. v. Mazza's Adm'r, 264 Ky. 158 , 94 S.W.2d 316, 1936 Ky. LEXIS 283 ( Ky. 1936 ).

3.Governmental Securities.

Valid delivery of city bonds by city officials was presumed and holder was a holder in due course. (decided under prior law) Erlanger v. Berkemeyer, 207 F.2d 832, 1953 U.S. App. LEXIS 2983 (6th Cir. Ky.), cert. denied, 346 U.S. 915, 74 S. Ct. 275, 98 L. Ed. 411, 1953 U.S. LEXIS 1370 (U.S. 1953).

Where holder of street improvement bonds purchased them from a contractor prior to maturity without knowledge payments had been made on the bonds, the payments were not available as a counterclaim in an action by the holder against city upon the bonds but it was available by abutting owners as a defense against enforcement of the bond lien against them. (decided under prior law) Irvine v. Wallace, 254 Ky. 564 , 71 S.W.2d 974, 1934 Ky. LEXIS 91 ( Ky. 1934 ).

355.8-203. Staleness as notice of defect or defense.

After an act or event, other than a call that has been revoked, creating a right to immediate performance of the principal obligation represented by a certificated security or setting a date on or after which the security is to be presented or surrendered for redemption or exchange, a purchaser is charged with notice of any defect in its issue or defense of the issuer, if the act or event:

  1. Requires the payment of money, the delivery of a certificated security, the registration of transfer of an uncertificated security, or any of them on presentation or surrender of the security certificate, the money or security is available on the date set for payment or exchange, and the purchaser takes the security more than one year after that date; or
  2. Is not covered by subsection (1) of this section and the purchaser takes the security more than two years after the date set for surrender or presentation or the date on which performance became due.

History. Enact. Acts 1958, ch. 77, § 8-203, effective July 1, 1960; 1986, ch. 118, § 19, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 132, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-203, effective July 1, 1960; 1986, ch. 118, § 19, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 132, effective January 1, 1997.

Official Comment

  1. The problem of matured or called securities is here dealt with in terms of the effect of such events in giving notice of the issuer’s defenses and not in terms of “negotiability”. The substance of this section applies only to certificated securities because certificates may be transferred to a purchaser by delivery after the security has matured, been called, or become redeemable or exchangeable. It is contemplated that uncertificated securities which have matured or been called will merely be canceled on the books of the issuer and the proceeds sent to the registered owner. Uncertificated securities which have become redeemable or exchangeable, at the option of the owner, may be transferred to a purchaser, but the transfer is effectuated only by registration of transfer, thus necessitating communication with the issuer. If defects or defenses in such securities exist, the issuer will necessarily have the opportunity to bring them to the attention of the purchaser.
  2. The fact that a security certificate is in circulation long after it has been called for redemption or exchange must give rise to the question in a purchaser’s mind as to why it has not been surrendered. After the lapse of a reasonable period of time a purchaser can no longer claim “no reason to know” of any defects or irregularities in its issue. Where funds are available for the redemption the security certificate is normally turned in more promptly and a shorter time is set as the “reasonable period” than is set where funds are not available.

    Defaulted certificated securities may be traded on financial markets in the same manner as unmatured and undefaulted instruments and a purchaser might not be placed upon notice of irregularity by the mere fact of default. An issuer, however, should at some point be placed in a position to determine definitely its liability on an invalid or improper issue, and for this purpose a security under this section becomes “stale” two years after the default. A different rule applies when the question is notice not of issuer’s defenses but of claims of ownership. Section 8-105 and comment.

  3. Nothing in this section is designed to extend the life of preferred stocks called for redemption as “shares of stock” beyond the redemption date. After such a call, the security represents only a right to the funds set aside for redemption.

Definitional Cross References:

“Certificated security”. Section 8-102(a)(4). “Notice”. Section 1-201(25). “Purchaser”. Sections 1-201(33) & 8-116. “Security”. Section 8-102(a)(15). “Security certificate”. Section 8-102(a)(16). “Uncertificated security”. Section 8-102(a)(18).

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355.8-204. Effect of issuer’s restrictions on transfer.

A restriction on transfer of a security imposed by the issuer, even if otherwise lawful, is ineffective against a person without knowledge of the restriction unless:

  1. The security is certificated and the restriction is noted conspicuously on the security certificate; or
  2. The security is uncertificated and the registered owner has been notified of the restriction.

History. Enact. Acts 1958, ch. 77, § 8-204, effective July 1, 1960; 1986, ch. 118, § 20, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 133, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-204, effective July 1, 1960; 1986, ch. 118, § 20, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 133, effective January 1, 1997.

Official Comment

  1. Restrictions on transfer of securities are imposed by issuers in a variety of circumstances and for a variety of purposes, such as to retain control of a close corporation or to ensure compliance with federal securities laws. Other law determines whether such restrictions are permissible. This section deals only with the consequences of failure to note the restriction on a security certificate.

    This section imposes no bar to enforcement of a restriction on transfer against a person who has actual knowledge of it.

  2. A restriction on transfer of a certificated security is ineffective against a person without knowledge of the restriction unless the restriction is noted conspicuously on the certificate. The word “noted” is used to make clear that the restriction need not be set forth in full text. Refusal by an issuer to register a transfer on the basis of an unnoted restriction would be a violation of the issuer’s duty to register under Section 8-401.
  3. The policy of this section is the same as in Section 8-202. A purchaser who takes delivery of a certificated security is entitled to rely on the terms stated on the certificate. That policy obviously does not apply to uncertificated securities. For uncertificated securities, this section requires only that the registered owner has been notified of the restriction. Suppose, for example, that A is the registered owner of an uncertificated security, and that the issuer has notified A of a restriction on transfer. A agrees to sell the security to B, in violation of the restriction. A completes a written instruction directing the issuer to register transfer to B, and B pays A for the security at the time A delivers the instruction to B. A does not inform B of the restriction, and B does not otherwise have notice or knowledge of it at the time B pays and receives the instruction. B presents the instruction to the issuer, but the issuer refuses to register the transfer on the grounds that it would violate the restriction. The issuer has complied with this section, because it did notify the registered owner A of the restriction. The issuer’s refusal to register transfer is not wrongful. B has an action against A for breach of transfer warranty, see Section 8-108(b)(4)(iii). B’s mistake was treating an uncertificated security transaction in the fashion appropriate only for a certificated security. The mechanism for transfer of uncertificated securities is registration of transfer on the books of the issuer; handing over an instruction only initiates the process. The purchaser should make arrangements to ensure that the price is not paid until it knows that the issuer has or will register transfer.
  4. In the indirect holding system, investors neither take physical delivery of security certificates nor have uncertificated securities registered in their names. So long as the requirements of this section have been satisfied at the level of the relationship between the issuer and the securities intermediary that is a direct holder, this section does not preclude the issuer from enforcing a restriction on transfer. See Section 8-202(a) and comment 2 thereto.
  5. This section deals only with restrictions imposed by the issuer. Restrictions imposed by statute are not affected. See Quiner v. Marblehead Social Co., 10 Mass. 476 (1813); Madison Bank v. Price, 79 Kan. 289, 100 P. 280 (1909); Healey v. Steele Center Creamery Ass’n, 115 Minn. 451, 133 N.W. 69 (1911). Nor does it deal with private agreements between stockholders containing restrictive covenants as to the sale of the security.

Definitional Cross References:

“Certificated security”. Section 8-102(a)(4). “Conspicuous”. Section 1-201(a)(10). “Issuer”. Section 8-201. “Knowledge”. Section 1-201(25). “Notify”. Section 1-201(26). “Purchaser”. Sections 1-201(33) & 8-116. “Security”. Section 8-102(a)(15). “Security certificate”. Section 8-102(a)(16). “Uncertificated security”. Section 8-102(a)(18).

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355.8-205. Effect of unauthorized signature on security certificate.

An unauthorized signature placed on a security certificate before or in the course of issue is ineffective, but the signature is effective in favor of a purchaser for value of the certificated security if the purchaser is without notice of the lack of authority and the signing has been done by:

  1. An authenticating trustee, registrar, transfer agent, or other person entrusted by the issuer with the signing of the security certificate or of similar security certificates, or the immediate preparation for signing of any of them; or
  2. An employee of the issuer, or of any of the persons listed in subsection (1) of this section, entrusted with responsible handling of the security certificate.

History. Enact. Acts 1958, ch. 77, § 8-205, effective July 1, 1960; 1986, ch. 118, § 21, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 134, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-205, effective July 1, 1960; 1986, ch. 118, § 21, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 134, effective January 1, 1997.

Official Comment

  1. The problem of forged or unauthorized signatures may arise where an employee of the issuer, transfer agent, or registrar has access to securities which the employee is required to prepare for issue by affixing the corporate seal or by adding a signature necessary for issue. This section is based upon the issuer’s duty to avoid the negligent entrusting of securities to such persons. Issuers have long been held responsible for signatures placed upon securities by parties whom they have held out to the public as authorized to prepare such securities. See Fifth Avenue Bank of New York v. The Forty-Second & Grand Street Ferry Railroad Co., 137 N.Y. 231, 33 N.E. 378, 19 L.R.A. 331, 33 Am.St.Rep. 712 (1893); Jarvis v. Manhattan Beach Co., 148 N.Y. 652, 43 N.E. 68, 31 L.R.A. 776, 51 Am.St.Rep. 727 (1896). The “apparent authority” concept of some of the case-law, however, is here extended and this section expressly rejects the technical distinction, made by courts reluctant to recognize forged signatures, between cases where forgers sign signatures they are authorized to sign under proper circumstances and those in which they sign signatures they are never authorized to sign. Citizens’ & Southern National Bank v. Trust Co. of Georgia, 50 Ga.App. 681, 179 S.E. 278 (1935). Normally the purchaser is not in a position to determine which signature a forger, entrusted with the preparation of securities, has “apparent authority” to sign. The issuer, on the other hand, can protect itself against such fraud by the careful selection and bonding of agents and employees, or by action over against transfer agents and registrars who in turn may bond their personnel.
  2. The issuer cannot be held liable for the honesty of employees not entrusted, directly or indirectly, with the signing, preparation, or responsible handling of similar securities and whose possible commission of forgery it has no reason to anticipate. The result in such cases as Hudson Trust Co. v. American Linseed Co., 232 N.Y. 350, 134 N.E. 178 (1922), and Dollar Savings Fund & Trust Co. v. Pittsburgh Plate Glass Co., 213 Pa. 307, 62 A. 916, 5 Ann.Cas. 248 (1906) is here adopted.
  3. This section is not concerned with forged or unauthorized indorsements, but only with unauthorized signatures of issuers, transfer agents, etc., placed upon security certificates during the course of their issue. The protection here stated is available to all purchasers for value without notice and not merely to subsequent purchasers.

Definitional Cross References:

“Certificated security”. Section 8-102(a)(4). “Issuer”. Section 8-201. “Notice”. Section 1-201(25). “Purchaser”. Sections 1-201(33) & 8-116. “Security certificate”. Section 8-102(a)(14). “Unauthorized signature”. Section 1-201(43).

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355.8-206. Completion or alteration of security certificate.

  1. If a security certificate contains the signatures necessary to its issue or transfer but is incomplete in any other respect:
    1. Any person may complete it by filling in the blanks as authorized; and
    2. Even if the blanks are incorrectly filled in, the security certificate as completed is enforceable by a purchaser who took it for value and without notice of the incorrectness.
  2. A complete security certificate that has been improperly altered, even if fraudulently, remains enforceable, but only according to its original terms.

History. Enact. Acts 1958, ch. 77, § 8-206, effective July 1, 1960; 1986, ch. 118, § 22, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 135, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-206, effective July 1, 1960; 1986, ch. 118, § 22, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 135, effective January 1, 1997.

Official Comment

  1. The problem of forged or unauthorized signatures necessary for the issue or transfer of a security is not involved here, and a person in possession of a blank certificate is not, by this section, given authority to fill in blanks with such signatures. Completion of blanks left in a transfer instruction is dealt with elsewhere (Section 8-305(a)).
  2. Blanks left upon issue of a security certificate are the only ones dealt with here, and a purchaser for value without notice is protected. A purchaser is not in a good position to determine whether blanks were completed by the issuer or by some person not authorized to complete them. On the other hand the issuer can protect itself by not placing its signature on the writing until the blanks are completed or, if it does sign before all blanks are completed, by carefully selecting the agents and employees to whom it entrusts the writing after authentication. With respect to a security certificate that is completed by the issuer but later is altered, the issuer has done everything it can to protect the purchaser and thus is not charged with the terms as altered. However, it is charged according to the original terms, since it is not thereby prejudiced. If the completion or alteration is obviously irregular, the purchaser may not qualify as a purchaser who took without notice under this section.
  3. Only the purchaser who physically takes the certificate is directly protected. However, a transferee may receive protection indirectly through Section 8-302(a).
  4. The protection granted a purchaser for value without notice under this section is modified to the extent that an overissue may result where an incorrect amount is inserted into a blank (Section 8-210).

Definitional Cross References:

“Notice”. Section 1-201(25). “Purchaser”. Sections 1-201(33) & 8-116. “Security certificate”. Section 8-102(a)(16). “Unauthorized signature”. Section 1-201(43). “Value”. Sections 1-201(44) & 8-116.

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355.8-207. Rights and duties of issuer with respect to registered owners.

  1. Before due presentment for registration of transfer of a certificated security in registered form or of an instruction requesting registration of transfer of an uncertificated security, the issuer or indenture trustee may treat the registered owner as the person exclusively entitled to vote, receive notifications, and otherwise exercise all the rights and powers of an owner.
  2. This article does not affect the liability of the registered owner of a security for a call, assessment, or the like.

History. Enact. Acts 1958, ch. 77, § 8-207, effective July 1, 1960; 1986, ch. 118, § 23, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 136, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-207, effective July 1, 1960; 1986, ch. 118, § 23, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 2, effective January 1, 1997.

Official Comment

  1. Subsection (a) states the issuer’s right to treat the registered owner of a security as the person entitled to exercise all the rights of an owner. This right of the issuer is limited by the provisions of Part 4 of this article. Once there has been due presentation for registration of transfer, the issuer has a duty to register ownership in the name of the transferee. Section 8-401. Thus its right to treat the old registered owner as exclusively entitled to the rights of ownership must cease.

    The issuer may under this section make distributions of money or securities to the registered owners of securities without requiring further proof of ownership, provided that such distributions are distributable to the owners of all securities of the same issue and the terms of the security do not require surrender of a security certificate as a condition of payment or exchange. Any such distribution shall constitute a defense against a claim for the same distribution by a person, even if that person is in possession of the security certificate and is a protected purchaser of the security. See PEB Commentary No. 4, dated March 10, 1990.

  2. Subsection (a) is permissive and does not require that the issuer deal exclusively with the registered owner. It is free to require proof of ownership before paying out dividends or the like if it chooses to. Barbato v. Breeze Corporations, 128 N.J.L. 309, 26 A.2d 53 (1942).
  3. This section does not operate to determine who is finally entitled to exercise voting and other rights or to receive payments and distributions. The parties are still free to incorporate their own arrangements as to these matters in seller-purchaser agreements which may be definitive as between them.
  4. No change in existing state laws as to the liability of registered owners for calls and assessments is here intended; nor is anything in this section designed to estop record holders from denying ownership when assessments are levied if they are otherwise entitled to do so under state law. See State ex rel. Squire v. Murfey, Blosson & Co., 131 Ohio St. 289, 2 N.E.2d 866 (1936); Willing v. Delaplaine, 23 F.Supp. 579 (1937).
  5. No interference is intended with the common practice of closing the transfer books or taking a record date for dividend, voting, and other purposes, as provided for in by-laws, charters, and statutes.

Definitional Cross References:

“Certificated security”. Section 8-102(a)(4). “Instruction”. Section 8-102(a)(12). “Issuer”. Section 8-201. “Registered form”. Section 8-102(a)(13). “Security”. Section 8-102(a)(15). “Uncertificated security”. Section 8-102(a)(18).

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NOTES TO DECISIONS

1.Voting Stock.

Those whose names appeared on the register as stockholders were prima facie entitled to vote the stock. (decided under prior law) Swaim v. Martin, 302 Ky. 381 , 194 S.W.2d 855, 1946 Ky. LEXIS 687 ( Ky. 1946 ).

Transfer agent who failed to enter shares of stock sold by holder on corporation’s transfer book at purchaser’s request or with knowledge of the facts could not claim purchaser was estopped to deny seller’s right to vote stock. (decided under prior law) Swaim v. Martin, 302 Ky. 381 , 194 S.W.2d 855, 1946 Ky. LEXIS 687 ( Ky. 1946 ).

2.Failure to Keep Accurate Records.

A shareholder could rely on record as recognition of ownership where the issue was between himself and the bank and he showed that he was in fact the owner of the stock so registered, but one who was actually a stockholder could not be denied his legal rights by the officers of a corporation merely because they had failed to keep the record accurately or properly. (decided under prior law) Swaim v. Martin, 302 Ky. 381 , 194 S.W.2d 855, 1946 Ky. LEXIS 687 ( Ky. 1946 ).

If officer of the corporation whose duty it was to have made an entry on the transfer book failed to do so upon request or with knowledge of the facts, he and the corporation were estopped to question it. (decided under prior law) Swaim v. Martin, 302 Ky. 381 , 194 S.W.2d 855, 1946 Ky. LEXIS 687 ( Ky. 1946 ).

3.Liquidating Dividends.

Liquidating officers of corporation who paid liquidating dividend to registered owner without demanding surrender of stock were liable to pledgee bank. (decided under prior law) Bogardus v. Kentucky State Bank, 281 S.W.2d 904, 1955 Ky. LEXIS 209 ( Ky. 1955 ).

355.8-208. Effect of signature of authenticating trustee, registrar, or transfer agent.

  1. A person signing a security certificate as authenticating trustee, registrar, transfer agent, or the like, warrants to a purchaser for value of the certificated security, if the purchaser is without notice of a particular defect, that:
    1. The certificate is genuine;
    2. The person’s own participation in the issue of the security is within the person’s capacity and within the scope of the authority received by the person from the issuer; and
    3. The person has reasonable grounds to believe that the certificated security is in the form and within the amount the issuer is authorized to issue.
  2. Unless otherwise agreed, a person signing under subsection (1) of this section does not assume responsibility for the validity of the security in other respects.

History. Enact. Acts 1958, ch. 77, § 8-208, effective July 1, 1960; 1964, ch. 130, § 17; 1986, ch. 118, § 24, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 137, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-208, effective July 1, 1960; 1964, ch. 130, § 17; 1986, ch. 118, § 24, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 1, § 137, effective January 1, 1997.

Official Comment

  1. The warranties here stated express the current understanding and prevailing case law as to the effect of the signatures of authenticating trustees, transfer agents, and registrars. See Jarvis v. Manhattan Beach Co., 148 N.Y. 652, 43 N.E. 68, 31 L.R.A. 776, 51 Am.St.Rep. 727 (1896). Although it has generally been regarded as the particular obligation of the transfer agent to determine whether securities are in proper form as provided by the by-laws and Articles of Incorporation, neither a registrar nor an authenticating trustee should properly place a signature upon a certificate without determining whether it is at least regular on its face. The obligations of these parties in this respect have therefor been made explicit in terms of due care. See Feldmeier v. Mortgage Securities, Inc., 34 Cal.App.2d 201, 93 P.2d 593 (1939).
  2. Those cases which hold that an authenticating trustee is not liable for any defect in the mortgage or property which secures the bond or for any fraudulent misrepresentations made by the issuer are not here affected since these matters do not involve the genuineness or proper form of the security. Ainsa v. Mercantile Trust Co., 174 Cal. 504, 163 P. 898 (1917); Tschetinian v. City Trust Co., 186 N.Y. 432, 79 N.E. 401 (1906); Davidge v. Guardian Trust Co. of New York, 203 N.Y. 331, 96 N.E. 751 (1911).
  3. The charter or an applicable statute may affect the capacity of a bank or other corporation undertaking to act as an authenticating trustee, registrar, or transfer agent. See, for example, the Federal Reserve Act, (U.S.C.A. Title 12, Banks and Banking, Section 248) under which the Board of Governors of the Federal Reserve Bank is authorized to grant special permits to National Banks permitting them to act as trustees. Such corporations are therefor held to certify as to their legal capacity to act as well as to their authority.
  4. Authenticating trustees, registrars, and transfer agents have normally been held liable for an issue in excess of the authorized amount. Jarvis v. Manhattan Beach Co., supra; Mullen v. Eastern Trust & Banking Co., 108 Me. 498, 81 A. 948 (1911). In imposing upon these parties a duty of due care with respect to the amount they are authorized to help issue, this section does not necessarily validate the security, but merely holds persons responsible for the excess issue liable in damages for any loss suffered by the purchaser.
  5. Aside from questions of genuineness and excess issue, these parties are not held to certify as to the validity of the security unless they specifically undertake to do so. The case law which has recognized a unique responsibility on the transfer agent’s part to testify as to the validity of any security which it countersigns is rejected.
  6. This provision does not prevent a transfer agent or issuer from agreeing with a registrar of stock to protect the registrar in respect of the genuineness and proper form of a security certificate signed by the issuer or the transfer agent or both. Nor does it interfere with proper indemnity arrangements between the issuer and trustees, transfer agents, registrars, and the like.
  7. An unauthorized signature is a signature for purposes of this section if and only if it is made effective by Section 8-205.

Definitional Cross References:

“Certificated security”. Section 8-102(a)(4). “Genuine”. Section 1-201(18). “Issuer”. Section 8-201. “Notice”. Section 1-201(25). “Purchaser”. Sections 1-201(33) & 8-116. “Security”. Section 8-102(a)(15). “Security certificate”. Section 8-102(a)(16). “Uncertificated security”. Section 8-102(a)(18). “Value”. Sections 1-201(44) & 8-116.

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355.8-209. Issuer’s lien.

A lien in favor of an issuer upon a certificated security is valid against a purchaser only if the right of the issuer to the lien is noted conspicuously on the security certificate.

History. Enact. Acts 1996, ch. 130, § 138, effective January 1, 1997.

Official Comment

This section is similar to Sections 8-202 and 8-204 which require that the terms of a certificated security and any restriction on transfer imposed by the issuer be noted on the security certificate. This section differs from those two sections in that the purchaser’s knowledge of the issuer’s claim is irrelevant. ‘Noted’ makes clear that the text of the lien provisions need not be set forth in full. However, this would not override a provision of an applicable corporation code requiring statement in haec verba. This section does not apply to uncertificated securities. It applies to the indirect holding system in the same fashion as Sections 8-202 and 8-204, see Comment 2 to Section 8-202.

Definitional Cross References:

“Certificated security”. Section 8-102(a)(4). “Issuer”. Section 8-201. “Purchaser”. Sections 1-201(33) & 8-116. “Security”. Section 8-102(a)(15). “Security certificate”. Section 8-102(a)(16).

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355.8-210. Overissue.

  1. In this section, “overissue” means the issue of securities in excess of the amount the issuer has corporate power to issue, but an overissue does not occur if appropriate action has cured the overissue.
  2. Except as otherwise provided in subsections (3) and (4) of this section, the provisions of this article which validate a security or compel its issue or reissue do not apply to the extent that validation, issue, or reissue would result in overissue.
  3. If an identical security not constituting an overissue is reasonably available for purchase, a person entitled to issue or validation may compel the issuer to purchase the security and deliver it if certificated or register its transfer if uncertificated, against surrender of any security certificate the person holds.
  4. If a security is not reasonably available for purchase, a person entitled to issue or validation may recover from the issuer the price the person or the last purchaser for value paid for it with interest from the date of the person’s demand.

History. Enact. Acts 1996, ch. 130, § 139, effective January 1, 1997.

Official Comment

  1. Deeply embedded in corporation law is the conception that “corporate power” to issue securities stems from the statute, either general or special, under which the corporation is organized. Corporation codes universally require that the charter or articles of incorporation state, at least as to capital shares, maximum limits in terms of number of shares or total dollar capital. Historically, special incorporation statutes are similarly drawn and sometimes similarly limit the face amount of authorized debt securities. The theory is that issue of securities in excess of the authorized amounts is prohibited. See, for example, McWilliams v. Geddes & Moss Undertaking Co., 169 So. 894 (1936, La.); Crawford v. Twin City Oil Co., 216 Ala. 216, 113 So. 61 (1927); New York and New Haven R.R. Co. v. Schuyler, 34 N.Y. 30 (1865). This conception persists despite modern corporation codes under which, by action of directors and stockholders, additional shares can be authorized by charter amendment and thereafter issued. This section does not give a person entitled to validation, issue, or reissue of a security, the right to compel amendment of the charter to authorize additional shares. Therefor, in a case where issue of an additional security would require charter amendment, the plaintiff is limited to the two alternate remedies set forth in subsections (c) and (d). The last clause of subsection (a), which is added in Revised Article 8, does, however, recognize that under modern conditions, overissue may be a relatively minor technical problem that can be cured by appropriate action under governing corporate law.
  2. Where an identical security is reasonably available for purchase, whether because traded on an organized market, or because one or more security owners may be willing to sell at a not unreasonable price, the issuer, although unable to issue additional shares, will be able to purchase them and may be compelled to follow that procedure. West v. Tintic Standard Mining Co., 71 Utah 158, 263 P. 490 (1928).
  3. The right to recover damages from an issuer who has permitted an overissue to occur is well settled. New York and New Haven R.R. Co. v. Schuyler, 34 N.Y. 30 (1865). The measure of such damages, however, has been open to question, some courts basing them upon the value of stock at the time registration is refused; some upon the value at the time of trial; and some upon the highest value between the time of refusal and the time of trial. Allen v. South Boston Railroad, 150 Mass. 200, 22 N.E. 917, 5 L.R.A. 716, 15 Am.St.Rep. 185 (1889); Commercial Bank v. Kortright, 22 Wend. (N.Y.) 348 (1839). The purchase price of the security to the last purchaser who gave value for it is here adopted as being the fairest means of reducing the possibility of speculation by the purchaser. Interest may be recovered as the best available measure of compensation for delay.

Definitional Cross References:

“Issuer”. Section 8-201. “Security”. Section 8-102(a)(25). “Security certificate”. Section 8-102(a)(16). “Uncertificated security”. Section 8-102(a)(18).

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Part 3. Transfer of Certificated and Uncertificated Securities

355.8-301. Delivery.

  1. Delivery of a certificated security to a purchaser occurs when:
    1. The purchaser acquires possession of the security certificate;
    2. Another person, other than a securities intermediary, either acquires possession of the security certificate on behalf of the purchaser or, having previously acquired possession of the certificate, acknowledges that it holds for the purchaser; or
    3. A securities intermediary acting on behalf of the purchaser acquires possession of the security certificate, only if the certificate is in registered form and is:
      1. Registered in the name of the purchaser;
      2. Payable to the order of the purchaser; or
      3. Specially indorsed to the purchaser by an effective indorsement and has not been indorsed to the securities intermediary or in blank.
  2. Delivery of an uncertificated security to a purchaser occurs when:
    1. The issuer registers the purchaser as the registered owner, upon original issue or registration of transfer; or
    2. Another person, other than a securities intermediary, either becomes the registered owner of the uncertificated security on behalf of the purchaser or, having previously become the registered owner, acknowledges that it holds for the purchaser.

History. Enact. Acts 1958, ch. 77, § 8-301, effective July 1, 1960; 1986, ch. 118, § 31, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 140, effective January 1, 1997; 2000, ch. 408, § 172, effective July 1, 2001.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-301, effective July 1, 1960; 1986, ch. 118, § 31, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 140, effective January 1, 1997.

Official Comment

  1. This section specifies the requirements for “delivery” of securities. Delivery is used in Article 8 to describe the formal steps necessary for a purchaser to acquire a direct interest in a security under this Article. The concept of delivery refers to the implementation of a transaction, not the legal categorization of the transaction which is consummated by delivery. Issuance and transfer are different kinds of transactions, though both may be implemented by delivery. Sale and pledge are different kinds of transfers, but both may be implemented by delivery.
  2. Subsection (a) defines delivery with respect to certificated securities. Paragraph (a)(1) deals with simple cases where purchasers themselves acquire physical possession of certificates. Paragraphs (2) and (3) of subsection (a) specify the circumstances in which delivery to a purchaser can occur although the certificate is in the possession of a person other than the purchaser. Paragraph (a)(2) contains the general rule that a purchaser can take delivery through another person, so long as the other person is actually acting on behalf of the purchaser or acknowledges that it is holding on behalf of the purchaser. Paragraph (a)(2) does not apply to acquisition of possession by a securities intermediary, because a person who holds securities through a securities account acquires a security entitlement, rather than having a direct interest. See Section 8-501. Subsection (a)(3) specifies the limited circumstances in which delivery of security certificates to a securities intermediary is treated as a delivery to the customer. Note that delivery is a method of perfecting a security interest in a certified security. See Section 9-313 (a), (e).
  3. Subsection (b) defines delivery with respect to uncertificated securities. Use of the term “delivery” with respect to uncertificated securities, does, at least on first hearing, seem a bit solecistic. The word “delivery” is, however, routinely used in the securities business in a broader sense than manual tradition. For example, settlement by entries on the books of a clearing corporation is commonly called “delivery,” as in the expression “delivery versus payment.” The diction of this section has the advantage of using the same term for uncertificated securities as for certificated securities, for which delivery is conventional usage. Paragraph (1) of subsection (b) provides that delivery occurs when the purchaser becomes the registered owner of an uncertificated security, either upon original issue or registration of transfer. Paragraph (2) provides for delivery of an uncertificated security through a third person, in a fashion analogous to subsection (a)(2).

Definitional Cross References:

“Certificated security”. Section 8-102(a)(4). “Effective”. Section 8-107. “Issuer”. Section 8-201. “Purchaser”. Sections 1-201(33) & 8-116. “Registered form”. Section 8-102(a)(13). “Securities intermediary”. Section 8-102(a)(14). “Security certificate”. Section 8-102(a)(16). “Special indorsement”. Section 8-304(a). “Uncertificated security”. Section 8-102(a)(18).

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355.8-302. Rights of purchaser.

  1. Except as otherwise provided in subsections (2) and (3) of this section, a purchaser of a certificated or uncertificated security acquires all rights in the security that the transferor had or had power to transfer.
  2. A purchaser of a limited interest acquires rights only to the extent of the interest purchased.
  3. A purchaser of a certificated security who as a previous holder had notice of an adverse claim does not improve its position by taking from a protected purchaser.

History. Enact. Acts 1958, ch. 77, § 8-302, effective July 1, 1960; 1986, ch. 118, § 27, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 141, effective January 1, 1997; 2000, ch. 408, § 173, effective July 1, 2001.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-302, effective July 1, 1960; 1986, ch. 118, § 27, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 141, effective January 1, 1997.

Official Comment

  1. Subsection (a) provides that a purchaser of a certificated or uncertificated security acquires all rights that the transferor had or had power to transfer. This statement of the familiar “shelter” principle is qualified by the exceptions that a purchaser of a limited interest acquires only that interest, subsection (b), and that a person who does not qualify as a protected purchaser cannot improve its position by taking from a subsequent protected purchaser, subsection (c).
  2. Although this section provides that a purchaser acquires a property interest in a certificated or uncertificated security upon “delivery,” it does not state that a person can acquire an interest in a security only by delivery. Article 8 is not a comprehensive codification of all of the law governing the creation or transfer of interests in securities. For example, the grant of a security interest is a transfer of a property interest, but the formal steps necessary to effectuate such a transfer are governed by Article 9 not by Article 8. Under the Article 9 rules, a security interest in a certificated or uncertificated security can be created by execution of a security agreement under Section 9-203 and can be perfected by filing. A transfer of an Article 9 security interest can be implemented by an Article 8 delivery, but need not be.

    Similarly, Article 8 does not determine whether a property interest in certificated or uncertificated security is acquired under other law, such as the law of gifts, trusts, or equitable remedies. Nor does Article 8 deal with transfers by operation of law. For example, transfers from decedent to administrator, from ward to guardian, and from bankrupt to trustee in bankruptcy are governed by other law as to both the time they occur and the substance of the transfer. The Article 8 rules do, however, determine whether the issuer is obligated to recognize the rights that a third party, such as a transferee, may acquire under other law. See Sections 8-207, 8-401, and 8-404.

Definitional Cross References:

“Certificated security”. Section 8-102(a)(4). “Delivery”. Section 8-301. “Notice of adverse claim”. Section 8-105. “Protected purchaser”. Section 8-303. “Purchaser”. Sections 1-201(33) & 8-116. “Uncertificated security”. Section 8-102(a)(18).

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NOTES TO DECISIONS

1.Acquisition of Rights of Predecessor.

Holder had the same rights as his predecessor in title. (decided under prior law) Erlanger v. Berkemeyer, 207 F.2d 832, 1953 U.S. App. LEXIS 2983 (6th Cir. Ky.), cert. denied, 346 U.S. 915, 74 S. Ct. 275, 98 L. Ed. 411, 1953 U.S. LEXIS 1370 (U.S. 1953).

2.Conduits.

Brokers were not holders in due course but mere conduits. (decided under prior law) Kentucky Rock Asphalt Co. v. Mazza's Adm'r, 264 Ky. 158 , 94 S.W.2d 316, 1936 Ky. LEXIS 283 ( Ky. 1936 ).

355.8-303. Protected purchaser.

  1. “Protected purchaser” means a purchaser of a certificated or uncertificated security, or of an interest therein, who:
    1. Gives value;
    2. Does not have notice of any adverse claim to the security; and
    3. Obtains control of the certificated or uncertificated security.
  2. In addition to acquiring the rights of a purchaser, a protected purchaser also acquires its interest in the security free of any adverse claim.

History. Enact. Acts 1958, ch. 77, § 8-303, effective July 1, 1960; repealed and reenact., Acts 1996, ch. 130, § 142, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-303, effective July 1, 1960) was repealed and reenacted by Acts 1996, ch. 130, § 142, effective January 1, 1997.

Official Comment

  1. Subsection (a) lists the requirements that a purchaser must meet to qualify as a “protected purchaser.” Subsection (b) provides that a protected purchaser takes its interest free from adverse claims. “Purchaser” is defined broadly in section 1-201. A secured party as well as an outright buyer can qualify as a protected purchaser. Also, “purchase” includes taking by issue, so a person to whom a security is originally issued can qualify as a protected purchaser.
  2. To qualify as a protected purchaser, a purchaser must give value, take without notice of any adverse claim, and obtain control. Value is used in the broad sense defined in Section 1-201(44). See also Section 8-116 (securities intermediary as purchaser for value). Adverse claim is defined in Section 8-102(a)(1). Section 8-105 specifies whether a purchaser has notice of an adverse claim. Control is defined in Section 8-106. To qualify as a protected purchaser there must be a time at which all of the requirements are satisfied. Thus if a purchaser obtains notice of an adverse claim before giving value or satisfying the requirements for control, the purchaser cannot be a protected purchaser. See also Section 8-304(d).

    The requirement that a protected purchaser obtain control expresses the point that to qualify for the adverse claim cut-off rule a purchaser must take through a transaction that is implemented by the appropriate mechanism. By contrast, the rules in Part 2 provide that any purchaser for value of a security without notice of a defense may take free of the issuer’s defense based on that defense. See Section 8-202.

  3. The requirements for control differ depending on the form of the security. For securities represented by bearer certificates, a purchaser obtains control by delivery. See Sections 8-106(a) and 8-301(a). For securities represented by certificates in registered form, the requirements for control are: (1) delivery as defined in Section 8-301(b), plus (2) either an effective indorsement or registration of transfer by the issuer. See Section 8-106(b). Thus, a person who takes through a forged indorsement does not qualify as a protected purchaser by virtue of the delivery alone. If, however, the purchaser presents the certificate to the issuer for registration of transfer, and the issuer registers transfer over the forged indorsement, the purchaser can qualify as a protected purchaser of the new certificate. If the issuer registers transfer on a forged indorsement, the true owner will be able to recover from the issuer for wrongful registration, see Section 8-404, unless the owner’s delay in notifying the issuer of a loss or theft of the certificate results in preclusion under Section 8-406.

    For uncertificated securities, a purchaser can obtain control either by delivery, see Sections 8-106(c)(1) and 8-301(b), or by obtaining an agreement pursuant to which the issuer agrees to act on instructions from the purchaser without further consent from the registered owner, see Section 8-106(c)(2). The control agreement device of Section 8-106(c)(2) takes the place of the “registered pledge” concept of the 1978 version of Article 8. A secured lender who obtains a control agreement under Section 8-106(c)(2) can qualify as a protected purchaser of an uncertificated security.

  4. This section states directly the rules determining whether one takes free from adverse claims without using the phrase “good faith.” Whether a person who takes under suspicious circumstances is disqualified is determined by the rules of Section 8-105 on notice of adverse claims. The term “protected purchaser,” which replaces the term “bona fide purchaser” used in the prior version of Article 8, is derived from the term “protected holder” used in the Convention on International Bills and Notes prepared by the United Nations Commission on International Trade Law (“UNCITRAL”).

Definitional Cross References:

“Adverse claim”. Section 8-102(a)(1). “Certificated security”. Section 8-102(a)(4). “Control”. Section 8-106. “Notice of adverse claim”. Section 8-105. “Purchaser”. Sections 1-201(33) & 8-116. “Uncertificated security”. Section 8-102(a)(18). “Value”. Sections 1-201(44) & 8-116.

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355.8-304. Indorsement.

  1. An indorsement may be in blank or special. An indorsement in blank includes an indorsement to bearer. A special indorsement specifies to whom a security is to be transferred or who has power to transfer it. A holder may convert a blank indorsement to a special indorsement.
  2. An indorsement purporting to be only of part of a security certificate representing units intended by the issuer to be separately transferable is effective to the extent of the indorsement.
  3. An indorsement, whether special or in blank, does not constitute a transfer until delivery of the certificate on which it appears or, if the indorsement is on a separate document, until delivery of both the document and the certificate.
  4. If a security certificate in registered form has been delivered to a purchaser without a necessary indorsement, the purchaser may become a protected purchaser only when the indorsement is supplied. However, against a transferor, a transfer is complete upon delivery and the purchaser has a specifically enforceable right to have any necessary indorsement supplied.
  5. An indorsement of a security certificate in bearer form may give notice of an adverse claim to the certificate, but it does not otherwise affect a right to registration that the holder possesses.
  6. Unless otherwise agreed, a person making an indorsement assumes only the obligations provided in KRS 355.8-108 and not an obligation that the security will be honored by the issuer.

History. Enact. Acts 1958, ch. 77, § 8-304; 1986, ch. 118, § 28, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 143, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-304; 1986, ch. 118, § 28, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 140, effective January 1, 1997.

Official Comment

  1. By virtue of the definition of indorsement in Section 8-102 and the rules of this section, the simplified method of indorsing certificated securities previously set forth in the Uniform Stock Transfer Act is continued. Although more than one special indorsement on a given security certificate is possible, the desire for dividends or interest, as the case may be, should operate to bring the certificate home for registration of transfer within a reasonable period of time. The usual form of assignment which appears in the back of a stock certificate or in a separate “power” may be filled up either in the form of an assignment, a power of attorney to transfer, or both. If it is not filled up at all but merely signed, the indorsement is in blank. If filled up either as an assignment or as a power of attorney to transfer, the indorsement is special.
  2. Subsection (b) recognizes the validity of a “partial” indorsement, e.g., as to fifty shares of the one hundred represented by a single certificate. The rights of a transferee under a partial indorsement to the status of a protected purchaser are left to the case law.
  3. Subsection (c) deals with the effect of an indorsement without delivery. There must be a voluntary parting with control in order to effect a valid transfer of a certificated security as between the parties. Levey v. Nason, 279 Mass. 268, 181 N.E. 193 (1932), and National Surety Co. v. Indemnity Insurance Co. of North America, 237 App.Div. 485, 261 N.Y.S. 605 (1933). The provision in Section 10 of the Uniform Stock Transfer Act that an attempted transfer without delivery amounts to a promise to transfer is omitted. Even under that Act the effect of such a promise was left to the applicable law of contracts, and this article by making no reference to such situations intends to achieve a similar result. With respect to delivery there is no counterpart to subsection (d) on right to compel indorsement, such as is envisaged in Johnson v. Johnson, 300 Mass. 24, 13 N.E.2d 788 (1938), where the transferee under a written assignment was given the right to compel a transfer of the certificate.
  4. Subsection (d) deals with the effect of delivery without indorsement. As between the parties the transfer is made complete upon delivery, but the transferee cannot become a protected purchaser until indorsement is made. The indorsement does not operate retroactively, and notice may intervene between delivery and indorsement so as to prevent the transferee from becoming a protected purchaser. Although a purchaser taking without a necessary indorsement may be subject to claims of ownership, any issuer’s defense of which the purchaser had no notice at the time of delivery will be cut off, since the provisions of this Article protect all purchasers for value without notice (Section 8-202).

    The transferee’s right to compel an indorsement where a security certificate has been delivered with intent to transfer is recognized in the case law. See Coats v. Guaranty Bank & Trust Co., 170 La. 871, 129 So. 513 (1930). A proper indorsement is one of the requisites of transfer which a purchaser of a certificated security has a right to obtain (Section 8-307). A purchaser may not only compel an indorsement under that section but may also recover for any reasonable expense incurred by the transferor’s failure to respond to the demand for an indorsement.

  5. Subsection (e) deals with the significance of an indorsement on a security certificate in bearer form. The concept of indorsement applies only to registered securities. A purported indorsement of bearer paper is normally of no effect. An indorsement “for collection,” “for surrender” or the like, charges a purchaser with notice of adverse claims (Section 8-105(d)) but does not operate beyond this to interfere with any right the holder may otherwise possess to have the security registered.
  6. Subsection (f) makes clear that the indorser of a security certificate does not warrant that the issuer will honor the underlying obligation. In view of the nature of investment securities and the circumstances under which they are normally transferred, a transferor cannot be held to warrant as to the issuer’s actions. As a transferor the indorser, of course, remains liable for breach of the warranties set forth in this Article (Section 8-108).

Definitional Cross References:

“Bearer form”. Section 8-102(a)(2). “Certificated security”. Section 8-102(a)(4). “Indorsement”. Section 8-102(a)(11). “Purchaser”. Sections 1-201(33) & 8-116. “Registered form”. Section 8-102(a)(13). “Security certificate”. Section 8-102(a)(16).

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355.8-305. Instruction.

  1. If an instruction has been originated by an appropriate person but is incomplete in any other respect, any person may complete it as authorized and the issuer may rely on it as completed, even though it has been completed incorrectly.
  2. Unless otherwise agreed, a person initiating an instruction assumes only the obligations imposed by KRS 355.8-108 and not an obligation that the security will be honored by the issuer.

History. Enact. Acts 1958, ch. 77, § 8-305, effective July 1, 1960; 1986, ch. 118, § 29, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 144, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-305, effective July 1, 1960; 1986, ch. 118, § 29, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 144, effective January 1, 1997.

Official Comment

  1. The term instruction is defined in Section 8-102(a)(12) as a notification communicated to the issuer of an uncertificated security directing that transfer be registered. Section 8-107 specifies who may initiate an effective instruction.

    Functionally, presentation of an instruction is quite similar to the presentation of an indorsed certificate for reregistration. Note that instruction is defined in terms of “communicate,” see Section 8-102(a)(6). Thus, the instruction may be in the form of a writing signed by the registered owner or in any other form agreed upon by the issuer and the registered owner. Allowing nonwritten forms of instructions will permit the development and employment of means of transmitting instructions electronically.

    When a person who originates an instruction leaves a blank and the blank later is completed, subsection (a) gives the issuer the same rights it would have had against the originating person had that person completed the blank. This is true regardless of whether the person completing the instruction had authority to complete it. Compare Section 8-206 and its comment, dealing with blanks left upon issue.

  2. Subsection (b) makes clear that the originator of an instruction, like the indorser of a security certificate, does not warrant that the issuer will honor the underlying obligation, but does make warranties as a transferor under Section 8-108.

Definitional Cross References:

“Appropriate person”. Section 8-107. “Instruction”. Section 8-102(a)(12). “Issuer”. Section 8-201.

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355.8-306. Effect of guaranteeing signature, indorsement, or instruction.

  1. A person who guarantees a signature of an indorser of a security certificate warrants that at the time of signing:
    1. The signature was genuine;
    2. The signer was an appropriate person to indorse, or if the signature is by an agent, the agent had actual authority to act on behalf of the appropriate person; and
    3. The signer had legal capacity to sign.
  2. A person who guarantees a signature of the originator of an instruction warrants that at the time of signing:
    1. The signature was genuine;
    2. The signer was an appropriate person to originate the instruction, or if the signature is by an agent, the agent had actual authority to act on behalf of the appropriate person, if the person specified in the instruction as the registered owner was, in fact, the registered owner, as to which fact the signature guarantor does not make a warranty; and
    3. The signer had legal capacity to sign.
  3. A person who specially guarantees the signature of an originator of an instruction makes the warranties of a signature guarantor under subsection (2) of this section and also warrants that at the time the instruction is presented to the issuer:
    1. The person specified in the instruction as the registered owner of the uncertificated security will be the registered owner; and
    2. The transfer of the uncertificated security requested in the instruction will be registered by the issuer free from all liens, security interests, restrictions, and claims other than those specified in the instruction.
  4. A guarantor under subsections (1) and (2) of this section or a special guarantor under subsection (3) of this section does not otherwise warrant the rightfulness of the transfer.
  5. A person who guarantees an indorsement of a security certificate makes the warranties of a signature guarantor under subsection (1) of this section and also warrants the rightfulness of the transfer in all respects.
  6. A person who guarantees an instruction requesting the transfer of an uncertificated security makes the warranties of a special signature guarantor under subsection (3) of this section and also warrants the rightfulness of the transfer in all respects.
  7. An issuer may not require a special guaranty of signature, a guaranty of indorsement, or a guaranty of instruction as a condition to registration of transfer.
  8. The warranties under this section are made to a person taking or dealing with the security in reliance on the guaranty, and the guarantor is liable to the person for loss resulting from their breach. An indorser or originator of an instruction whose signature, indorsement, or instruction has been guaranteed is liable to a guarantor for any loss suffered by the guarantor as a result of breach of the warranties of the guarantor.

History. Enact. Acts 1958, ch. 77, § 8-306, effective July 1, 1960; 1964, ch. 130, § 18, effective July 1, 1964; 1986, ch. 118, § 30, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 145, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-306, effective July 1, 1960; 1964, ch. 130, § 18, effective July 1, 1964; 1986, ch. 118, § 30, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 145, effective January 1, 1997.

Official Comment

  1. Subsection (a) provides that a guarantor of the signature of the indorser of a security certificate warrants that the signature is genuine, that the signer is an appropriate person or has actual authority to indorse on behalf of the appropriate person, and that the signer has legal capacity. Subsection (b) provides similar, though not identical, warranties for the guarantor of a signature of the originator of an instruction for transfer of an uncertificated security.

    Appropriate person is defined in Section 8-107(a) to include a successor or person who has power under other law to act for a person who is deceased or lacks capacity. Thus if a certificate registered in the name of Mary Roe is indorsed by Jane Doe as executor of Mary Roe, a guarantor of the signature of Jane Doe warrants that she has power to act as executor.

    Although the definition of appropriate person in Section 8-107(a) does not itself include an agent, an indorsement by an agent is effective under Section 8-107(b) if the agent has authority to act for the appropriate person. Accordingly, this section provides an explicit warranty of authority for agents.

  2. The rationale of the principle that a signature guarantor warrants the authority of the signer, rather than simply the genuineness of the signature, was explained in the leading case of Jennie Clarkson Home for Children v. Missouri, K. & T. R. Co., 182 N.Y. 47, 74 N.E. 571, 70 A.L.R. 787 (1905), which dealt with a guaranty of the signature of a person indorsing on behalf of a corporation. “If stock is held by an individual who is executing a power of attorney for its transfer, the member of the exchange who signs as a witness thereto guaranties not only the genuineness of the signature affixed to the power of attorney, but that the person signing is the individual in whose name the stock stands. With reference to stock standing in the name of a corporation, which can only sign a power of attorney through its authorized officers or agents, a different situation is presented. If the witnessing of the signature of the corporation is only that of the signature of a person who signs for the corporation, then the guaranty is of no value, and there is nothing to protect purchasers or the companies who are called upon to issue new stock in the place of that transferred from the frauds of persons who have signed the names of corporations without authority. If such is the only effect of the guaranty, purchasers and transfer agents must first go to the corporation in whose name the stock stands and ascertain whether the individual who signed the power of attorney had authority to so do. This will require time, and in many cases will necessitate the postponement of the completion of the purchase by the payment of the money until the facts can be ascertained. The broker who is acting for the owner has an opportunity to become acquainted with his customer, and may readily before sale ascertain, in case of a corporation, the name of the officer who is authorized to execute the power of attorney. It was therefore, we think, the purpose of the rule to cast upon the broker who witnesses the signature the duty of ascertaining whether the person signing the name of the corporation had authority to so do, and making the witness a guarantor that it is the signature of the corporation in whose name the stock stands.”
  3. Subsection (b) sets forth the warranties that can reasonably be expected from the guarantor of the signature of the originator of an instruction, who, though familiar with the signer, does not have any evidence that the purported owner is in fact the owner of the subject uncertificated security. This is in contrast to the position of the person guaranteeing a signature on a certificate who can see a certificate in the signer’s possession in the name of or indorsed to the signer or in blank. Thus, the warranty in paragraph (2) of subsection (b) is expressly conditioned on the actual registration’s conforming to that represented by the originator. If the signer purports to be the owner, the guarantor under paragraph (2), warrants only the identity of the signer. If, however, the signer is acting in a representative capacity, the guarantor warrants both the signer’s identity and authority to act for the purported owner. The issuer needs no warranty as to the facts of registration because those facts can be ascertained from the issuer’s own records.
  4. Subsection (c) sets forth a “special guaranty of signature” under which the guarantor additionally warrants both registered ownership and freedom from undisclosed defects of record. The guarantor of the signature of an indorser of a security certificate effectively makes these warranties to a purchaser for value on the evidence of a clean certificate issued in the name of the indorser, indorsed to the indorser, or indorsed in blank. By specially guaranteeing under subsection (c), the guarantor warrants that the instruction will, when presented to the issuer, result in the requested registration free from defects not specified.
  5. Subsection (d) makes clear that the warranties of a signature guarantor are limited to those specified in this section and do not include a general warranty of rightfulness. On the other hand subsections (e) and (f) provide that a person guaranteeing an indorsement or an instruction does warrant that the transfer is rightful in all respects.
  6. Subsection (g) makes clear what can be inferred from the combination of Sections 8-401 and 8-402, that the issuer may not require as a condition to transfer a guaranty of the indorsement or instruction nor may it require a special signature guaranty.
  7. Subsection (h) specifies to whom the warranties in this section run, and also provides that a person who gives a guaranty under this section has an action against the indorser or originator for any loss suffered by the guarantor.

Definitional Cross References:

“Appropriate person”. Section 8-107. “Genuine”. Section 1-201(18). “Indorsement”. Section 8-102(a)(11). “Instruction”. Section 8-102(a)(12). “Issuer”. Section 8-201. “Security certificate”. Section 8-102(a)(16). “Uncertificated security”. Section 8-102(a)(18).

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355.8-307. Purchaser’s right to requisites for registration of transfer.

Unless otherwise agreed, the transferor of a security on due demand shall supply the purchaser with proof of authority to transfer or with any other requisite necessary to obtain registration of the transfer of the security, but if the transfer is not for value, a transferor need not comply unless the purchaser pays the necessary expenses. If the transferor fails within a reasonable time to comply with the demand, the purchaser may reject or rescind the transfer.

History. Enact. Acts 1958, ch. 77, § 8-307, effective July 1, 1960; 1986, ch. 118, § 31, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 146, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-307, effective July 1, 1960; 1986, ch. 118, § 31, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 146, effective January 1, 1997.

Official Comment

  1. Because registration of the transfer of a security is a matter of vital importance, a purchaser is here provided with the means of obtaining such formal requirements for registration as signature guaranties, proof of authority, transfer tax stamps, and the like. The transferor is the one in a position to supply most conveniently whatever documentation may be requisite for registration of transfer, and the duty to do so upon demand within a reasonable time is here stated affirmatively. If an essential item is peculiarly within the province of the transferor so that the transferor is the only one who can obtain it, the purchaser may specifically enforce the right to obtain it. Compare Section 8-304(d). If a transfer is not for value the transferee need not pay expenses.
  2. If the transferor’s duty is not performed the transferee may reject or rescind the contract to transfer. The transferee is not bound to do so. An action for damages for breach of contract may be preferred.

Definitional Cross References:

“Purchaser”. Sections 1-201(33) & 8-116. “Security”. Section 8-102(a)(15). “Value”. Sections 1-201(44) & 8-116.

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355.8-308. Indorsements — Instructions. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-308; 1964, ch. 130, § 19; 1986, ch. 118, § 32, effective July 1, 1987) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.8-309. Effect of indorsement without delivery. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-309, effective July 1, 1960; 1986, ch. 118, § 33, effective July 1, 1987) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.8-310. Indorsement of certificated security in bearer form. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-310, effective July 1, 1960; 1986, ch. 118, § 34, effective July 1, 1987) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.8-311. Effect of unauthorized indorsement or instruction. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-311, effective July 1, 1960; 1982, ch. 329, § 1, effective July 15, 1982; 1986, ch. 118, § 35, effective July 1, 1987) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.8-312. Effect of guaranteeing signature, indorsement or instruction. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-312, effective July 1, 1960; 1986, ch. 118, § 36, effective July 1, 1987) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.8-313. When transfer to purchaser occurs — Financial intermediary as bona fide purchaser — “Financial intermediary”. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-313, effective July 1, 1960; 1964, ch. 130, § 20; 1986, ch. 118, § 31, effective July 1, 1987) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.8-314. Duty to transfer — When completed. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-314, effective July 1, 1960; 1986, ch. 118, § 38, effective July 1, 1987) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.8-315. Action against transferee based upon wrongful transfer. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-315, effective July 1, 1960; 1986, ch. 118, § 39, effective July 1, 1987) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.8-316. Purchaser’s right to requisites for registration of transfer, pledge or release on books. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-316, effective July 1, 1960; 1986, ch. 118, § 40, effective July 1, 1987) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.8-317. Creditors’ rights. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-317, effective July 1, 1960; 1986, ch. 118, § 41, effective July 1, 1987) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.8-318. No conversion by good faith conduct. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-318; 1962, ch. 83, § 2; 1986, ch. 118, § 42, effective July 1, 1987) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.8-319. Statute of frauds. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-319, effective July 1, 1960; 1986, ch. 118, § 43, effective July 1, 1987) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.8-320. Transfer or pledge within central depository system. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1964, ch. 130, § 21; 1986, ch. 118, § 44, effective July 1, 1987) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

355.8-321. Enforceability, attachment, perfection and termination of security interests. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1986, ch. 118, § 45, effective July 1, 1987) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

Part 4. Registration

355.8-401. Duty of issuer to register transfer.

  1. If a certificated security in registered form is presented to an issuer with a request to register transfer or an instruction is presented to an issuer with a request to register transfer of an uncertificated security, the issuer shall register the transfer as requested if:
    1. Under the terms of the security the person seeking registration of transfer is eligible to have the security registered in its name;
    2. The indorsement or instruction is made by the appropriate person or by an agent who has actual authority to act on behalf of the appropriate person;
    3. Reasonable assurance is given that the indorsement or instruction is genuine and authorized (KRS 355.8-402 );
    4. Any applicable law relating to the collection of taxes has been complied with;
    5. The transfer does not violate any restriction on transfer imposed by the issuer in accordance with KRS 355.8-204 ;
    6. A demand that the issuer not register transfer has not become effective under KRS 355.8-403 , or the issuer has complied with KRS 355.8-403 (2) but no legal process or indemnity bond is obtained as provided in KRS 355.8-403(4); and
    7. The transfer is in fact rightful or is to a protected purchaser.
  2. If an issuer is under a duty to register a transfer of a security, the issuer is liable to a person presenting a certificated security or an instruction for registration or to the person’s principal for loss resulting from unreasonable delay in registration or failure or refusal to register the transfer.

History. Enact. Acts 1958, ch. 77, § 8-401, effective July 1, 1960; 1986, ch. 118, § 46, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 147, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-401, effective July 1, 1960; 1986, ch. 118, § 46, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 147, effective January 1, 1997.

Section 183 of Acts 1996, ch. 130 read:

“(1) This Act does not affect an action or proceeding commenced before this act takes effect.

“(2) If a security interest in a security is perfected at the date this Act takes effect [January 1, 1997], and the action by which the security was perfected would suffice to perfect a security interest under this Act, no further action is required to continue perfection. If a security interest in a security is perfected at the date this Act takes effect but the action by which the security interest was perfected would not suffice to perfect a security interest under this Act, the security interest remains prefected for a period of four months after the effective date and continues perfected thereafter if appropriate action to perfect under this Act is taken within that period. If a security interest is perfected at the date this Act takes effect and the security interest can be perfected by filing under this Act, a financing statement signed by the secured party instead of the debtor may be filed within that period to continue perfection or thereafter to perfect.”

Official Comment

  1. This section states the duty of the issuer to register transfers. A duty exists only if certain preconditions exist. If any of the preconditions do not exist, there is no duty to register transfer. If an indorsement on a security certificate is a forgery, there is no duty. If an instruction to transfer an uncertificated security is not originated by an appropriate person, there is no duty. If there has not been compliance with applicable tax laws, there is no duty. If a security certificate is properly indorsed but nevertheless the transfer is in fact wrongful, there is no duty unless the transfer is to a protected purchaser (and the other preconditions exist).

    This section does not constitute a mandate that the issuer must establish that all preconditions are met before the issuer registers a transfer. The issuer may waive the reasonable assurances specified in paragraph (a)(3). If it has confidence in the responsibility of the persons requesting transfer, it may ignore questions of compliance with tax laws. Although an issuer has no duty if the transfer is wrongful, the issuer has no duty to inquire into adverse claims, see Section 8-404.

  2. By subsection (b) the person entitled to registration may not only compel it but may hold the issuer liable in damages for unreasonable delay.
  3. Section 8-201(c) provides that with respect to registration of transfer, “issuer” means the person on whose behalf transfer books are maintained. Transfer agents, registrars or the like within the scope of their respective functions have rights and duties under this part similar to those of the issuer. See Section 8-407.

Definitional Cross References:

“Appropriate person”. Section 8-107. “Certificated security”. Section 8-102(a)(4). “Genuine”. Section 1-201(18). “Indorsement”. Section 8-102(a)(11). “Instruction”. Section 8-102(a)(12). “Issuer”. Section 8-201. “Protected purchaser”. Section 8-303. “Registered form”. Section 8-102(a)(13). “Uncertificated security”. Section 8-102(a)(18).

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NOTES TO DECISIONS

1.Estoppel by Failure to Register.

Corporation which failed to enter shares of stock sold by holder on corporation’s transfer book at purchaser’s request or with knowledge of the facts could not claim purchaser was estopped to deny seller’s right to vote stock. Swaim v. Martin, 302 Ky. 381 , 194 S.W.2d 855, 1946 Ky. LEXIS 687 ( Ky. 1946 ) (decided under prior law) .

Research References and Practice Aids

Kentucky Law Journal.

Wyatt, Investment Securities — Article 8 of the Uniform Commercial Code, 48 Ky. L.J. 333 (1960).

355.8-402. Assurance that indorsement or instruction is effective.

  1. An issuer may require the following assurance that each necessary indorsement or each instruction is genuine and authorized:
    1. In all cases, a guaranty of the signature of the person making an indorsement or originating an instruction including, in the case of an instruction, reasonable assurance of identity;
    2. If the indorsement is made or the instruction is originated by an agent, appropriate assurance of actual authority to sign;
    3. If the indorsement is made or the instruction is originated by a fiduciary pursuant to KRS 355.8-107 (1)(d) or (1)(e), appropriate evidence of appointment or incumbency;
    4. If there is more than one fiduciary, reasonable assurance that all who are required to sign have done so; and
    5. If the indorsement is made or the instruction is originated by a person not covered by another provision of this subsection, assurance appropriate to the case corresponding as nearly as may be to the provisions of this subsection.
  2. An issuer may elect to require reasonable assurance beyond that specified in this section.
  3. In this section:
    1. “Guaranty of the signature” means a guaranty signed by or on behalf of a person reasonably believed by the issuer to be responsible. An issuer may adopt standards with respect to responsibility if they are not manifestly unreasonable.
    2. “Appropriate evidence of appointment or incumbency” means:
      1. In the case of a fiduciary appointed or qualified by a court, a certificate issued by or under the direction or supervision of the court or an officer thereof and dated within sixty (60) days before the date of presentation for transfer; or
      2. In any other case, a copy of a document showing the appointment or a certificate issued by or on behalf of a person reasonably believed by an issuer to be responsible or, in the absence of that document or certificate, other evidence the issuer reasonably considers appropriate.

History. Enact. Acts 1958, ch. 77, § 8-402; 1962, ch. 83, § 3; 1986, ch. 118, § 47, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 148, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-402; 1962, ch. 83, § 3; 1986, ch. 118, § 47, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 145, effective January 1, 1997.

Official Comment

  1. An issuer is absolutely liable for wrongful registration of transfer if the indorsement or instruction is ineffective. See Section 8-404. Accordingly, an issuer is entitled to require such assurance as is reasonable under the circumstances that all necessary indorsements are effective, and thus to minimize its risk. This section establishes the requirements the issuer may make in terms of documentation which, except in the rarest of instances, should be easily furnished. Subsection (b) provides that an issuer may require additional assurances if that requirement is reasonable under the circumstances, but if the issuer demands more than reasonable assurance that the instruction or the necessary indorsements are genuine and authorized, the presenter may refuse the demand and sue for improper refusal to register. Section 8-401(b).
  2. Under subsection (a)(1), the issuer may require in all cases a guaranty of signature. See Section 8-306. When an instruction is presented the issuer always may require reasonable assurance as to the identity of the originator. Subsection (c) allows the issuer to require that the person making these guaranties be one reasonably believed to be responsible, and the issuer may adopt standards of responsibility which are not manifestly unreasonable. Regulations under the federal securities laws, however, place limits on the requirements transfer agents may impose concerning the responsibility of eligible signature guarantors. See 17 C.F.R. 240.17Ad-15.
  3. This section, by paragraphs (2) through (5) of subsection (a), permits the issuer to seek confirmation that the indorsement or instruction is genuine and authorized. The permitted methods act as a double check on matters which are within the warranties of the signature guarantor. See Section 8-306. Thus, an agent may be required to submit a power of attorney, a corporation to submit a certified resolution evidencing the authority of its signing officer to sign, an executor or administrator to submit the usual “short-form certificate,” etc. But failure of a fiduciary to obtain court approval of the transfer or to comply with other requirements does not make the fiduciary’s signature ineffective. Section 8-107(c). Hence court orders and other controlling instruments are omitted from subsection (a).

    Subsection (a)(3) authorizes the issuer to require “appropriate evidence” of appointment or incumbency, and subsection (c) indicates what evidence will be “appropriate”. In the case of a fiduciary appointed or qualified by a court that evidence will be a court certificate dated within sixty days before the date of presentation, subsection (c)(2)(i). Where the fiduciary is not appointed or qualified by a court, as in the case of a successor trustee, subsection (c)(2)(ii) applies. In that case, the issuer may require a copy of a trust instrument or other document showing the appointment, or it may require the certificate of a responsible person. In the absence of such a document or certificate, it may require other appropriate evidence. If the security is registered in the name of the fiduciary as such, the person’s signature is effective even though the person is no longer serving in that capacity, see Section 8-107(d), hence no evidence of incumbency is needed.

  4. Circumstances may indicate that a necessary signature was unauthorized or was not that of an appropriate person. Such circumstances would be ignored at risk of absolute liability. To minimize that risk the issuer may properly exercise the option given by subsection (b) to require assurance beyond that specified in subsection (a). On the other hand, the facts at hand may reflect only on the rightfulness of the transfer. Such facts do not create a duty of inquiry, because the issuer is not liable to an adverse claimant unless the claimant obtains legal process. See Section 8-404.

Definitional Cross References:

“Appropriate person”. Section 8-107. “Genuine”. Section 1-201(18). “Indorsement”. Section 8-102(a)(11). “Instruction”. Section 8-102(a)(12). “Issuer”. Section 8-201.

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355.8-403. Demand that issuer not register transfer.

  1. A person who is an appropriate person to make an indorsement or originate an instruction may demand that the issuer not register transfer of a security by communicating to the issuer a notification that identifies the registered owner and the issue of which the security is a part and provides an address for communications directed to the person making the demand. The demand is effective only if it is received by the issuer at a time and in a manner affording the issuer reasonable opportunity to act on it.
  2. If a certificated security in registered form is presented to an issuer with a request to register transfer or an instruction is presented to an issuer with a request to register transfer of an uncertificated security after a demand that the issuer not register transfer has become effective, the issuer shall promptly communicate to the person who initiated the demand at the address provided in the demand and the person who presented the security for registration of transfer or initiated the instruction requesting registration of transfer a notification stating that:
    1. The certificated security has been presented for registration of transfer or the instruction for registration of transfer of the uncertificated security has been received;
    2. A demand that the issuer not register transfer had previously been received; and
    3. The issuer will withhold registration of transfer for a period of time stated in the notification in order to provide the person who initiated the demand an opportunity to obtain legal process or an indemnity bond.
  3. The period described in subsection (2)(c) of this section may not exceed thirty (30) days after the date of communication of the notification. A shorter period may be specified by the issuer if it is not manifestly unreasonable.
  4. An issuer is not liable to a person who initiated a demand that the issuer not register transfer for any loss the person suffers as a result of registration of a transfer pursuant to an effective indorsement or instruction if the person who initiated the demand does not, within the time stated in the issuer’s communication, either:
    1. Obtain an appropriate restraining order, injunction, or other process from a court of competent jurisdiction enjoining the issuer from registering the transfer; or
    2. File with the issuer an indemnity bond, sufficient in the issuer’s judgment to protect the issuer and any transfer agent, registrar, or other agent of the issuer involved from any loss it or they may suffer by refusing to register the transfer.
  5. This section does not relieve an issuer from liability for registering transfer pursuant to an indorsement or instruction that was not effective.

History. Enact. Acts 1958, ch. 77, § 8-403; 1962 ch. 83, § 4; 1986, ch. 118, § 48, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 149, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-403; 1962 ch. 83, § 4; 1986, ch. 118, § 48, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 149, effective January 1, 1997.

Official Comment

  1. The general rule under this article is that if there has been an effective indorsement or instruction, a person who contends that registration of the transfer would be wrongful should not be able to interfere with the registration process merely by sending notice of the assertion to the issuer. Rather, the claimant must obtain legal process. See Section 8-404. Section 8-403 is an exception to this general rule. It permits the registered owner — but not third parties — to demand that the issuer not register a transfer.
  2. This section is intended to alleviate the problems faced by registered owners of certificated securities who lose or misplace their certificates. A registered owner who realizes that a certificate may have been lost or stolen should promptly report that fact to the issuer, lest the owner be precluded from asserting a claim for wrongful registration. See Section 8-406. The usual practice of issuers and transfer agents is that when a certificate is reported as lost, the owner is notified that a replacement can be obtained if the owner provides an indemnity bond. See Section 8-405. If the registered owner does not plan to transfer the securities, the owner might choose not to obtain a replacement, particularly if the owner suspects that the certificate has merely been misplaced.

    Under this section, the owner’s notification that the certificate has been lost would constitute a demand that the issuer not register transfer. No indemnity bond or legal process is necessary. If the original certificate is presented for registration of transfer, the issuer is required to notify the registered owner of that fact, and defer registration of transfer for a stated period. In order to prevent undue delay in the process of registration, the stated period may not exceed thirty days. This gives the registered owner an opportunity to either obtain legal process or post an indemnity bond and thereby prevent the issuer from registering transfer.

  3. Subsection (e) makes clear that this section does not relieve an issuer from liability for registering a transfer pursuant to an ineffective indorsement. An issuer’s liability for wrongful registration in such cases does not depend on the presence or absence of notice that the indorsement was ineffective. Registered owners who are confident that they neither indorsed the certificates, nor did anything that would preclude them from denying the effectiveness of another’s indorsement, see Sections 8-107(b) and 8-406, might prefer to pursue their rights against the issuer for wrongful registration rather than take advantage of the opportunity to post a bond or seek a restraining order when notified by the issuer under this section that their lost certificates have been presented for registration in apparently good order.

Definitional Cross References:

“Appropriate person”. Section 8-107. “Certificated security”. Section 8-102(a)(4). “Communicate”. Section 8-102(a)(6). “Effective”. Section 8-107. “Indorsement”. Section 8-102(a)(11). “Instruction”. Section 8-102(a)(12). “Issuer”. Section 8-201. “Registered form”. Section 8-102(a)(13). “Uncertificated security”. Section 8-102(a)(18).

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355.8-404. Wrongful registration.

  1. Except as otherwise provided in KRS 355.8-406 , an issuer is liable for wrongful registration of transfer if the issuer has registered a transfer of a security to a person not entitled to it, and the transfer was registered:
    1. Pursuant to an ineffective indorsement or instruction;
    2. After a demand that the issuer not register transfer became effective under KRS 355.8-403 (1) and the issuer did not comply with KRS 355.8-403 (2);
    3. After the issuer had been served with an injunction, restraining order, or other legal process enjoining it from registering the transfer, issued by a court of competent jurisdiction, and the issuer had a reasonable opportunity to act on the injunction, restraining order, or other legal process; or
    4. By an issuer acting in collusion with the wrongdoer.
  2. An issuer that is liable for wrongful registration of transfer under subsection (1) of this section on demand shall provide the person entitled to the security with a like certificated or uncertificated security, and any payments or distributions that the person did not receive as a result of the wrongful registration. If an overissue would result, the issuer’s liability to provide the person with a like security is governed by KRS 355.8-210 .
  3. Except as otherwise provided in subsection (1) of this section or in a law relating to the collection of taxes, an issuer is not liable to an owner or other person suffering loss as a result of the registration of a transfer of a security if registration was made pursuant to an effective indorsement or instruction.

History. Enact. Acts 1958, ch. 77, § 8-404, effective July 1, 1960; 1986, ch. 118, § 49, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 150, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-404, effective July 1, 1960; 1986, ch. 118, § 49, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 150, effective January 1, 1997.

Official Comment

  1. Subsection (a)(1) provides that an issuer is liable if it registers transfer pursuant to an indorsement or instruction that was not effective. For example, an issuer that registers transfer on a forged indorsement is liable to the registered owner. The fact that the issuer had no reason to suspect that the indorsement was forged or that the issuer obtained the ordinary assurances under Section 8-402 does not relieve the issuer from liability. The reason that issuers obtain signature guaranties and other assurances is that they are liable for wrongful registration.

    Subsection (b) specifies the remedy for wrongful registration. Pre-Code cases established the registered owner’s right to receive a new security where the issuer had wrongfully registered a transfer, but some cases also allowed the registered owner to elect between an equitable action to compel issue of a new security and an action for damages. Cf. Casper v. Kalt-Zimmers Mfg. Co., 159 Wis. 517, 149 N.W. 754 (1914). Article 8 does not allow such election. The true owner of a certificated security is required to take a new security except where an overissue would result and a similar security is not reasonably available for purchase. See Section 8-210. The true owner of an uncertificated security is entitled and required to take restoration of the records to their proper state, with a similar exception for overissue.

  2. Read together, subsections (a) and (c) have the effect of providing that an issuer has no duties to an adverse claimant unless the claimant serves legal process on the issuer to enjoin registration. Issuers, or their transfer agents, perform a record-keeping function for the direct holding system that is analogous to the functions performed by clearing corporations and securities intermediaries in the indirect holding system. This section applies to the record-keepers for the direct holding system the same standard that Section 8-115 applies to the record-keepers for the indirect holding system. Thus, issuers are not liable to adverse claimants merely on the basis of notice. As in the case of the analogous rules for the indirect holding system, the policy of this section is to protect the right of investors to have their securities transfers processed without the disruption or delay that might result if the record-keepers risked liability to third parties. It would be undesirable to apply different standards to the direct and indirect holding systems, since doing so might operate as a disincentive to the development of a book-entry direct holding system.
  3. This section changes prior law under which an issuer could be held liable, even though it registered transfer on an effective indorsement or instruction, if the issuer had in some fashion been notified that the transfer might be wrongful against a third party, and the issuer did not appropriately discharge its duty to inquire into the adverse claim. See Section 8-403 (1978).

    The rule of former Section 8-403 was anomalous inasmuch as Section 8-207 provides that the issuer is entitled to “treat the registered owner as the person exclusively entitled to vote, receive notifications, and otherwise exercise all the rights and powers of an owner.” Under Section 8-207, the fact that a third person notifies the issuer of a claim does not preclude the issuer from treating the registered owner as the person entitled to the security. See Kerrigan v. American Orthodontics Corp., 960 F.2d 43 (7th Cir. 1992). The change made in the present version of Section 8-404 ensures that the rights of registered owners and the duties of issuers with respect to registration of transfer will be protected against third-party interference in the same fashion as other rights of registered ownership.

Definitional Cross References:

“Certificated security”. Section 8-102(a)(4). “Effective”. Section 8-107. “Indorsement”. Section 8-102(a)(11). “Instruction”. Section 8-102(a)(13). “Issuer”. Section 8-201. “Security”. Section 8-102(a)(15). “Uncertificated security”. Section 8-102(a)(18).

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355.8-405. Replacement of lost, destroyed, or wrongfully taken security certificate.

  1. If an owner of a certificated security, whether in registered or bearer form, claims that the certificate has been lost, destroyed, or wrongfully taken, the issuer shall issue a new certificate if the owner:
    1. So requests before the issuer has notice that the certificate has been acquired by a protected purchaser;
    2. Files with the issuer a sufficient indemnity bond; and
    3. Satisfies other reasonable requirements imposed by the issuer.
  2. If, after the issue of a new security certificate, a protected purchaser of the original certificate presents it for registration of transfer, the issuer shall register the transfer unless an overissue would result. In that case, the issuer’s liability is governed by KRS 355.8-210 . In addition to any rights on the indemnity bond, an issuer may recover the new certificate from a person to whom it was issued or any person taking under that person, except a protected purchaser.

History. Enact. Acts 1958, ch. 77, § 8-405, effective July 1, 1960; 1986, ch. 118, § 50, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 151, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-405, effective July 1, 1960; 1986, ch. 118, § 50, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 151, effective January 1, 1997.

Official Comment

  1. This section enables the owner to obtain a replacement of a lost, destroyed, or stolen certificate, provided that reasonable requirements are satisfied and a sufficient indemnity bond supplied.
  2. Where an “original” security certificate has reached the hands of a protected purchaser, the registered owner — who was in the best position to prevent the loss, destruction or theft of the security certificate — is now deprived of the new security certificate issued as a replacement. This changes the pre-Uniform Commercial Code law under which the original certificate was ineffective after the issue of a replacement except insofar as it might represent an action for damages in the hands of a purchaser for value without notice. Keller v. Eureka Brick Mach. Mfg. Co., 43 Mo.App. 84, 11 L.R.A. 472 (1890). Where both the original and the new certificate have reached protected purchasers the issuer is required to honor both certificates unless an overissue would result and the security is not reasonably available for purchase. See Section 8-210. In the latter case alone, the protected purchaser of the original certificate is relegated to an action for damages. In either case, the issuer itself may recover on the indemnity bond.

Definitional Cross References:

“Bearer form”. Section 8-102(a)(2). “Certificated security”. Section 8-102(a)(4). “Issuer”. Section 8-201. “Notice”. Section 1-201(25). “Overissue”. Section 8-210. “Protected purchaser”. Section 8-303. “Registered form”. Section 8-102(a)(13). “Security certificate”. Section 8-102(a)(16).

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Research References and Practice Aids

Kentucky Law Journal.

Ham, A Survey of Kentucky Corporation Cases Since 1946, 44 Ky. L.J. 5 (1955).

355.8-406. Obligation to notify issuer of lost, destroyed, or wrongfully taken security certificate.

If a security certificate has been lost, apparently destroyed, or wrongfully taken, and the owner fails to notify the issuer of that fact within a reasonable time after the owner has notice of it and the issuer registers a transfer of the security before receiving notification, the owner may not assert against the issuer a claim for registering the transfer under KRS 355.8-404 or a claim to a new security certificate under KRS 355.8-405 .

History. Enact. Acts 1958, ch. 77, § 8-406, effective July 1, 1960; 1986, ch. 118, § 51, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 152, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 8-406, effective July 1, 1960; 1986, ch. 118, § 51, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 152, effective January 1, 1997.

Official Comment

An owner who fails to notify the issuer within a reasonable time after the owner knows or has reason to know of the loss or theft of a security certificate is estopped from asserting the ineffectiveness of a forged or unauthorized indorsement and the wrongfulness of the registration of the transfer. If the lost certificate was indorsed by the owner, then the registration of the transfer was not wrongful under Section 8-404, unless the owner made an effective demand that the issuer not register transfer under Section 8-403.

Definitional Cross References:

“Issuer”. Section 8-201. “Notify”. Section 1-201(25). “Security certificate”. Section 8-102(a)(16).

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355.8-407. Authenticating trustee, transfer agent, and registrar.

A person acting as authenticating trustee, transfer agent, registrar, or other agent for an issuer in the registration of a transfer of its securities, in the issue of new security certificates or uncertificated securities, or in the cancellation of surrendered security certificates has the same obligation to the holder or owner of a certificated or uncertificated security with regard to the particular functions performed as the issuer has in regard to those functions.

History. Enact. Acts 1986, ch. 118, § 52, effective July 1, 1987; repealed and reenact., Acts 1996, ch. 130, § 153, effective January 1, 1997.

Compiler’s Notes.

This section (Enact. Acts 1986, ch. 118, § 52, effective July 1, 1987) was repealed and reenacted by Acts 1996, ch. 130, § 153, effective January 1, 1997.

Official Comment

  1. Transfer agents, registrars, and the like are here expressly held liable both to the issuer and to the owner for wrongful refusal to register a transfer as well as for wrongful registration of a transfer in any case within the scope of their respective functions where the issuer would itself be liable. Those cases which have regarded these parties solely as agents of the issuer and have therefor refused to recognize their liability to the owner for mere nonfeasance, i.e., refusal to register a transfer, are rejected. Hulse v. Consolidated Quicksilver Mining Corp., 65 Idaho 768, 154 P.2d 149 (1944); Nicholson v. Morgan, 119 Misc. 309, 196 N.Y.Supp. 147 (1922); Lewis v. Hargadine-McKittrick Dry Goods Co., 305 Mo. 396, 274 S.W. 1041 (1924).
  2. The practice frequently followed by authenticating trustees of issuing certificates of indebtedness rather than authenticating duplicate certificates where securities have been lost or stolen became obsolete in view of the provisions of Section 8-405, which makes express provision for the issue of substitute securities. It is not a breach of trust or lack of due diligence for trustees to authenticate new securities. Cf. Switzerland General Ins. Co. of Zurich v. N.Y.C. & H.R.R. Co., 152 App.Div. 70, 136 N.Y.S. 726 (1912).

Definitional Cross References:

“Certificated security”. Section 8-102(a)(4). “Issuer”. Section 8-201. “Security”. Section 8-102(a)(15). “Security certificate”. Section 8-102(a)(16). “Uncertificated security”. Section 8-102(a)(18).

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355.8-408. Statements of uncertificated securities. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1986, ch. 118, § 53, effective July 1, 1987) was repealed by Acts 1996, ch. 130, § 182, effective January 1, 1997.

Part 5. Security Entitlements

355.8-501. Securities account — Acquisition of security entitlement from securities intermediary.

  1. “Securities account” means an account to which a financial asset is or may be credited in accordance with an agreement under which the person maintaining the account undertakes to treat the person for whom the account is maintained as entitled to exercise the rights that comprise the financial asset.
  2. Except as otherwise provided in subsections (4) and (5) of this section, a person acquires a security entitlement if a securities intermediary:
    1. Indicates by book entry that a financial asset has been credited to the person’s securities account;
    2. Receives a financial asset from the person or acquires a financial asset for the person and, in either case, accepts it for credit to the person’s securities account; or
    3. Becomes obligated under other law, regulation, or rule to credit a financial asset to the person’s securities account.
  3. If a condition of subsection (2) of this section has been met, a person has a security entitlement even though the securities intermediary does not itself hold the financial asset.
  4. If a securities intermediary holds a financial asset for another person, and the financial asset is registered in the name of, payable to the order of, or specially indorsed to the other person, and has not been indorsed to the securities intermediary or in blank, the other person is treated as holding the financial asset directly rather than as having a security entitlement with respect to the financial asset.
  5. Issuance of a security is not establishment of a security entitlement.

History. Enact. Acts 1996, ch. 130, § 154, effective January 1, 1997.

Official Comment

  1. Part 5 rules apply to security entitlements, and Section 8-501(b) provides that a person has a security entitlement when a financial asset has been credited to a “securities account.” Thus, the term “securities account” specifies the type of arrangements between institutions and their customers that are covered by Part 5. A securities account is a consensual arrangement in which the intermediary undertakes to treat the customer as entitled to exercise the rights that comprise the financial asset. The consensual aspect is covered by the requirement that the account be established pursuant to agreement. The term agreement is used in the broad sense defined in Section 1-201(3). There is no requirement that a formal or written agreement be signed.

    As the securities business is presently conducted, several significant relationships clearly fall within the definition of a securities account, including the relationship between a clearing corporation and its participants, a broker and customers who leave securities with the broker, and a bank acting as securities custodian and its custodial customers. Given the enormous variety of arrangements concerning securities that exist today, and the certainty that new arrangements will evolve in the future, it is not possible to specify all of the arrangements to which the term does and does not apply.

    Whether an arrangement between a firm and another person concerning a security or other financial asset is a “securities account” under this Article depends on whether the firm has undertaken to treat the other person as entitled to exercise the rights that comprise the security or other financial asset. Section 1-102, however, states the fundamental principle of interpretation that the Code provisions should be construed and applied to promote their underlying purposes and policies. Thus, the question whether a given arrangement is a securities account should be decided not by dictionary analysis of the words of the definition taken out of context, but by considering whether it promotes the objectives of Article 8 to include the arrangement within the term securities account.

    The effect of concluding that an arrangement is a securities account is that the rules of Part 5 apply. Accordingly, the definition of “securities account” must be interpreted in light of the substantive provisions in Part 5, which describe the core features of the type of relationship for which the commercial law rules of Revised Article 8 concerning security entitlements were designed. There are many arrangements between institutions and other persons concerning securities or other financial assets which do not fall within the definition of “securities account” because the institutions have not undertaken to treat the other persons as entitled to exercise the ordinary rights of an entitlement holder specified in the Part 5 rules. For example, the term securities account does not cover the relationship between a bank and its depositors or the relationship between a trustee and the beneficiary of an ordinary trust, because those are not relationships in which the holder of a financial asset has undertaken to treat the other as entitled to exercise the rights that comprise the financial asset in the fashion contemplated by the Part 5 rules.

    In short, the primary factor in deciding whether an arrangement is a securities account is whether application of the Part 5 rules is consistent with the expectations of the parties to the relationship. Relationships not governed by Part 5 may be governed by other parts of Article 8 if the relationship gives rise to a new security, or may be governed by other law entirely.

  2. Subsection (b) of this section specifies what circumstances give rise to security entitlements. Paragraph (1) of subsection (b) sets out the most important rule. It turns on the intermediary’s conduct, reflecting a basic operating assumption of the indirect holding system that once a securities intermediary has acknowledged that it is carrying a position in a financial asset for its customer or participant, the intermediary is obligated to treat the customer or participant as entitled to the financial asset. Paragraph (1) does not attempt to specify exactly what accounting, record-keeping, or information transmission steps suffice to indicate that the intermediary has credited the account. That is left to agreement, trade practice, or rule in order to provide the flexibility necessary to accommodate varying or changing accounting and information processing systems. The point of paragraph (i) is that once an intermediary has acknowledged that it is carrying a position for the customer or participant, the customer or participant has a security entitlement. The precise form in which the intermediary manifests that acknowledgment is left to private ordering.

    Paragraph (2) of subsection (b) sets out a different operational test, turning not on the intermediary’s accounting system but on the facts that accounting systems are supposed to represent. Under paragraph (b)(2) a person has a security entitlement if the intermediary has received and accepted a financial asset for credit to the account of its customer or participant. For example, if a customer of a broker or bank custodian delivers a security certificate in proper form to the broker or bank to be held in the customer’s account, the customer acquires a security entitlement. Paragraph (b)(2) also covers circumstances in which the intermediary receives a financial asset from a third person for credit to the account of the customer or participant. Paragraph (b)(2) is not limited to circumstances in which the intermediary receives security certificates or other financial assets in physical form. Paragraph (b)(2) also covers circumstances in which the intermediary acquires a security entitlement with respect to a financial asset which is to be credited to the account of the intermediary’s own customer. For example, if a customer transfers her account from Broker A to Broker B, she acquires security entitlements against Broker B once the clearing corporation has credited the positions to Broker B’s account. It should be noted, however, that paragraph (b)(2) provides that a person acquires a security entitlement when the intermediary not only receives but also accepts the financial asset for credit to the account. This limitation is included to take account of the fact that there may be circumstances in which an intermediary has received a financial asset but is not willing to undertake the obligations that flow from establishing a security entitlement. For example, a security certificate which is sent to an intermediary may not be in proper form, or may represent a type of financial asset which the intermediary is not willing to carry for others. It should be noted that in all but extremely unusual cases, the circumstances covered by paragraph (2) will also be covered by paragraph (i), because the intermediary will have credited the positions to the customer’s account.

    Paragraph (3) of subsection (b) sets out a residual test, to avoid any implication that the failure of an intermediary to make the appropriate entries to credit a position to a customer’s securities account would prevent the customer from acquiring the rights of an entitlement holder under Part 5. As is the case with the paragraph (2) test, the paragraph (3) test would not be needed for the ordinary cases, since they are covered by paragraph (1).

  3. In a sense, Section 8-501(b) is analogous to the rules set out in the provisions of Sections 8-313(1)(d) and 8-320 of the prior version of Article 8 that specified what acts by a securities intermediary or clearing corporation sufficed as a transfer of securities held in fungible bulk. Unlike the prior version of Article 8, however, this section is not based on the idea that an entitlement holder acquires rights only by virtue of a “transfer” from the securities intermediary to the entitlement holder. In the indirect holding system, the significant fact is that the securities intermediary has undertaken to treat the customer as entitled to the financial asset. It is up to the securities intermediary to take the necessary steps to ensure that it will be able to perform its undertaking. It is, for example, entirely possible that a securities intermediary might make entries in a customer’s account reflecting that customer’s acquisition of a certain security at a time when the securities intermediary did not itself happen to hold any units of that security. The person from whom the securities intermediary bought the security might have failed to deliver and it might have taken some time to clear up the problem, or there may have been an operational gap in time between the crediting of a customer’s account and the receipt of securities from another securities intermediary. The entitlement holder’s rights against the securities intermediary do not depend on whether or when the securities intermediary acquired its interests. Subsection (c) is intended to make this point clear. Subsection (c) does not mean that the intermediary is free to create security entitlements without itself holding sufficient financial assets to satisfy its entitlement holders. The duty of a securities intermediary to maintain sufficient assets is governed by Section 8-504 and regulatory law. Subsection (c) is included only to make it clear the question whether a person has acquired a security entitlement does not depend on whether the intermediary has complied with that duty.
  4. Part 5 of Article 8 sets out a carefully designed system of rules for the indirect holding system. Persons who hold securities through brokers or custodians have security entitlements that are governed by Part 5, rather than being treated as the direct holders of securities. Subsection (d) specifies the limited circumstance in which a customer who leaves a financial asset with a broker or other securities intermediary has a direct interest in the financial asset, rather than a security entitlement.

    The customer can be a direct holder only if the security certificate, or other financial asset, is registered in the name of, payable to the order of, or specially indorsed to the customer, and has not been indorsed by the customer to the securities intermediary or in blank. The distinction between those circumstances where the customer can be treated as direct owner and those where the customer has a security entitlement is essentially the same as the distinction drawn under the federal bankruptcy code between customer name securities and customer property. The distinction does not turn on any form of physical identification or segregation. A customer who delivers certificates to a broker with blank indorsements or stock powers is not a direct holder but has a security entitlement, even though the broker holds those certificates in some form of separate safe-keeping arrangement for that particular customer. The customer remains the direct holder only if there is no indorsement or stock power so that further action by the customer is required to place the certificates in a form where they can be transferred by the broker.

    The rule of subsection (d) corresponds to the rule set out in Section 8-301(a)(3) specifying when acquisition of possession of a certificate by a securities intermediary counts as “delivery” to the customer.

  5. Subsection (e) is intended to make clear that Part 5 does not apply to an arrangement in which a security is issued representing an interest in underlying assets, as distinguished from arrangements in which the underlying assets are carried in a securities account. A common mechanism by which new financial instruments are devised is that a financial institution that holds some security, financial instrument, or pool thereof, creates interests in that asset or pool which are sold to others. In many such cases, the interests so created will fall within the definition of “security” in Section 8-102(a)(15). If so, then by virtue of subsection (e) of Section 8-501, the relationship between the institution that creates the interests and the persons who hold them is not a security entitlement to which the Part 5 rules apply. Accordingly, an arrangement such as an American depositary receipt facility which creates freely transferable interests in underlying securities will be issuance of a security under Article 8 rather than establishment of a security entitlement to the underlying securities.

    The subsection (e) rule can be regarded as an aspect of the definitional rules specifying the meaning of securities account and security entitlement. Among the key components of the definition of security in Section 8-102(a)(15) are the “transferability” and “divisibility” tests. Securities, in the Article 8 sense, are fungible interests or obligations that are intended to be tradable. The concept of security entitlement under Part 5 is quite different. A security entitlement is the package of rights that a person has against the person’s own intermediary with respect to the positions carried in the person’s securities account. That package of rights is not, as such, something that is traded. When a customer sells a security that he or she had held through a securities account, her security entitlement is terminated; when she buys a security that she will hold through her securities account, she acquires a security entitlement. In most cases, settlement of a securities trade will involve termination of one person’s security entitlement and acquisition of a security entitlement by another person. That transaction, however, is not a “transfer” of the same entitlement from one person to another. That is not to say that an entitlement holder cannot transfer an interest in her security entitlement as such; granting a security interest in a security entitlement is such a transfer. On the other hand, the nature of a security entitlement is that the intermediary is undertaking duties only to the person identified as the entitlement holder.

Definitional Cross References:

“Financial asset”. Section 8-102(a)(9). “Indorsement”. Section 8-102(a)(11). “Securities intermediary”. Section 8-102(a)(14). “Security”. Section 8-102(a)(15). “Security entitlement”. Section 8-102(a)(17).

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355.8-502. Assertion of adverse claim against entitlement holder.

An action based on an adverse claim to a financial asset, whether framed in conversion, replevin, constructive trust, equitable lien, or other theory, may not be asserted against a person who acquires a security entitlement under KRS 355.8-501 for value and without notice of the adverse claim.

History. Enact. Acts 1996, ch. 130, § 155, effective January 1, 1997.

Official Comment

  1. This section provides investors in the indirect holding system with protection against adverse claims by specifying that no adverse claim can be asserted against a person who acquires a security entitlement under Section 8-501 for value and without notice of the adverse claim. It plays a role in the indirect holding system analogous to the rule of the direct holding system that protected purchasers take free from adverse claims (Section 8-303).

    This section does not use the locution “takes free from adverse claims” because that could be confusing as applied to the indirect holding system. The nature of the indirect holding system is that an entitlement holder has an interest in common with others who hold positions in the same financial asset through the same intermediary. Thus, a particular entitlement holder’s interest in the financial assets held by its intermediary is necessarily “subject to” the interests of others. See Section 8-503. The rule stated in this section might have been expressed by saying that a person who acquires a security entitlement under Section 8-501 for value and without notice of adverse claims takes “that security entitlement” free from adverse claims. That formulation has not been used, however, for fear that it would be misinterpreted as suggesting that the person acquires a right to the underlying financial assets that could not be affected by the competing rights of others claiming through common or higher tier intermediaries. A security entitlement is a complex bundle of rights. This section does not deal with the question of what rights are in the bundle. Rather, this section provides that once a person has acquired the bundle, someone else cannot take it away on the basis of assertion that the transaction in which the security entitlement was created involved a violation of the claimant’s rights.

  2. Because securities trades are typically settled on a net basis by book-entry movements, it would ordinarily be impossible for anyone to trace the path of any particular security, no matter how the interest of parties who hold through intermediaries is described. Suppose, for example, that S has a 1000 share position in XYZ common stock through an account with a broker, Able & Co. S’s identical twin impersonates S and directs Able to sell the securities. That same day, B places an order with Baker & Co., to buy 1000 shares of XYZ common stock. Later, S discovers the wrongful act and seeks to recover “her shares.” Even if S can show that, at the stage of the trade, her sell order was matched with B’s buy order, that would not suffice to show that ‘her shares’ went to B. Settlement between Able and Baker occurs on a net basis for all trades in XYZ that day; indeed Able’s net position may have been such that it received rather than delivered shares in XYZ through the settlement system.

    In the unlikely event that this was the only trade in XYZ common stock executed in the market that day, one could follow the shares from S’s account to B’s account. The plaintiff in an action in conversion or similar legal action to enforce a property interest must show that the defendant has an item of property that belongs to the plaintiff. In this example, B’s security entitlement is not the same item of property that formerly was held by S, it is a new package of rights that B acquired against Baker under Section 8-501. Principles of equitable remedies might, however, provide S with a basis for contending that if the position B received was the traceable product of the wrongful taking of S’s property by S’s twin, a constructive trust should be imposed on B’s property in favor of S. See G. Palmer, The Law of Restitution G.S. 2.14. Section 8-502 ensures that no such claims can be asserted against a person, such as B in this example, who acquires a security entitlement under Section 8-501 for value and without notice, regardless of what theory of law or equity is used to describe the basis of the assertion of the adverse claim.

    In the above example, S would ordinarily have no reason to pursue B unless Able is insolvent and S’s claim will not be satisfied in the insolvency proceedings. Because S did not give an entitlement order for the disposition of her security entitlement, Able must recredit her account for the 1000 shares of XYZ common stock. See section 8-507(b).

  3. The following examples illustrate the operation of Section 8-502.

    Example 1. Thief steals bearer bonds from Owner. Thief delivers the bonds to Broker for credit to Thief’s securities account, thereby acquiring a security entitlement under Section 8-501(b). Under other law, Owner may have a claim to have a constructive trust imposed on the security entitlement as the traceable product of the bonds that Thief misappropriated. Because Thief was the wrongdoer, Thief obviously had notice of Owner’s adverse claim. Accordingly, Section 8-502 does not preclude Owner from asserting an adverse claim against Thief.

    Example 2. Thief steals bearer bonds from Owner. Thief owes a personal debt to Creditor. Creditor has a securities account with Broker. Thief agrees to transfer the bonds to Creditor as security for or in satisfaction of his debt to Creditor. Thief does so by sending the bonds to Broker for credit to Creditor’s securities account. Creditor thereby acquires a security entitlement under Section 8-501(b). Under other law, Owner may have a claim to have a constructive trust imposed on the security entitlement as the traceable product of the bonds that Thief misappropriated. Creditor acquired the security entitlement for value, since Creditor acquired it as security for or in satisfaction of Thief’s debt to Creditor. See Section 1-201(44). If Creditor did not have notice of Owner’s claim, Section 8-502 precludes any action by Owner against Creditor, whether framed in constructive trust or other theory. Section 8-105 specifies what counts as notice of an adverse claim.

    Example 3. Father, as trustee for Son, holds XYZ Co. shares in a securities account with Able & Co. In violation of his fiduciary duties, Father sells the XYZ Co. shares and uses the proceeds for personal purposes. Father dies, and his estate is insolvent. Assume - implausibly - that Son is able to trace the XYZ Co. shares and show that the “same shares” ended up in Buyer’s securities account with Baker & Co. Section 8-502 precludes any action by Son against Buyer, whether framed in constructive trust or other theory, provided that Buyer acquired the security entitlement for value and without notice of adverse claims.

    Example 4. Debtor holds XYZ Co. shares in a securities account with Able & Co. As collateral for a loan from Bank, Debtor grants Bank a security interest in the security entitlement to the XYZ Co. shares. Bank perfects by a method which leaves Debtor with the ability to dispose of the shares. See Section 9-312. In violation of the security agreement, Debtor sells the XYZ Co. shares and absconds with the proceeds. Assume - implausibly - that Bank is able to trace the XYZ Co. shares and show that the “same shares” ended up in Buyer’s securities account with Baker & Co. Section 8-502 precludes any action by Bank against Buyer, whether framed in constructive trust or other theory, provided that Buyer acquired the security entitlement for value and without notice of adverse claims.

    Example 5. Debtor owns controlling interests in various public companies, including Acme and Ajax. Acme owns 60% of the stock of another public company, Beta. Debtor causes the Beta stock to be pledged to Lending Bank as collateral for Ajax’s debt. Acme holds the Beta stock through an account with a securities custodian, C Bank, which in turn holds through Clearing Corporation. Lending Bank is also a Clearing Corporation participant. The pledge of the Beta stock is implemented by Acme instructing C Bank to instruct Clearing Corporation to debit C Bank’s account and credit Lending Bank’s account. Acme and Ajax both become insolvent. The Beta stock is still valuable. Acme’s liquidator asserts that the pledge of the Beta stock for Ajax’s debt was wrongful as against Acme and seeks to recover the Beta stock from Lending Bank. Because the pledge was implemented by an outright transfer into Lending Bank’s account at Clearing Corporation, Lending Bank acquired a security entitlement to the Beta stock under Section 8-501. Lending Bank acquired the security entitlement for value, since it acquired it as security for a debt. See Section 1-201(44). If Lending Bank did not have notice of Acme’s claim, Section 8-502 will preclude any action by Acme against Lending Bank, whether framed in constructive trust or other theory.

    Example 6. Debtor grants Alpha Co. a security interest in a security entitlement that includes 1000 shares of XYZ Co. stock that Debtor holds through an account with Able & Co. Alpha also has an account with Able. Debtor instructs Able to transfer the shares to Alpha, and Able does so by crediting the shares to Alpha’s account. Alpha has control of the 1000 shares under Section 8-106(d). (The facts to this point are identical to those in Section 8-106, Comment 4, Example 1, except that Alpha Co. was Alpha Bank.) Alpha next grants Beta Co. a security interest in the 1000 shares included in Alpha’s security entitlement. See Section 9-207(c)(3). Alpha instructs Able to transfer the shares to Gamma Co., Beta’s custodian. Able does so, and Gamma credits the 1000 shares to Beta’s account. Beta now has control under section 8-106(d). By virtue of Debtor’s explicit permission or by virtue of the permission inherent in Debtor’s creation of a security interest in favor of Alpha and Alpha’s resulting power to grant a security interest under Section 9-207, Debtor has no adverse claim to assert against Beta, assuming implausibly that Debtor could “trace” an interest to the Gamma account. Moreover, even if Debtor did hold an adverse claim, if Beta did not have notice of Debtor’s claim, Section 8-502 will preclude any action by Debtor against Beta, whether framed in constructive trust or other theory.

  4. Although this section protects entitlement holders against adverse claims, it does not protect them against the risk that their securities intermediary will not itself have sufficient financial assets to satisfy the claims of all of its entitlement holders. Suppose that Customer A holds 1000 shares of XYZ Co. stock in an account with her broker, Able & Co. Able in turn holds 1000 shares of XYZ Co. through its account with Clearing Corporation, but has no other positions in XYZ Co. shares, either for other customers or for its own proprietary account. Customer B places an order with Able for the purchase of 1000 shares of XYZ Co. stock, and pays the purchase price. Able credits B’s account with a 1000 share position in XYZ Co. stock, but Able does not itself buy any additional XYZ Co. shares. Able fails, having only 1000 shares to satisfy the claims of A and B. Unless other insolvency law establishes a different distributional rule, A and B would share the 1000 shares held by Able pro rata, without regard to the time that their respective entitlements were established. See Section 8-503(b). Section 8-502 protects entitlement holders, such as A and B, against adverse claimants. In this case, however, the problem that A and B face is not that someone is trying to take away their entitlements, but that the entitlements are not worth what they thought. The only role that Section 8-502 plays in this case is to preclude any assertion that A has some form of claim against B by virtue of the fact that Able’s establishment of an entitlement in favor of B diluted A’s rights to the limited assets held by Able.

355.8-503. Property interest of entitlement holder in financial asset held by securities intermediary.

  1. To the extent necessary for a securities intermediary to satisfy all security entitlements with respect to a particular financial asset, all interests in that financial asset held by the securities intermediary are held by the securities intermediary for the entitlement holders, are not property of the securities intermediary, and are not subject to claims of creditors of the securities intermediary, except as otherwise provided in KRS 355.8-511 .
  2. An entitlement holder’s property interest with respect to a particular financial asset under subsection (1) of this section is a pro rata property interest in all interests in that financial asset held by the securities intermediary, without regard to the time the entitlement holder acquired the security entitlement or the time the securities intermediary acquired the interest in that financial asset.
  3. An entitlement holder’s property interest with respect to a particular financial asset under subsection (1) of this section may be enforced against the securities intermediary only by exercise of the entitlement holder’s rights under KRS 355.8-505 to 355.8-508 .
  4. An entitlement holder’s property interest with respect to a particular financial asset under subsection (1) of this section may be enforced against a purchaser of the financial asset or interest therein only if:
    1. Insolvency proceedings have been initiated by or against the securities intermediary;
    2. The securities intermediary does not have sufficient interests in the financial asset to satisfy the security entitlements of all of its entitlement holders to that financial asset;
    3. The securities intermediary violated its obligations under KRS 355.8-504 by transferring the financial asset or interest therein to the purchaser; and
    4. The purchaser is not protected under subsection (5) of this section. The trustee or other liquidator, acting on behalf of all entitlement holders having security entitlements with respect to a particular financial asset, may recover the financial asset, or interest therein, from the purchaser. If the trustee or other liquidator elects not to pursue that right, an entitlement holder whose security entitlement remains unsatisfied has the right to recover its interest in the financial asset from the purchaser.
  5. An action based on the entitlement holder’s property interest with respect to a particular financial asset under subsection (1) of this section, whether framed in conversion, replevin, constructive trust, equitable lien, or other theory, may not be asserted against any purchaser of a financial asset or interest therein who gives value, obtains control, and does not act in collusion with the securities intermediary in violating the securities intermediary’s obligations under KRS 355.8-504 .

History. Enact. Acts 1996, ch. 130, § 156, effective January 1, 1997.

Official Comment

  1. This section specifies the sense in which a security entitlement is an interest in the property held by the securities intermediary. It expresses the ordinary understanding that securities that a firm holds for its customers are not general assets of the firm subject to the claims of creditors. Since securities intermediaries generally do not segregate securities in such fashion that one could identify particular securities as the ones held for customers, it would not be realistic for this section to state that “customers’ securities” are not subject to creditors’ claims. Rather subsection (a) provides that to the extent necessary to satisfy all customer claims, all units of that security held by the firm are held for the entitlement holders, are not property of the securities intermediary, and are not subject to creditors’ claims, except as otherwise provided in Section 8-511.

    An entitlement holder’s property interest under this section is an interest with respect to a specific issue of securities or financial assets. For example, customers of a firm who have positions in XYZ common stock have security entitlements with respect to the XYZ common stock held by the intermediary, while other customers who have positions in ABC common stock have security entitlements with respect to the ABC common stock held by the intermediary.

    Subsection (b) makes clear that the property interest described in subsection (a) is an interest held in common by all entitlement holders who have entitlements to a particular security or other financial asset. Temporal factors are irrelevant. One entitlement holder cannot claim that its rights to the assets held by the intermediary are superior to the rights of another entitlement holder by virtue of having acquired those rights before, or after, the other entitlement holder. Nor does it matter whether the intermediary had sufficient assets to satisfy all entitlement holders’ claims at one point, but no longer does. Rather, all entitlement holders have a pro rata interest in whatever positions in that financial asset the intermediary holds.

    Although this section describes the property interest of entitlement holders in the assets held by the intermediary, it does not necessarily determine how property held by a failed intermediary will be distributed in insolvency proceedings. If the intermediary fails and its affairs are being administered in an insolvency proceeding, the applicable insolvency law governs how the various parties having claims against the firm are treated. For example, the distributional rules for stockbroker liquidation proceedings under the Bankruptcy Code and the Securities Investor Protection Act (‘SIPA’) provide that all customer property is distributed pro rata among all customers in proportion to the dollar value of their total positions, rather than dividing the property on an issue by issue basis. For intermediaries that are not subject to the Bankruptcy Code and SIPA, other insolvency law would determine what distributional rule is applied.

  2. Although this section recognizes that the entitlement holders of a securities intermediary have a property interest in the financial assets held by the intermediary, the incidents of this property interest are established by the rules of Article 8, not by common law property concepts. The traditional Article 8 rules on certificated securities were based on the idea that a paper certificate could be regarded as a nearly complete reification of the underlying right. The rules on transfer and the consequences of wrongful transfer could then be written using the same basic concepts as the rules for physical chattels. A person’s claim of ownership of a certificated security is a right to a specific identifiable physical object, and that right can be asserted against any person who ends up in possession of that physical certificate, unless cut off by the rules protecting purchasers for value without notice. Those concepts do not work for the indirect holding system. A security entitlement is not a claim to a specific identifiable thing; it is a package of rights and interests that a person has against the person’s securities intermediary and the property held by the intermediary. The idea that discrete objects might be traced through the hands of different persons has no place in the Revised Article 8 rules for the indirect holding system. The fundamental principles of the indirect holding system rules are that an entitlement holder’s own intermediary has the obligation to see to it that the entitlement holder receives all of the economic and corporate rights that comprise the financial asset, and that the entitlement holder can look only to that intermediary for performance of the obligations. The entitlement holder cannot assert rights directly against other persons, such as other intermediaries through whom the intermediary holds the positions, or third parties to whom the intermediary may have wrongfully transferred interests, except in extremely unusual circumstances where the third party was itself a participant in the wrongdoing. Subsections (c) through (e) reflect these fundamental principles.

    Subsection (c) provides that an entitlement holder’s property interest can be enforced against the intermediary only by exercise of the entitlement holder’s rights under Sections 8-505 through 8-508. These are the provisions that set out the duty of an intermediary to see to it that the entitlement holder receives all of the economic and corporate rights that comprise the security. If the intermediary is in insolvency proceedings and can no longer perform in accordance with the ordinary Part 5 rules, the applicable insolvency law will determine how the intermediary’s assets are to be distributed.

    Subsections (d) and (e) specify the limited circumstances in which an entitlement holder’s property interest can be asserted against a third person to whom the intermediary transferred a financial asset that was subject to the entitlement holder’s claim when held by the intermediary. Subsection (d) provides that the property interest of entitlement holders cannot be asserted against any transferee except in the circumstances therein specified. So long as the intermediary is solvent, the entitlement holders must look to the intermediary to satisfy their claims. If the intermediary does not hold financial assets corresponding to the entitlement holders’ claims, the intermediary has the duty to acquire them. See Section 8-504. Thus, paragraphs (1), (2), and (3) of subsection (d) specify that the only occasion in which the entitlement holders can pursue transferees is when the intermediary is unable to perform its obligation, and the transfer to the transferee was a violation of those obligations. Even in that case, a transferee who gave value and obtained control is protected by virtue of the rule in subsection (e), unless the transferee acted in collusion with the intermediary.

    Subsections (d) and (e) have the effect of protecting transferees from an intermediary against adverse claims arising out of assertions by the intermediary’s entitlement holders that the intermediary acted wrongfully in transferring the financial assets. These rules, however, operate in a slightly different fashion than traditional adverse claim cut-off rules. Rather than specifying that a certain class of transferee takes free from all claims, subsections (d) and (e) specify the circumstances in which this particular form of claim can be asserted against a transferee. Revised Article 8 also contains general adverse claim cut-off rules for the indirect holding system. See Sections 8-502 and 8-510. The rule of subsections (d) and (e) takes precedence over the general cut-off rules of those sections, because Section 8-503 itself defines and sets limits on the assertion of the property interest of entitlement holders. Thus, the question whether entitlement holders’ property interest can be asserted as an adverse claim against a transferee from the intermediary is governed by the collusion test of Section 8-503(e), rather than by the “without notice” test of Sections 8-502 and 8-510.

  3. The limitations that subsections (c) through (e) place on the ability of customers of a failed intermediary to recover securities or other financial assets from transferees are consistent with the fundamental policies of investor protection that underlie this article and other bodies of law governing the securities business. The commercial law rules for the securities holding and transfer system must be assessed from the forward-looking perspective of their impact on the vast number of transactions in which no wrongful conduct occurred or will occur, rather than from the post hoc perspective of what rule might be most advantageous to a particular class of persons in litigation that might arise out of the occasional case in which someone has acted wrongfully. Although one can devise hypothetical scenarios where particular customers might find it advantageous to be able to assert rights against someone other than the customers’ own intermediary, commercial law rules that permitted customers to do so would impair rather than promote the interest of investors and the safe and efficient operation of the clearance and settlement system. Suppose, for example, that Intermediary A transfers securities to B, that Intermediary A acted wrongfully as against its customers in so doing, and that after the transaction Intermediary A did not have sufficient securities to satisfy its obligations to its entitlement holders. Viewed solely from the standpoint of the customers of Intermediary A, it would seem that permitting the property to be recovered from B, would be good for investors. That, however, is not the case. B may itself be an intermediary with its own customers, or may be some other institution through which individuals invest, such as a pension fund or investment company. There is no reason to think that rules permitting customers of an intermediary to trace and recover securities that their intermediary wrongfully transferred work to the advantage of investors in general. To the contrary, application of such rules would often merely shift losses from one set of investors to another. The uncertainties that would result from rules permitting such recoveries would work to the disadvantage of all participants in the securities markets.

    The use of the collusion test in Section 8-503(e) furthers the interests of investors generally in the sound and efficient operation of the securities holding and settlement system. The effect of the choice of this standard is that customers of a failed intermediary must show that the transferee from whom they seek to recover was affirmatively engaged in wrongful conduct, rather than casting on the transferee any burden of showing that the transferee had no awareness of wrongful conduct by the failed intermediary. The rule of Section 8-503(e) is based on the long-standing policy that it is undesirable to impose upon purchasers of securities any duty to investigate whether their sellers may be acting wrongfully.

    Rather than imposing duties to investigate, the general policy of the commercial law of the securities holding and transfer system has been to eliminate legal rules that might induce participants to conduct investigations of the authority of persons transferring securities on behalf of others for fear that they might be held liable for participating in a wrongful transfer. The rules in Part 4 of Article 8 concerning transfers by fiduciaries provide a good example. Under Lowry v. Commercial & Farmers’ Bank, 15 F. Cas. 1040 (C.C.D. Md. 1848) (No. 8551), an issuer could be held liable for wrongful transfer if it registered transfer of securities by a fiduciary under circumstances where it had any reason to believe that the fiduciary may have been acting improperly. In one sense that seems to be advantageous for beneficiaries who might be harmed by wrongful conduct by fiduciaries. The consequence of the Lowry rule, however, was that in order to protect against risk of such liability, issuers developed the practice of requiring extensive documentation for fiduciary stock transfers, making such transfers cumbersome and time consuming. Accordingly, the rules in Part 4 of Article 8, and in the prior fiduciary transfer statutes, were designed to discourage transfer agents from conducting investigations into the rightfulness of transfers by fiduciaries.

    The rules of Revised Article 8 implement for the indirect holding system the same policies that the rules on protected purchasers and registration of transfer adopt for the direct holding system. A securities intermediary is, by definition, a person who is holding securities on behalf of other persons. There is nothing unusual or suspicious about a transaction in which a securities intermediary sells securities that it was holding for its customers. That is exactly what securities intermediaries are in business to do. The interests of customers of securities intermediaries would not be served by a rule that required counterparties to transfers from securities intermediaries to investigate whether the intermediary was acting wrongfully against its customers. Quite the contrary, such a rule would impair the ability of securities intermediaries to perform the function that customers want.

    The rules of Section 8-503(c) through (e) apply to transferees generally, including pledgees. The reasons for treating pledgees in the same fashion as other transferees are discussed in the Comments to Section 8-511. The statement in subsection (a) that an intermediary holds financial assets for customers and not as its own property does not, of course, mean that the intermediary lacks power to transfer the financial assets to others. For example, although Article 9 provides that for a security interest to attach the debtor must have “rights” in the collateral, see Section 9-203, the fact that an intermediary is holding a financial asset in a form that permits ready transfer means that it has such rights, even if the intermediary is acting wrongfully against its entitlement holders in granting the security interest. The question whether the secured party takes subject to the entitlement holder’s claim in such a case is governed by Section 8-511, which is an application to secured transactions of the general principles expressed in subsections (d) and (e) of this section.

Definitional Cross References:

“Control”. Section 8-106. “Entitlement holder”. Section 8-102(a)(7). “Financial asset”. Section 8-102(a)(9). “Insolvency proceedings”. Section 1-201(22). “Purchaser”. Sections 1-201(33) & 8-116. “Securities intermediary”. Section 8-102(a)(14). “Security entitlement”. Section 8-102(a)(17). “Value”. Sections 1-201(44) & 8-116.

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355.8-504. Duties of securities intermediary to maintain financial asset.

  1. A securities intermediary shall promptly obtain and thereafter maintain a financial asset in a quantity corresponding to the aggregate of all security entitlements it has established in favor of its entitlement holders with respect to that financial asset. The securities intermediary may maintain those financial assets directly or through one or more other securities intermediaries.
  2. Except to the extent otherwise agreed by its entitlement holder, a securities intermediary may not grant any security interests in a financial asset it is obligated to maintain pursuant to subsection (1) of this section.
  3. A securities intermediary satisfies the duty in subsection (1) of this section if:
    1. The securities intermediary acts with respect to the duty as agreed upon by the entitlement holder and the securities intermediary; or
    2. In the absence of agreement, the securities intermediary exercises due care in accordance with reasonable commercial standards to obtain and maintain the financial asset.
  4. This section does not apply to a clearing corporation that is itself the obligor of an option or similar obligation to which its entitlement holders have security entitlements.

History. Enact. Acts 1996, ch. 130, § 157, effective January 1, 1997.

Official Comment

  1. This section expresses one of the core elements of the relationships for which the Part 5 rules were designed, to wit, that a securities intermediary undertakes to hold financial assets corresponding to the security entitlements of its entitlement holders. The locution “shall promptly obtain and shall thereafter maintain” is taken from the corresponding regulation under federal securities law, 17 C.F.R. G.S. 240.15c3-3. This section recognizes the reality that as the securities business is conducted today, it is not possible to identify particular securities as belonging to customers as distinguished from other particular securities that are the firm’s own property. Securities firms typically keep all securities in fungible form, and may maintain their inventory of a particular security in various locations and forms, including physical securities held in vaults or in transit to transfer agents, and book entry positions at one or more clearing corporations. Accordingly, this section states that a securities intermediary shall maintain a quantity of financial assets corresponding to the aggregate of all security entitlements it has established. The last sentence of subsection (a) provides explicitly that the securities intermediary may hold directly or indirectly. That point is implicit in the use of the term “financial asset,” inasmuch as Section 8-102(a)(9) provides that the term “financial asset” may refer either to the underlying asset or the means by which it is held, including both security certificates and security entitlements.
  2. Subsection (b) states explicitly a point that is implicit in the notion that a securities intermediary must maintain financial assets corresponding to the security entitlements of its entitlement holders, to wit, that it is wrongful for a securities intermediary to grant security interests in positions that it needs to satisfy customers’ claims, except as authorized by the customers. This statement does not determine the rights of a secured party to whom an securities intermediary wrongfully grants a security interest; that issue is governed by Sections 8-503 and 8-511.

    Margin accounts are common examples of arrangements in which an entitlement holder authorizes the securities intermediary to grant security interests in the positions held for the entitlement holder. Securities firms commonly obtain the funds needed to provide margin loans to their customers by “rehypothecating” the customers’ securities. In order to facilitate rehypothecation, agreements between margin customers and their brokers commonly authorize the broker to commingle securities of all margin customers for rehypothecation to the lender who provides the financing. Brokers commonly rehypothecate customer securities having a value somewhat greater than the amount of the loan made to the customer, since the lenders who provide the necessary financing to the broker need some cushion of protection against the risk of decline in the value of the rehypothecated securities. The extent and manner in which a firm may rehypothecate customers’ securities are determined by the agreement between the intermediary and the entitlement holder and by applicable regulatory law. Current regulations under the federal securities laws require that brokers obtain the explicit consent of customers before pledging customer securities or commingling different customers’ securities for pledge. Federal regulations also limit the extent to which a broker may rehypothecate customer securities to 110% of the aggregate amount of the borrowings of all customers.

  3. The statement in this section that an intermediary must obtain and maintain financial assets corresponding to the aggregate of all security entitlements it has established is intended only to capture the general point that one of the key elements that distinguishes securities accounts from other relationships, such as deposit accounts, is that the intermediary undertakes to maintain a direct correspondence between the positions it holds and the claims of its customers. This section is not intended as a detailed specification of precisely how the intermediary is to perform this duty, nor whether there may be special circumstances in which an intermediary’s general duty is excused. Accordingly, the general statement of the duties of a securities intermediary in this and the following sections is supplemented by two other provisions. First, each of Sections 8-504 through 8-508 contains an “agreement/due care” provision. Second, Section 8-509 sets out general qualifications on the duties stated in these sections, including the important point that compliance with corresponding regulatory provisions constitutes compliance with the Article 8 duties.
  4. The “agreement/due care” provision in subsection (c) of this section is necessary to provide sufficient flexibility to accommodate the general duty stated in subsection (a) to the wide variety of circumstances that may be encountered in the modern securities holding system. For the most common forms of publicly traded securities, the modern depository-based indirect holding system has made the likelihood of an actual loss of securities remote, though correctable errors in accounting or temporary interruptions of data processing facilities may occur. Indeed, one of the reasons for the evolution of book-entry systems is to eliminate the risk of loss or destruction of physical certificates. There are, however, some forms of securities and other financial assets which must still be held in physical certificated form, with the attendant risk of loss or destruction. Risk of loss or delay may be a more significant consideration in connection with foreign securities. An American securities intermediary may well be willing to hold a foreign security in a securities account for its customer, but the intermediary may have relatively little choice of or control over foreign intermediaries through which the security must in turn be held. Accordingly, it is common for American securities intermediaries to disclaim responsibility for custodial risk of holding through foreign intermediaries.

    Subsection (c)(1) provides that a securities intermediary satisfies the duty stated in subsection (a) if the intermediary acts with respect to that duty in accordance with the agreement between the intermediary and the entitlement holder. Subsection (c)(2) provides that if there is no agreement on the matter, the intermediary satisfies the subsection (a) duty if the intermediary exercises due care in accordance with reasonable commercial standards to obtain and maintain the financial asset in question. This formulation does not state that the intermediary has a universally applicable statutory duty of due care. Section 1-102(a)(3) provides that statutory duties of due care cannot be disclaimed by agreement, but the “agreement/due care” formula contemplates that there may be particular circumstances where the parties do not wish to create a specific duty of due care, for example, with respect to foreign securities. Under subsection (c)(1), compliance with the agreement constitutes satisfaction of the subsection (a) duty, whether or not the agreement provides that the intermediary will exercise due care.

    In each of the sections where the “agreement/due care” formula is used, it provides that entering into an agreement and performing in accordance with that agreement is a method by which the securities intermediary may satisfy the statutory duty stated in that section. Accordingly, the general obligation of good faith performance of statutory and contract duties, see Sections 1-203 and 8-102(a)(10), would apply to such an agreement. It would not be consistent with the obligation of good faith performance for an agreement to purport to establish the usual sort of arrangement between an intermediary and entitlement holder, yet disclaim altogether one of the basic elements that define that relationship. For example, an agreement stating that an intermediary assumes no responsibilities whatsoever for the safekeeping any of the entitlement holder’s securities positions would not be consistent with good faith performance of the intermediary’s duty to obtain and maintain financial assets corresponding to the entitlement holder’s security entitlements.

    To the extent that no agreement under subsection (c)(1) has specified the details of the intermediary’s performance of the subsection (a) duty, subsection (c)(2) provides that the intermediary satisfies that duty if it exercises due care in accordance with reasonable commercial standards. The duty of care includes both care in the intermediary’s own operations and care in the selection of other intermediaries through whom the intermediary holds the assets in question. The statement of the obligation of due care is meant to incorporate the principles of the common law under which the specific actions or precautions necessary to meet the obligation of care are determined by such factors as the nature and value of the property, the customs and practices of the business, and the like.

  5. This section necessarily states the duty of a securities intermediary to obtain and maintain financial assets only at the very general and abstract level. For the most part, these matters are specified in great detail by regulatory law. Broker-dealers registered under the federal securities laws are subject to detailed regulation concerning the safeguarding of customer securities. See 17 C.F.R. 240.15c3-3. Section 8-509(a) provides explicitly that if a securities intermediary complies with such regulatory law, that constitutes compliance with Section 8-503. In certain circumstances, these rules permit a firm to be in a position where it temporarily lacks a sufficient quantity of financial assets to satisfy all customer claims. For example, if another firm has failed to make a delivery to the firm in settlement of a trade, the firm is permitted a certain period of time to clear up the problem before it is obligated to obtain the necessary securities from some other source.
  6. Subsection (d) is intended to recognize that there are some circumstances, where the duty to maintain a sufficient quantity of financial assets does not apply because the intermediary is not holding anything on behalf of others. For example, the Options Clearing Corporation is treated as a “securities intermediary” under this Article, although it does not itself hold options on behalf of its participants. Rather, it becomes the issuer of the options, by virtue of guaranteeing the obligations of participants in the clearing corporation who have written or purchased the options cleared through it. See Section 8-103(e). Accordingly, the general duty of an intermediary under subsection (a) does not apply, nor would other provisions of Part 5 that depend upon the existence of a requirement that the securities intermediary hold financial assets, such as Sections 8-503 and 8-508.

Definitional Cross References:

“Agreement”. Section 1-201(3). “Clearing corporation”. Section 8-102(a)(5). “Entitlement holder”. Section 8-102(a)(7). “Financial asset”. Section 8-102(a)(9). “Securities intermediary”. Section 8-102(a)(14). “Security entitlement”. Section 8-102(a)(17).

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355.8-505. Duty of securities intermediary with respect to payments and distributions.

  1. A securities intermediary shall take action to obtain a payment or distribution made by the issuer of a financial asset. A securities intermediary satisfies the duty if:
    1. The securities intermediary acts with respect to the duty as agreed upon by the entitlement holder and the securities intermediary; or
    2. In the absence of agreement, the securities intermediary exercises due care in accordance with reasonable commercial standards to attempt to obtain the payment or distribution.
  2. A securities intermediary is obligated to its entitlement holder for a payment or distribution made by the issuer of a financial asset if the payment or distribution is received by the securities intermediary.

History. Enact. Acts 1996, ch. 130, § 158, effective January 1, 1997.

Official Comment

  1. One of the core elements of the securities account relationships for which the Part 5 rules were designed is that the securities intermediary passes through to the entitlement holders the economic benefit of ownership of the financial asset, such as payments and distributions made by the issuer. Subsection (a) expresses the ordinary understanding that a securities intermediary will take appropriate action to see to it that any payments or distributions made by the issuer are received. One of the main reasons that investors make use of securities intermediaries is to obtain the services of a professional in performing the record-keeping and other functions necessary to ensure that payments and other distributions are received.
  2. Subsection (a) incorporates the same “agreement/due care” formula as the other provisions of part 5 dealing with the duties of a securities intermediary. See comment 4 to Section 8-504. This formulation permits the parties to specify by agreement what action, if any, the intermediary is to take with respect to the duty to obtain payments and distributions. In the absence of specification by agreement, the intermediary satisfies the duty if the intermediary exercises due care in accordance with reasonable commercial standards. The provisions of Section 8-509 also apply to the Section 8-505 duty, so that compliance with applicable regulatory requirements constitutes compliance with the Section 8-505 duty.
  3. Subsection (b) provides that a securities intermediary is obligated to its entitlement holder for those payments or distributions made by the issuer that are in fact received by the intermediary. It does not deal with the details of the time and manner of payment. Moreover, as with any other monetary obligation, the obligation to pay may be subject to other rights of the obligor, by way of set-off, counterclaim, or the like. Section 8-509(c) makes this point explicit.

Definitional Cross References:

“Agreement”. Section 1-201(3). “Entitlement holder”. Section 8-102(a)(7). “Financial asset”. Section 8-102(a)(9). “Securities intermediary”. Section 8-102(a)(14). “Security entitlement”. Section 8-102(a)(17).

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355.8-506. Duty of securities intermediary to exercise rights as directed by entitlement holder.

A securities intermediary shall exercise rights with respect to a financial asset if directed to do so by an entitlement holder. A securities intermediary satisfies the duty if:

  1. The securities intermediary acts with respect to the duty as agreed upon by the entitlement holder and the securities intermediary; or
  2. In the absence of agreement, the securities intermediary either places the entitlement holder in a position to exercise the rights directly or exercises due care in accordance with reasonable commercial standards to follow the direction of the entitlement holder.

History. Enact. Acts 1996, ch. 130, § 159, effective January 1, 1997.

Official Comment

  1. Another of the core elements of the securities account relationships for which the Part 5 rules were designed is that although the intermediary may, by virtue of the structure of the indirect holding system, be the party who has the power to exercise the corporate and other rights that come from holding the security, the intermediary exercises these powers as representative of the entitlement holder rather than at its own discretion. This characteristic is one of the things that distinguishes a securities account from other arrangements where one person holds securities “on behalf of” another, such as the relationship between a mutual fund and its shareholders or a trustee and its beneficiary.
  2. The fact that the intermediary exercises the rights of security holding as representative of the entitlement holder does not, of course, preclude the entitlement holder from conferring discretionary authority upon the intermediary. Arrangements are not uncommon in which investors do not wish to have their intermediaries forward proxy materials or other information. Thus, this section provides that the intermediary shall exercise corporate and other rights “if directed to do so” by the entitlement holder. Moreover, as with the other Part 5 duties, the “agreement/due care” formulation is used in stating how the intermediary is to perform this duty. This section also provides that the intermediary satisfies the duty if it places the entitlement holder in a position to exercise the rights directly. This is to take account of the fact that some of the rights attendant upon ownership of the security, such as rights to bring derivative and other litigation, are far removed from the matters that intermediaries are expected to perform.
  3. This section, and the two that follow, deal with the aspects of securities holding that are related to investment decisions. For example, one of the rights of holding a particular security that would fall within the purview of this section would be the right to exercise a conversion right for a convertible security. It is quite common for investors to confer discretionary authority upon another person, such as an investment adviser, with respect to these rights and other investment decisions. Because this section, and the other sections of Part 5, all specify that a securities intermediary satisfies the Part 5 duties if it acts in accordance with the entitlement holder’s agreement, there is no inconsistency between the statement of duties of a securities intermediary and these common arrangements.
  4. Section 8-509 also applies to the Section 8-506 duty, so that compliance with applicable regulatory requirements constitutes compliance with this duty. This is quite important in this context, since the federal securities laws establish a comprehensive system of regulation of the distribution of proxy materials and exercise of voting rights with respect to securities held through brokers and other intermediaries. By virtue of Section 8-509(a), compliance with such regulatory requirement constitutes compliance with the Section 8-506 duty.

Definitional Cross References:

“Agreement”. Section 1-201(3). “Entitlement holder”. Section 8-102(a)(7). “Financial asset”. Section 8-102(a)(9). “Securities intermediary”. Section 8-102(a)(14). “Security entitlement”. Section 8-102(a)(17).

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355.8-507. Duty of securities intermediary to comply with entitlement order.

  1. A securities intermediary shall comply with an entitlement order if the entitlement order is originated by the appropriate person, the securities intermediary has had reasonable opportunity to assure itself that the entitlement order is genuine and authorized, and the securities intermediary has had reasonable opportunity to comply with the entitlement order. A securities intermediary satisfies the duty if:
    1. The securities intermediary acts with respect to the duty as agreed upon by the entitlement holder and the securities intermediary; or
    2. In the absence of agreement, the securities intermediary exercises due care in accordance with reasonable commercial standards to comply with the entitlement order.
  2. If a securities intermediary transfers a financial asset pursuant to an ineffective entitlement order, the securities intermediary shall reestablish a security entitlement in favor of the person entitled to it, and pay or credit any payments or distributions that the person did not receive as a result of the wrongful transfer. If the securities intermediary does not reestablish a security entitlement, the securities intermediary is liable to the entitlement holder for damages.

History. Enact. Acts 1996, ch. 130, § 160, effective January 1, 1997.

Official Comment

  1. Subsection (a) of this section states another aspect of duties of securities intermediaries that make up security entitlements - the securities intermediary’s duty to comply with entitlement orders. One of the main reasons for holding securities through securities intermediaries is to enable rapid transfer in settlement of trades. Thus the right to have one’s orders for disposition of the security entitlement honored is an inherent part of the relationship. Subsection (b) states the correlative liability of a securities intermediary for transferring a financial asset from an entitlement holder’s account pursuant to an entitlement order that was not effective.
  2. The duty to comply with entitlement orders is subject to several qualifications. The intermediary has a duty only with respect to an entitlement order that is in fact originated by the appropriate person. Moreover, the intermediary has a duty only if it has had reasonable opportunity to assure itself that the order is genuine and authorized, and reasonable opportunity to comply with the order. The same “agreement/due care” formula is used in this section as in the other Part 5 sections on the duties of intermediaries, and the rules of Section 8-509 apply to the Section 8-507 duty.
  3. Appropriate person is defined in Section 8-107. In the usual case, the appropriate person is the entitlement holder, see Section 8-107(a)(3). Entitlement holder is defined in Section 8-102(a)(7) as the person “identified in the records of a securities intermediary as the person having a security entitlement.” Thus, the general rule is that an intermediary’s duty with respect to entitlement orders runs only to the person with whom the intermediary has established a relationship. One of the basic principles of the indirect holding system is that securities intermediaries owe duties only to their own customers. See also Section 8-115. The only situation in which a securities intermediary has a duty to comply with entitlement orders originated by a person other than the person with whom the intermediary established a relationship is covered by Section 8-107(a)(4) and (a)(5), which provide that the term “appropriate person” includes the successor or personal representative of a decedent, or the custodian or guardian of a person who lacks capacity. If the entitlement holder is competent, another person does not fall within the defined term “appropriate person” merely by virtue of having power to act as an agent for the entitlement holder. Thus, an intermediary is not required to determine at its peril whether a person who purports to be authorized to act for an entitlement holder is in fact authorized to do so. If an entitlement holder wishes to be able to act through agents, the entitlement holder can establish appropriate arrangements in advance with the securities intermediary.

    One important application of this principle is that if an entitlement holder grants a security interest in its security entitlements to a third-party lender, the intermediary owes no duties to the secured party, unless the intermediary has entered into a “control” agreement in which it agrees to act on entitlement orders originated by the secured party. See Section 8-106. Even though the security agreement or some other document may give the secured party authority to act as agent for the debtor, that would not make the secured party an “appropriate person” to whom the security intermediary owes duties. If the entitlement holder and securities intermediary have agreed to such a control arrangement, then the intermediary’s action in following instructions from the secured party would satisfy the subsection (a) duty. Although an agent, such as the secured party in this example, is not an “appropriate person,” an entitlement order is “effective” if originated by an authorized person. See Section 8-107(a) and (b). Moreover, Section 8-507(a) provides that the intermediary satisfies its duty if it acts in accordance with the entitlement holder’s agreement.

  4. Subsection (b) provides that an intermediary is liable for a wrongful transfer if the entitlement order was “ineffective.” Section 8-107 specifies whether an entitlement order is effective. An “effective entitlement order” is different from an “entitlement order originated by an appropriate person.” An entitlement order is effective under Section 8-107(b) if it is made by the appropriate person, or by a person who has power to act for the appropriate person under the law of agency, or if the appropriate person has ratified the entitlement order or is precluded from denying its effectiveness. Thus, although a securities intermediary does not have a duty to act on an entitlement order originated by the entitlement holder’s agent, the intermediary is not liable for wrongful transfer if it does so.

    Subsection (b), together with Section 8-107, has the effect of leaving to other law most of the questions of the sort dealt with by Article 4A for wire transfers of funds, such as allocation between the securities intermediary and the entitlement holder of the risk of fraudulent entitlement orders.

  5. The term entitlement order does not cover all directions that a customer might give a broker concerning securities held through the broker. Article 8 is not a codification of all of the law of customers and stockbrokers. Article 8 deals with the settlement of securities trades, not the trades. The term entitlement order does not refer to instructions to a broker to make trades, that is, enter into contracts for the purchase or sale of securities. Rather, the entitlement order is the mechanism of transfer for securities held through intermediaries, just as indorsements and instructions are the mechanism for securities held directly. In the ordinary case the customer’s direction to the broker to deliver the securities at settlement is implicit in the customer’s instruction to the broker to sell. The distinction is, however, significant in that this section has no application to the relationship between the customer and broker with respect to the trade itself. For example, assertions by a customer that it was damaged by a broker’s failure to execute a trading order sufficiently rapidly or in the proper manner are not governed by this article.

Definitional Cross References:

“Agreement”. Section 1-201(3). “Appropriate person”. Section 8-107. “Effective”. Section 8-107. “Entitlement holder”. Section 8-102(a)(7). “Entitlement order”. Section 8-102(a)(8). “Financial asset”. Section 8-102(a)(9). “Securities intermediary”. Section 8-102(a)(14). “Security entitlement”. Section 8-102(a)(17).

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355.8-508. Duty of securities intermediary to change entitlement holder’s position to other form of security holding.

A securities intermediary shall act at the direction of an entitlement holder to change a security entitlement into another available form of holding for which the entitlement holder is eligible, or to cause the financial asset to be transferred to a securities account of the entitlement holder with another securities intermediary. A securities intermediary satisfies the duty if:

  1. The securities intermediary acts as agreed upon by the entitlement holder and the securities intermediary; or
  2. In the absence of agreement, the securities intermediary exercises due care in accordance with reasonable commercial standards to follow the direction of the entitlement holder.

History. Enact. Acts 1996, ch. 130, § 161, effective January 1, 1997.

Official Comment

  1. This section states another aspect of the duties of securities intermediaries that make up security entitlements - the obligation of the securities intermediary to change an entitlement holder’s position into any other form of holding for which the entitlement holder is eligible or to transfer the entitlement holder’s position to an account at another intermediary. This section does not state unconditionally that the securities intermediary is obligated to turn over a certificate to the customer or to cause the customer to be registered on the books of the issuer, because the customer may not be eligible to hold the security directly. For example, municipal bonds are now commonly issued in “book-entry only” form, in which the only entity that the issuer will register on its own books is a depository.

    If security certificates in registered form are issued for the security, and individuals are eligible to have the security registered in their own name, the entitlement holder can request that the intermediary deliver or cause to be delivered to the entitlement holder a certificate registered in the name of the entitlement holder or a certificate indorsed in blank or specially indorsed to the entitlement holder. If security certificates in bearer form are issued for the security, the entitlement holder can request that the intermediary deliver or cause to be delivered a certificate in bearer form. If the security can be held by individuals directly in uncertificated form, the entitlement holder can request that the security be registered in its name. The specification of this duty does not determine the pricing terms of the agreement in which the duty arises.

  2. The same “agreement/due care” formula is used in this section as in the other Part 5 sections on the duties of intermediaries. So too, the rules of Section 8-509 apply to the Section 8-508 duty.

Definitional Cross References:

“Agreement”. Section 1-201(3). “Entitlement holder”. Section 8-102(a)(7). “Financial asset”. Section 8-102(a)(9). “Securities intermediary”. Section 8-102(a)(14). “Security entitlement”. Section 8-102(a)(17).

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355.8-509. Specification of duties of securities intermediary by other statute or regulation — Manner of performance of duties of securities intermediary and exercise of rights of entitlement holder.

  1. If the substance of a duty imposed upon a securities intermediary by KRS 355.8-504 to 355.8-508 is the subject of other statute, regulation, or rule, compliance with that statute, regulation, or rule satisfies the duty.
  2. To the extent that specific standards for the performance of the duties of a securities intermediary or the exercise of the rights of an entitlement holder are not specified by other statute, regulation, or rule or by agreement between the securities intermediary and entitlement holder, the securities intermediary shall perform its duties and the entitlement holder shall exercise its rights in a commercially reasonable manner.
  3. The obligation of a securities intermediary to perform the duties imposed by KRS 355.8-504 to 355.8-508 is subject to:
    1. Rights of the securities intermediary arising out of a security interest under a security agreement with the entitlement holder or otherwise; and
    2. Rights of the securities intermediary under other law, regulation, rule, or agreement to withhold performance of its duties as a result of unfulfilled obligations of the entitlement holder to the securities intermediary.
  4. KRS 355.8-504 to 355.8-508 do not require a securities intermediary to take any action that is prohibited by other statute, regulation, or rule.

History. Enact. Acts 1996, ch. 130, § 162, effective January 1, 1997.

Official Comment

This article is not a comprehensive statement of the law governing the relationship between broker-dealers or other securities intermediaries and their customers. Most of the law governing that relationship is the common law of contract and agency, supplemented or supplanted by regulatory law. This Article deals only with the most basic commercial/property law principles governing the relationship. Although Sections 8-504 through 8-508 specify certain duties of securities intermediaries to entitlement holders, the point of these sections is to identify what it means to have a security entitlement, not to specify the details of performance of these duties.

For many intermediaries, regulatory law specifies in great detail the intermediary’s obligations on such matters as safekeeping of customer property, distribution of proxy materials, and the like. To avoid any conflict between the general statement of duties in this Article and the specific statement of intermediaries’ obligations in such regulatory schemes, subsection (a) provides that compliance with applicable regulation constitutes compliance with the duties specified in Sections 8-504 through 8-508.

Definitional Cross References:

“Agreement”. Section 1-201(3). “Entitlement holder”. Section 8-102(a)(7). “Securities intermediary”. Section 8-102(a)(14). “Security agreement”. Section 9-102(a)(73). “Security interest”. Section 1-201(37).

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355.8-510. Rights of purchaser of security entitlement from entitlement holder.

  1. In a case not covered by the priority rules in Article 9 of this chapter or the rules stated in subsection (3) of this section, an action based on an adverse claim to a financial asset or security entitlement, whether framed in conversion, replevin, constructive trust, equitable lien, or other theory, may not be asserted against a person who purchases a security entitlement, or an interest therein, from an entitlement holder if the purchaser gives value, does not have notice of the adverse claim, and obtains control.
  2. If an adverse claim could not have been asserted against an entitlement holder under KRS 355.8-502 , the adverse claim cannot be asserted against a person who purchases a security entitlement, or an interest therein, from the entitlement holder.
  3. In a case not covered by the priority rules in Article 9 of this chapter, a purchaser for value of a security entitlement, or an interest therein, who obtains control has priority over a purchaser of a security entitlement, or an interest therein, who does not obtain control. Except as otherwise provided in subsection (4) of this section, purchasers who have control rank according to priority in time of:
    1. The purchaser’s becoming the person for whom the securities account, in which the security entitlement is carried, is maintained, if the purchaser obtained control under KRS 355.8-106 (4)(a);
    2. The securities intermediary’s agreement to comply with the purchaser’s entitlement orders with respect to security entitlements carried or to be carried in the securities account in which the security entitlement is carried, if the purchaser obtained control under KRS 355.8-106 (4)(b); or
    3. If the purchaser obtained control through another person under KRS 355.8-106(4)(c), the time on which priority would be based under this subsection if the other person were the secured party.
  4. A securities intermediary as purchaser has priority over a conflicting purchaser who has control unless otherwise agreed by the securities intermediary.

History. Enact. Acts 1996, ch. 130, § 163, effective January 1, 1997; 2000, ch. 408, § 174, effective July 1, 2001.

Official Comment

  1. This section specifies certain rules concerning the rights of persons who purchase interests in security entitlements from entitlement holders. The rules of this section are provided to take account of cases where the purchaser’s rights are derivative from the rights of another person who is and continues to be the entitlement holder.
  2. Subsection (a) provides that no adverse claim can be asserted against a purchaser of an interest in a security entitlement if the purchaser gives value, obtains control, and does not have notice of the adverse claim. The primary purpose of this rule is to give adverse claim protection to persons who take security interests in security entitlements and obtain control, but do not themselves become entitlement holders.

    The following examples illustrate subsection (a):

    Example 1. X steals a certificated bearer bond from Owner. X delivers the certificate to Able & Co. for credit to X’s securities account. Later, X borrows from Bank and grants Bank a security interest in the security entitlement. Bank obtains control under Section 8-106(d)(ii) by virtue of an agreement in which Able agrees to comply with entitlement orders originated by Bank. X absconds.

    Example 2. Same facts as in Example 1, except that Bank does not obtain a control agreement. Instead, Bank perfects by filing a financing statement.

    In both of these examples, when X deposited the bonds X acquired a security entitlement under Section 8-501. Under other law, Owner may be able have a constructive trust imposed on the security entitlement as the traceable product of the bonds that X misappropriated. X granted a security interest in that entitlement to Bank. Bank was a purchaser of an interest in the security entitlement from X. In Example 1, although Bank was not a person who acquired a security entitlement from the intermediary, Bank did obtain control. If Bank did not have notice of Owner’s claim, Section 8-510(a) precludes Owner from asserting an adverse claim against Bank. In Example 2, Bank had a perfected security interest, but did not obtain control. Accordingly, Section 8-510(a) does not preclude Owner from asserting its adverse claim against Bank.

  3. Subsection (b) applies to the indirect holding system a limited version of the “shelter principle.” The following example illustrates the relatively limited class of cases for which it may be needed:

    Example 3. Thief steals a certificated bearer bond from Owner. Thief delivers the certificate to Able & Co. for credit to Thief’s securities account. Able forwards the certificate to a clearing corporation for credit to Able’s account. Later Thief instructs Able to sell the positions in the bonds. Able sells to Baker & Co., acting as broker for Buyer. The trade is settled by book-entries in the accounts of Able and Baker at the clearing corporation, and in the accounts of Thief and Buyer at Able and Baker respectively. Owner may be able to reconstruct the trade records to show that settlement occurred in such fashion that the ‘same bonds’ that were carried in Thief’s account at Able are traceable into Buyer’s account at Baker. Buyer later decides to donate the bonds to Alma Mater University and executes an assignment of its rights as entitlement holder to Alma Mater.

    Buyer had a position in the bonds, which Buyer held in the form of a security entitlement against Baker. Buyer then made a gift of the position to Alma Mater. Although Alma Mater is a purchaser, Section 1-201(33), it did not give value. Thus, Alma Mater is a person who purchased a security entitlement, or an interest therein, from an entitlement holder (Buyer). Buyer was protected against Owner’s adverse claim by the Section 8-502 rule. Thus, by virtue of the Section 8-510(b), Owner is also precluded from asserting an adverse claim against Alma Mater.

  4. Subsection (c) specifies a priority rule for cases where an entitlement holder transfers conflicting interests in the same security entitlement to different purchasers. It follows the same principle as the Article 9 priority rule for investment property, that is, control trumps non-control. Indeed, the most significant category of conflicting “purchasers” may be secured parties. Priority questions for security interests, however, are governed by the rules in Article 9. Subsection (c) applies only to cases not covered by the Article 9 rules. It is intended primarily for disputes over conflicting claims arising out of repurchase agreement transactions that are not covered by the other rules set out in Articles 8 and 9.

    The following example illustrates subsection (c):

    Example 4. Dealer holds securities through an account at Alpha Bank. Alpha Bank in turn holds through a clearing corporation account. Dealer transfers securities to RP1 in a “hold in custody” repo transaction. Dealer then transfers the same securities to RP2 in another repo transaction. The repo to RP2 is implemented by transferring the securities from Dealer’s regular account at Alpha Bank to a special account maintained by Alpha Bank for Dealer and RP2. The agreement among Dealer, RP2, and Alpha Bank provides that Dealer can make substitutions for the securities but RP2 can direct Alpha Bank to sell any securities held in the special account. Dealer becomes insolvent. RP1 claims a prior interest in the securities transferred to RP2.

    In this example Dealer remained the entitlement holder but agreed that RP2 could initiate entitlement orders to Dealer’s security intermediary, Alpha Bank. If RP2 had become the entitlement holder, the adverse claim rule of Section 8-502 would apply. Even if RP2 does not become the entitlement holder, the arrangement among Dealer, Alpha Bank, and RP2 does suffice to give RP2 control. Thus, under Section 8-510(c), RP2 has priority over RP1, because RP2 is a purchaser who obtained control, and RP1 is a purchaser who did not obtain control. The same result could be reached under Section 8-510(a) which provides that RP1’s earlier in time interest cannot be asserted as an adverse claim against RP2. The same result would follow under the Article 9 priority rules if the interests of RP1 and RP2 are characterized as “security interests,” see Section 9-328(a)(1). The main point of the rules of Section 8-510(c) is to ensure that there will be clear rules to cover the conflicting claims of RP1 and RP2 without characterizing their interests as Article 9 security interests.

    The priority rules in Article 9 for conflicting security interests also include a default temporal priority rule for cases where multiple secured parties have obtained control but omitted to specify their respective rights by agreement. See Section 9-328(a)(2) and Comment 5 to Section 9-328. Because the purchaser priority rule in Section 8-510(c) is intended to track the Article 9 priority rules, it too has a temporal priority rule for cases where multiple nonsecured party purchasers have obtained control but omitted to specify their respective rights by agreement. The rule is patterned on Section 9-328(a)(2).

  5. If a securities intermediary itself is a purchaser, subsection (d) provides that it has priority over the interest of another purchaser who has control. Article 9 contains a similar rule. See Section 9-328(a)(3).

Definitional Cross References:

“Adverse claim”. Section 8-102(a)(1). “Control”. Section 8-106. “Entitlement holder”. Section 8-102(a)(7). “Notice of adverse claim”. Section 8-105. “Purchase”. Section 1-201(32). “Purchaser”. Sections 1-201(33) & 8-116. “Securities intermediary”. Section 8-102(a)(14). “Security entitlement”. Section 8-102(a)(17). “Value”. Sections 1-201(44) & 8-116.

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355.8-511. Priority among security interests and entitlement holders.

  1. Except as otherwise provided in subsections (2) and (3) of this section, if a securities intermediary does not have sufficient interests in a particular financial asset to satisfy both its obligations to entitlement holders who have security entitlements to that financial asset and its obligation to a creditor of the securities intermediary who has a security interest in that financial asset, the claims of entitlement holders, other than the creditor, have priority over the claim of the creditor.
  2. A claim of a creditor of a securities intermediary who has a security interest in a financial asset held by a securities intermediary has priority over claims of the securities intermediary’s entitlement holders who have security entitlements with respect to that financial asset if the creditor has control over the financial asset.
  3. If a clearing corporation does not have sufficient financial assets to satisfy both its obligations to entitlement holders who have security entitlements with respect to a financial asset and its obligation to a creditor of the clearing corporation who has a security interest in that financial asset, the claim of the creditor has priority over the claims of entitlement holders.

History. Enact. Acts 1996, ch. 130, § 164, effective January 1, 1997.

Official Comment

  1. This section sets out priority rules for circumstances in which a securities intermediary fails leaving an insufficient quantity of securities or other financial assets to satisfy the claims of its entitlement holders and the claims of creditors to whom it has granted security interests in financial assets held by it. Subsection (a) provides that entitlement holders’ claims have priority except as otherwise provided in subsection (b), and subsection (b) provides that the secured creditor’s claim has priority if the secured creditor obtains control, as defined in Section 8-106. The following examples illustrate the operation of these rules.

    Example 1. Able & Co., a broker, borrows from Alpha Bank and grants Alpha Bank a security interest pursuant to a written agreement which identifies certain securities that are to be collateral for the loan, either specifically or by category. Able holds these securities in a clearing corporation account. Able becomes insolvent and it is discovered that Able holds insufficient securities to satisfy the claims of customers who have paid for securities that they held in accounts with Able and the collateral claims of Alpha Bank. Alpha Bank’s security interest in the security entitlements that Able holds through the clearing corporation account may be perfected under the automatic perfection rule of Section 9-309(10), but Alpha Bank did not obtain control under Section 8-106. Thus, under Section 8-511(a) the entitlement holders’ claims have priority over Alpha Bank’s claim.

    Example 2. Able & Co., a broker, borrows from Beta Bank and grants Beta Bank a security interest in securities that Able holds in a clearing corporation account. Pursuant to the security agreement, the securities are debited from Alpha’s account and credited to Beta’s account in the clearing corporation account. Able becomes insolvent and it is discovered that Able holds insufficient securities to satisfy the claims of customers who have paid for securities that they held in accounts with Able and the collateral claims of Alpha Bank. Although the transaction between Able and Beta took the form of an outright transfer on the clearing corporation’s books, as between Able and Beta, Able remains the owner and Beta has a security interest. In that respect the situation is no different than if Able had delivered bearer bonds to Beta in pledge to secure a loan. Beta’s security interest is perfected, and Beta obtained control. See Sections 8-106 and 9-314. Under Section 8-511(b), Beta Bank’s security interest has priority over claims of Able’s customers.

    The result in Example 2 is an application to this particular setting of the general principle expressed in Section 8-503, and explained in the Comments thereto, that the entitlement holders of a securities intermediary cannot assert rights against third parties to whom the intermediary has wrongfully transferred interests, except in extremely unusual circumstances where the third party was itself a participant in the transferor’s wrongdoing. Under subsection (b) the claim of a secured creditor of a securities intermediary has priority over the claims of entitlement holders if the secured creditor has obtained control. If, however, the secured creditor acted in collusion with the intermediary in violating the intermediary’s obligation to its entitlement holders, then under Section 8-503(e), the entitlement holders, through their representative in insolvency proceedings, could recover the interest from the secured creditor, that is, set aside the security interest.

  2. The risk that investors who hold through an intermediary will suffer a loss as a result of a wrongful pledge by the intermediary is no different than the risk that the intermediary might fail and not have the securities that it was supposed to be holding on behalf of its customers, either because the securities were never acquired by the intermediary or because the intermediary wrongfully sold securities that should have been kept to satisfy customers’ claims. Investors are protected against that risk by the regulatory regimes under which securities intermediaries operate. Intermediaries are required to maintain custody, through clearing corporation accounts or in other approved locations, of their customers’ securities and are prohibited from using customers’ securities in their own business activities. Securities firms who are carrying both customer and proprietary positions are not permitted to grant blanket liens to lenders covering all securities which they hold, for their own account or for their customers. Rather, securities firms designate specifically which positions they are pledging. Under SEC Rules 8c-1 and 15c2-1, customers’ securities can be pledged only to fund loans to customers, and only with the consent of the customers. Customers’ securities cannot be pledged for loans for the firm’s proprietary business; only proprietary positions can be pledged for proprietary loans. SEC Rule 15c3-3 implements these prohibitions in a fashion tailored to modern securities firm accounting systems by requiring brokers to maintain a sufficient inventory of securities, free from any liens, to satisfy the claims of all of their customers for fully paid and excess margin securities. Revised Article 8 mirrors that requirement, specifying in Section 8-504 that a securities intermediary must maintain a sufficient quantity of investment property to satisfy all security entitlements, and may not grant security interests in the positions it is required to hold for customers, except as authorized by the customers.

    If a failed brokerage has violated the customer protection regulations and does not have sufficient securities to satisfy customers’ claims, its customers are protected against loss from a shortfall by the federal Securities Investor Protection Act (“SIPA”). Securities firms required to register as brokers or dealers are also required to become members of the Securities Investor Protection Corporation (“SIPC”), which provides their customers with protection somewhat similar to that provided by FDIC and other deposit insurance programs for bank depositors. When a member firm fails, SIPC is authorized to initiate a liquidation proceeding under the provisions of SIPA. If the assets of the securities firm are insufficient to satisfy all customer claims, SIPA makes contributions to the estate from a fund financed by assessments on its members to protect customers against losses up to $500,000 for cash and securities held at member firms.

    Article 8 is premised on the view that the important policy of protecting investors against the risk of wrongful conduct by their intermediaries is sufficiently treated by other law.

  3. Subsection (c) sets out a special rule for secured financing provided to enable clearing corporations to complete settlement. The reasons that secured financing arrangements are needed in such circumstances are explained in Comment 7 to Section 9-115. In order to permit clearing corporations to establish liquidity facilities where necessary to ensure completion of settlement, subsection (c) provides a priority for secured lenders to such clearing corporations. Subsection (c) does not turn on control because the clearing corporation may be the top tier securities intermediary for the securities pledged, so that there may be no practicable method for conferring control on the lender.

Definitional Cross References:

“Clearing corporation”. Section 8-102(a)(5). “Control”. Section 8-106. “Entitlement holder”. Section 8-102(a)(7). “Financial asset”. Section 8-102(a)(9). “Securities intermediary”. Section 8-102(a)(14). “Security entitlement”. Section 8-102(a)(17). “Security interest”. Section 1-201(37). “Value”. Sections 1-201(44) & 8-116.

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Article 9. Secured Transactions — Sales of Accounts, Contract Rights and Chattel Paper.

Compiler’s Notes.

Article 9 of Chapter 355 was revised by the Kentucky General Assembly during its 2000 Regular Session, considered and enacted as Senate Bill 11 and appearing as Chapter 408 of the 2000 Acts. This bill was based on the 1999 revision of the Uniform Commercial Code by the American Law Institute and National Conference of Commissioners of Uniform State Laws.

The official comments in this article are copyrighted by the National Conference of Commissioners of Uniform State Laws and the American Law Institute, and are reproduced by permission.

Part 1. General Provisions

Subpart 1. Short Title, Definitions, and General Concepts

355.9-101. Short title.

This article may be cited as Uniform Commercial Code — Secured Transactions.

History. Enact. Acts 1958, ch. 77, § 9-101, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 21, effective July 1, 2001.

Official Comment

  1. Source . This article supersedes former Uniform Commercial Code (UCC) Article 9. As did its predecessor, it provides a comprehensive scheme for the regulation of security interests in personal property and fixtures. For the most part this Article follows the general approach and retains much of the terminology of former Article 9. In addition to describing many aspects of the operation and interpretation of this Article, these comments explain the material changes that this Article makes to former Article 9. Former Article 9 superseded the wide variety of pre-UCC security devices. Unlike the comments to former Article 9, however, these comments dwell very little on the pre-UCC state of the law. For that reason, the comments to former Article 9 will remain of substantial historical value and interest. They also will remain useful in understanding the background and general conceptual approach of this Article.

    Citations to “Bankruptcy Code section _________ ” in these comments are to Title 11 of the United States Code as in effect on December 31, 1998.

  2. Background and History . In 1990, the Permanent Editorial Board for the UCC with the support of its sponsors, The American Law Institute and the National Conference of Commissioners on Uniform State Laws, established a committee to study Article 9 of the UCC. The study committee issued its report as of December 1, 1992, recommending the creation of a drafting committee for the revision of Article 9 and also recommending numerous specific changes to Article 9. Organized in 1993, a drafting committee met fifteen times from 1993 to 1998. This article was approved by its sponsors in 1998.
  3. Reorganization and Renumbering; Captions; Style . This article reflects a substantial reorganization of former Article 9 and renumbering of most sections. New part 4 deals with several aspects of third-party rights and duties that are unrelated to perfection and priority. Some of these were covered by part 3 of former Article 9. Part 5 deals with filing (covered by former part 4) and part 6 deals with default and enforcement (covered by former part 5). Appendix I contains conforming revisions to other articles of the UCC, and Appendix II contains model provisions for production-money priority.

    This article also includes headings for the subsections as an aid to readers. Unlike section captions, which are part of the UCC, see Section 1-109, subsection headings are not a part of the official text itself and have not been approved by the sponsors. Each jurisdiction in which this Article is introduced may consider whether to adopt the headings as a part of the statute and whether to adopt a provision clarifying the effect, if any, to be given to the headings. This article also has been conformed to current style conventions.

  4. Summary of Revisions . Following is a brief summary of some of the more significant revisions of Article 9 that are included in this Article.
    1. Scope of Article 9 . This article expands the scope of Article 9 in several respects.

      Deposit accounts . Section 9-109 includes within this Article’s scope deposit accounts as original collateral, except in consumer transactions. Former Article 9 dealt with deposit accounts only as proceeds of other collateral.

      Sales of payment intangibles and promissory notes . Section 9-109 also includes within the scope of this Article most sales of “payment intangibles” (defined in Section 9-102 as general intangibles under which an account debtor’s principal obligation is monetary) and “promissory notes” (also defined in Section 9-102). Former Article 9 included sales of accounts and chattel paper, but not sales of payment intangibles or promissory notes. In its inclusion of sales of payment intangibles and promissory notes, this Article continues the drafting convention found in former Article 9; it provides that the sale of accounts, chattel paper, payment intangibles, or promissory notes creates a “security interest.” The definition of “account” in Section 9-102 also has been expanded to include various rights to payment that were general intangibles under former Article 9.

      Health-care-insurance receivables . Section 9-109 narrows Article 9’s exclusion of transfers of interests in insurance policies by carving out of the exclusion “health-care-insurance receivables” (defined in Section 9-102). A health-care-insurance receivable is included within the definition of “account” in Section 9-102.

      Nonpossessory statutory agricultural liens . Section 9-109 also brings nonpossessory statutory agricultural liens within the scope of Article 9.

      Consignments . Section 9-109 provides that “true” consignments—bailments for the purpose of sale by the bailee—are security interests covered by Article 9, with certain exceptions. See Section 9-102 (defining “consignment”). Currently, many consignments are subject to Article 9’s filing requirements by operation of former Section 2-326.

      Supporting obligations and property securing rights to payment . This article also addresses explicitly (i) obligations, such as guaranties and letters of credit, that support payment or performance of collateral such as accounts, chattel paper, and payment intangibles, and (ii) any property (including real property) that secures a right to payment or performance that is subject to an Article 9 security interest. See Sections 9-203, 9-308.

      Commercial tort claims . Section 9-109 expands the scope of Article 9 to include the assignment of commercial tort claims by narrowing the exclusion of tort claims generally. However, this Article continues to exclude tort claims for bodily injury and other nonbusiness tort claims of a natural person. See Section 9-102 (defining “commercial tort claim”).

      Transfers by states and governmental units of states . Section 9-109 narrows the exclusion of transfers by states and their governmental units. It excludes only transfers covered by another statute (other than a statute generally applicable to security interests) to the extent the statute governs the creation, perfection, priority, or enforcement of security interests.

      Nonassignable general intangibles, promissory notes, health-care-insurance receivables, and letter-of-credit rights . This article enables a security interest to attach to letter-of-credit rights, health-care-insurance receivables, promissory notes, and general intangibles, including contracts, permits, licenses, and franchises, notwithstanding a contractual or statutory prohibition against or limitation on assignment. This article explicitly protects third parties against any adverse effect of the creation or attempted enforcement of the security interest. See Sections 9-408 and 9-409.

      Subject to Sections 9-408 and 9-409 and two other exceptions (Sections 9-406, concerning accounts, chattel paper, and payment intangibles, and 9-407, concerning interests in leased goods), Section 9-401 establishes a baseline rule that the inclusion of transactions and collateral within the scope of Article 9 has no effect on non-Article 9 law dealing with the alienability or inalienability of property. For example, if a commercial tort claim is nonassignable under other applicable law, the fact that a security interest in the claim is within the scope of Article 9 does not override the other applicable law’s effective prohibition of assignment.

    2. Duties of Secured Party . This article provides for expanded duties of secured parties.

      Release of control . Section 9-208 imposes upon a secured party having control of a deposit account, investment property, or a letter-of-credit right the duty to release control when there is no secured obligation and no commitment to give value. Section 9-209 contains analogous provisions when an account debtor has been notified to pay a secured party.

      Information . Section 9-210 expands a secured party’s duties to provide the debtor with information concerning collateral and the obligations that it secures.

      Default and enforcement . Part 6 also includes some additional duties of secured parties in connection with default and enforcement. See, e.g., Section 9-616 (duty to explain calculation of deficiency or surplus in a consumer-goods transaction).

    3. Choice of Law . The choice of law rules for the law governing perfection, the effect of perfection or nonperfection, and priority are found in part 3, subpart 1 (Sections 9-301 through 9-307). See also Section 9-316.

      Where to file: Location of debtor . This article changes the choice of law rule governing perfection (i.e., where to file) for most collateral to the law of the jurisdiction where the debtor is located. See Section 9-301. Under former Article 9, the jurisdiction of the debtor’s location governed only perfection and priority of a security interest in accounts, general intangibles, mobile goods, and, for purposes of perfection by filing, chattel paper and investment property.

      Determining debtor’s location . As a baseline rule, Section 9-307 follows former Section 9-103, under which the location of the debtor is the debtor’s place of business (or chief executive office, if the debtor has more than one place of business). Section 9-307 contains three major exceptions. First, a “registered organization,” such as a corporation or limited liability company, is located in the state under whose law the debtor is organized, e.g., a corporate debtor’s state of incorporation. Second, an individual debtor is located at his or her principal residence. Third, there are special rules for determining the location of the United States and registered organizations organized under the law of the United States.

      Location of non-U.S. debtors . If, applying the foregoing rules, a debtor is located in a jurisdiction whose law does not require public notice as a condition of perfection of a nonpossessory security interest, the entity is deemed located in the District of Columbia. See Section 9-307. Thus, to the extent that this Article applies to non-U.S. debtors, perfection could be accomplished in many cases by a domestic filing.

      Priority . For tangible collateral such as goods and instruments, Section 9-301 provides that the law applicable to priority and the effect of perfection or nonperfection will remain the law of the jurisdiction where the collateral is located, as under former Section 9-103 (but without the confusing “last event” test). For intangible collateral, such as accounts, the applicable law for priority will be that of the jurisdiction in which the debtor is located.

      Possessory security interests; agricultural liens . Perfection, the effect of perfection or nonperfection, and priority of a possessory security interest or an agricultural lien are governed by the law of the jurisdiction where the collateral subject to the security interest or lien is located. See Sections 9-301 and 9-302.

      Goods covered by certificates of title; deposit accounts; letter-of-credit rights; investment property . This article includes several refinements to the treatment of choice of law matters for goods covered by certificates of title. See Section 9-303. It also provides special choice of law rules, similar to those for investment property under current Articles 8 and 9, for deposit accounts (Section 9-304), investment property (Section 9-305), and letter-of-credit rights (Section 9-306).

      Change in applicable law . Section 9-316 addresses perfection following a change in applicable law.

    4. Perfection . The rules governing perfection of security interests and agricultural liens are found in part 3, subpart 2 (Sections 9-308 through 9-316).

      Deposit accounts; letter-of-credit rights . With certain exceptions, this Article provides that a security interest in a deposit account or a letter-of-credit right may be perfected only by the secured party’s acquiring “control” of the deposit account or letter-of-credit right. See Sections 9-312 and 9-314. Under Section 9-104, a secured party has “control” of a deposit account when, with the consent of the debtor, the secured party obtains the depositary bank’s agreement to act on the secured party’s instructions (including when the secured party becomes the account holder) or when the secured party is itself the depositary bank. The control requirements are patterned on Section 8-106, which specifies the requirements for control of investment property. Under Section 9-107, “control” of a letter-of-credit right occurs when the issuer or nominated person consents to an assignment of proceeds under Section 5-114.

      Electronic chattel paper . Section 9-102 includes a new defined term: “Electronic chattel paper.” Electronic chattel paper is a record or records consisting of information stored in an electronic medium (i.e., it is not written). Perfection of a security interest in electronic chattel paper may be by control or filing. See Sections 9-105 (sui generis definition of control of electronic chattel paper), 9-312 (perfection by filing), and 9-314 (perfection by control).

      Investment property . The perfection requirements for “investment property” (defined in Section 9-102), including perfection by control under Section 9-106, remain substantially unchanged. However, a new provision in Section 9-314 is designed to ensure that a secured party retains control in “repledge” transactions that are typical in the securities markets.

      Instruments, agricultural liens, and commercial tort claims . This article expands the types of collateral in which a security interest may be perfected by filing to include instruments. See Section 9-312. Agricultural liens and security interests in commercial tort claims also are perfected by filing, under this Article. See Sections 9-308 and 9-310.

      Sales of payment intangibles and promissory notes . Although former Article 9 covered the outright sale of accounts and chattel paper, sales of most other types of receivables also are financing transactions to which Article 9 should apply. Accordingly, Section 9-102 expands the definition of “account” to include many types of receivables (including “health-care-insurance receivables,” defined in Section 9-102) that former Article 9 classified as “general intangibles.” It thereby subjects to Article 9’s filing system sales of more types of receivables than did former Article 9. Certain sales of payment intangibles—primarily bank loan participation transactions—should not be subject to the Article 9 filing rules. These transactions fall in a residual category of collateral, “payment intangibles” (general intangibles under which the account debtor’s principal obligation is monetary), the sale of which is exempt from the filing requirements of Article 9. See Sections 9-102, 9-109, and 9-309 (perfection upon attachment). The perfection rules for sales of promissory notes are the same as those for sales of payment intangibles.

      Possessory security interests . Several provisions of this Article address aspects of security interests involving a secured party or a third party who is in possession of the collateral. In particular, Section 9-313 resolves a number of uncertainties under former Section 9-305. It provides that a security interest in collateral in the possession of a third party is perfected when the third party acknowledges in an authenticated record that it holds for the secured party’s benefit. Section 9-313 also provides that a third party need not so acknowledge and that its acknowledgment does not impose any duties on it, unless it otherwise agrees. A special rule in Section 9-313 provides that if a secured party already is in possession of collateral, its security interest remains perfected by possession if it delivers the collateral to a third party and the collateral is accompanied by instructions to hold it for the secured party or to redeliver it to the secured party. Section 9-313 also clarifies the limited circumstances under which a security interest in goods covered by a certificate of title may be perfected by the secured party’s taking possession.

      Automatic perfection . Section 9-309 lists various types of security interests as to which no public-notice step is required for perfection (e.g., purchase-money security interests in consumer goods other than automobiles). This automatic perfection also extends to a transfer of a health-care-insurance receivable to a health-care provider. Those transfers normally will be made by natural persons who receive health-care services; there is little value in requiring filing for perfection in that context. Automatic perfection also applies to security interests created by sales of payment intangibles and promissory notes. Section 9-308 provides that a perfected security interest in collateral supported by a “supporting obligation” (such as an account supported by a guaranty) also is a perfected security interest in the supporting obligation, and that a perfected security interest in an obligation secured by a security interest or lien on property (e.g., a real property mortgage) also is a perfected security interest in the security interest or lien.

    5. Priority; Special Rules for Banks and Deposit Accounts . The rules governing priority of security interests and agricultural liens are found in part 3, subpart 3 (Sections 9-317 through 9-339). This article includes several new priority rules and some special rules relating to banks and deposit accounts found in part 3, subpart 4 (Sections 9-340 through 9-342).

      Purchase-money security interests: General; consumer-goods transactions; inventory . Section 9-103 substantially rewrites the definition of purchase-money security interest (PMSI) (although the term is not formally “defined”). The substantive changes, however, apply only to nonconsumer goods transactions. (Consumer transactions and consumer goods transactions are discussed below in Comment 4.j.). For nonconsumer goods transactions, Section 9-103 makes clear that a security interest in collateral may be (to some extent) both a PMSI as well as a non-PMSI, in accord with the “dual status” rule applied by some courts under former Article 9 (thereby rejecting the “transformation” rule). The definition provides an even broader conception of a PMSI in inventory, yielding a result that accords with private agreements entered into in response to the uncertainty under former Article 9. It also treats consignments as purchase-money security interests in inventory. Section 9-324 revises the PMSI priority rules, but for the most part without material change in substance. Section 9-324 also clarifies the priority rules for competing PMSIs in the same collateral.

      Purchase-money security interests in livestock; agricultural liens . Section 9-324 provides a special PMSI priority, similar to the inventory PMSI priority rule, for livestock. Section 9-322 (which contains the baseline first-to-file-or-perfect priority rule) also recognizes special non-Article 9 priority rules for agricultural liens, which can override the baseline first-in-time rule.

      Purchase-money security interests in software . Section 9-324 contains a new priority rule for a software purchase-money security interest. (Section 9-102 includes a definition of “software.”) Under Section 9-103, a software PMSI includes a PMSI in software that is used in goods that are also subject to a PMSI. (Note also that the definition of “chattel paper” has been expanded to include records that evidence a monetary obligation and a security interest in specific goods and software used in the goods.)

      Investment property . The priority rules for investment property are substantially similar to the priority rules found in former Section 9-115, which was added in conjunction with the 1994 revisions to UCC Article 8. Under Section 9-328, if a secured party has control of investment property (Sections 8-106 and 9-106), its security interest is senior to a security interest perfected in another manner (e.g., by filing). Also under Section 9-328, security interests perfected by control generally rank according to the time that control is obtained or, in the case of a security entitlement or a commodity contract carried in a commodity account, the time when the control arrangement is entered into. This is a change from former Section 9-115, under which the security interests ranked equally. However, as between a securities intermediary’s security interest in a security entitlement that it maintains for the debtor and a security interest held by another secured party, the securities intermediary’s security interest is senior.

      Deposit accounts . This article’s priority rules applicable to deposit accounts are found in Section 9-327. They are patterned on and are similar to those for investment property in former Section 9-115 and Section 9-328 of this Article. Under Section 9-327, if a secured party has control of a deposit account, its security interest is senior to a security interest perfected in another manner (i.e., as cash proceeds). Also under Section 9-327, security interests perfected by control rank according to the time that control is obtained, but as between a depositary bank’s security interest and one held by another secured party, the depositary bank’s security interest is senior. A corresponding rule in Section 9-340 makes a depositary bank’s right of set-off generally senior to a security interest held by another secured party. However, if the other secured party becomes the depositary bank’s customer with respect to the deposit account, then its security interest is senior to the depositary bank’s security interest and right of set-off. See Sections 9-327 and 9-340.

      Letter-of-credit rights . The priority rules for security interests in letter-of-credit rights are found in Section 9-329. They are somewhat analogous to those for deposit accounts. A security interest perfected by control has priority over one perfected in another manner (i.e., as a supporting obligation for the collateral in which a security interest is perfected). Security interests in a letter-of-credit right perfected by control rank according to the time that control is obtained. However, the rights of a transferee beneficiary or a nominated person are independent and superior to the extent provided in Section 5-114. See Section 9-109(c)(4).

      Chattel paper and instruments . Section 9-330 is the successor to former Section 9-308. As under former Section 9-308, differing priority rules apply to purchasers of chattel paper who give new value and take possession (or, in the case of electronic chattel paper, obtain control) of the collateral depending on whether a conflicting security interest in the collateral is claimed merely as proceeds. The principal change relates to the role of knowledge and the effect of an indication of a previous assignment of the collateral. Section 9-330 also affords priority to purchasers of instruments who take possession in good faith and without knowledge that the purchase violates the rights of the competing secured party. In addition, to qualify for priority, purchasers of chattel paper, but not of instruments, must purchase in the ordinary course of business.

      Proceeds . Section 9-322 contains new priority rules that clarify when a special priority of a security interest in collateral continues or does not continue with respect to proceeds of the collateral. Other refinements to the priority rules for proceeds are included in Sections 9-324 (purchase-money security interest priority) and 9-330 (priority of certain purchasers of chattel paper and instruments).

      Miscellaneous priority provisions . This article also includes: (i) Clarifications of selected good-faith-purchase and similar issues (Sections 9-317 and 9-331); (ii) new priority rules to deal with the “double debtor” problem arising when a debtor creates a security interest in collateral acquired by the debtor subject to a security interest created by another person (Section 9-325); (iii) new priority rules to deal with the problems created when a change in corporate structure or the like results in a new entity that has become bound by the original debtor’s after-acquired property agreement (Section 9-326); (iv) a provision enabling most transferees of funds from a deposit account or money to take free of a security interest (Section 9-332); (v) substantially rewritten and refined priority rules dealing with accessions and commingled goods (Sections 9-335 and 9-336); (vi) revised priority rules for security interests in goods covered by a certificate of title (Section 9-337); and (vii) provisions designed to ensure that security interests in deposit accounts will not extend to most transferees of funds on deposit or payees from deposit accounts and will not otherwise “clog” the payments system (Sections 9-341 and 9-342).

      Model provisions relating to production-money security interests . Appendix II to this Article contains model definitions and priority rules relating to “production-money security interests” held by secured parties who give new value used in the production of crops. Because no consensus emerged on the wisdom of these provisions during the drafting process, the sponsors make no recommendation on whether these model provisions should be enacted.

    6. Proceeds . Section 9-102 contains an expanded definition of “proceeds” of collateral which includes additional rights and property that arise out of collateral, such as distributions on account of collateral and claims arising out of the loss or nonconformity of, defects in, or damage to collateral. The term also includes collections on account of “supporting obligations,” such as guarantees.
    7. Part 4: Additional Provisions Relating to Third-Party Rights . New part 4 contains several provisions relating to the relationships between certain third parties and the parties to secured transactions. It contains new Sections 9-401 (replacing former Section 9-311) (alienability of debtor’s rights), 9-402 (replacing former Section 9-317) (secured party not obligated on debtor’s contracts), 9-403 (replacing former Section 9-206) (agreement not to assert defenses against assignee), 9-404, 9-405, and 9-406 (replacing former Section 9-318) (rights acquired by assignee, modification of assigned contract, discharge of account debtor, restrictions on assignment of account, chattel paper, promissory note, or payment intangible ineffective), and 9-407 (replacing some provisions of former Section 2A-303) (restrictions on creation or enforcement of security interest in leasehold interest or lessor’s residual interest ineffective). It also contains new Sections 9-408 (restrictions on assignment of promissory notes, health-care-insurance receivables ineffective, and certain general intangibles ineffective) and 9-409 (restrictions on assignment of letter-of-credit rights ineffective), which are discussed above.
    8. Filing . Part 5 (formerly part 4) of Article 9 has been substantially rewritten to simplify the statutory text and to deal with numerous problems of interpretation and implementation that have arisen over the years.

      Medium-neutrality . This article is “medium-neutral”; that is, it makes clear that parties may file and otherwise communicate with a filing office by means of records communicated and stored in media other than on paper.

      Identity of person who files a record; authorization . Part 5 is largely indifferent as to the person who effects a filing. Instead, it addresses whose authorization is necessary for a person to file a record with a filing office. The filing scheme does not contemplate that the identity of a “filer” will be a part of the searchable records. This approach is consistent with, and a necessary aspect of, eliminating signatures or other evidence of authorization from the system (except to the extent that filing offices may choose to employ authentication procedures in connection with electronic communications). As long as the appropriate person authorizes the filing, or, in the case of a termination statement, the debtor is entitled to the termination, it is largely insignificant whether the secured party or another person files any given record.

      Section 9-509 collects in one place most of the rules that determine when a record may be filed. In general, the debtor’s authorization is required for the filing of an initial financing statement or an amendment that adds collateral. With one further exception, a secured party of record’s authorization is required for the filing of other amendments. The exception arises if a secured party has failed to provide a termination statement that is required because there is no outstanding secured obligation or commitment to give value. In that situation, a debtor is authorized to file a termination statement indicating that it has been filed by the debtor.

      Financing statement formal requisites . The formal requisites for a financing statement are set out in Section 9-502. A financing statement must provide the name of the debtor and the secured party and an indication of the collateral that it covers. Sections 9-503 and 9-506 address the sufficiency of a name provided on a financing statement and clarify when a debtor’s name is correct and when an incorrect name is insufficient. Section 9-504 addresses the indication of collateral covered. Under Section 9-504, a super-generic description (e.g., “all assets” or “all personal property”) in a financing statement is a sufficient indication of the collateral. (Note, however, that a super-generic description is inadequate for purposes of a security agreement. See Sections 9-108 and 9-203.) To facilitate electronic filing, this Article does not require that the debtor’s signature or other authorization appear on a financing statement. Instead, it prohibits the filing of unauthorized financing statements and imposes liability upon those who violate the prohibition. See Sections 9-509 and 9-626.

      Filing-office operations . Part 5 contains several provisions governing filing operations. First, it prohibits the filing office from rejecting an initial financing statement or other record for a reason other than one of the few that are specified. See Sections 9-516 and 9-520. Second, the filing office is obliged to link all subsequent records (e.g., assignments, continuation statements, etc.) to the initial financing statement to which they relate. See Section 9-519. Third, the filing office may delete a financing statement and related records from the files no earlier than one year after lapse (lapse normally is five years after the filing date), and then only if a continuation statement has not been filed. See Sections 9-515, 9-519, and 9-522. Thus, a financing statement and related records would be discovered by a search of the files even after the filing of a termination statement. This approach helps eliminate filing-office discretion and also eases problems associated with multiple secured parties and multiple partial assignments. Fourth, part 5 mandates performance standards for filing offices. See Sections 9-519, 9-520, and 9-523. Fifth, it provides for the promulgation of filing-office rules to deal with details best left out of the statute and requires the filing office to submit periodic reports. See Sections 9-526 and 9-527.

      Correction of records: Defaulting or missing secured parties and fraudulent filings . In some areas of the country, serious problems have arisen from fraudulent financing statements that are filed against public officials and other persons. This article addresses the fraud problem by providing the opportunity for a debtor to file a termination statement when a secured party wrongfully refuses or fails to provide a termination statement. See Section 9-509. This opportunity also addresses the problem of secured parties that simply disappear through mergers or liquidations. In addition, Section 9-518 affords a statutory method by which a debtor who believes that a filed record is inaccurate or was wrongfully filed may indicate that fact in the files by filing a correction statement, albeit without affecting the efficacy, if any, of the challenged record.

      Extended period of effectiveness for certain financing statements . Section 9-515 contains an exception to the usual rule that financing statements are effective for five years unless a continuation statement is filed to continue the effectiveness for another five years. Under that section, an initial financing statement filed in connection with a “public-finance transaction” or a “manufactured-home transaction” (terms defined in Section 9-102) is effective for 30 years.

      National form of financing statement and related forms . Section 9-521 provides for uniform, national written forms of financing statements and related written records that must be accepted by a filing office that accepts written records.

      Debtor, secondary obligor; waiver . Section 9-602 clarifies the identity of persons who have rights and persons to whom a secured party owes specified duties under part 6. Under that section, the rights and duties are enjoyed by and run to the “debtor,” defined in Section 9-102 to mean any person with a nonlien property interest in collateral, and to any “obligor.” However, with one exception (Section 9-616, as it relates to a consumer obligor), the rights and duties concerned affect nondebtor obligors only if they are “secondary obligors.” “Secondary obligor” is defined in Section 9-102 to include one who is secondarily obligated on the secured obligation, e.g., a guarantor, or one who has a right of recourse against the debtor or another obligor with respect to an obligation secured by collateral. However, under Section 9-628, the secured party is relieved from any duty or liability to any person unless the secured party knows that the person is a debtor or obligor. Resolving an issue on which courts disagreed under former Article 9, this Article generally prohibits waiver by a secondary obligor of its rights and a secured party’s duties under part 6. See Section 9-602. However, Section 9-624 permits a secondary obligor or debtor to waive the right to notification of disposition of collateral and, in a nonconsumer transaction, the right to redeem collateral, if the secondary obligor or debtor agrees to do so after default.

      Rights of collection and enforcement of collateral . Section 9-607 explains in greater detail than former Section 9-502 the rights of a secured party who seeks to collect or enforce collateral, including accounts, chattel paper, and payment intangibles. It also sets forth the enforcement rights of a depositary bank holding a security interest in a deposit account maintained with the depositary bank. Section 9-607 relates solely to the rights of a secured party vis-a-vis a debtor with respect to collections and enforcement. It does not affect the rights or duties of third parties, such as account debtors on collateral, which are addressed elsewhere (e.g., Section 9-406). Section 9-608 clarifies the manner in which proceeds of collection or enforcement are to be applied.

      Disposition of collateral: Warranties of title . Section 9-610 imposes on a secured party who disposes of collateral the warranties of title, quiet possession, and the like that are otherwise applicable under other law. It also provides rules for the exclusion or modification of those warranties.

      Disposition of collateral: Notification, application of proceeds, surplus and deficiency, other effects . Section 9-611 requires a secured party to give notification of a disposition of collateral to other secured parties and lienholders who have filed financing statements against the debtor covering the collateral. (That duty was eliminated by the 1972 revisions to Article 9.) However, that section relieves the secured party from that duty when the secured party undertakes a search of the records and a report of the results is unreasonably delayed. Section 9-613, which applies only to nonconsumer transactions, specifies the contents of a sufficient notification of disposition and provides that a notification sent 10 days or more before the earliest time for disposition is sent within a reasonable time. Section 9-615 addresses the application of proceeds of disposition, the entitlement of a debtor to any surplus, and the liability of an obligor for any deficiency. Section 9-619 clarifies the effects of a disposition by a secured party, including the rights of transferees of the collateral.

      Rights and duties of secondary obligor . Section 9-618 provides that a secondary obligor obtains the rights and assumes the duties of a secured party if the secondary obligor receives an assignment of a secured obligation, agrees to assume the secured party’s rights and duties upon a transfer to it of collateral, or becomes subrogated to the rights of the secured party with respect to the collateral. The assumption, transfer, or subrogation is not a disposition of collateral under Section 9-610, but it does relieve the former secured party of further duties. Former Section 9-504(5) did not address whether a secured party was relieved of its duties in this situation.

      Transfer of record or legal title . Section 9-619 contains a new provision making clear that a transfer of record or legal title to a secured party is not of itself a disposition under part 6. This rule applies regardless of the circumstances under which the transfer of title occurs.

      Strict foreclosure . Section 9-620, unlike former Section 9-505, permits a secured party to accept collateral in partial satisfaction, as well as full satisfaction, of the obligations secured. This right of strict foreclosure extends to intangible as well as tangible property. Section 9-622 clarifies the effects of an acceptance of collateral on the rights of junior claimants. It rejects the approach taken by some courts—deeming a secured party to have constructively retained collateral in satisfaction of the secured obligations—in the case of a secured party’s unreasonable delay in the disposition of collateral. Instead, unreasonable delay is relevant when determining whether a disposition under Section 9-610 is commercially reasonable.

      Effect of noncompliance: “Rebuttable presumption” test . Section 9-626 adopts the “rebuttable presumption” test for the failure of a secured party to proceed in accordance with certain provisions of part 6 (As discussed in Comment 4.j., the test does not necessarily apply to consumer transactions). Under this approach, the deficiency claim of a noncomplying secured party is calculated by crediting the obligor with the greater of the actual net proceeds of a disposition and the amount of net proceeds that would have been realized if the disposition had been conducted in accordance with part 6 (e.g., in a commercially reasonable manner). Section 9-626 rejects the “absolute bar” test that some courts have imposed; that approach bars a noncomplying secured party from recovering any deficiency, regardless of the loss (if any) the debtor suffered as a consequence of the noncompliance.

      “Low-price” dispositions: Calculation of deficiency and surplus . Section 9-615(f) addresses the problem of procedurally regular dispositions that fetch a low price. Subsection (f) provides a special method for calculating a deficiency if the proceeds of a disposition of collateral to a secured party, a person related to the secured party, or a secondary obligor are “significantly below the range of proceeds that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought.” (“Person related to” is defined in Section 9-102.) In these situations there is reason to suspect that there may be inadequate incentives to obtain a better price. Consequently, instead of calculating a deficiency (or surplus) based on the actual net proceeds, the deficiency (or surplus) would be calculated based on the proceeds that would have been received in a disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor.

j. Consumer Goods, Consumer-Goods Transactions, and Consumer Transactions . This article (including the accompanying conforming revisions) includes several special rules for “consumer goods,” “consumer transactions,” and “consumer-goods transactions.” Each term is defined in Section 9-102.

(i) Revised Sections 2-502 and 2-716 provide a buyer of consumer goods with enhanced rights to possession of the goods, thereby accelerating the opportunity to achieve “buyer in ordinary course of business” status under Section 1-201.

(ii) Section 9-103(e) (allocation of payments for determining extent of purchase-money status), (f) (purchase-money status not affected by cross-collateralization, refinancing, restructuring, or the like), and (g) (secured party has burden of establishing extent of purchase-money status) do not apply to consumer-goods transactions. Section 9-103 also provides that the limitation of those provisions to transactions other than consumer-goods transactions leaves to the courts the proper rules for consumer-goods transactions and prohibits the courts from drawing inferences from that limitation.

(iii) Section 9-108 provides that in a consumer transaction a description of consumer goods, a security entitlement, securities account, or commodity account “only by (UCC-defined) type of collateral” is not a sufficient collateral description in a security agreement.

(iv) Sections 9-403 and 9-404 make effective the Federal Trade Commission’s antiholder-in-due-course rule (when applicable), 16 C.F.R. part 433, even in the absence of the required legend.

(v) The 10-day safe-harbor for notification of a disposition provided by Section 9-612 does not apply in a consumer transaction.

(vi) Section 9-613 (contents and form of notice of disposition) does not apply to a consumer-goods transaction.

(vii) Section 9-614 contains special requirements for the contents of a notification of disposition and a safe-harbor, “plain English” form of notification, for consumer-goods transactions.

(viii) Section 9-616 requires a secured party in a consumer-goods transaction to provide a debtor with a notification of how it calculated a deficiency at the time it first undertakes to collect a deficiency.

(ix) Section 9-620 prohibits partial strict foreclosure with respect to consumer goods collateral and, unless the debtor agrees to waive the requirement in an authenticated record after default, in certain cases requires the secured party to dispose of consumer goods collateral which has been repossessed.

(x) Section 9-626 (“rebuttable presumption” rule) does not apply to a consumer transaction. Section 9-626 also provides that its limitation to transactions other than consumer transactions leaves to the courts the proper rules for consumer transactions and prohibits the courts from drawing inferences from that limitation.

k. Good Faith . Section 9-102 contains a new definition of “good faith” that includes not only “honesty in fact” but also “the observance of reasonable commercial standards of fair dealing.” The definition is similar to the ones adopted in connection with other, recently completed revisions of the UCC.

l. Transition Provisions . Part 7 (Sections 9-701 through 9-707) contains transition provisions. Transition from former Article 9 to this Article will be particularly challenging in view of its expanded scope, its modification of choice of law rules for perfection and priority, and its expansion of the methods of perfection.

m. Conforming and Related Amendments to Other UCC Articles . Appendix I contains several proposed revisions to the provisions and Comments of other UCC articles. For the most part the revisions are explained in the Comments to the proposed revisions. Cross-references in other UCC articles to sections of Article 9 also have been revised.

Article 1 . Revised Section 1-201 contains revisions to the definitions of “buyer in ordinary course of business,” “purchaser,” and “security interest.”

Articles 2 and 2A . Sections 2-210, 2-326, 2-502, 2-716, 2A-303, and 2A-307 have been revised to address the intersection between Articles 2 and 2A and Article 9.

Article 5 . New Section 5-118 is patterned on Section 4-210. It provides for a security interest in documents presented under a letter of credit in favor of the issuer and a nominated person on the letter of credit.

Article 8 . Revisions to Section 8-106, which deals with “control” of securities and security entitlements, conform it to Section 8-302, which deals with “delivery.” Revisions to Section 8-110, which deals with a “securities intermediary’s jurisdiction,” conform it to the revised treatment of a “commodity intermediary’s jurisdiction” in Section 9-305. Sections 8-301 and 8-302 have been revised for clarification. Section 8-510 has been revised to conform it to the revised priority rules of Section 9-328. Several comments in Article 8 also have been revised.

NOTES TO DECISIONS

1.Applicability.

No part of KRS Ch. 355, commonly referred to as the Uniform Commercial Code, applies to a written assignment of funds presently due and owing for the purpose of liquidation or satisfying a prior existing obligation. Spurlin v. Sloan, 368 S.W.2d 314, 1963 Ky. LEXIS 41 ( Ky. 1963 ).

2.Security Agreements.

Where creditor listed in security agreement the wrong serial number, by one (1) digit, it was similar enough to put a bank claiming a security interest in a tractor on notice that creditor might be claiming a security interest in the same tractor or at the very least, the close similarity in serial numbers required bank to at least make further inquiry. Laurel Explosives, Inc. v. First Nat'l Bank & Trust Co., 801 S.W.2d 336, 1990 Ky. App. LEXIS 134 (Ky. Ct. App. 1990).

Cited:

In re Mel Golde Shoes, Inc., 403 F.2d 658, 1968 U.S. App. LEXIS 4652 (6th Cir. 1968); In re Proctor, 27 B.R. 7, 1982 Bankr. LEXIS 4169 (Bankr. W.D. Ky. 1982 ).

Research References and Practice Aids

Kentucky Law Journal.

Young, Scope, Purposes and Functions of the Uniform Commercial Code, 48 Ky. L.J. 191 (1960).

Kripke, Kentucky Modernizes the Law of Chattel Security, 48 Ky. L.J. 369 (1960).

Spivack, Financing the Manufacturer: Article 9 of the Uniform Commercial Code, 48 Ky. L.J. 397 (1960).

Whiteside, Uniform Commercial Code — Major Changes in Sales Law, 49 Ky. L.J. 165 (1960).

Whiteside, Amending the Uniform Commercial Code, 51 Ky. L.J. 3 (1962).

Fitzgerald, The Crazy Quilt of Commercial Law: A Study in Legislative Patchwork, 54 Ky. L.J. 85 (1965).

King, Statutory Liens — 1966 Amendment of Section 67 of the Bankruptcy Act, 55 Ky. L.J. 542 (1967).

Viles, The Uniform Commercial Code v. The Bankruptcy Act, 55 Ky. L.J. 636 (1967).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

Hakes, A Quest for Justice in the Conversion of Security Interests, 82 Ky. L.J. 837 (1993-94).

355.9-102. Definitions and index of definitions.

  1. In this article:
    1. “Accession” means goods that are physically united with other goods in such a manner that the identity of the original goods is not lost;
      1. “Account,” except as used in “account for,” means a right to payment of a monetary obligation, whether or not earned by performance: (b) 1. “Account,” except as used in “account for,” means a right to payment of a monetary obligation, whether or not earned by performance:
        1. For property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of;
        2. For services rendered or to be rendered;
        3. For a policy of insurance issued or to be issued;
        4. For a secondary obligation incurred or to be incurred;
        5. For energy provided or to be provided;
        6. For the use or hire of a vessel under a charter or other contract;
        7. Arising out of the use of a credit or charge card or information contained on or for use with the card; or
        8. As winnings in a lottery or other game of chance operated or sponsored by a state, governmental unit of a state, or person licensed or authorized to operate the game by a state or governmental unit of a state.
      2. The term includes health-care-insurance receivables.
      3. The term does not include:
        1. Rights to payment evidenced by chattel paper or an instrument;
        2. Commercial tort claims;
        3. Deposit accounts;
        4. Investment property;
        5. Letter-of-credit rights or letters of credit; or
        6. Rights to payment for money or funds advanced or sold, other than rights arising out of the use of a credit or charge card or information contained on or for use with the card;
    2. “Account debtor” means a person obligated on an account, chattel paper, or general intangible. The term does not include persons obligated to pay a negotiable instrument, even if the instrument constitutes part of chattel paper;
    3. “Accounting,” except as used in “accounting for,” means a record:
      1. Authenticated by a secured party;
      2. Indicating the aggregate unpaid secured obligations as of a date not more than thirty-five (35) days earlier or thirty-five (35) days later than the date of the record; and
      3. Identifying the components of the obligations in reasonable detail;
    4. “Agricultural lien” means an interest in farm products:
      1. Which secures payment or performance of an obligation for:
        1. Goods or services furnished in connection with a debtor’s farming operation; or
        2. Rent on real property leased by a debtor in connection with its farming operation;
      2. Which is created by statute in favor of a person that:
        1. In the ordinary course of its business furnished goods or services to a debtor in connection with a debtor’s farming operation; or
        2. Leased real property to a debtor in connection with the debtor’s farming operation; and
      3. Whose effectiveness does not depend on the person’s possession of the personal property;
    5. “As-extracted collateral” means:
      1. Oil, gas, or other minerals that are subject to a security interest that:
        1. Is created by a debtor having an interest in the minerals before extraction; and
        2. Attaches to the minerals as extracted; or
      2. Accounts arising out of the sale at the wellhead or minehead of oil, gas, or other minerals in which the debtor had an interest before extraction;
    6. “Authenticate” means:
      1. To sign; or
      2. With present intent to adopt or accept a record, to attach to or logically associate with the record an electronic sound, symbol, or process;
    7. “Bank” means an organization that is engaged in the business of banking. The term includes savings banks, savings and loan associations, credit unions, and trust companies;
    8. “Cash proceeds” means proceeds that are money, checks, deposit accounts, or the like;
    9. “Certificate of title” means a certificate of title with respect to which a statute provides for the security interest in question to be indicated on the certificate as a condition or result of the security interest’s obtaining priority over the rights of a lien creditor with respect to the collateral. The term includes another record maintained as an alternative to a certificate of title by the governmental unit that issues certificates of title if a statute permits the security interest in question to be indicated on the record as a condition or result of the security interest’s obtaining priority over the rights of a lien creditor with respect to the collateral;
    10. “Chattel paper” means a record or records that evidence both a monetary obligation and a security interest in specific goods, a security interest in specific goods and software used in the goods, a security interest in specific goods and license of software used in the goods, a lease of specific goods, or a lease of specific goods and license of software used in the goods. In this paragraph, “monetary obligation” means a monetary obligation secured by the goods or owed under a lease of the goods and includes a monetary obligation with respect to software used in the goods. The term does not include:
      1. Charters or other contracts involving the use or hire of a vessel; or
      2. Records that evidence a right of payment arising out of the use of a credit or charge card or information contained on or for use with the card. If a transaction is evidenced by records that include an instrument or series of instruments, the group of records taken together constitutes chattel paper;
    11. “Collateral” means the property subject to a security interest or agricultural lien. The term includes:
      1. Proceeds to which a security interest attaches;
      2. Accounts, chattel paper, payment intangibles, and promissory notes that have been sold; and
      3. Goods that are the subject of a consignment;
    12. “Commercial tort claim” means a claim arising in tort with respect to which:
      1. The claimant is an organization; or
      2. The claimant is an individual and the claim:
        1. Arose in the course of the claimant’s business or profession; and
        2. Does not include damages arising out of personal injury to or the death of an individual;
    13. “Commodity account” means an account maintained by a commodity intermediary in which a commodity contract is carried for a commodity customer;
    14. “Commodity contract” means a commodity futures contract, an option on a commodity futures contract, a commodity option, or another contract if the contract or option is:
      1. Traded on or subject to the rules of a board of trade that has been designated as a contract market for such a contract pursuant to federal commodities laws; or
      2. Traded on a foreign commodity board of trade, exchange, or market, and is carried on the books of a commodity intermediary for a commodity customer;
    15. “Commodity customer” means a person for which a commodity intermediary carries a commodity contract on its books;
    16. “Commodity intermediary” means a person that:
      1. Is registered as a futures commission merchant under federal commodities law; or
      2. In the ordinary course of its business provides clearance or settlement services for a board of trade that has been designated as a contract market pursuant to federal commodities law;
    17. “Communicate” means:
      1. To send a written or other tangible record;
      2. To transmit a record by any means agreed upon by the persons sending and receiving the record; or
      3. In the case of transmission of a record to or by a filing office, to transmit a record by any means prescribed by filing-office rule;
    18. “Consignee” means a merchant to which goods are delivered in a consignment;
    19. “Consignment” means a transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale and:
      1. The merchant:
        1. Deals in goods of that kind under a name other than the name of the person making delivery;
        2. Is not an auctioneer; and
        3. Is not generally known by its creditors to be substantially engaged in selling the goods of others;
      2. With respect to each delivery, the aggregate value of the goods is one thousand dollars ($1,000) or more at the time of delivery;
      3. The goods are not consumer goods immediately before delivery; and
      4. The transaction does not create a security interest that secures an obligation;
    20. “Consignor” means a person that delivers goods to a consignee in a consignment;
    21. “Consumer debtor” means a debtor in a consumer transaction;
    22. “Consumer goods” means goods that are used or bought for use primarily for personal, family, or household purposes;
    23. “Consumer-goods transaction” means a consumer transaction in which:
      1. An individual incurs an obligation primarily for personal, family, or household purposes; and
      2. A security interest in consumer goods secures the obligation;
    24. “Consumer obligor” means an obligor who is an individual and who incurred the obligation as part of a transaction entered into primarily for personal, family, or household purposes;
    25. “Consumer transaction” means a transaction in which:
      1. An individual incurs an obligation primarily for personal, family, or household purposes;
      2. A security interest secures the obligation; and
      3. The collateral is held or acquired primarily for personal, family, or household purposes. The term includes consumer-goods transactions;
    26. “Continuation statement” means an amendment of a financing statement which:
      1. Identifies, by its file number, the initial financing statement to which it relates; and
      2. Indicates that it is a continuation statement for, or that it is filed to continue the effectiveness of, the identified financing statement;
    27. “Debtor” means:
      1. A person having an interest, other than a security interest or other lien, in the collateral, whether or not the person is an obligor;
      2. A seller of accounts, chattel paper, payment intangibles, or promissory notes; or
      3. A consignee;
    28. “Deposit account” means a demand, time, savings, passbook, or similar account maintained with a bank. The term does not include investment property or accounts evidenced by an instrument;
    29. “Document” means a document of title or a receipt of the type described in KRS 355.7-201 (2);
    30. “Electronic chattel paper” means chattel paper evidenced by a record or records consisting of information stored in an electronic medium;
    31. “Encumbrance” means a right, other than an ownership interest, in real property. The term includes mortgages and other liens on real property;
    32. “Equipment” means goods other than inventory, farm products, or consumer goods;
    33. “Farm products” means goods, other than standing timber, with respect to which the debtor is engaged in a farming operation and which are:
      1. Crops grown, growing, or to be grown, including:
        1. Crops produced on trees, vines, and bushes; and
        2. Aquatic goods produced in aquacultural operations;
      2. Livestock, born or unborn, including aquatic goods produced in aquacultural operations;
      3. Supplies used or produced in a farming operation;
      4. Products of crops or livestock in their unmanufactured states; or
      5. Equine interests, including, but not limited to, interests in horses, mares, yearlings, foals, weanlings, stallions, syndicated stallions, and stallion shares (including seasons and other rights in connection therewith), whether or not the debtor is engaged in farming operations and without regard to the use thereof. If goods are farm products, they are neither equipment nor inventory;
    34. “Farming operation” means raising, cultivating, propagating, fattening, grazing, or any other farming, livestock, or aquacultural operation;
    35. “File number” means the number assigned to an initial financing statement pursuant to KRS 355.9-519 (1);
    36. “Filing office” means an office designated in KRS 355.9-501 as the place to file a financing statement;
    37. “Filing-office rule” means a rule adopted pursuant to KRS 355.9-526 ;
    38. “Financing statement” means a record or records composed of an initial financing statement and any filed record relating to the initial financing statement;
    39. “Fixture filing” means the filing of a financing statement covering goods that are or are to become fixtures and satisfying KRS 355.9-502 (1) and (2). The term includes the filing of a financing statement covering goods of a transmitting utility which are or are to become fixtures;
    40. “Fixtures” means goods that have become so related to particular real property that an interest in them arises under real property law;
    41. “General intangible” means any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software;
    42. (Reserved)
    43. “Goods” means all things that are movable when a security interest attaches.
      1. The term includes:
        1. Fixtures;
        2. Standing timber that is to be cut and removed under a conveyance or contract for sale;
        3. The unborn young of animals;
        4. Crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes; and
        5. Manufactured homes.
      2. The term also includes a computer program embedded in goods and any supporting information provided in connection with a transaction relating to the program if:
        1. The program is associated with the goods in such a manner that it customarily is considered part of the goods; or
        2. By becoming the owner of the goods, a person acquires a right to use the program in connection with the goods.
      3. The term does not include a computer program embedded in goods that consist solely of the medium in which the program is embedded.
      4. The term also does not include accounts, chattel paper, commercial tort claims, deposit accounts, documents, general intangibles, instruments, investment property, letter-of-credit rights, letters of credit, money, or oil, gas, or other minerals before extraction;
    44. “Governmental unit” means a subdivision, agency, department, county, parish, municipality, or other unit of the government of the United States, a State, or a foreign country. The term includes an organization having a separate corporate existence if the organization is eligible to issue debt on which interest is exempt from income taxation under the laws of the United States;
    45. “Health-care-insurance receivable” means an interest in or claim under a policy of insurance which is a right to payment of a monetary obligation for health-care goods or services provided or to be provided;
    46. “Instrument” means a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment. The term does not include:
      1. Investment property;
      2. Letters of credit; or
      3. Writings that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card;
    47. “Inventory” means goods, other than farm products, which:
      1. Are leased by a person as lessor;
      2. Are held by a person for sale or lease or to be furnished under a contract of service;
      3. Are furnished by a person under a contract of service; or
      4. Consist of raw materials, work in process, or materials used or consumed in a business;
    48. “Investment property” means a security, whether certificated or uncertificated, security entitlement, securities account, commodity contract, or commodity account;
    49. “Jurisdiction of organization,” with respect to a registered organization, means the jurisdiction under whose law the organization is organized;
    50. “Letter-of-credit right” means a right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance. The term does not include the right of a beneficiary to demand payment or performance under a letter of credit;
    51. “Lien creditor” means:
      1. A creditor that has acquired a lien on the property involved by attachment, levy, or the like;
      2. An assignee for benefit of creditors from the time of assignment;
      3. A trustee in bankruptcy from the date of the filing of the petition; or
      4. A receiver in equity from the time of appointment;
    52. “Manufactured home” means a structure, transportable in one (1) or more sections, which, in the traveling mode, is eight (8) body feet or more in width or forty (40) body feet or more in length, or, when erected on site, is three hundred twenty (320) or more square feet, and which is built on a permanent chassis and designed to be used as a dwelling with or without a permanent foundation when connected to the required utilities, and includes the plumbing, heating, air-conditioning, and electrical systems contained therein. The term includes any structure that meets all of the requirements of this paragraph except the size requirements and with respect to which the manufacturer voluntarily files a certification required by the United States Secretary of Housing and Urban Development and complies with the standards established under Title 42 of the United States Code;
    53. “Manufactured-home transaction” means a secured transaction:
      1. That creates a purchase-money security interest in a manufactured home, other than a manufactured home held as inventory; or
      2. In which a manufactured home, other than a manufactured home held as inventory, is the primary collateral;
    54. “Mortgage” means a consensual interest in real property, including fixtures, which secures payment or performance of an obligation;
    55. “New debtor” means a person that becomes bound as debtor under KRS 355.9-203 (4) by a security agreement previously entered into by another person;
    56. “New value” means:
      1. Money;
      2. Money’s worth in property, services, or new credit; or
      3. Release by a transferee of an interest in property previously transferred to the transferee. The term does not include an obligation substituted for another obligation;
    57. “Noncash proceeds” means proceeds other than cash proceeds;
    58. “Obligor” means a person that, with respect to an obligation secured by a security interest in or an agricultural lien on the collateral:
      1. Owes payment or other performance of the obligation;
      2. Has provided property other than the collateral to secure payment or other performance of the obligation; or
      3. Is otherwise accountable in whole or in part for payment or other performance of the obligation. The term does not include issuers or nominated persons under a letter of credit;
    59. “Original debtor,” except as used in KRS 355.9-310 (3), means a person that, as debtor, entered into a security agreement to which a new debtor has become bound under KRS 355.9-203 (4);
    60. “Payment intangible” means a general intangible under which the account debtor’s principal obligation is a monetary obligation;
    61. “Person related to,” with respect to an individual, means:
      1. The spouse of the individual;
      2. A brother, brother-in-law, sister, or sister-in-law of the individual;
      3. An ancestor or lineal descendant of the individual or the individual’s spouse; or
      4. Any other relative, by blood or marriage, of the individual or the individual’s spouse who shares the same home with the individual;
    62. “Person related to,” with respect to an organization, means:
      1. A person directly or indirectly controlling, controlled by, or under common control with the organization;
      2. An officer or director of, or a person performing similar functions with respect to, the organization;
      3. An officer or director of, or a person performing similar functions with respect to, a person described in subparagraph 1. of this paragraph;
      4. The spouse of an individual described in subparagraph 1., 2., or 3. of this paragraph; or
      5. An individual who is related by blood or marriage to an individual described in subparagraph 1., 2., 3., or 4. of this paragraph and shares the same home with the individual;
    63. “Proceeds,” except as used in KRS 355.9-609 (2), means the following property:
      1. Whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral;
      2. Whatever is collected on, or distributed on account of, collateral;
      3. Rights arising out of collateral;
      4. To the extent of the value of collateral, claims arising out of the loss, nonconformity, or interference with the use of, defects or infringement of rights in, or damage to, the collateral; or
      5. To the extent of the value of collateral and to the extent payable to the debtor or the secured party, insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to, the collateral;
    64. “Promissory note” means an instrument that evidences a promise to pay a monetary obligation, does not evidence an order to pay, and does not contain an acknowledgment by a bank that the bank has received for deposit a sum of money or funds;
    65. “Proposal” means a record authenticated by a secured party which includes the terms on which the secured party is willing to accept collateral in full or partial satisfaction of the obligation it secures pursuant to KRS 355.9-620 , 355.9-621 , and 355.9-622 ;
    66. “Public-finance transaction” means a secured transaction in connection with which:
      1. Debt securities are issued;
      2. All or a portion of the securities issued have an initial stated maturity of at least twenty (20) years; and
      3. The debtor, obligor, secured party, account debtor or other person obligated on collateral, assignor or assignee of a secured obligation, or assignor or assignee of a security interest is a state or a governmental unit of a state;
    67. “Public organic record” means a record that is available to the public for inspection and that is:
      1. A record consisting of the record initially filed with or issued by a state or the United States to form or organize an organization and any record filed with or issued by the state or the United States which amends or restates the initial record;
      2. An organic record of a business trust consisting of the record initially filed with a state and any record filed with the state which amends or restates the initial record, if a statute of the state governing business trusts requires that the record be filed with the state; or
      3. A record consisting of legislation enacted by the legislature of a state or the Congress of the United States which forms or organizes an organization, any record amending the legislation, and any record filed with or issued by the state or United States which amends or restates the name of the organization;
    68. “Pursuant to commitment,” with respect to an advance made or other value given by a secured party, means pursuant to the secured party’s obligation, whether or not a subsequent event of default or other event not within the secured party’s control has relieved or may relieve the secured party from its obligation;
    69. “Record,” except as used in “for record,” “of record,” “record or legal title,” and “record owner,” means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form;
    70. “Registered organization” means an organization formed or organized solely under the law of a single state or the United States by the filing of a public organic record with, the issuance of a public organic record by, or the enactment of legislation by the state or the United States. The term includes a business trust that is formed or organized under the law of a single state if a statute of the state governing business trusts requires that the business trust’s organic record be filed with the state;
    71. “Secondary obligor” means an obligor to the extent that:
      1. The obligor’s obligation is secondary; or
      2. The obligor has a right of recourse with respect to an obligation secured by collateral against the debtor, another obligor, or property of either;
    72. “Secured party” means:
      1. A person in whose favor a security interest is created or provided for under a security agreement, whether or not any obligation to be secured is outstanding;
      2. A person that holds an agricultural lien;
      3. A consignor;
      4. A person to which accounts, chattel paper, payment intangibles, or promissory notes have been sold;
      5. A trustee, indenture trustee, agent, collateral agent, or other representative in whose favor a security interest or agricultural lien is created or provided for; or
      6. A person that holds a security interest arising under KRS 355.2-401 , 355.2-505 , 355.2-711 (3), 355.2A-508 (5), 355.4-210 , or 355.5-118 ;
    73. “Security agreement” means an agreement that creates or provides for a security interest;
    74. “Send,” in connection with a record or notification, means:
      1. To deposit in the mail, deliver for transmission, or transmit by any other usual means of communication, with postage or cost of transmission provided for, addressed to any address reasonable under the circumstances; or
      2. To cause the record or notification to be received within the time that it would have been received if properly sent under subparagraph 1. of this paragraph;
    75. “Software” means a computer program and any supporting information provided in connection with a transaction relating to the program. The term does not include a computer program that is included in the definition of goods;
    76. “State” means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States;
    77. “Supporting obligation” means a letter-of-credit right or secondary obligation that supports the payment or performance of an account, chattel paper, a document, a general intangible, an instrument, or investment property;
    78. “Tangible chattel paper” means chattel paper evidenced by a record or records consisting of information that is inscribed on a tangible medium;
    79. “Termination statement” means an amendment of a financing statement which:
      1. Identifies, by its file number, the initial financing statement to which it relates; and
      2. Indicates either that it is a termination statement or that the identified financing statement is no longer effective; and
    80. “Transmitting utility” means a person primarily engaged in the business of:
      1. Operating a railroad, subway, street railway, or trolley bus;
      2. Transmitting communications electrically, electromagnetically, or by light;
      3. Transmitting goods by pipeline or sewer; or
      4. Transmitting or producing and transmitting electricity, steam, gas, or water.
  2. The following definitions in other articles apply to this article:
    1. “Applicant.” KRS 355.5-102 ;
    2. “Beneficiary.” KRS 355.5-102 ;
    3. “Broker.” KRS 355.8-102 ;
    4. “Certificated security.” KRS 355.8-102 ;
    5. “Check.” KRS 355.3-104 ;
    6. “Clearing corporation.” KRS 355.8-102;
    7. “Contract for sale.” KRS 355.2-106 ;
    8. “Customer.” KRS 355.4-104 ;
    9. “Entitlement holder.” KRS 355.8-102;
    10. “Financial asset.” KRS 355.8-102;
    11. “Holder in due course.” KRS 355.3-302 ;
    12. “Issuer.” (with respect to a letter of credit or letter-of-credit right) KRS 355.5-102;
    13. “Issuer.” (with respect to a security) KRS 355.8-201 ;
    14. “Lease.” KRS 355.2A-103 ;
    15. “Lease agreement.” KRS 355.2A-103 ;
    16. “Lease contract.” KRS 355.2A-103;
    17. “Leasehold interest.” KRS 355.2A-103;
    18. “Lessee.” KRS 355.2A-103;
    19. “Lessee in ordinary course of business.” KRS 355.2A-103;
    20. “Lessor.” KRS 355.2A-103;
    21. “Lessor’s residual interest.” KRS 355.2A-103;
    22. “Letter of credit.” KRS 355.5-102;
    23. “Merchant.” KRS 355.2-104 ;
    24. “Negotiable instrument.” KRS 355.3-104 ;
    25. “Nominated person.” KRS 355.5-102;
    26. “Note.” KRS 355.3-104;
    27. “Proceeds of a letter of credit.” KRS 355.5-114 ;
    28. “Prove.” KRS 355.3-103 ;
    29. “Sale.” KRS 355.2-106 ;
    30. “Securities account.” KRS 355.8-501 ;
    31. “Securities intermediary.” KRS 355.8-102;
    32. “Security.” KRS 355.8-102;
    33. “Security certificate.” KRS 355.8-102;
    34. “Security entitlement.” KRS 355.8-102; and
    35. “Uncertificated security.” KRS 355.8-102.
  3. Article 1 of this chapter contains general definitions and principles of construction and interpretation applicable throughout this article.

History. Enact. Acts 1958, ch. 77, § 9-102, effective July 1, 1960; 1986, ch. 118, § 54, effective July 1, 1987; repealed and reenact., Acts 2000, ch. 408, § 22, effective July 1, 2001; 2006, ch. 242, § 57, effective July 12, 2006; 2012, ch. 132, § 60, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source . All terms that are defined in Article 9 and used in more than one section are consolidated in this section. Note that the definition of “security interest” is found in Section 1-201, not in this Article, and has been revised. See Appendix I. Many of the definitions in this section are new; many others derive from those in former Section 9-105. The following Comments also indicate other sections of former Article 9 that defined (or explained) terms.
  2. Parties to Secured Transactions .
    1. “Debtor”; “Obligor”; “Secondary Obligor.”  Determining whether a person was a “debtor” under former Section 9-105(1)(d) required a close examination of the context in which the term was used. To reduce the need for this examination, this Article redefines “debtor” and adds new defined terms, “secondary obligor” and “obligor.” In the context of Part 6 (default and enforcement), these definitions distinguish among three classes of persons: (i) those persons who may have a stake in the proper enforcement of a security interest by virtue of their non-lien property interest (typically, an ownership interest) in the collateral, (ii) those persons who may have a stake in the proper enforcement of the security interest because of their obligation to pay the secured debt, and (iii) those persons who have an obligation to pay the secured debt but have no stake in the proper enforcement of the security interest. Persons in the first class are debtors. Persons in the second class are secondary obligors if any portion of the obligation is secondary or if the obligor has a right of recourse against the debtor or another obligor with respect to an obligation secured by collateral. One must consult the law of suretyship to determine whether an obligation is secondary. The Restatement (3d), Suretyship and Guaranty § 1 (1996), contains a useful explanation of the concept. Obligors in the third class are neither debtors nor secondary obligors. With one exception (Section 9-616, as it relates to a consumer obligor), the rights and duties provided by Part 6 affect non-debtor obligors only if they are “secondary obligors.”

      By including in the definition of “debtor” all persons with a property interest (other than a security interest in or other lien on collateral), the definition includes transferees of collateral, whether or not the secured party knows of the transfer or the transferee’s identity. Exculpatory provisions in Part 6 protect the secured party in that circumstance. See Sections 9-605 and 9-628. The definition renders unnecessary former Section 9-112, which governed situations in which collateral was not owned by the debtor. The definition also includes a “consignee,” as defined in this section, as well as a seller of accounts, chattel paper, payment intangibles, or promissory notes.

      Secured parties and other lienholders are excluded from the definition of “debtor” because the interests of those parties normally derive from and encumber a debtor’s interest. However, if in a separate secured transaction a secured party grants, as debtor, a security interest in its own interest (i.e., its security interest and any obligation that it secures), the secured party is a debtor in that transaction . This typically occurs when a secured party with a security interest in specific goods assigns chattel paper.

      Consider the following examples:

    2. “Secured Party.”  The secured party is the person in whose favor the security interest has been created, as determined by reference to the security agreement. This definition controls, among other things, which person has the duties and potential liability that Part 6 imposes upon a secured party. The definition of “secured party” also includes a “consignor,” a person to which accounts, chattel paper, payment intangibles, or promissory notes have been sold, and the holder of an agricultural lien.

      The definition of “secured party” clarifies the status of various types of representatives. Consider, for example, a multi-bank facility under which Bank A, Bank B, and Bank C are lenders and Bank A serves as the collateral agent. If the security interest is granted to the banks, then they are the secured parties. If the security interest is granted to Bank A as collateral agent, then Bank A is the secured party.

    3. Other Parties.  A “consumer obligor” is defined as the obligor in a consumer transaction. Definitions of “new debtor” and “original debtor” are used in the special rules found in Sections 9-326 and 9-508.
  3. Definitions Relating to Creation of a Security Interest.
    1. “Collateral.”  As under former Section 9-105, “collateral” is the property subject to a security interest and includes accounts and chattel paper that have been sold. It has been expanded in this Article. The term now explicitly includes proceeds subject to a security interest. It also reflects the broadened scope of the Article. It includes property subject to an agricultural lien as well as payment intangibles and promissory notes that have been sold.
    2. “Security Agreement.”  The definition of “security agreement” is substantially the same as under former Section 9-105-an agreement that creates or provides for a security interest. However, the term frequently was used colloquially in former Article 9 to refer to the document or writing that contained a debtor’s security agreement. This Article eliminates that usage, reserving the term for the more precise meaning specified in the definition.

      Whether an agreement creates a security interest depends not on whether the parties intend that the law characterize the transaction as a security interest but rather on whether the transaction falls within the definition of “security interest” in Section 1-201. Thus, an agreement that the parties characterize as a “lease” of goods may be a “security agreement,” notwithstanding the parties’ stated intention that the law treat the transaction as a lease and not as a secured transaction.

  4. Goods-Related Definitions.
    1. “Goods”; “Consumer Goods”; “Equipment”; “Farm Products”; “Farming Operation”; “Inventory.”  The definition of “goods” is substantially the same as the definition in former Section 9-105. This Article also retains the four mutually-exclusive “types” of collateral that consist of goods: “consumer goods,” “equipment,” “farm products,” and “inventory.” The revisions are primarily for clarification.

      The classes of goods are mutually exclusive. For example, the same property cannot simultaneously be both equipment and inventory. In borderline cases—a physician’s car or a farmer’s truck that might be either consumer goods or equipment—the principal use to which the property is put is determinative. Goods can fall into different classes at different times. For example, a radio may be inventory in the hands of a dealer and consumer goods in the hands of a consumer. As under former Article 9, goods are “equipment” if they do not fall into another category.

      The definition of “consumer goods” follows former Section 9-109. The classification turns on whether the debtor uses or bought the goods for use “primarily for personal, family, or household purposes.”

      Goods are inventory if they are leased by a lessor or held by a person for sale or lease. The revised definition of “inventory” makes clear that the term includes goods leased by the debtor to others as well as goods held for lease. (The same result should have obtained under the former definition.) Goods to be furnished or furnished under a service contract, raw materials, and work in process also are inventory. Implicit in the definition is the criterion that the sales or leases are or will be in the ordinary course of business. For example, machinery used in manufacturing is equipment, not inventory, even though it is the policy of the debtor to sell machinery when it becomes obsolete or worn. Inventory also includes goods that are consumed in a business (e.g., fuel used in operations). In general, goods used in a business are equipment if they are fixed assets or have, as identifiable units, a relatively long period of use, but are inventory, even though not held for sale or lease, if they are used up or consumed in a short period of time in producing a product or providing a service.

      Goods are “farm products” if the debtor is engaged in farming operations with respect to the goods. Animals in a herd of livestock are covered whether the debtor acquires them by purchase or as a result of natural increase. Products of crops or livestock remain farm products as long as they have not been subjected to a manufacturing process. The terms “crops” and “livestock” are not defined. The new definition of “farming operations” is for clarification only.

      Crops, livestock, and their products cease to be “farm products” when the debtor ceases to be engaged in farming operations with respect to them. If, for example, they come into the possession of a marketing agency for sale or distribution or of a manufacturer or processor as raw materials, they become inventory. Products of crops or livestock, even though they remain in the possession of a person engaged in farming operations, lose their status as farm products if they are subjected to a manufacturing process. What is and what is not a manufacturing operation is not specified in this Article. At one end of the spectrum, some processes are so closely connected with farming—such as pasteurizing milk or boiling sap to produce maple syrup or sugar—that they would not constitute manufacturing. On the other hand an extensive canning operation would be manufacturing. Once farm products have been subjected to a manufacturing operation, they normally become inventory.

      The revised definition of “farm products” clarifies the distinction between crops and standing timber and makes clear that aquatic goods produced in aquacultural operations may be either crops or livestock. Although aquatic goods that are vegetable in nature often would be crops and those that are animal would be livestock, this Article leaves the courts free to classify the goods on a case-by-case basis. See Section 9-324, Comment 11.

      The definitions of “goods” and “software” are also mutually exclusive. Computer programs usually constitute “software,” and, as such, are not “goods” as this Article uses the terms. However, under the circumstances specified in the definition of “goods,” computer programs embedded in goods are part of the “goods” and are not “software.”

    2. “Accession”; “Manufactured Home”; “Manufactured-Home Transaction. ” Other specialized definitions of goods include “accession” (see the special priority and enforcement rules in Section 9-335), and “manufactured home” (see Section 9-515, permitting a financing statement in a “manufactured-home transaction” to be effective for 30 years). The definition of “manufactured home” borrows from the federal Manufactured Housing Act, 42 U.S.C. §§ 5401et seq., and is intended to have the same meaning.
    3. “As-Extracted Collateral.”  Under this Article, oil, gas, and other minerals that have not been extracted from the ground are treated as real property, to which this Article does not apply. Upon extraction, minerals become personal property (goods) and eligible to be collateral under this Article. See the definition of “goods,” which excludes “oil, gas, and other minerals before extraction.” To take account of financing practices reflecting the shift from real to personal property, this Article contains special rules for perfecting security interests in minerals which attach upon extraction and in accounts resulting from the sale of minerals at the wellhead or minehead. See, e.g., Sections 9-301(4) (law governing perfection and priority); 9-501 (place of filing), 9-502 (contents of financing statement), 9-519 (indexing of records). The new term, “as-extracted collateral,” refers to the minerals and related accounts to which the special rules apply. The term “at the wellhead” encompasses arrangements based on a sale of the produce at the moment that it issues from the ground and is measured, without technical distinctions as to whether title passes at the “Christmas tree” of a well, the far side of a gathering tank, or at some other point. The term “at . . . the minehead” is comparable.

      The following examples explain the operation of these provisions.

  5. Receivables-Related Definitions.
    1. “Account”; “Health-Care-Insurance Receivable”; “As-Extracted Collateral.”  The definition of “account” has been expanded and reformulated. It is no longer limited to rights to payment relating to goods or services. Many categories of rights to payment that were classified as general intangibles under former Article 9 are accounts under this Article. Thus, if they are sold, a financing statement must be filed to perfect the buyer’s interest in them. As used in the definition of “account,” a right to payment “arising out of the use of a credit or charge card or information contained on or for use with the card” is the right of a card issuer to payment from its cardholder. A credit-card or charge-card transaction may give rise to other rights to payments; however, those other rights do not “arise out of the use” of the card or information contained on or for use with the card. Among the types of property that are expressly excluded from the definition of account is “a right to payment for money or funds advanced or sold.” As defined in Section 1-201, “money” is limited essentially to currency. As used in the exclusion from the definition of “account,” however, “funds” is a broader concept (although the term is not defined). For example, when a bank-lender credits a borrower’s deposit account for the amount of a loan, the bank’s advance of funds is not a transaction giving rise to an account.

      The definition of “health-care-insurance receivable” is new. It is a subset of the definition of “account.” However, the rules generally applicable to account debtors on accounts do not apply to insurers obligated on health-care-insurance receivables. See Sections 9-404(e), 9-405(d), 9-406(i).

      Note that certain accounts also are “as-extracted collateral.” See Comment 4.c., Examples 6 and 7.

    2. “Chattel Paper”; “Electronic Chattel Paper”; “Tangible Chattel Paper.”  “Chattel paper” consists of a monetary obligation together with a security interest in or a lease of specific goods if the obligation and security interest or lease are evidenced by “a record or records.” The definition has been expanded from that found in former Article 9 to include records that evidence a monetary obligation and a security interest in specific goods and software used in the goods, a security interest in specific goods and license of software used in the goods, or a lease of specific goods and license of software used in the goods. The expanded definition covers transactions in which the debtor’s or lessee’s monetary obligation includes amounts owed with respect to software used in the goods. The monetary obligation with respect to the software need not be owed under a license from the secured party or lessor, and the secured party or lessor need not be a party to the license transaction itself. Among the types of monetary obligations that are included in “chattel paper” are amounts that have been advanced by the secured party or lessor to enable the debtor or lessee to acquire or obtain financing for a license of the software used in the goods. The definition also makes clear that rights to payment arising out of credit-card transactions are not chattel paper.

      Charters of vessels are expressly excluded from the definition of chattel paper; they are accounts. The term “charter” as used in this section includes bareboat charters, time charters, successive voyage charters, contracts of affreightment, contracts of carriage, and all other arrangements for the use of vessels.

      Under former Section 9-105, only if the evidence of an obligation consisted of “a writing or writings” could an obligation qualify as chattel paper. In this Article, traditional, written chattel paper is included in the definition of “tangible chattel paper.” “Electronic chattel paper” is chattel paper that is stored in an electronic medium instead of in tangible form. The concept of an electronic medium should be construed liberally to include electrical, digital, magnetic, optical, electromagnetic, or any other current or similar emerging technologies.

    3. “Instrument”; “Promissory Note.”  The definition of “instrument” includes a negotiable instrument. As under former Section 9-105, it also includes any other right to payment of a monetary obligation that is evidenced by a writing of a type that in ordinary course of business is transferred by delivery (and, if necessary, an indorsement or assignment). Except in the case of chattel paper, the fact that an instrument is secured by a security interest or encumbrance on property does not change the character of the instrument as such or convert the combination of the instrument and collateral into a separate classification of personal property. The definition makes clear that rights to payment arising out of credit-card transactions are not instruments. The definition of “promissory note” is new, necessitated by the inclusion of sales of promissory notes within the scope of Article 9. It explicitly excludes obligations arising out of “orders” to pay (e.g., checks) as opposed to “promises” to pay. See Section 3-104.
    4. “General Intangible”; “Payment Intangible.”  “General intangible” is the residual category of personal property, including things in action, that is not included in the other defined types of collateral. Examples are various categories of intellectual property and the right to payment of a loan of funds that is not evidenced by chattel paper or an instrument. As used in the definition of “general intangible,” “things in action” includes rights that arise under a license of intellectual property, including the right to exploit the intellectual property without liability for infringement. The definition has been revised to exclude commercial tort claims, deposit accounts, and letter-of-credit rights. Each of the three is a separate type of collateral. One important consequence of this exclusion is that tortfeasors (commercial tort claims), banks (deposit accounts), and persons obligated on letters of credit (letter-of-credit rights) are not “account debtors” having the rights and obligations set forth in Sections 9-404, 9-405, and 9-406. In particular, tortfeasors, banks, and persons obligated on letters of credit are not obligated to pay an assignee (secured party) upon receipt of the notification described in Section 9-404(a). See Comment 5.h. Another important consequence relates to the adequacy of the description in the security agreement. See Section 9-108.

      “Payment intangible” is a subset of the definition of “general intangible.” The sale of a payment intangible is subject to this Article. See Section 9-109(a)(3). Virtually any intangible right could give rise to a right to payment of money once one hypothesizes, for example, that the account debtor is in breach of its obligation. The term “payment intangible,” however, embraces only those general intangibles “under which the account debtor’s principal obligation is a monetary obligation.” (Emphasis added.) A debtor’s right to payment from another person of amounts received by the other person on the debtor’s behalf, including the right of a merchant in a credit-card, debit-card, prepaid-card, or other payment-card transaction to payment of amounts received by its bank from the card system in settlement of the transaction, is a “payment intangible.” (In contrast, the right of a credit-card issuer to payment arising out of the use of a credit card is an “account.”)

      In classifying intangible collateral, a court should begin by identifying the particular rights that have been assigned. The account debtor (promisor) under a particular contract may owe several types of monetary obligations as well as other, nonmonetary obligations. If the promisee’s right to payment of money is assigned separately, the right is an account or payment intangible, depending on how the account debtor’s obligation arose. When all the promisee’s rights are assigned together, an account, a payment intangible, and a general intangible all may be involved, depending on the nature of the rights.

      A right to the payment of money is frequently buttressed by ancillary rights, such as rights arising from covenants in a purchase agreement, note, or mortgage requiring insurance on the collateral or forbidding removal of the collateral, rights arising from covenants to preserve the creditworthiness of the promisor, and the lessor’s rights with respect to leased goods that arise upon the lessee’s default (see Section 2A-523). This Article does not treat these ancillary rights separately from the rights to payment to which they relate. For example, attachment and perfection of an assignment of a right to payment of a monetary obligation, whether it be an account or payment intangible, also carries these ancillary rights. Thus, an assignment of the lessor’s right to payment under a lease also transfers the lessor’s rights with respect to the leased goods under Section 2A-523. If, taken together, the lessor’s rights to payment and with respect to the leased goods are evidenced by chattel paper, then, contrary to In re Commercial Money Center, Inc., 350 B.R. 465 (Bankr. App. 9th Cir. 2006), an assignment of the lessor’s right to payment constitutes an assignment of the chattel paper. Although an agreement excluding the lessor’s rights with respect to the leased goods from an assignment of the lessor’s right to payment may be effective between the parties, the agreement does not affect the characterization of the collateral to the prejudice of creditors of, and purchasers from, the assignor.

      Every “payment intangible” is also a “general intangible.” Likewise, “software” is a “general intangible” for purposes of this Article. See Comment 25. Accordingly, except as otherwise provided, statutory provisions applicable to general intangibles apply to payment intangibles and software.

    5. “Letter-of-Credit Right.”  The term “letter-of-credit right” embraces the rights to payment and performance under a letter of credit (defined in Section 5-102). However, it does not include a beneficiary’s right to demand payment or performance. Transfer of those rights to a transferee beneficiary is governed by Article 5. See Sections 9-107, Comment 4, and 9-329, Comments 3 and 4.
    6. “Supporting Obligation.”  This new term covers the most common types of credit enhancements—suretyship obligations (including guarantees) and letter-of-credit rights that support one of the types of collateral specified in the definition. As explained in Comment 2.a., suretyship law determines whether an obligation is “secondary” for purposes of this definition. Section 9-109 generally excludes from this Article transfers of interests in insurance policies. However, the regulation of a secondary obligation as an insurance product does not necessarily mean that it is a “policy of insurance” for purposes of the exclusion in Section 9-109. Thus, this Article may cover a secondary obligation (as a supporting obligation), even if the obligation is issued by a regulated insurance company and the obligation is subject to regulation as an “insurance” product.

      This Article contains rules explicitly governing attachment, perfection, and priority of security interests in supporting obligations. See Sections 9-203, 9-308, 9-310, and 9-322. These provisions reflect the principle that a supporting obligation is an incident of the collateral it supports.

      Collections of or other distributions under a supporting obligation are “proceeds” of the supported collateral as well as “proceeds” of the supporting obligation itself. See Section 9-102 (defining “proceeds”) and Comment 13.b. As such, the collections and distributions are subject to the priority rules applicable to proceeds generally. See Section 9-322. However, under the special rule governing security interests in a letter-of-credit right, a secured party’s failure to obtain control (Section 9-107) of a letter-of-credit right supporting collateral may leave its security interest exposed to a priming interest of a party who does take control. See Section 9-329 (security interest in a letter-of-credit right perfected by control has priority over a conflicting security interest).

    7. “Commercial Tort Claim.”  This term is new. A tort claim may serve as original collateral under this Article only if it is a “commercial tort claim.” See Section 9-109(d). Although security interests in commercial tort claims are within its scope, this Article does not override other applicable law restricting the assignability of a tort claim. See Section 9-401. A security interest in a tort claim also may exist under this Article if the claim is proceeds of other collateral.
    8. “Account Debtor.”  An “account debtor” is a person obligated on an account, chattel paper, or general intangible. The account debtor’s obligation often is a monetary obligation; however, this is not always the case. For example, if a franchisee uses its rights under a franchise agreement (a general intangible) as collateral, then the franchisor is an “account debtor.” As a general matter, Article 3, and not Article 9, governs obligations on negotiable instruments. Accordingly, the definition of “account debtor” excludes obligors on negotiable instruments constituting part of chattel paper. The principal effect of this change from the definition in former Article 9 is that the rules in Sections 9-403, 9-404, 9-405, and 9-406, dealing with the rights of an assignee and duties of an account debtor, do not apply to an assignment of chattel paper in which the obligation to pay is evidenced by a negotiable instrument. (Section 9-406(d), however, does apply to promissory notes, including negotiable promissory notes.) Rather, the assignee’s rights are governed by Article 3. Similarly, the duties of an obligor on a nonnegotiable instrument are governed by non-Article 9 law unless the nonnegotiable instrument is a part of chattel paper, in which case the obligor is an account debtor.
    9. Receivables Under Government Entitlement Programs.  This Article does not contain a defined term that encompasses specifically rights to payment or performance under the many and varied government entitlement programs. Depending on the nature of a right under a program, it could be an account, a payment intangible, a general intangible other than a payment intangible, or another type of collateral. The right also might be proceeds of collateral (e.g., crops).
  6. Investment-Property-Related Definitions: “Commodity Account”; “Commodity Contract”; “Commodity Customer”; “Commodity Intermediary”; “Investment Property.”  These definitions are substantially the same as the corresponding definitions in former Section 9-115. “Investment property” includes securities, both certificated and uncertificated, securities accounts, security entitlements, commodity accounts, and commodity contracts. The term investment property includes a “securities account” in order to facilitate transactions in which a debtor wishes to create a security interest in all of the investment positions held through a particular account rather than in particular positions carried in the account. Former Section 9-115 was added in conjunction with Revised Article 8 and contained a variety of rules applicable to security interests in investment property. These rules have been relocated to the appropriate sections of Article 9. See, e.g., Sections 9-203 (attachment), 9-314 (perfection by control), 9-328 (priority).

    The terms “security,” “security entitlement,” and related terms are defined in Section 8-102, and the term “securities account” is defined in Section 8-501. The terms “commodity account,” “commodity contract,” “commodity customer,” and “commodity intermediary” are defined in this section. Commodity contracts are not “securities” or “financial assets” under Article 8. See Section 8-103(f). Thus, the relationship between commodity intermediaries and commodity customers is not governed by the indirect-holding-system rules of Part 5 of Article 8. For securities, Article 9 contains rules on security interests, and Article 8 contains rules on the rights of transferees, including secured parties, on such matters as the rights of a transferee if the transfer was itself wrongful and gives rise to an adverse claim. For commodity contracts, Article 9 establishes rules on security interests, but questions of the sort dealt with in Article 8 for securities are left to other law.

    The indirect-holding-system rules of Article 8 are sufficiently flexible to be applied to new developments in the securities and financial markets, where that is appropriate. Accordingly, the definition of “commodity contract” is narrowly drafted to ensure that it does not operate as an obstacle to the application of the Article 8 indirect-holding-system rules to new products. The term “commodity contract” covers those contracts that are traded on or subject to the rules of a designated contract market and foreign commodity contracts that are carried on the books of American commodity intermediaries. The effect of this definition is that the category of commodity contracts that are excluded from Article 8 but governed by Article 9 is essentially the same as the category of contracts that fall within the exclusive regulatory jurisdiction of the federal Commodity Futures Trading Commission.

    Commodity contracts are different from securities or other financial assets. A person who enters into a commodity futures contract is not buying an asset having a certain value and holding it in anticipation of increase in value. Rather the person is entering into a contract to buy or sell a commodity at set price for delivery at a future time. That contract may become advantageous or disadvantageous as the price of the commodity fluctuates during the term of the contract. The rules of the commodity exchanges require that the contracts be marked to market on a daily basis; that is, the customer pays or receives any increment attributable to that day’s price change. Because commodity customers may incur obligations on their contracts, they are required to provide collateral at the outset, known as “original margin,” and may be required to provide additional amounts, known as “variation margin,” during the term of the contract.

    The most likely setting in which a person would want to take a security interest in a commodity contract is where a lender who is advancing funds to finance an inventory of a physical commodity requires the borrower to enter into a commodity contract as a hedge against the risk of decline in the value of the commodity. The lender will want to take a security interest in both the commodity itself and the hedging commodity contract. Typically, such arrangements are structured as security interests in the entire commodity account in which the borrower carries the hedging contracts, rather than in individual contracts.

    One important effect of including commodity contracts and commodity accounts in Article 9 is to provide a clearer legal structure for the analysis of the rights of commodity clearing organizations against their participants and futures commission merchants against their customers. The rules and agreements of commodity clearing organizations generally provide that the clearing organization has the right to liquidate any participant’s positions in order to satisfy obligations of the participant to the clearing corporation. Similarly, agreements between futures commission merchants and their customers generally provide that the futures commission merchant has the right to liquidate a customer’s positions in order to satisfy obligations of the customer to the futures commission merchant.

    The main property that a commodity intermediary holds as collateral for the obligations that the commodity customer may incur under its commodity contracts is not other commodity contracts carried by the customer but the other property that the customer has posted as margin. Typically, this property will be securities. The commodity intermediary’s security interest in such securities is governed by the rules of this Article on security interests in securities, not the rules on security interests in commodity contracts or commodity accounts.

    Although there are significant analytic and regulatory differences between commodities and securities, the development of commodity contracts on financial products in the past few decades has resulted in a system in which the commodity markets and securities markets are closely linked. The rules on security interests in commodity contracts and commodity accounts provide a structure that may be essential in times of stress in the financial markets. Suppose, for example that a firm has a position in a securities market that is hedged by a position in a commodity market, so that payments that the firm is obligated to make with respect to the securities position will be covered by the receipt of funds from the commodity position. Depending upon the settlement cycles of the different markets, it is possible that the firm could find itself in a position where it is obligated to make the payment with respect to the securities position before it receives the matching funds from the commodity position. If cross-margining arrangements have not been developed between the two markets, the firm may need to borrow funds temporarily to make the earlier payment. The rules on security interests in investment property would facilitate the use of positions in one market as collateral for loans needed to cover obligations in the other market.

  7. Consumer-Related Definitions: “Consumer Debtor”; “Consumer Goods”; “Consumer-goods transaction”; “Consumer Obligor”; “Consumer Transaction.”  The definition of “consumer goods” (discussed above) is substantially the same as the definition in former Section 9-109. The definitions of “consumer debtor,” “consumer obligor,” “consumer-goods transaction,” and “consumer transaction” have been added in connection with various new (and old) consumer-related provisions and to designate certain provisions that are inapplicable in consumer transactions.

    “Consumer-goods transaction” is a subset of “consumer transaction.” Under each definition, both the obligation secured and the collateral must have a personal, family, or household purpose. However, “mixed” business and personal transactions also may be characterized as a consumer-goods transaction or consumer transaction. Subparagraph (A) of the definition of consumer-goods transactions and clause (i) of the definition of consumer transaction are primary purposes tests. Under these tests, it is necessary to determine the primary purpose of the obligation or obligations secured. Subparagraph (B) and clause (iii) of these definitions are satisfied if any of the collateral is consumer goods, in the case of a consumer-goods transaction, or “is held or acquired primarily for personal, family, or household purposes,” in the case of a consumer transaction. The fact that some of the obligations secured or some of the collateral for the obligation does not satisfy the tests (e.g., some of the collateral is acquired for a business purpose) does not prevent a transaction from being a “consumer transaction” or “consumer-goods transaction.”

  8. Filing-Related Definitions: “Continuation Statement”; “File Number”; “Filing Office”; “Filing-Office Rule”; “Financing Statement”; “Fixture Filing”; “Manufactured-Home Transaction”; “New Debtor”; “Original Debtor”; “Public-Finance Transaction”; “Termination Statement”; “Transmitting Utility.”  These definitions are used exclusively or primarily in the filing-related provisions in Part 5. Most are self-explanatory and are discussed in the Comments to Part 5. A financing statement filed in a manufactured-home transaction or a public-finance transaction may remain effective for 30 years instead of the 5 years applicable to other financing statements. See Section 9-515(b). The definitions relating to medium neutrality also are significant for the filing provisions. See Comment 9.

    The definition of “transmitting utility” has been revised to embrace the business of transmitting communications generally to take account of new and future types of communications technology. The term designates a special class of debtors for whom separate filing rules are provided in Part 5, thereby obviating the many local fixture filings that would be necessary under the rules of Section 9-501 for a far-flung public-utility debtor. A transmitting utility will not necessarily be regulated by or operating as such in a jurisdiction where fixtures are located. For example, a utility might own transmission lines in a jurisdiction, although the utility generates no power and has no customers in the jurisdiction.

  9. Definitions Relating to Medium Neutrality.
    1. “Record.”  In many, but not all, instances, the term “record” replaces the term “writing” and “written.” A “record” includes information that is in intangible form (e.g., electronically stored) as well as tangible form (e.g., written on paper). Given the rapid development and commercial adoption of modern communication and storage technologies, requirements that documents or communications be “written,” “in writing,” or otherwise in tangible form do not necessarily reflect or aid commercial practices.

      A “record” need not be permanent or indestructible, but the term does not include any oral or other communication that is not stored or preserved by any means. The information must be stored on paper or in some other medium. Information that has not been retained other than through human memory does not qualify as a record. Examples of current technologies commercially used to communicate or store information include, but are not limited to, magnetic media, optical discs, digital voice messaging systems, electronic mail, audio tapes, and photographic media, as well as paper. “Record” is an inclusive term that includes all of these methods of storing or communicating information. Any “writing” is a record. A record may be authenticated. See Comment 9.b. A record may be created without the knowledge or intent of a particular person.

      Like the terms “written” or “in writing,” the term “record” does not establish the purposes, permitted uses, or legal effect that a record may have under any particular provision of law. Whatever is filed in the Article 9 filing system, including financing statements, continuation statements, and termination statements, whether transmitted in tangible or intangible form, would fall within the definition. However, in some instances, statutes or filing-office rules may require that a paper record be filed. In such cases, even if this Article permits the filing of an electronic record, compliance with those statutes or rules is necessary. Similarly, a filer must comply with a statute or rule that requires a particular type of encoding or formatting for an electronic record.

      This Article sometimes uses the terms “for record,” “of record,” “record or legal title,” and “record owner.” Some of these are terms traditionally used in real-property law. The definition of “record” in this Article now explicitly excepts these usages from the defined term. Also, this Article refers to a record that is filed or recorded in real-property recording systems to record a mortgage as a “record of a mortgage.” This usage recognizes that the defined term “mortgage” means an interest in real property; it does not mean the record that evidences, or is filed or recorded with respect to, the mortgage.

    2. “Authenticate”; “Communicate”; “Send.”  The terms “authenticate” and “authenticated” generally replace “sign” and “signed.” “Authenticated” replaces and broadens the definition of “signed,” in Section 1-201, to encompass authentication of all records, not just writings. (References to authentication of, e.g., an agreement, demand, or notification mean, of course, authentication of a record containing an agreement, demand, or notification.) The terms “communicate” and “send” also contemplate the possibility of communication by nonwritten media. These definitions include the act of transmitting both tangible and intangible records. The definition of “send” replaces, for purposes of this Article, the corresponding term in Section 1-201. The reference to “usual means of communication” in that definition contemplates an inquiry into the appropriateness of the method of transmission used in the particular circumstances involved.
  10. Scope-Related Definitions.
    1. Expanded Scope of Article: “Agricultural Lien”; “Consignment”; “Payment Intangible”; “Promissory Note.”  These new definitions reflect the expanded scope of Article 9, as provided in Section 9-109(a).
    2. Reduced Scope of Exclusions: “Governmental Unit”; “Health-Care-Insurance Receivable”; “Commercial Tort Claims. ” These new definitions reflect the reduced scope of the exclusions, provided in Section 9-109(c) and (d), of transfers by governmental debtors and assignments of interests in insurance policies and commercial tort claims.
  11. Choice-of-Law-Related Definitions: “Certificate of Title”; “Governmental Unit”; “Jurisdiction of Organization”; “Registered Organization”; “State.”  These new definitions reflect the changes in the law governing perfection and priority of security interests and agricultural liens provided in Part 3, Subpart 1.

    Statutes often require applicants for a certificate of title to identify all security interests on the application and require the issuing agency to indicate the identified security interests on the certificate. Some of these statutes provide that priority over the rights of a lien creditor (i.e., perfection of a security interest) in goods covered by the certificate occurs upon indication of the security interest on the certificate; that is, they provide for the indication of the security interest on the certificate as a “condition” of perfection. Other statutes contemplate that perfection is achieved upon the occurrence of another act, e.g., delivery of the application to the issuing agency, that “results” in the indication of the security interest on the certificate. A certificate governed by either type of statute can qualify as a “certificate of title” under this Article. The statute providing for the indication of a security interest need not expressly state the connection between the indication and perfection. For example, a certificate issued pursuant to a statute that requires applicants to identify security interests, requires the issuing agency to indicate the identified security interests on the certificate, but is silent concerning the legal consequences of the indication would be a “certificate of title” if, under a judicial interpretation of the statute, perfection of a security interest is a legal consequence of the indication. Likewise, a certificate would be a “certificate of title” if another statute provides, expressly or as interpreted, the requisite connection between the indication and perfection.

    The first sentence of the definition of “certificate of title” includes certificates consisting of tangible records, of electronic records, and of combinations of tangible and electronic records.

    In many States, a certificate of title covering goods that are encumbered by a security interest is delivered to the secured party by the issuing authority. To eliminate the need for the issuance of a paper certificate under these circumstances, several States have revised their certificate of title statutes to permit or require a State agency to maintain an electronic record that evidences ownership of the goods and in which a security interest in the goods may be noted. The second sentence of the definition provides that such a record is a “certificate-of-title” if it is in fact maintained as an alternative to the issuance of a paper certificate of title, regardless of whether the certificate-of-title statute provides that the record is a certificate of title and even if the statute does not expressly state that the record is maintained instead of issuing a paper certificate.

    Not every organization that may provide information about itself in the public records is a “registered organization.” For example, a general partnership is not a “registered organization,” even if it files a statement of partnership authority under Section 303 of the Uniform Partnership Act (1994) or an assumed name (“dba”) certificate. This is because such a partnership is not formed or organized by the filing of a record with, or the issuance of a record by, a State or the United States. In contrast, corporations, limited liability companies, and limited partnerships ordinarily are “registered organizations.”

    Not every record concerning a registered organization that is filed with, or issued by, a State or the United States is a “public organic record.” For example, a certificate of good standing issued with respect to a corporation or a published index of domestic corporations would not be a “public organic record” because its issuance or publication does not form or organize the corporations named.

    When collateral is held in a trust, one must look to non-UCC law to determine whether the trust is a “registered organization.” Non-UCC law typically distinguishes between statutory trusts and common-law trusts. A statutory trust is formed by the filing of a record, commonly referred to as a certificate of trust, in a public office pursuant to a statute. See, e.g., Uniform Statutory Trust Entity Act 201 (2009); Delaware Statutory Trust Act, Del. Code Ann. tit. 12, 3801 et seq. A statutory trust is a juridical entity, separate from its trustee and beneficial owners, that may sue and be sued, own property, and transact business in its own name. Inasmuch as a statutory trust is a “legal or commercial entity,” it qualifies as a “person other than an individual,” and therefore as an “organization,” under Section 1-201. A statutory trust that is formed by the filing of a record in a public office is a “registered organization,” and the filed record is a “public organic record” of the statutory trust, if the filed record is available to the public for inspection. (The requirement that a record be “available to the public for inspection” is satisfied if a copy of the relevant record is available for public inspection.)

    Unlike a statutory trust, a common-law trust—whether its purpose is donative or commercial—arises from private action without the filing of a record in a public office. See Uniform Trust Code § 401 (2000); Restatement (Third) of Trusts § 10 (2003). Moreover, under traditional law, a common-law trust is not itself a juridical entity and therefore must sue and be sued, own property, and transact business in the name of the trustee acting in the capacity of trustee. A common-law trust that is a “business trust,” i.e., that has a business or commercial purpose, is an “organization” under Section 1-201. However, such a trust would not be a “registered organization” if, as is typically the case, the filing of a public record is not needed to form it.

    In some states, however, the trustee of a common-law trust that has a commercial or business purpose is required by statute to file a record in a public office following the trust’s formation. See, e.g., Mass. Gen. Laws Ch. 182, § 2; Fla. Stat. Ann. § 609.02. A business trust that is required to file its organic record in a public office is a “registered organization” under the second sentence of the definition if the filed record is available to the public for inspection. Any organic record required to be filed, and filed, with respect to a common-law business trust after the trust is formed is a “public organic record” of the trust. Some statutes require a trust or other organization to file, after formation or organization, a record other than an organic record. See, e.g., N.Y. Gen Assn’s Law § 18 (requiring associations doing business within New York to file a certificate designating the secretary of state as an agent upon whom process may be served). This requirement does not render the organization a “registered organization” under the second sentence of the definition, and the record is not a “public organic record.”

  12. Deposit-Account-Related Definitions: “Deposit Account”; “Bank.”  The revised definition of “deposit account” incorporates the definition of “bank,” which is new. The definition derives from the definitions of “bank” in Sections 4-105(1) and 4A-105(a)(2), which focus on whether the organization is “engaged in the business of banking.”

    Deposit accounts evidenced by Article 9 “instruments” are excluded from the term “deposit account.” In contrast, former Section 9-105 excluded from the former definition “an account evidenced by a certificate of deposit.” The revised definition clarifies the proper treatment of nonnegotiable or uncertificated certificates of deposit. Under the definition, an uncertificated certificate of deposit would be a deposit account (assuming there is no writing evidencing the bank’s obligation to pay) whereas a nonnegotiable certificate of deposit would be a deposit account only if it is not an “instrument” as defined in this section (a question that turns on whether the nonnegotiable certificate of deposit is “of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment.”)

    A deposit account evidenced by an instrument is subject to the rules applicable to instruments generally. As a consequence, a security interest in such an instrument cannot be perfected by “control” (see Section 9-104), and the special priority rules applicable to deposit accounts (see Sections 9-327 and 9-340) do not apply.

    The term “deposit account” does not include “investment property,” such as securities and security entitlements. Thus, the term also does not include shares in a money-market mutual fund, even if the shares are redeemable by check.

  13. Proceeds-Related Definitions: “Cash Proceeds”; “Noncash Proceeds”; “Proceeds.”  The revised definition of “proceeds” expands the definition beyond that contained in former Section 9-306 and resolves ambiguities in the former section.
    1. Distributions on Account of Collateral.  The phrase “whatever is collected on, or distributed on account of, collateral,” in subparagraph (B), is broad enough to cover cash or stock dividends distributed on account of securities or other investment property that is original collateral. Compare former Section 9-306 (“Any payments or distributions made with respect to investment property collateral are proceeds.”). This section rejects the holding of Hastie v. FDIC, 2 F.3d 1042 (10th Cir. 1993) (postpetition cash dividends on stock subject to a prepetition pledge are not “proceeds” under Bankruptcy Code Section 552(b)), to the extent the holding relies on the Article 9 definition of “proceeds.”
    2. Distributions on Account of Supporting Obligations.  Under subparagraph (B), collections on and distributions on account of collateral consisting of various credit-support arrangements (“supporting obligations,” as defined in Section 9-102) also are proceeds. Consequently, they are afforded treatment identical to proceeds collected from or distributed by the obligor on the underlying (supported) right to payment or other collateral. Proceeds of supporting obligations also are proceeds of the underlying rights to payment or other collateral.
    3. Proceeds of Proceeds.  The definition of “proceeds” no longer provides that proceeds of proceeds are themselves proceeds. That idea is expressed in the revised definition of “collateral” in Section 9-102. No change in meaning is intended.
    4. Proceeds Received by Person Who Did Not Create Security Interest.  When collateral is sold subject to a security interest and the buyer then resells the collateral, a question arose under former Article 9 concerning whether the “debtor” had “received” what the buyer received on resale and, therefore, whether those receipts were “proceeds” under former Section 9-306(2). This Article contains no requirement that property be “received” by the debtor for the property to qualify as proceeds. It is necessary only that the property be traceable, directly or indirectly, to the original collateral.
    5. Cash Proceeds and Noncash Proceeds.  The definition of “cash proceeds” is substantially the same as the corresponding definition in former Section 9-306. The phrase “and the like” covers property that is functionally equivalent to “money, checks, or deposit accounts,” such as some money market accounts that are securities or part of securities entitlements. Proceeds other than cash proceeds are noncash proceeds.
  14. Consignment-Related Definitions: “Consignee”; “Consignment”; “Consignor.”  The definition of “consignment” excludes, in subparagraphs (B) and (C), transactions for which filing would be inappropriate or of insufficient benefit to justify the costs. A consignment excluded from the application of this Article by one of those subparagraphs may still be a true consignment; however, it is governed by non-Article 9 law. The definition also excludes, in subparagraph (D), what have been called “consignments intended for security.” These “consignments” are not bailments but secured transactions. Accordingly, all of Article 9 applies to them. See Sections 1-201(b)(35), 9-109(a)(1). The “consignor” is the person who delivers goods to the “consignee” in a consignment.

    The definition of “consignment” requires that the goods be delivered “to a merchant for the purpose of sale.” If the goods are delivered for another purpose as well, such as milling or processing, the transaction is a consignment nonetheless because a purpose of the delivery is “sale.” On the other hand, if a merchant-processor-bailee will not be selling the goods itself but will be delivering to buyers to which the owner-bailor agreed to sell the goods, the transaction would not be a consignment.

  15. “Accounting.”  This definition describes the record and information that a debtor is entitled to request under Section 9-210.
  16. “Document.”  The definition of “document” incorporates both tangible and electronic documents of title. See Section 1-201(b)(16) and Comment 16.
  17. “Encumbrance”; “Mortgage.”  The definitions of “encumbrance” and “mortgage” are unchanged in substance from the corresponding definitions in former Section 9-105. They are used primarily in the special real-property-related priority and other provisions relating to crops, fixtures, and accessions.
  18. “Fixtures.”  This definition is unchanged in substance from the corresponding definition in former Section 9-313. See Section 9-334 (priority of security interests in fixtures and crops).
  19. “Good Faith.”  This Article expands the definition of “good faith” to include “the observance of reasonable commercial standards of fair dealing.” The definition in this section applies when the term is used in this Article, and the same concept applies in the context of this Article for purposes of the obligation of good faith imposed by Section 1-203. See subsection (c).
  20. “Lien Creditor.”  This definition is unchanged in substance from the corresponding definition in former Section 9-301.
  21. “New Value.”   This Article deletes former Section 9-108. Its broad formulation of new value, which embraced the taking of after-acquired collateral for a pre-existing claim, was unnecessary, counterintuitive, and ineffective for its original purpose of sheltering after-acquired collateral from attack as a voidable preference in bankruptcy. The new definition derives from Bankruptcy Code Section 547(a). The term is used with respect to temporary perfection of security interests in instruments, certificated securities, or negotiable documents under Section 9-312(e) and with respect to chattel paper priority in Section 9-330.
  22. “Person Related To.”  Section 9-615 provides a special method for calculating a deficiency or surplus when “the secured party, a person related to the secured party, or a secondary obligor” acquires the collateral at a foreclosure disposition. Separate definitions of the term are provided with respect to an individual secured party and with respect to a secured party that is an organization. The definitions are patterned on the corresponding definition in Section 1.301(32) of the Uniform Consumer Credit Code (1974).
  23. “Proposal.”  This definition describes a record that is sufficient to propose to retain collateral in full or partial satisfaction of a secured obligation. See Sections 9-620, 9-621, 9-622.
  24. “Pursuant to Commitment.”  This definition is unchanged in substance from the corresponding definition in former Section 9-105. It is used in connection with special priority rules applicable to future advances. See Section 9-323.
  25. “Software.”  The definition of “software” is used in connection with the priority rules applicable to purchase-money security interests. See Sections 9-103, 9-324. Software, like a payment intangible, is a type of general intangible for purposes of this Article. See Comment 4.a., above, regarding the distinction between “goods” and “software.”
  26. Terminology: “Assignment” and “Transfer.”  In numerous provisions, this Article refers to the “assignment” or the “transfer” of property interests. These terms and their derivatives are not defined. This Article generally follows common usage by using the terms “assignment” and “assign” to refer to transfers of rights to payment, claims, and liens and other security interests. It generally uses the term “transfer” to refer to other transfers of interests in property. Except when used in connection with a letter-of-credit transaction (see Section 9-107, Comment 4), no significance should be placed on the use of one term or the other. Depending on the context, each term may refer to the assignment or transfer of an outright ownership interest or to the assignment or transfer of a limited interest, such as a security interest.

Example 1: Behnfeldt borrows money and grants a security interest in her Miata to secure the debt. Behnfeldt is a debtor and an obligor.

Example 2: Behnfeldt borrows money and grants a security interest in her Miata to secure the debt. Bruno co-signs a negotiable note as maker. As before, Behnfeldt is the debtor and an obligor. As an accommodation party (see Section 3-419), Bruno is a secondary obligor. Bruno has this status even if the note states that her obligation is a primary obligation and that she waives all suretyship defenses.

Example 3: Behnfeldt borrows money on an unsecured basis. Bruno co-signs the note and grants a security interest in her Honda to secure her obligation. Inasmuch as Behnfeldt does not have a property interest in the Honda, Behnfeldt is not a debtor. Having granted the security interest, Bruno is the debtor. Because Behnfeldt is a principal obligor, she is not a secondary obligor. Whatever the outcome of enforcement of the security interest against the Honda or Bruno’s secondary obligation, Bruno will look to Behnfeldt for her losses. The enforcement will not affect Behnfeldt’s aggregate obligations.

When the principal obligor (borrower) and the secondary obligor (surety) each has granted a security interest in different collateral, the status of each is determined by the collateral involved.

Example 4: Behnfeldt borrows money and grants a security interest in her Miata to secure the debt. Bruno co-signs the note and grants a security interest in her Honda to secure her obligation. When the secured party enforces the security interest in Behnfeldt’s Miata, Behnfeldt is the debtor, and Bruno is a secondary obligor. When the secured party enforces the security interest in the Honda, Bruno is the “debtor.” As in Example 3, Behnfeldt is an obligor, but not a secondary obligor.

Example 5: Debtor owns an interest in oil that is to be extracted. To secure Debtor’s obligations to Lender, Debtor enters into an authenticated agreement granting Lender an interest in the oil. Although Lender may acquire an interest in the oil under real-property law, Lender does not acquire a security interest under this Article until the oil becomes personal property, i.e., until is extracted and becomes “goods” to which this Article applies. Because Debtor had an interest in the oil before extraction and Lender’s security interest attached to the oil as extracted, the oil is “as-extracted collateral.”

Example 6: Debtor owns an interest in oil that is to be extracted and contracts to sell the oil to Buyer at the wellhead. In an authenticated agreement, Debtor agrees to sell to Lender the right to payment from Buyer. This right to payment is an account that constitutes “as-extracted collateral.” If Lender then resells the account to Financer, Financer acquires a security interest. However, inasmuch as the debtor-seller in that transaction, Lender, had no interest in the oil before extraction, Financer’s collateral (the account it owns) is not “as-extracted collateral.”

Example 7: Under the facts of Example 6, before extraction, Buyer grants a security interest in the oil to Bank. Although Bank’s security interest attaches when the oil is extracted, Bank’s security interest is not in “as-extracted collateral,” inasmuch as its debtor, Buyer, did not have an interest in the oil before extraction.

NOTES TO DECISIONS

1.Security Interest.

The right of reclamation of a defrauded seller is not a “security interest” within the meaning of former KRS 355.9-301 and that section has no application in determining the priority of claims between a reclaiming seller and attaching creditors. (decided under prior law) In re Mel Golde Shoes, Inc., 403 F.2d 658, 1968 U.S. App. LEXIS 4652 (6th Cir. Ky. 1968 ).

An obligation of state highway department to a contractor that had been earned by performance was no longer a “contract right” but an “account” and as such its absolute assignment for the payment of a past-due obligation was not a “security interest.” (decided under prior law) Spurlin v. Sloan, 368 S.W.2d 314, 1963 Ky. LEXIS 41 ( Ky. 1963 ).

Article 9 applies to a lease intended as security; thus, the provisions of former KRS 355.9-504 (3) apply only if a lease between parties was intended as security, and this intent is to be determined by the facts of each case. (decided under prior law) Ford Motor Credit Co. v. Webb-Elkhorn Coal Corp., 775 S.W.2d 945, 1989 Ky. App. LEXIS 111 (Ky. Ct. App. 1989).

Chapter 13 debtors’ argument that a finance company’s secured claim in connection with the debtors’ purchase and financing of a vehicle was invalid because the creditor did not sign the title lien statement that was filed with the county clerk per KRS 186A.195 was rejected because the title lien statement was not the same as a security agreement; there was no requirement that the creditor sign it and KRS 355.9-102 (g) did not apply to a title lien statement. In re Ford, 2007 Bankr. LEXIS 867 (Bankr. E.D. Ky. Mar. 21, 2007).

Transfer of payments to a secured creditor could not be considered as preferential because the transfer was made out of a deposit account that was part of the collateral for the creditor’s secured loan transaction and the creditor did not receive more than it would have received in a Chapter 7 proceeding. The creditor had a properly perfected security interest in the collateral. Dunlap v. Independence Bank (In re Nationwide Tower Co.), 2008 Bankr. LEXIS 1738 (Bankr. W.D. Ky. June 16, 2008).

2.Security Agreement.

In determining whether a document or set of documents constitute a valid security agreement, a court must first resolve, as a question of law, whether the language embodied in the writing objectively indicates that the parties may have intended to create or provide for a security interest and secondly, a court must determine whether the parties actually intended to create a security interest. (decided under prior law) In re Owensboro Canning Co., 46 B.R. 607, 1985 Bankr. LEXIS 6683 (Bankr. W.D. Ky. 1985 ), aff'd, 82 B.R. 450, 1988 U.S. Dist. LEXIS 1109 (W.D. Ky. 1988 ).

Even though the security agreement was stamped “PAID,” the security agreement was never released because the debtor did in fact continue to borrow from the creditor and never abated its indebtedness to the creditor. (decided under prior law) First Nat'l Bank v. Citizens Deposit Bank & Trust, 735 S.W.2d 328, 1987 Ky. App. LEXIS 536 (Ky. Ct. App. 1987).

No magic words need be included in any security agreement to establish a valid security interest; rather, the language of the instrument need only lead to the logical conclusion that it was the intention of the parties that a security interest be created, and the intention of the parties may be gleaned from the transaction as a whole. (decided under prior law) In re Owensboro Canning Co., 82 B.R. 450, 1988 U.S. Dist. LEXIS 1109 (W.D. Ky. 1988 ).

The letter agreement executed by the debtor created a valid and enforceable security interest regarding its accounts receivable, inventory and raw materials even though it did not contain a “granting” clause. (decided under prior law) In re Owensboro Canning Co., 82 B.R. 450, 1988 U.S. Dist. LEXIS 1109 (W.D. Ky. 1988 ).

3.Equipment.

Excavation machinery falls within the category of goods of a type normally used in more than one (1) jurisdiction and is subclassified as equipment under this section. (decided under prior law) Westinghouse Credit Corp. v. Rovi Property & Management Corp., 607 S.W.2d 682, 1980 Ky. App. LEXIS 379 (Ky. Ct. App. 1980).

4.Inventory.

Since grain grown in first county but thereafter stored in second county changed classification from farm products to inventory, lender’s error in failing to file in the county where the crops were grown did not impair proper perfection of the crops when they became inventory, and such collateral was subject to the financing statement filed in second county, the county of debtor’s residence and county where this collateral was located prior to commencement of bankruptcy proceeding. Therefore, debtor’s rights as a hypothetical lien creditor were subrogated to lender’s perfected interests in all crops stored in second county. (decided under prior law) In re Tinsley & Groom, 49 B.R. 85, 1984 Bankr. LEXIS 4658 (Bankr. W.D. Ky. 1984 ).

5.Two-for-One Contracts.

Two-for-one contracts which obligated persons to pay soybeans to the debtor at an ascertainable date or to pay an ascertainable amount of money in lieu thereof at any time prior to the ascertainable date were not instruments nor chattel paper within the meaning of former KRS 355.9-105 , but were accounts within the meaning of former KRS 355.9-106 . (decided under prior law) In re Padgett, 49 B.R. 212, 1985 Bankr. LEXIS 6230 (Bankr. W.D. Ky. 1985 ).

Since two-for-one contracts were accounts, and a security interest in an account can only be perfected by filing, bank which did not file to perfect its interest was an unperfected party, whose interest was defeated by second bank, which had filed a financial statement with the county clerk as a perfected secured party. (decided under prior law) In re Padgett, 49 B.R. 212, 1985 Bankr. LEXIS 6230 (Bankr. W.D. Ky. 1985 ).

6.Account.

Assignment by one (1) partner to another of the right to collect money due and owing to the copartners was not an assignment of a “contract right” as contemplated by the Uniform Commercial Code, as the right had already been earned by performance, but was assignment of an “account” which was not a “security interest” requiring filing under former KRS 355.9-301 (1)(b) to perfect the interest, and the assignment had priority over a subsequent attachment by judgment creditor of assigning partner. (decided under prior law) Spurlin v. Sloan, 368 S.W.2d 314, 1963 Ky. LEXIS 41 ( Ky. 1963 ).

Trial court erred in not granting summary judgment to a debtor in an action to recover on a deficient “account”; under both KRS 355.9-102 and Ohio Rev. Code Ann. § 1309.102, the note that had secured a debt to the bank that sold the account to a buyer was not an “account,” so the buyer could only recover on the note deficiency if the evidence showed it purchased or was assigned the note, and the evidence failed to establish either a purchase or assignment. Harrington v. Asset Acceptance, LLC, 270 S.W.3d 405, 2008 Ky. App. LEXIS 309 (Ky. Ct. App. 2008).

Secured creditor did not have a perfected security interest in cash receipts or deposit accounts generated by hotel room revenue on the petition date because a cash transaction did not create an account or payment intangible from which proceeds were generated as there was no monetary obligation. In re Lexington Hosp. Grp., LLC, 2017 Bankr. LEXIS 3782 (Bankr. E.D. Ky. Nov. 1, 2017).

7.Contract Right.

Where a contractor failed to pay subcontractor as required by their agreement, and the subcontractor filed its mechanic’s lien upon owner’s property to secure the payment, owners became directly obligated to pay subcontractors in order to discharge the debt of the contractor and to obtain a release of lien, and thus subcontractor’s sums payable ceased to be part of contractor’s “contract right” and did not become accounts receivable covered by security agreement executed by contractors to the bank. (decided under prior law) Citizens Fidelity Bank & Trust Co. v. Fenton Rigging Co., 522 S.W.2d 862, 1975 Ky. LEXIS 145 ( Ky. 1975 ).

8.Consumer Goods.

All-terrain vehicle (ATV) was a consumer good as defined in KRS 355.9-102 (1)(w) because it was bought and used for personal purposes and thus, a creditor’s purchase-money security interest was automatically perfected upon attachment under KRS 355.9-309 without the necessity of the creditor filing a lien. Thus, a Chapter 7 trustee could not avoid the lien under 11 U.S.C.S. § 544 and failed to identify a preferential transfer for purposes of an 11 U.S.C.S. § 547 count. Higgason v. HSBC/Kawasaki (In re Winchester), 2011 Bankr. LEXIS 3465 (Bankr. E.D. Ky. Sept. 2, 2011).

9.Payment Intangible.

Where debtor operated both hotel and restaurant on hotel site, secured creditor did not have perfected security interest in room revenue generated by credit card receipts because obligation created from credit card transaction was payment intangible and creditor did not have perfected prepetition lien in payment intangibles. In re Lexington Hosp. Grp., LLC, 2017 Bankr. LEXIS 3782 (Bankr. E.D. Ky. Nov. 1, 2017).

Opinions of Attorney General.

Where the intended collateral for a secured transaction was “equipment,” as specifically defined in former KRS 355.9-108 (2), and where motor vehicles, fixtures, crops, and farm equipment were not involved, the use of the word “equipment” to describe the collateral in the financing statement was valid and the county clerk should have filed the financing statement when it was tendered. OAG 83-196 .

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Research References and Practice Aids

Journal of Mineral Law & Policy.

Comments, Injected Gas: Realty or Personalty, 3 J.M.L. & P. 571 (1988).

Kentucky Bench & Bar.

Schneiter, Equine Statutory Liens, Vol. 67, No. 4, July 2003, Ky. Bench & Bar 23.

Kentucky Law Journal.

Lester, Security Interests in Thoroughbred and Standardbred Horses: A Transactional Approach, 70 Ky. L.J. 1065 (1981-82).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Sales and Use Tax Planning for the Horse Industry, 78 Ky. L.J. 601 (1989-90).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

Northern Kentucky Law Review.

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Verified Motion for Writ of Possession, Form 152.03.

Petrilli, Kentucky Family Law, Business Transactions, § 15.3.

355.9-103. Purchase-money security interest — Application of payments — Burden of establishing.

  1. In this section:
    1. “Purchase-money collateral” means goods or software that secures a purchase-money obligation incurred with respect to that collateral; and
    2. “Purchase-money obligation” means an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used.
  2. A security interest in goods is a purchase-money security interest:
    1. To the extent that the goods are purchase-money collateral with respect to that security interest;
    2. If the security interest is in inventory that is or was purchase-money collateral, also to the extent that the security interest secures a purchase-money obligation incurred with respect to other inventory in which the secured party holds or held a purchase-money security interest; and
    3. Also to the extent that the security interest secures a purchase-money obligation incurred with respect to software in which the secured party holds or held a purchase-money security interest.
  3. A security interest in software is a purchase-money security interest to the extent that the security interest also secures a purchase-money obligation incurred with respect to goods in which the secured party holds or held a purchase-money security interest if:
    1. The debtor acquired its interest in the software in an integrated transaction in which it acquired an interest in the goods; and
    2. The debtor acquired its interest in the software for the principal purpose of using the software in the goods.
  4. The security interest of a consignor in goods that are the subject of a consignment is a purchase-money security interest in inventory.
  5. In a transaction other than a consumer-goods transaction, if the extent to which a security interest is a purchase-money security interest depends on the application of a payment to a particular obligation, the payment must be applied:
    1. In accordance with any reasonable method of application to which the parties agree;
    2. In the absence of the parties’ agreement to a reasonable method, in accordance with any intention of the obligor manifested at or before the time of payment; or
    3. In the absence of an agreement to a reasonable method and a timely manifestation of the obligor’s intention, in the following order:
      1. To obligations that are not secured; and
      2. If more than one (1) obligation is secured, to obligations secured by purchase-money security interests in the order in which those obligations were incurred.
  6. In a transaction other than a consumer-goods transaction, a purchase-money security interest does not lose its status as such, even if:
    1. The purchase-money collateral also secures an obligation that is not a purchase-money obligation;
    2. Collateral that is not purchase-money collateral also secures the purchase-money obligation; or
    3. The purchase-money obligation has been renewed, refinanced, consolidated, or restructured.
  7. In a transaction other than a consumer-goods transaction, a secured party claiming a purchase-money security interest has the burden of establishing the extent to which the security interest is a purchase-money security interest.
  8. The limitation of the rules in subsections (5), (6), and (7) of this section to transactions other than consumer-goods transactions is intended to leave to the court the determination of the proper rules in consumer-goods transactions. The court may not infer from that limitation the nature of the proper rule in consumer-goods transactions and may continue to apply established approaches.

History. Enact. Acts 1958, ch. 77, § 9-103, effective July 1, 1960; 1986, ch. 118, § 55, effective July 1, 1987; 1996, ch. 130, § 165, effective January 1, 1997; repealed and reenact., Acts 2000, ch. 408, § 23, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-107.
  2. Scope of This Section.  Under Section 9-309(a)(1), a purchase-money security interest in consumer goods is perfected when it attaches. Sections 9-317 and 9-324 provide special priority rules for purchase-money security interests in a variety of contexts. This section explains when a security interest enjoys purchase-money status.
  3. “Purchase-Money Collateral”; “Purchase-Money Obligation”; “Purchase-Money Security Interest.”  Subsection (a) defines “purchase-money collateral” and “purchase-money obligation.” These terms are essential to the description of what constitutes a purchase-money security interest under subsection (b). As used in subsection (a)(2), the definition of “purchase-money obligation,” the “price” of collateral or the “value given to enable” includes obligations for expenses incurred in connection with acquiring rights in the collateral, sales taxes, duties, finance charges, interest, freight charges, costs of storage in transit, demurrage, administrative charges, expenses of collection and enforcement, attorney’s fees, and other similar obligations.

    The concept of “purchase-money security interest” requires a close nexus between the acquisition of collateral and the secured obligation. Thus, a security interest does not qualify as a purchase-money security interest if a debtor acquires property on unsecured credit and subsequently creates the security interest to secure the purchase price.

  4. Cross-Collateralization of Purchase-Money Security Interests in Inventory.  Subsection (b)(2) deals with the problem of cross-collateralized purchase-money security interests in inventory. Consider a simple example:
  5. Purchase-Money Security Interests in Goods and Software.  Subsections (b) and (c) limit purchase-money security interests to security interests in goods, including fixtures, and software. Otherwise, no change in meaning from former Section 9-107 is intended. The second sentence of former Section 9-115(5)(f) made the purchase-money priority rule (former Section 9-312(4)) inapplicable to investment property. This section’s limitation makes that provision unnecessary.

    Subsection (c) describes the limited circumstances under which a security interest in goods may be accompanied by a purchase-money security interest in software. The software must be acquired by the debtor in a transaction integrated with the transaction in which the debtor acquired the goods, and the debtor must acquire the software for the principal purpose of using the software in the goods. “Software” is defined in Section 9-102.

  6. Consignments.  Under former Section 9-114, the priority of the consignor’s interest is similar to that of a purchase-money security interest. Subsection (d) achieves this result more directly, by defining the interest of a “consignor,” defined in Section 9-102, to be a purchase-money security interest in inventory for purposes of this Article. This drafting convention obviates any need to set forth special priority rules applicable to the interest of a consignor. Rather, the priority of the consignor’s interest as against the rights of lien creditors of the consignee, competing secured parties, and purchasers of the goods from the consignee can be determined by reference to the priority rules generally applicable to inventory, such as Sections 9-317, 9-320, 9-322, and 9-324. For other purposes, including the rights and duties of the consignor and consignee as between themselves, the consignor would remain the owner of goods under a bailment arrangement with the consignee. See Section 9-319.
  7. Provisions Applicable Only to Non-Consumer-Goods Transactions.
    1. “Dual-Status” Rule.  For transactions other than consumer-goods transactions, this Article approves what some cases have called the “dual-status” rule, under which a security interest may be a purchase-money security interest to some extent and a nonpurchase-money security interest to some extent. (Concerning consumer-goods transactions, see subsection (h) and Comment 8.) Some courts have found this rule to be explicit or implicit in the words “to the extent,” found in former Section 9-107 and continued in subsections (b)(1) and (b)(2). The rule is made explicit in subsection (e). For nonconsumer-goods transactions, this Article rejects the “transformation” rule adopted by some cases, under which any cross-collateralization, refinancing, or the like destroys the purchase-money status entirely.

      Consider, for example, what happens when a $10,000 loan secured by a purchase-money security interest is refinanced by the original lender, and, as part of the transaction, the debtor borrows an additional $2,000 secured by the collateral. Subsection (f) resolves any doubt that the security interest remains a purchase-money security interest. Under subsection (b), however, it enjoys purchase-money status only to the extent of $10,000.

    2. Allocation of Payments.  Continuing with the example, if the debtor makes a $1,000 payment on the $12,000 obligation, then one must determine the extent to which the security interest remains a purchase-money security interest — $9,000 or $10,000. Subsection (e)(1) expresses the overriding principle, applicable in cases other than consumer-goods transactions, for determining the extent to which a security interest is a purchase-money security interest under these circumstances: Freedom of contract, as limited by principle of reasonableness. An unconscionable method of application, for example, is not a reasonable one and so would not be given effect under subsection (e)(1). In the absence of agreement, subsection (e)(2) permits the obligor to determine how payments should be allocated. If the obligor fails to manifest its intention, obligations that are not secured will be paid first. (As used in this Article, the concept of “obligations that are not secured” means obligations for which the debtor has not created a security interest. This concept is different from and should not be confused with the concept of an “unsecured claim” as it appears in Bankruptcy Code section 506(a).) The obligor may prefer this approach, because unsecured debt is likely to carry a higher interest rate than secured debt. A creditor who would prefer to be secured rather than unsecured also would prefer this approach.

      After the unsecured debt is paid, payments are to be applied first toward the obligations secured by purchase-money security interests. In the event that there is more than one such obligation, payments first received are to be applied to obligations first incurred. See subsection (e)(3). Once these obligations are paid, there are no purchase-money security interests and no additional allocation rules are needed.

      Subsection (f) buttresses the dual-status rule by making it clear that (in a transaction other than a consumer-goods transaction) cross-collateralization and renewals, refinancings, and restructurings do not cause a purchase-money security interest to lose its status as such. The statutory terms “renewed,” “refinanced,” and “restructured” are not defined. Whether the terms encompass a particular transaction depends upon whether, under the particular facts, the purchase-money character of the security interest fairly can be said to survive. Each term contemplates that an identifiable portion of the purchase-money obligation could be traced to the new obligation resulting from a renewal, refinancing, or restructuring.

    3. Burden of Proof.  As is the case when the extent of a security interest is in issue, under subsection (g) the secured party claiming a purchase-money security interest in a transaction other than a consumer-goods transaction has the burden of establishing whether the security interest retains its purchase-money status. This is so whether the determination is to be made following a renewal, refinancing, or restructuring or otherwise.
  8. Consumer-Goods Transactions; Characterization Under Other Law.  Under subsection (h), the limitation of subsections (e), (f), and (g) to transactions other than consumer-goods transactions leaves to the court the determination of the proper rules in consumer-goods transactions. Subsection (h) also instructs the court not to draw any inference from this limitation as to the proper rules for consumer-goods transactions and leaves the court free to continue to apply established approaches to those transactions.

    This section addresses only whether a security interest is a “purchase-money security interest” under this Article, primarily for purposes of perfection and priority. See, e.g., Sections 9-317 and 9-324. In particular, its adoption of the dual-status rule, allocation of payments rules, and burden of proof standards for non-consumer-goods transactions is not intended to affect or influence characterizations under other statutes. Whether a security interest is a “purchase-money security interest” under other law is determined by that law. For example, decisions under Bankruptcy Code section 522(f) have applied both the dual-status and the transformation rules. The Bankruptcy Code does not expressly adopt the state law definition of “purchase-money security interest.” Where federal law does not defer to this Article, this Article does not, and could not, determine a question of federal law.

Example: Seller (S) sells an item of inventory (Item-1) to Debtor (D), retaining a security interest in Item-1 to secure Item-1’s price and all other obligations, existing and future, of D to S. S then sells another item of inventory to D (Item-2), again retaining a security interest in Item-2 to secure Item-2’s price as well as all other obligations of D to S. D then pays to S Item-1’s price. D then sells Item-2 to a buyer in ordinary course of business, who takes Item-2 free of S’s security interest.

Under subsection (b)(2), S’s security interest in Item-1 securing Item-2’s unpaid price would be a purchase-money security interest. This is so because S has a purchase-money security interest in Item-1, Item-1 secures the price of (a “purchase-money obligation incurred with respect to”) Item-2 (“other inventory”), and Item-2 itself was subject to a purchase-money security interest. Note that, to the extent Item-1 secures the price of Item-2, S’s security interest in Item-1 would not be a purchase-money security interest under subsection (b)(1). The security interest in Item-1 is a purchase-money security interest under subsection (b)(1) only to the extent that Item-1 is “purchase-money collateral,” i.e., only to the extent that Item-1 “secures a purchase-money obligation incurred with respect to that collateral” (i.e., Item-1). See subsection (a)(1).

NOTES TO DECISIONS

1.Conditional Sales Contracts.

“Trust receipt” was a conditional sales contract. (decided under prior law) White v. General Motors Acceptance Corp., 2 F. Supp. 406, 1932 U.S. Dist. LEXIS 1640 (D. Ky. 1932 ).

A sale was not a conditional sale where it was to have been for cash and seller delivered the merchandise without collecting the selling price. (decided under prior law) Kloak Bros. & Co. v. Joseph, 150 Ky. 508 , 150 S.W. 651, 1912 Ky. LEXIS 927 ( Ky. 1912 ).

Seller could retain title to the goods under the terms of a conditional sales contract with a right to repossess upon default. (decided under prior law) Brown v. Woods Motor Co., 239 Ky. 312 , 39 S.W.2d 507, 1931 Ky. LEXIS 779 ( Ky. 1931 ), limited, Commonwealth v. Larson, 242 Ky. 317 , 46 S.W.2d 82, 1932 Ky. LEXIS 251 ( Ky. 1932 ).

Conditional sales contracts expressly reserving title in seller were recognized by law and, under such contract, title did not pass to the purchaser until he had completed and performed the contractual stipulations therein, and an agreement for accelerated maturity of future installments in the event of default in payment of installments due was lawful and could not be condemned as oppressive and seller could repossess without being liable to purchaser for conversion. (decided under prior law) General Motors Acceptance Corp. v. Shuey, 243 Ky. 74 , 47 S.W.2d 968, 1932 Ky. LEXIS 45 ( Ky. 1932 ).

A conditional sales contract had to be recorded in order to preserve the seller’s rights retained in the property as against an innocent purchaser or a creditor. (decided under prior law) Munz v. National Bond & Inv. Co., 243 Ky. 293 , 47 S.W.2d 1055, 1932 Ky. LEXIS 72 ( Ky. 1932 ); Johnson v. Sauerman Bros., Inc., 243 Ky. 587 , 49 S.W.2d 331, 1932 Ky. LEXIS 152 ( Ky. 1932 ); In re Selman's, Inc., 58 F.2d 681, 1932 U.S. Dist. LEXIS 1215 (D. Ky. 1932); White v. General Motors Acceptance Corp., 2 F. Supp. 406, 1932 U.S. Dist. LEXIS 1640 (D. Ky. 1932); Fields Motor Co. v. Sturgill, 279 Ky. 47 , 129 S.W.2d 1003, 1939 Ky. LEXIS 231 ( Ky. 1939 ).

If title was retained as security for the purchase price and obligation further to pay was not abated by a retaking of the property and retention of partial payments, then the transaction was not a pure conditional sale but an undertaking in the nature of a chattel mortgage. (decided under prior law) Munz v. National Bond & Inv. Co., 243 Ky. 293 , 47 S.W.2d 1055, 1932 Ky. LEXIS 72 ( Ky. 1932 ).

2.Purchase Price.

Purchase price means the cash amount paid or agreed to be paid, plus the agreed value of any merchandise traded, but not including interest or finance charges. (decided under prior law) Mammoth Cave Production Credit Asso. v. York, 429 S.W.2d 26, 1968 Ky. LEXIS 729 ( Ky. 1968 ).

3.Item Securing More Than Price.

This section confers purchase money status “to the extent that” the security interest is retained by the seller or taken by one making advances; an item may thus secure both its price and other debt as well, though a security interest is purchase money only as to that part of the debt representing the item’s unpaid price. (decided under prior law) In re Conn, 16 B.R. 454, 1982 Bankr. LEXIS 5029 (Bankr. W.D. Ky. 1982 ), disapproved, In re Matthews, 724 F.2d 798, 1984 U.S. App. LEXIS 26142 (9th Cir. Cal. 1984).

A purchase money security interest is not invalidated entirely merely because an item secures more than its price. (decided under prior law) In re Conn, 16 B.R. 454, 1982 Bankr. LEXIS 5029 (Bankr. W.D. Ky. 1982 ), disapproved, In re Matthews, 724 F.2d 798, 1984 U.S. App. LEXIS 26142 (9th Cir. Cal. 1984).

If consumer goods secure any price other than their own, and there is no formula for application of payments, the security interest in those goods is not purchase money. (decided under prior law) In re Hobdy, 18 B.R. 70, 1982 Bankr. LEXIS 4883 (Bankr. W.D. Ky. 1982 ).

4.Refinancing of Loan.

The purchase money status of a creditor’s security interest survives a subsequent refinancing of the same loan by the same creditor; therefore, where a creditor obtained a purchase money security interest in a television console and the debtors refinanced the obligation by executing a new note for an increased amount, the creditor’s purchase money security interest taken under the original note survived to the extent of the balance owed on the television. (decided under prior law) In re Conn, 16 B.R. 454, 1982 Bankr. LEXIS 5029 (Bankr. W.D. Ky. 1982 ), disapproved, In re Matthews, 724 F.2d 798, 1984 U.S. App. LEXIS 26142 (9th Cir. Cal. 1984).

Where the sum due on the first contract for the purchase of a washer and dryer was simply added to the second contract for the purchase of a refrigerator, the purchase money character of the finance company’s security interest in the washer and dryer was extinguished by novation, thereby converting the finance company’s interest in the washer and dryer to one in the nature of a nonpossessory, nonpurchase money security interest which could be avoided in bankruptcy; however, since the second contract clearly delineated the amount due on the washer and dryer and listed the purchase price of the refrigerator, and there was no evidence that the buyer debtors had made any payments on the second contract, the finance company held a purchase money security interest for the value of the purchase price of the refrigerator which could not be avoided in bankruptcy. (decided under prior law) In re Hobdy, 18 B.R. 70, 1982 Bankr. LEXIS 4883 (Bankr. W.D. Ky. 1982 ).

Creditor to whom retail installment contract was assigned held a purchase money security interest in the household furniture covered therein by virtue of assignment of the retail installment contract from the seller, and renegotiation transaction which took place ostensibly for the purpose of making the debtors’ account current, and culminated in a renewal loan secured by a chattel mortgage covering the identical items of collateral with no additional funds were advanced to the debtors, did not convert the plaintiff’s purchase money security interest into a nonpurchase money security interest. (decided under prior law) In re Littlejohn, 20 B.R. 695, 1982 Bankr. LEXIS 4647 (Bankr. W.D. Ky. 1982 ).

5.Assignment of Interest.

Where a retail installment contract for the purchase of a washer and dryer was assigned by the seller to a finance company, the finance company held a purchase money security interest in the washer and dryer and no document was required to be filed as a condition of perfection. (decided under prior law) In re Hobdy, 18 B.R. 70, 1982 Bankr. LEXIS 4883 (Bankr. W.D. Ky. 1982 ).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Weinberg, Commercial Law and Consumer Credit, 65 Ky. L.J. 370 (1976-77).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

355.9-104. Control of deposit account.

  1. A secured party has control of a deposit account if:
    1. The secured party is the bank with which the deposit account is maintained;
    2. The debtor, secured party, and bank have agreed in an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the debtor; or
    3. The secured party becomes the bank’s customer with respect to the deposit account.
  2. A secured party that has satisfied subsection (1) of this section has control, even if the debtor retains the right to direct the disposition of funds from the deposit account.

History. Enact. Acts 1958, ch. 77, § 9-104, effective July 1, 1960; 1986, ch. 118, § 56, effective July 1, 1987; repealed and reenact., Acts 2000, ch. 408, § 24, effective July 1, 2001.

Official Comment

  1. Source.  New; derived from Section 8-106.
  2. Why “Control” Matters.  This section explains the concept of “control” of a deposit account. “Control” under this section may serve two functions. First, “control … pursuant to the debtor’s agreement” may substitute for an authenticated security agreement as an element of attachment. See Section 9-203(b)(3)(D). Second, when a deposit account is taken as original collateral, the only method of perfection is obtaining control under this section. See Section 9-312(b)(1).
  3. Requirements for “Control.”  This section derives from Section 8-106 of revised Article 8, which defines “control” of securities and certain other investment property. Under subsection (a)(1), the bank with which the deposit account is maintained has control. The effect of this provision is to afford the bank automatic perfection. No other form of public notice is necessary; all actual and potential creditors of the debtor are always on notice that the bank with which the debtor’s deposit account is maintained may assert a claim against the deposit account.

    Under subsection (a)(2), a secured party may obtain control by obtaining the bank’s authenticated agreement that it will comply with the secured party’s instructions without further consent by the debtor. The analogous provision in Section 8-106 does not require that the agreement be authenticated. An agreement to comply with the secured party’s instructions suffices for “control” of a deposit account under this section even if the bank’s agreement is subject to specified conditions, e.g., that the secured party’s instructions are accompanied by a certification that the debtor is in default. (Of course, if the condition is the debtor’s further consent, the statute explicitly provides that the agreement would not confer control.) See revised Section 8-106, Comment 7.

    Under subsection (a)(3), a secured party may obtain control by becoming the bank’s “customer,” as defined in Section 4-104. As the customer, the secured party would enjoy the right (but not necessarily the exclusive right) to withdraw funds from, or close, the deposit account. See Sections 4-401(a) and 4-403(a).

    Although the arrangements giving rise to control may themselves prevent, or may enable the secured party at its discretion to prevent, the debtor from reaching the funds on deposit, subsection (b) makes clear that the debtor’s ability to reach the funds is not inconsistent with “control.”

    Perfection by control is not available for bank accounts evidenced by an instrument (e.g., certain certificates of deposit), which by definition are “instruments” and not “deposit accounts.” See Section 9-102 (defining “deposit account” and “instrument”).

NOTES TO DECISIONS

1.Applicability.

Where the creditor did not make prior arrangements, as contemplated by former KRS 355.9-104 , through an agreement with the debtor and the debtor’s bank to provide the creditor with a superior secured interest in any funds deposited with the bank, the bank did not have an obligation to preserve the funds for the creditor, even if the debtor was depositing customer proceeds into the account contrary to the debtor’s agreement with the creditor. Under former KRS 355.9-340 , the bank had authority to exercise its right to set-off to the funds deposited by the debtor in the bank’s account. Ky. Highlands Inv. Corp. v. Bank of Corbin, Inc., 217 S.W.3d 851, 2006 Ky. App. LEXIS 286 (Ky. Ct. App. 2006).

Transfer of payments to a secured creditor could not be considered as preferential because the transfer was made out of a deposit account that was part of the collateral for the creditor’s secured loan transaction and the creditor did not receive more than it would have received in a Chapter 7 proceeding. The creditor had a properly perfected security interest in the collateral. Dunlap v. Independence Bank (In re Nationwide Tower Co.), 2008 Bankr. LEXIS 1738 (Bankr. W.D. Ky. June 16, 2008).

355.9-105. Control of electronic chattel paper.

  1. A secured party has control of electronic chattel paper if a system employed for evidencing the transfer of interests in the chattel paper reliably establishes the secured party as the person to which the chattel paper was assigned.
  2. A system satisfies subsection (1) of this section, and a secured party has control of electronic chattel paper, if the record or records comprising the chattel paper are created, stored, and assigned in such a manner that:
    1. A single authoritative copy of the record or records exists which is unique, identifiable and, except as otherwise provided in paragraphs (d), (e), and (f) of this subsection, unalterable;
    2. The authoritative copy identifies the secured party as the assignee of the record or records;
    3. The authoritative copy is communicated to and maintained by the secured party or its designated custodian;
    4. Copies or amendments that add or change an identified assignee of the authoritative copy can be made only with the consent of the secured party;
    5. Each copy of the authoritative copy and any copy of a copy is readily identifiable as a copy that is not the authoritative copy; and
    6. Any amendment of the authoritative copy is readily identifiable as authorized or unauthorized.

History. Enact. Acts 1958, ch. 77, § 9-105, effective July 1, 1960; 1986, ch. 118, § 57, effective July 1, 1987; 1996, ch. 130, § 166, effective January 1, 1997; 1998, ch. 542, § 3, effective July 15, 1998; repealed and reenact., Acts 2000, ch. 408, § 25, effective July 1, 2001; 2012, ch. 132, § 61, effective July 1, 2013.

Official Comment

  1. Source.  New.
  2. “Control” of Electronic Chattel Paper.  This Article covers security interests in “electronic chattel paper,” a new term defined in Section 9-102. This section governs how “control” of electronic chattel paper may be obtained. Subsection (a), which derives from Section 16 of the Uniform Electronic Transactions Act, sets forth the general test for control. Subsection (b) sets forth a safe harbor test that, if satisfied, establishes control under the general test in subsection (a).

    A secured party’s control of electronic chattel paper (i) may substitute for an authenticated security agreement for purposes of attachment under Section 9-203, (ii) is a method of perfection under Section 9-314, and (iii) is a condition for obtaining special, non-temporal priority under Section 9-330. Because electronic chattel paper cannot be transferred, assigned, or possessed in the same manner as tangible chattel paper, a special definition of control is necessary. In descriptive terms, this section provides that control of electronic chattel paper is the functional equivalent of possession of “tangible chattel paper” (a term also defined in Section 9-102).

  3. Development of Control Systems.  This Article leaves to the marketplace the development of systems and procedures, through a combination of suitable technologies and business practices, for dealing with control of electronic chattel paper in a commercial context. Systems that evolve for control of electronic chattel paper may or may not involve a third party custodian of the relevant records. As under UETA, a system must be shown to reliably establish that the secured party is the assignee of the chattel paper. Reliability is a high standard and encompasses the general principles of uniqueness, identifiability, and unalterability found in subsection (b) without setting forth specific guidelines as to how these principles must be achieved. However, the standards applied to determine whether a party is in control of electronic chattel paper should not be more stringent than the standards now applied to determine whether a party is in possession of tangible chattel paper. For example, just as a secured party does not lose possession of tangible chattel paper merely by virtue of the possibility that a person acting on its behalf could wrongfully redeliver the chattel paper to the debtor, so control of electronic chattel paper would not be defeated by the possibility that the secured party’s interest could be subverted by the wrongful conduct of a person (such as a custodian) acting on its behalf.

    This section and the concept of control of electronic chattel paper are not based on the same concepts as are control of deposit accounts (Section 9-104), security entitlements, a type of investment property (Section 9-106), and letter-of-credit rights (Section 9-107). The rules for control of those types of collateral are based on existing market practices and legal and regulatory regimes for institutions such as banks and securities intermediaries. Analogous practices for electronic chattel paper are developing nonetheless. The flexible approach adopted by this section, moreover, should not impede the development of these practices and, eventually, legal and regulatory regimes, which may become analogous to those for, e.g., investment property.

  4. “Authoritative Copy” of Electronic Chattel Paper.  One requirement for establishing control under subsection (b) is that a particular copy be an “authoritative copy.” Although other copies may exist, they must be distinguished from the authoritative copy. This may be achieved, for example, through the methods of authentication that are used or by business practices involving the marking of any additional copies. When tangible chattel paper is converted to electronic chattel paper, in order to establish that a copy of the electronic chattel paper is the authoritative copy it may be necessary to show that the tangible chattel paper no longer exists or has been permanently marked to indicate that it is not the authoritative copy.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-106. Control of investment property.

  1. A person has control of a certificated security, uncertificated security, or security entitlement as provided in KRS 355.8-106 .
  2. A secured party has control of a commodity contract if:
    1. The secured party is the commodity intermediary with which the commodity contract is carried; or
    2. The commodity customer, secured party, and commodity intermediary have agreed that the commodity intermediary will apply any value distributed on account of the commodity contract as directed by the secured party without further consent by the commodity customer.
  3. A secured party having control of all security entitlements or commodity contracts carried in a securities account or commodity account has control over the securities account or commodity account.

History. Enact. Acts 1958, ch. 77, § 9-106, effective July 1, 1960; 1986, ch. 118, § 58, effective July 1, 1987; 1996, ch. 130, § 167, effective January 1, 1997; repealed and reenact., Acts 2000, ch. 408, § 26, effective July 1, 2001; repealed and reenact. Acts 2001, ch. 119, § 2, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-115(e).
  2. “Control” Under Article 8.  For an explanation of “control” of securities and certain other investment property, see Section 8-106, Comments 4 and 7.
  3. “Control” of Commodity Contracts.  This section, as did former Section 9-115(1)(e), contains provisions relating to control of commodity contracts which are analogous to those in Section 8-106 for other types of investment property.
  4. Securities Accounts and Commodity Accounts.  For drafting convenience, control with respect to a securities account or commodity account is defined in terms of obtaining control over the security entitlements or commodity contracts. Of course, an agreement that provides that (without further consent of the debtor) the securities intermediary or commodity intermediary will honor instructions from the secured party concerning a securities account or commodity account described as such is sufficient. Such an agreement necessarily implies that the intermediary will honor instructions concerning all security entitlements or commodity contracts carried in the account and thus affords the secured party control of all the security entitlements or commodity contracts.

355.9-107. Control of letter-of-credit right.

A secured party has control of a letter-of-credit right to the extent of any right to payment or performance by the issuer or any nominated person if the issuer or nominated person has consented to an assignment of proceeds of the letter of credit under KRS 355.5-114 (3) or otherwise applicable law or practice.

History. Enact. Acts 1958, ch. 77, § 9-107, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 27, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. “Control” of Letter-of-Credit Right.  Whether a secured party has control of a letter-of-credit right may determine the secured party’s priority as against competing secured parties. See Section 9-329. This section provides that a secured party acquires control of a letter-of-credit right by receiving an assignment if the secured party obtains the consent of the issuer or any nominated person, such as a confirmer or negotiating bank, under Section 5-114 or other applicable law or practice. Because both issuers and nominated persons may give or be obligated to give value under a letter of credit, this section contemplates that a secured party obtains control of a letter-of-credit right with respect to the issuer or a particular nominated person only to the extent that the issuer or that nominated person consents to the assignment. For example, if a secured party obtains control to the extent of an issuer’s obligation but fails to obtain the consent of a nominated person, the secured party does not have control to the extent that the nominated person gives value. In many cases the person or persons who will give value under a letter of credit will be clear from its terms. In other cases, prudence may suggest obtaining consent from more than one person. The details of the consenting issuer’s or nominated person’s duties to pay or otherwise render performance to the secured party are left to the agreement of the parties.
  3. “Proceeds of a Letter of Credit.”  Section 5-114 follows traditional banking terminology by referring to a letter of credit beneficiary’s assignment of its right to receive payment thereunder as an assignment of the “proceeds of a letter of credit.” However, as the seller of goods can assign its right to receive payment (an “account”) before it has been earned by delivering the goods to the buyer, so the beneficiary of a letter of credit can assign its contingent right to payment before the letter of credit has been honored. See Section 5-114(b). If the assignment creates a security interest, the security interest can be perfected at the time it is created. An assignment of, including the creation of a security interest in, a letter-of-credit right is an assignment of a present interest.
  4. “Transfer” vs. “Assignment.”  Letter-of-credit law and practice distinguish the “transfer” of a letter of credit from an “assignment.” Under a transfer, the transferee itself becomes the beneficiary and acquires the right to draw. Whether a new, substitute credit is issued or the issuer advises the transferee of its status as such, the transfer constitutes a novation under which the transferee is the new, substituted beneficiary (but only to the extent of the transfer, in the case of a partial transfer).

    Section 5-114(e) provides that the rights of a transferee beneficiary or nominated person are independent of the beneficiary’s assignment of the proceeds of a letter of credit and are superior to the assignee’s right to the proceeds. For this reason, transfer does not appear in this Article as a means of control or perfection. Section 9-109(c)(4) recognizes the independent and superior rights of a transferee beneficiary under Section 5-114(e); this Article does not apply to the rights of a transferee beneficiary or nominated person to the extent that those rights are independent and superior under Section 5-114.

  5. Supporting Obligation: Automatic Attachment and Perfection.  A letter-of-credit right is a type of “supporting obligation,” as defined in Section 9-102. Under Sections 9-203 and 9-308, a security interest in a letter-of-credit right automatically attaches and is automatically perfected if the security interest in the supported obligation is a perfected security interest. However, unless the secured party has control of the letter-of-credit right or itself becomes a transferee beneficiary, it cannot obtain any rights against the issuer or a nominated person under Article 5. Consequently, as a practical matter, the secured party’s rights would be limited to its ability to locate and identify proceeds distributed by the issuer or nominated person under the letter of credit.

355.9-108. Sufficiency of description.

  1. Except as otherwise provided in subsections (3), (4), and (5) of this section, a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described.
  2. Except as otherwise provided in subsection (4) of this section, a description of collateral reasonably identifies the collateral if it identifies the collateral by:
    1. Specific listing;
    2. Category;
    3. Except as otherwise provided in subsection (5) of this section, a type of collateral defined in this chapter;
    4. Quantity;
    5. Computational or allocational formula or procedure; or
    6. Except as otherwise provided in subsection (3) of this section, any other method, if the identity of the collateral is objectively determinable.
  3. A description of collateral as “all the debtor’s assets” or “all the debtor’s personal property” or using words of similar import does not reasonably identify the collateral.
  4. Except as otherwise provided in subsection (5) of this section, a description of a security entitlement, securities account, or commodity account is sufficient if it describes:
    1. The collateral by those terms or as investment property; or
    2. The underlying financial asset or commodity contract.
  5. A description only by type of collateral defined in this chapter is an insufficient description of:
    1. A commercial tort claim; or
    2. In a consumer transaction, consumer goods, a security entitlement, a securities account, or a commodity account.

History. Enact. Acts 1958, ch. 77, § 9-108, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 28, effective July 1, 2001.

Official Comment

  1. Source.  Former Sections 9-110 and 9-115(3).
  2. General Rules.  Subsection (a) retains substantially the same formulation as former Section 9-110. Subsection (b) expands upon subsection (a) by indicating a variety of ways in which a description might reasonably identify collateral. Whereas a provision similar to subsection (b) was applicable only to investment property under former Section 9-115(3), subsection (b) applies to all types of collateral, subject to the limitation in subsection (d). Subsection (b) is subject to subsection (c), which follows prevailing case law and adopts the view that an “all assets” or “all personal property” description for purposes of a security agreement is not sufficient. Note, however, that under Section 9-504, a financing statement sufficiently indicates the collateral if it “covers all assets or all personal property.”

    The purpose of requiring a description of collateral in a security agreement under Section 9-203 is evidentiary. The test of sufficiency of a description under this section, as under former Section 9-110, is that the description do the job assigned to it: Make possible the identification of the collateral described. This section rejects any requirement that a description is insufficient unless it is exact and detailed (the so-called “serial number” test).

  3. After-Acquired Collateral.  Much litigation has arisen over whether a description in a security agreement is sufficient to include after-acquired collateral if the agreement does not explicitly so provide. This question is one of contract interpretation and is not susceptible to a statutory rule (other than a rule to the effect that it is a question of contract interpretation). Accordingly, this section contains no reference to descriptions of after-acquired collateral.
  4. Investment Property.  Under subsection (d), the use of the wrong Article 8 terminology does not render a description invalid (e.g., a security agreement intended to cover a debtor’s “security entitlements” is sufficient if it refers to the debtor’s “securities”). Note also that given the broad definition of “securities account” in Section 8-501, a security interest in a securities account also includes all other rights of the debtor against the securities intermediary arising out of the securities account. For example, a security interest in a securities account would include credit balances due to the debtor from the securities intermediary, whether or not they are proceeds of a security entitlement. Moreover, describing collateral as a securities account is a simple way of describing all of the security entitlements carried in the account.
  5. Consumer Investment Property; Commercial Tort Claims.  Subsection (e) requires greater specificity of description in order to prevent debtors from inadvertently encumbering certain property. Subsection (e) requires that a description by defined “type” of collateral alone of a commercial tort claim or, in a consumer transaction, of a security entitlement, securities account, or commodity account, is not sufficient. For example, “all existing and after-acquired investment property” or “all existing and after-acquired security entitlements,” without more, would be insufficient in a consumer transaction to describe a security entitlement, securities account, or commodity account. The reference to “only by type” in subsection (e) means that a description is sufficient if it satisfies subsection (a) and contains a descriptive component beyond the “type” alone. Moreover, if the collateral consists of a securities account or commodity account, a description of the account is sufficient to cover all existing and future security entitlements or commodity contracts carried in the account. See Section 9-203(h), (i).

    Under Section 9-204, an after-acquired collateral clause in a security agreement will not reach future commercial tort claims. It follows that when an effective security agreement covering a commercial tort claim is entered into the claim already will exist. Subsection (e) does not require a description to be specific. For example, a description such as “all tort claims arising out of the explosion of debtor’s factory” would suffice, even if the exact amount of the claim, the theory on which it may be based, and the identity of the tortfeasor(s) are not described. (Indeed, those facts may not be known at the time.)

NOTES TO DECISIONS

1.In General.

Financing statement in which the description of the secured property read “all farm machinery and equipment, including but not limited to tractors, tanks, tilling and harvesting tools” was sufficient to describe tractor, breaker for the tractor, tractor cultivator and tractor warmer but was insufficient to describe speed feeders, disc hillers, planter parts, grain bed, fertilizer distributor, and rotary mower. (decided under prior law) In re Anselm, 344 F. Supp. 544, 1972 U.S. Dist. LEXIS 14915 (W.D. Ky. 1972 ).

2.After-Acquired Goods.

The description in a security agreement “all farm equipment” and “all property similar to that listed above” when none was listed was deemed too vague and indefinite to include an after-acquired tractor. (decided under prior law) Mammoth Cave Production Credit Asso. v. York, 429 S.W.2d 26, 1968 Ky. LEXIS 729 ( Ky. 1968 ).

Mammoth Cave Prod. Credit Ass’n v. York, 429 S.W.2d 26, 1968 Ky. LEXIS 729 ( Ky. 1968 ), in its categorization of “all farm equipment” as an overly broad and vague description appears to run contrary to the purpose of the Uniform Commercial Code and its provisions as enacted in this commonwealth; the continued vitality of the opinion would seem to exist only in those unique and limited circumstances wherein a debtor could prove that the creditor, in contravention of the parties’ security agreement, sought to incorporate, within its terms as collateral, property not originally contemplated by the parties to be included. (decided under prior law) Nolin Production Credit Asso. v. Canmer Deposit Bank, 726 S.W.2d 693, 2 U.C.C. Rep. Serv. 2d (CBC) 636,, 1986 Ky. App. LEXIS 1466 (Ky. Ct. App. 1986).

3.External Evidence.

A description is sufficient, when assisted by external evidence that does not add to or contradict the terms of the contract, which will enable a third party to identify the property. (decided under prior law) In re Drane, 202 F. Supp. 221, 1962 U.S. Dist. LEXIS 4284 (W.D. Ky. 1962 ).

The duty to seek identification of encumbered property from sources external to financing statement is incumbent upon the noticed third party and not upon a creditor properly utilizing the right to file a financing statement rather than full security agreement. (decided under prior law) In re Pendleton, 40 B.R. 306, 1984 Bankr. LEXIS 6271 (Bankr. W.D. Ky. 1984 ).

4.Description.
5.— Insufficient.

If a security agreement contains an omnibus clause as well as a schedule of specific collateral which does not list all that the omnibus clause ostensibly describes, then the initial creditor has failed to provide adequate notice to subsequent creditors. (decided under prior law) Citizens Bank & Trust v. Gibson Lumber Co., 96 B.R. 751, 1989 U.S. Dist. LEXIS 8114 (W.D. Ky. 1989 ).

In a case in which a bank appealed a bankruptcy court’s order in favor of a bankruptcy trustee and reversed a payment on debtor’s defaulted loan from a Certificate of Deposit Account Registry Service account, there was not a sufficient description of the underlying financial assets; therefore, the bank’s security interest did not attach and perfect. Nothing in the security agreement described, or even acknowledged the existence of, underlying financial assets. Monticello Banking Co. v. Flener, 2010 U.S. Dist. LEXIS 132300 (W.D. Ky. Dec. 13, 2010), aff'd, 2011 U.S. App. LEXIS 26350 (6th Cir. Ky. Dec. 14, 2011).

6.—Sufficient.

Where a financial statement accurately described the type of collateral which the creditor was holding, and it was obvious from the description set out in the statement that the debtor was an on-going business whose various types of assets were being used as security, such statement was sufficient to suggest inquiries or means of identification which, if pursued, would disclose the property which was secured. (decided under prior law) American Plating & Mfg. Co. v. Liberty Nat'l Bank & Trust Co., 468 F. Supp. 103, 1979 U.S. Dist. LEXIS 14793 (W.D. Ky. 1979 ).

Lawn tending equipment of a borrower was sufficiently described by the security agreement, where the borrower was listed in the security agreement and the recorded financing statement as a going lawn service business, and where the listing of collateral, described by categories, included all the usual assets of a going business. (decided under prior law) In re Cooley, 624 F.2d 55, 1980 U.S. App. LEXIS 15952 (6th Cir. Ky. 1980 ).

Where debtor was shown in security agreement and recorded financing statement as individual, and doing business as lawn service, and where the list of collateral described by categories included all the usual assets of a going business, it would be contrary to the purpose of this section to hold that lawn-tending equipment was not sufficiently described by the language used in the security agreement. (decided under prior law) In re Cooley, 624 F.2d 55, 1980 U.S. App. LEXIS 15952 (6th Cir. Ky. 1980 ).

The description of collateral on the financing statement is sufficient if it raises a question regarding the identity of encumbered property which causes a third party to reasonably inquire as to external sources available which specify property subject to the parties’ agreement. (decided under prior law) In re Pendleton, 40 B.R. 306, 1984 Bankr. LEXIS 6271 (Bankr. W.D. Ky. 1984 ).

Description of collateral in financial statement as “all equipment, livestock and products thereof, and proceeds” would cause a reasonable third person to inquire further to identify equipment subject to the parties’ security agreement and thus was sufficient to perfect creditor’s interest in certain equipment owned by debtors-in-possession. (decided under prior law) In re Pendleton, 40 B.R. 306, 1984 Bankr. LEXIS 6271 (Bankr. W.D. Ky. 1984 ).

Where the types of collateral subject to financing statement were identified and the names and addresses of debtors and lender as creditor provided a means for a third party to inquire and have defined, if questioned, the description of the collateral as “Members’” share of “growing or stored crops” and “all equipment” subject to the agreement of the parties as set forth specifically in the security agreement, and since it is the duty of a noticed third party to seek specific identification of encumbered property rather than the duty of a creditor to file a security agreement containing specific descriptions of all collateral, the financing statements were adequate notice to a third party that certain collateral might be subject to a creditor’s interest, and further provided means for a third party to identify such specific collateral. (decided under prior law) In re Tinsley & Groom, 49 B.R. 85, 1984 Bankr. LEXIS 4658 (Bankr. W.D. Ky. 1984 ).

Where the description in a financing statement of the covered collateral as “all farm machinery, including but not limited to tractor, plow and disc,” was sufficient to enable a creditor to reasonably identify the covered collateral, the trial court did not err by finding that the description in the financing statement complied with the requirements of this section. (decided under prior law) Horse Cave State Bank v. Nolin Production Credit Asso., 672 S.W.2d 66, 1984 Ky. App. LEXIS 518 (Ky. Ct. App. 1984).

Description in security agreement that included clause that stated “ . . . . . and all rights of the Debtor earned or yet to be earned under contracts to sell, or to render services, or any other contract rights, choses in action or general intangibles, of every kind whatsoever” was sufficient description to include “two-for-one contracts” as collateral securing interest of bank, even though such contracts were entered into subsequent to the filing of the security agreement. (decided under prior law) In re Padgett, 49 B.R. 212, 1985 Bankr. LEXIS 6230 (Bankr. W.D. Ky. 1985 ).

Under the “inquiry test,” a description of collateral is sufficient for either a security agreement or a financing statement if it puts subsequent creditors on notice so that, aided by inquiry, they may reasonably identify the collateral involved. (decided under prior law) Nolin Production Credit Asso. v. Canmer Deposit Bank, 726 S.W.2d 693, 1986 Ky. App. LEXIS 1466 (Ky. Ct. App. 1986).

Where the security agreement covered “all farm machinery and equipment,” the second creditor, upon proper investigation, could have reasonably identified the farm equipment in which the secured creditor had previously taken a security interest based upon the description of collateral involved; therefore, the collateral description was neither overly broad in its designation of the property involved. (decided under prior law) Nolin Production Credit Asso. v. Canmer Deposit Bank, 726 S.W.2d 693, 1986 Ky. App. LEXIS 1466 (Ky. Ct. App. 1986).

The use of an omnibus clause in a security agreement is consistent with the purpose of the UCC; therefore, the bank’s omnibus clause, “all equipment”, was effective to cover the Corley gang saw, Delta feeder and the Allison diesel generator, where the security agreement used the phrase “all sawmill equipment” or “saws.” (decided under prior law) Citizens Bank & Trust v. Gibson Lumber Co., 96 B.R. 751, 1989 U.S. Dist. LEXIS 8114 (W.D. Ky. 1989 ).

Where creditor listed in security agreement the wrong serial number, by one digit, it was similar enough to put a bank claiming a security interest in a tractor on notice that creditor might be claiming a security interest in the same tractor or at the very least, the close similarity in serial numbers required bank to at least make further inquiry. (decided under prior law) Laurel Explosives, Inc. v. First Nat'l Bank & Trust Co., 801 S.W.2d 336, 1990 Ky. App. LEXIS 134 (Ky. Ct. App. 1990).

Although there was a slight error in the serial number of the borrower’s backhoe as mentioned in the creditor bank’s financial statement, the description of the collateral as a 1999 Case backhoe 580L was sufficient to put the purchaser of the backhoe on notice that the collateral mentioned in the bank’s financial statement was the same as the backhoe he had purchased from the borrower. Bishop v. Alliance Banking Co., 412 S.W.3d 217, 2013 Ky. App. LEXIS 151 (Ky. Ct. App. 2013).

Opinions of Attorney General.

When filing a financing statement which covers fixtures being attached to realty, the requirement as to description of the real estate is met if the street number address is set out in the financing statement. OAG 73-599 .

The index cards kept by a county clerk in accordance with former KRS 355.9-403 (4) do not have to specifically list household goods and other personal property when the collateral is not specifically described in the financing statement, and a general reference to “all household goods and other personal property,” is a sufficient description under the statutes. OAG 80-190 .

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Subpart 2. Applicability of Article

355.9-109. Scope.

  1. Except as otherwise provided in subsections (3) and (4) of this section, this article applies to:
    1. A transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract;
    2. An agricultural lien;
    3. A sale of accounts, chattel paper, payment intangibles, or promissory notes;
    4. A consignment;
    5. A security interest arising under KRS 355.2-401 , 355.2-505 , 355.2-711 (3), or 355.2A-508 (5), as provided in KRS 355.9-110 ; and
    6. A security interest arising under KRS 355.4-210 or 355.5-118 .
  2. The application of this article to a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which this article does not apply.
  3. This article does not apply to the extent that:
    1. A statute, regulation, or treaty of the United States preempts this article;
    2. Another statute of this Commonwealth expressly governs the creation, perfection, priority, or enforcement of a security interest created by this Commonwealth or a governmental unit of this Commonwealth;
    3. A statute of another state, a foreign country, or a governmental unit of another state or a foreign country, other than a statute generally applicable to security interests, expressly governs creation, perfection, priority, or enforcement of a security interest created by the state, country, or governmental unit; or
    4. The rights of a transferee beneficiary or nominated person under a letter of credit are independent and superior under KRS 355.5-114 .
  4. This article does not apply to:
    1. A landlord’s lien, other than an agricultural lien;
    2. A lien, other than an agricultural lien, given by statute or other rule of law for services or materials, but KRS 355.9-333 applies with respect to priority of the lien;
    3. An assignment of a claim for wages, salary, or other compensation of an employee, or for workers’ compensation benefits payable to an individual;
    4. A sale of accounts, chattel paper, payment intangibles, or promissory notes as part of a sale of the business out of which they arose;
    5. An assignment of accounts, chattel paper, payment intangibles, or promissory notes which is for the purpose of collection only;
    6. An assignment of a right to payment under a contract to an assignee that is also obligated to perform under the contract;
    7. An assignment of a single account, payment intangible, or promissory note to an assignee in full or partial satisfaction of a preexisting indebtedness;
    8. A transfer of an interest in or an assignment of a claim under a policy of insurance, other than an assignment by or to a health-care provider of a health-care-insurance receivable and any subsequent assignment of the right to payment, but KRS 355.9-315 and 355.9-322 apply with respect to proceeds and priorities in proceeds;
    9. An assignment of a right represented by a judgment, other than a judgment taken on a right to payment that was collateral;
    10. A right of recoupment or set-off, but:
      1. KRS 355.9-340 applies with respect to the effectiveness of rights of recoupment or set-off against deposit accounts; and
      2. KRS 355.9-404 applies with respect to defenses or claims of an account debtor;
    11. The creation or transfer of an interest in or lien on real property, including a lease or rents thereunder, except to the extent that provision is made for:
      1. Liens on real property in KRS 355.9-203 and 355.9-308 ;
      2. Fixtures in KRS 355.9-334 ;
      3. Fixture filings in KRS 355.9-501 , 355.9-502 , 355.9-512 , 355.9-516 , and 355.9-519 ; and
      4. Security agreements covering personal and real property in KRS 355.9-604 ;
    12. An assignment of a claim arising in tort, other than a commercial tort claim, but KRS 355.9-315 and 355.9-322 apply with respect to proceeds and priorities in proceeds;
    13. An assignment of a deposit account in a consumer transaction, but KRS 355.9-315 and 355.9-322 apply with respect to proceeds and priorities in proceeds;
    14. A claim or right to receive compensation for injuries or sickness as described in 26 U.S.C. sec. 104(a)(1) or (2), as amended from time to time;
    15. A claim or right to receive benefits under a special needs trust as described in 42 U.S.C. sec. 1396 p(d)(4), as amended from time to time;
    16. A right to receive money under a structured settlement as defined by KRS 454.430 ; or
    17. A public-finance transaction or a transfer by a government or governmental unit.

History. Enact. Acts 1958, ch. 77, § 9-109, effective July 1, 1960; 1990, ch. 478, § 2, effective July 13, 1990; repealed and reenact., Acts 2000, ch. 408, § 29, effective July 1, 2001; repealed and reenact., Acts 2001, ch. 119, § 3, effective July 1, 2001; 2002, ch. 124, § 1, effective April 2, 2002.

Legislative Research Commission Note.

(7/14/2000). Although 2000 Acts ch. 408, sec. 29, has a reference to “Section 165 of this Act” (which was codified as KRS 355.2A-307 ) in subsection (1)(f) of this statute, that reference has been codified as KRS 355.4-210 (which was Section 167 of Chapter 408) in order to match the official text of Revised Article 9. Amendments to the introduced version of this bill in the Senate inadvertently did not make the necessary adjustment to this internal reference; this failure was clearly a manifest typographical or clerical error and has been corrected in codification under KRS 7.136(1)(h).

Official Comment

  1. Source.  Former Sections 9-102 and 9-104.
  2. Basic Scope Provision.  Subsection (a)(1) derives from former Section 9-102(1) and (2). These subsections have been combined and shortened. No change in meaning is intended. Under subsection (a)(1), all consensual security interests in personal property and fixtures are covered by this Article, except for transactions excluded by subsections (c) and (d). As to which transactions give rise to a “security interest,” the definition of that term in Section 1-201 must be consulted. When a security interest is created, this Article applies regardless of the form of the transaction or the name that parties have given to it.
  3. Agricultural Liens.  Subsection (a)(2) is new. It expands the scope of this Article to cover agricultural liens, as defined in Section 9-102.
  4. Sales of Accounts, Chattel Paper, Payment Intangibles, Promissory Notes, and Other Receivables.  Under subsection (a)(3), as under former Section 9-102, this Article applies to sales of accounts and chattel paper. This approach generally has been successful in avoiding difficult problems of distinguishing between transactions in which a receivable secures an obligation and those in which the receivable has been sold outright. In many commercial financing transactions the distinction is blurred.

    Subsection (a)(3) expands the scope of this Article by including the sale of a “payment intangible” (defined in Section 9-102 as “a general intangible under which the account debtor’s principal obligation is a monetary obligation”) and a “promissory note” (also defined in Section 9-102). To a considerable extent, this Article affords these transactions treatment identical to that given sales of accounts and chattel paper. In some respects, however, sales of payment intangibles and promissory notes are treated differently from sales of other receivables. See, e.g., Sections 9-309 (automatic perfection upon attachment) and 9-408 (effect of restrictions on assignment). By virtue of the expanded definition of “account” (defined in Section 9-102), this Article now covers sales of (and other security interests in) “health-care-insurance receivables” (also defined in Section 9-102). Although this Article occasionally distinguishes between outright sales of receivables and sales that secure an obligation, neither this Article nor the definition of “security interest” (Section 1-201(37)) delineates how a particular transaction is to be classified. That issue is left to the courts.

  5. Transfer of Ownership in Sales of Receivables.  A “sale” of an account, chattel paper, a promissory note, or a payment intangible includes a sale of a right in the receivable, such as a sale of a participation interest. The term also includes the sale of an enforcement right. For example, a “(p)erson entitled to enforce” a negotiable promissory note (Section 3-301) may sell its ownership rights in the instrument. See Section 3-203, Comment 1 (“Ownership rights in instruments may be determined by principles of the law of property, independent of Article 3, which do not depend upon whether the instrument was transferred under Section 3-203.”). Also, the right under Section 3-309 to enforce a lost, destroyed, or stolen negotiable promissory note may be sold to a purchaser who could enforce that right by causing the seller to provide the proof required under that section. This article rejects decisions reaching a contrary result, e.g., Dennis Joslin Co. v. Robinson Broadcasting, 977 F.Supp. 491 (D.D.C. 1997).

    Nothing in this section or any other provision of Article 9 prevents the transfer of full and complete ownership of an account, chattel paper, an instrument, or a payment intangible in a transaction of sale. However, as mentioned in Comment 4, neither this Article nor the definition of “security interest” in Section 1-201 provides rules for distinguishing sales transactions from those that create a security interest securing an obligation. This article applies to both types of transactions. The principal effect of this coverage is to apply this Article’s perfection and priority rules to these sales transactions. Use of terminology such as “security interest,” “debtor,” and “collateral” is merely a drafting convention adopted to reach this end, and its use has no relevance to distinguishing sales from other transactions. See PEB Commentary No. 14.

    Following a debtor’s outright sale and transfer of ownership of a receivable, the debtor-seller retains no legal or equitable rights in the receivable that has been sold. See Section 9-318(a). This is so whether or not the buyer’s security interest is perfected. (A security interest arising from the sale of a promissory note or payment intangible is perfected upon attachment without further action. See Section 9-309.) However, if the buyer’s interest in accounts or chattel paper is unperfected, a subsequent lien creditor, perfected secured party, or qualified buyer can reach the sold receivable and achieve priority over (or take free of) the buyer’s unperfected security interest under Section 9-317. This is so not because the seller of a receivable retains rights in the property sold; it does not. Nor is this so because the seller of a receivable is a “debtor” and the buyer of a receivable is a “secured party” under this Article (they are). It is so for the simple reason that Sections 9-317, 9-318(b), and 9-322 make it so, as did former Sections 9-301 and 9-312. Because the buyer’s security interest is unperfected, for purposes of determining the rights of creditors of and purchasers for value from the debtor-seller, under Section 9-318(b) the debtor-seller is deemed to have the rights and title it sold. Section 9-317 subjects the buyer’s unperfected interest in accounts and chattel paper to that of the debtor-seller’s lien creditor and other persons who qualify under that section.

  6. Consignments.  Subsection (a)(4) is new. This article applies to every “consignment.” The term, defined in Section 9-102, includes many but not all “true” consignments (i.e., bailments for the purpose of sale). If a transaction is a “sale or return,” as defined in revised Section 2-326, it is not a “consignment.” In a “sale or return” transaction, the buyer becomes the owner of the goods, and the seller may obtain an enforceable security interest in the goods only by satisfying the requirements of Section 9-203.

    Under common law, creditors of a bailee were unable to reach the interest of the bailor (in the case of a consignment, the consignor-owner). Like former Section 2-326 and former Article 9, this Article changes the common law result; however, it does so in a different manner. For purposes of determining the rights and interests of third-party creditors of, and purchasers of the goods from, the consignee, but not for other purposes, such as remedies of the consignor, the consignee is deemed to acquire under this Article whatever rights and title the consignor had or had power to transfer. See Section 9-319. The interest of a consignor is defined to be a security interest under revised Section 1-201(37), more specifically, a purchase-money security interest in the consignee’s inventory. See Section 9-103(d). Thus, the rules pertaining to lien creditors, buyers, and attachment, perfection, and priority of competing security interests apply to consigned goods. The relationship between the consignor and consignee is left to other law. Consignors also have no duties under part 6. See Section 9-601(g).

    Sometimes parties characterize transactions that secure an obligation (other than the bailee’s obligation to returned bailed goods) as “consignments.” These transactions are not “consignments” as contemplated by Section 9-109(a)(4). See Section 9-102. This article applies also to these transactions, by virtue of Section 9-109(a)(1). They create a security interest within the meaning of the first sentence of Section 1-201(37).

    This article does not apply to bailments for sale that fall outside the definition of “consignment” in Section 9-102 and that do not create a security interest that secures an obligation.

  7. Security Interest in Obligation Secured by Non-Article 9 Transaction.  Subsection (b) is unchanged in substance from former Section 9-102(3). The following example provides an illustration.
  8. Federal Preemption.  Former Section 9-104(a) excluded from Article 9 “a security interest subject to any statute of the United States, to the extent that such statute governs the rights of parties to and third parties affected by transactions in particular types of property.” Some (erroneously) read the former section to suggest that Article 9 sometimes deferred to federal law even when federal law did not preempt Article 9. Subsection (c)(1) recognizes explicitly that this Article defers to federal law only when and to the extent that it must—i.e., when federal law preempts it.
  9. Governmental Debtors.  Former Section 9-104(e) excluded transfers by governmental debtors. It has been revised and replaced by the exclusions in new paragraphs (2) and (3) of subsection (c). These paragraphs reflect the view that Article 9 should apply to security interests created by a state, foreign country, or a “governmental unit” (defined in Section 9-102) of either except to the extent that another statute governs the issue in question. Under paragraph (2), this Article defers to all statutes of the forum state. (A forum cannot determine whether it should consult the choice of law rules in the forum’s UCC unless it first determines that its UCC applies to the transaction before it.) Paragraph (3) defers to statutes of another state or a foreign country only to the extent that those statutes contain rules applicable specifically to security interests created by the governmental unit in question.
  10. Certain Statutory and Common-Law Liens; Interests in Real Property.  With few exceptions (nonconsensual agricultural liens being one), this Article applies only to consensual security interests in personal property. Following former Section 9-104(b) and (j), paragraphs (i) and (xi) of subsection (d) exclude landlord’s liens and leases and most other interests in or liens on real property. These exclusions generally reiterate the limitations on coverage (i.e., “by contract,” “in personal property and fixtures”) made explicit in subsection (a)(1). Similarly, most jurisdictions provide special liens to suppliers of many types of services and materials, either by statute or by common law. With the exception of agricultural liens, it is not necessary for this Article to provide general codification of this lien structure, which is determined in large part by local conditions and which is far removed from ordinary commercial financing. As under former Section 9-104(c), subsection (d)(2) excludes these suppliers’ liens (other than agricultural liens) from this Article. However, Section 9-333 provides a rule for determining priorities between certain possessory suppliers’ liens and security interests covered by this Article.
  11. Wage and Similar Claims.  As under former Section 9-104(d), subsection (d)(3) excludes assignments of claims for wages and the like from this Article. These assignments present important social issues that other law addresses. The Federal Trade Commission has ruled that, with some exceptions, the taking of an assignment of wages or other earnings is an unfair act or practice under the Federal Trade Commission Act. See 16 C.F.R. part 444. State statutes also may regulate such assignments.
  12. Certain Sales and Assignments of Receivables; Judgments.  In general this Article covers security interests in (including sales of) accounts, chattel paper, payment intangibles, and promissory notes. Paragraphs (4), (5), (6), and (7) of subsection (d) exclude from the article certain sales and assignments of receivables that, by their nature, do not concern commercial financing transactions. These paragraphs add to the exclusions in former Section 9-104(f) analogous sales and assignments of payment intangibles and promissory notes. For similar reasons, subsection (d)(9) retains the exclusion of assignments of judgments under former Section 9-104(h) (other than judgments taken on a right to payment that itself was collateral under this Article).
  13. Insurance.  Subsection (d)(8) narrows somewhat the broad exclusion of interests in insurance policies under former Section 9-104(g). This article now covers assignments by or to a health-care provider of “health-care-insurance receivables” (defined in Section 9-102).
  14. Set-Off.  Subsection (d)(10) adds two exceptions to the general exclusion of set-off rights from Article 9 under former Section 9-104(i). The first takes account of new Section 9-340, which regulates the effectiveness of a set-off against a deposit account that stands as collateral. The second recognizes Section 9-404, which affords the obligor on an account, chattel paper, or general intangible the right to raise claims and defenses against an assignee (secured party).
  15. Tort Claims.  Subsection (d)(12) narrows somewhat the broad exclusion of transfers of tort claims under former Section 9-104(k). This article now applies to assignments of “commercial tort claims” (defined in Section 9-102) as well as to security interests in tort claims that constitute proceeds of other collateral (e.g., a right to payment for negligent destruction of the debtor’s inventory). Note that once a claim arising in tort has been settled and reduced to a contractual obligation to pay, the right to payment becomes a payment intangible and ceases to be a claim arising in tort.

    This article contains two special rules governing creation of a security interest in tort claims. First, a description of collateral in a security agreement as “all tort claims” is insufficient to meet the requirement for attachment. See Section 9-108(e). Second, no security interest attaches under an after-acquired property clause to a tort claim. See Section 9-204(b). In addition, this Article does not determine whom the tortfeasor must pay to discharge its obligation. Inasmuch as a tortfeasor is not an “account debtor,” the rules governing waiver of defenses and discharge of an obligation by an obligor (Sections 9-403, 9-404, 9-405, and 9-406) are inapplicable to tort claim collateral.

  16. Deposit Accounts.  Except in consumer transactions, deposit accounts may be taken as original collateral under this Article. Under former Section 9-104(l), deposit accounts were excluded as original collateral, leaving security interests in deposit accounts to be governed by the common law. The common law is nonuniform, often difficult to discover and comprehend, and frequently costly to implement. As a consequence, debtors who wished to use deposit accounts as collateral sometimes were precluded from doing so as a practical matter. By excluding deposit accounts from the article’s scope as original collateral in consumer transactions, subsection (d)(13) leaves those transactions to law other than this Article. However, in both consumer and nonconsumer transactions, Sections 9-315 and 9-322 apply to deposit accounts as proceeds and with respect to priorities in proceeds.

    This article contains several safeguards to protect debtors against inadvertently encumbering deposit accounts and to reduce the likelihood that a secured party will realize a windfall from a debtor’s deposit accounts. For example, because “deposit account” is a separate type of collateral, a security agreement covering general intangibles will not adequately describe deposit accounts. Rather, a security agreement must reasonably identify the deposit accounts that are the subject of a security interest, e.g., by using the term “deposit accounts.” See Section 9-108. To perfect a security interest in a deposit account as original collateral, a secured party (other than the bank with which the deposit account is maintained) must obtain “control” of the account either by obtaining the bank’s authenticated agreement or by becoming the bank’s customer with respect to the deposit account. See Sections 9-104 and 9-312(b)(1). Either of these steps requires the debtor’s consent.

    This article also contains new rules that determine which state’s law governs perfection and priority of a security interest in a deposit account (Section 9-304), priority of conflicting security interests in and set-off rights against a deposit account (Sections 9-327 and 9-340), the rights of transferees of funds from an encumbered deposit account (Section 9-332), the obligations of the bank (Section 9-341), enforcement of security interests in a deposit account (Section 9-607(c)), and the duty of a secured party to terminate control of a deposit account (Section 9-208(b)).

Example 1: O borrows $10,000 from M and secures its repayment obligation, evidenced by a promissory note, by granting to M a mortgage on O’s land. This article does not apply to the creation of the real property mortgage. However, if M sells the promissory note to X or gives a security interest in the note to secure M’s own obligation to X, this Article applies to the security interest thereby created in favor of X. The security interest in the promissory note is covered by this Article even though the note is secured by a real property mortgage. Also, X’s security interest in the note gives X an attached security interest in the mortgage lien that secures the note and, if the security interest in the note is perfected, the security interest in the mortgage lien likewise is perfected. See Sections 9-203 and 9-308.

It also follows from subsection (b) that an attempt to obtain or perfect a security interest in a secured obligation by complying with non-Article 9 law, as by an assignment of record of a real property mortgage, would be ineffective. Finally, it is implicit from subsection (b) that one cannot obtain a security interest in a lien, such as a mortgage on real property, that is not also coupled with an equally effective security interest in the secured obligation. This article rejects cases such as In re Maryville Savings & Loan Corp., 743 F.2d 413 (6th Cir. 1984), clarified on reconsideration, 760 F.2d 119 (1985).

Example 2: A New Jersey state commission creates a security interest in favor of a New York bank. The validity of the security interest is litigated in New York. The relevant security agreement provides that it is governed by New York law. To the extent that a New Jersey statute contains rules peculiar to creation of security interests by governmental units generally, to creation of security interests by state commissions, or to creation of security interests by this particular state commission, then that law will govern. On the other hand, to the extent that New Jersey law provides that security interests created by governmental units, state commissions, or this state commission are governed by the law generally applicable to secured transactions (i.e., New Jersey’s Article 9), then New York’s Article 9 will govern.

Example 3: An airline that is an instrumentality of a foreign country creates a security interest in favor of a New York bank. The analysis used in the previous example would apply here. That is, if the matter is litigated in New York, New York law would govern except to the extent that the foreign country enacted a statute applicable to security interests created by governmental units generally or by the airline specifically.

The fact that New York law applies does not necessarily mean that perfection is accomplished by filing in New York. Rather, it means that the court should apply New York’s Article 9, including its choice of law provisions. Under New York’s Section 9-301, perfection is governed by the law of the jurisdiction in which the debtor is located. Section 9-307 determines the debtor’s location for choice of law purposes.

If a transaction does not bear an appropriate relation to the forum state, then that state’s Article 9 will not apply, regardless of whether the transaction would be excluded by paragraph (iii).

Example 4: A Belgian governmental unit grants a security interest in its equipment to a Swiss secured party. The equipment is located in Belgium. A dispute arises and, for some reason, an action is brought in a New Mexico state court. Inasmuch as the transaction bears no “appropriate relation” to New Mexico, New Mexico’s UCC, including its Article 9, is inapplicable. See Section 1-105(a). New Mexico’s Section 9-109(c) on excluded transactions should not come into play. Even if the parties agreed that New Mexico law would govern, the parties’ agreement would not be effective because the transaction does not bear a “reasonable relation” to New Mexico. See Section 1-105(a).

Conversely, Article 9 will come into play only if the litigation arises in a UCC jurisdiction or if a foreign choice of law rule leads a foreign court to apply the law of a UCC jurisdiction. For example, if issues concerning a security interest granted by a foreign airline to a New York bank are litigated overseas, the court may be bound to apply the law of the debtor’s jurisdiction and not New York’s Article 9.

NOTES TO DECISIONS

1.Applicability.

Former KRS 355.9-104 (b) providing that article 9 does not apply “to a landlord’s lien” refers to liens created by statute and not to landlord’s liens created by contract. (decided under prior law) In re Leckie Freeburn Coal Co., 405 F.2d 1043, 1969 U.S. App. LEXIS 9150 (6th Cir. Ky.), cert. denied, 395 U.S. 960, 89 S. Ct. 2101, 23 L. Ed. 2d 746, 1969 U.S. LEXIS 3173 (U.S. 1969).

Where landlord had a “contract lien” on lessee’s mining machinery and equipment under a clause in the lease agreement, the granting and filing of the lease would have to comply with Uniform Commercial Code in order to create a security interest in the personalty which would be superior to the lien of trustee in bankruptcy. (decided under prior law) In re Leckie Freeburn Coal Co., 405 F.2d 1043, 1969 U.S. App. LEXIS 9150 (6th Cir. Ky.), cert. denied, 395 U.S. 960, 89 S. Ct. 2101, 23 L. Ed. 2d 746, 1969 U.S. LEXIS 3173 (U.S. 1969).

The fact that a deposit account is excluded from the provisions of KRS Ch. 355.9 does not mean that a security interest in the transaction excluded by this section cannot be created; it only means that if a security interest exists in the included transaction, KRS Ch. 355.9 does not govern the rights of the parties; other law, i.e., state or federal, controls; thus where credit union’s security interest in account was created pursuant to Federal Credit Union Act and such act expressly states that federal credit unions have the power to impress and enforce a lien upon the account and dividends of any member to the extent of a loan made to him and any dues or charges payable by him, credit union had the statutory authority to create a security interest in bankruptcy declarant’s account. (decided under prior law) In re Gifford, 174 B.R. 231, 1994 Bankr. LEXIS 1784 (Bankr. W.D. Ky. 1994 ).

2.Security Interest.

The right of reclamation of a defrauded seller is not a “security interest” within the meaning of former KRS 355.9-301 and that section has no application in determining the priority of claims between a reclaiming seller and attaching creditors. (decided under prior law) In re Mel Golde Shoes, Inc., 403 F.2d 658, 1968 U.S. App. LEXIS 4652 (6th Cir. Ky. 1968 ).

An obligation of state highway department to a contractor that had been earned by performance was no longer a “contract right” but an “account” and as such its absolute assignment for the payment of a past-due obligation was not a “security interest.” (decided under prior law) Spurlin v. Sloan, 368 S.W.2d 314, 1963 Ky. LEXIS 41 ( Ky. 1963 ).

Article 9 applies to a lease intended as security; thus, the provisions of former KRS 355.9-504 (3) apply only if a lease between parties was intended as security, and this intent is to be determined by the facts of each case. (decided under prior law) Ford Motor Credit Co. v. Webb-Elkhorn Coal Corp., 775 S.W.2d 945, 1989 Ky. App. LEXIS 111 (Ky. Ct. App. 1989).

3.Trust Receipts.

A trust receipt did not occupy a different status from a chattel mortgage for, whatever was the name or form of a transaction when it was designed to hold personal property as a mere security for a debt, it was regarded as a chattel mortgage. (decided under prior law) General Motors Acceptance Corp. v. Sharp Motor Sales Co., 233 Ky. 290 , 25 S.W.2d 405, 1930 Ky. LEXIS 542 ( Ky. 1930 ); In re Draughn & Steel Motor Co., 49 F.2d 636, 1931 U.S. Dist. LEXIS 1329 (D. Ky. 1931 ), aff'd, 58 F.2d 910, 1932 U.S. App. LEXIS 4792 (6th Cir. Ky. 1932 ); Commercial Inv. Trust Corp. v. Wilson, 58 F.2d 910, 1932 U.S. App. LEXIS 4792 (6th Cir. Ky. 1932 ).

4.Chattel Mortgages.

A contract was a chattel mortgage where the seller agreed to repurchase goods at a designated profit for buyer and to pay interest on the money paid by the buyer. (decided under prior law) Kaye v. Macmillan, 60 F.2d 7, 1932 U.S. App. LEXIS 2430 (6th Cir. Ky. 1932 ).

5.Conditional Sales Contracts.

A conditional sales contract was a chattel mortgage within the Kentucky recording statute requiring recording to be valid against purchasers for a valuable consideration without notice or against creditors. (decided under prior law) Rankin v. McFarlane Carriage Co., 75 S.W. 221, 25 Ky. L. Rptr. 258 (1903); Kelley v. Brack, 214 Ky. 9 , 282 S.W. 190, 1926 Ky. LEXIS 256 ( Ky. 1926 ); In re Draughn & Steel Motor Co., 49 F.2d 636, 1931 U.S. Dist. LEXIS 1329 (D. Ky. 1931 ), aff'd, 58 F.2d 910, 1932 U.S. App. LEXIS 4792 (6th Cir. Ky. 1932 ); Munz v. National Bond & Inv. Co., 243 Ky. 293 , 47 S.W.2d 1055, 1932 Ky. LEXIS 72 ( Ky. 1932 ); Johnson v. Sauerman Bros., Inc., 243 Ky. 587 , 49 S.W.2d 331, 1932 Ky. LEXIS 152 (Ky. 1932); In re Selman's, Inc., 58 F.2d 681, 1932 U.S. Dist. LEXIS 1215 (D. Ky. 1932); In re Henry, 60 F.2d 605, 1932 U.S. Dist. LEXIS 1369 (D. Ky. 1932); White v. General Motors Acceptance Corp., 2 F. Supp. 406, 1932 U.S. Dist. LEXIS 1640 (D. Ky. 1932); Fields Motor Co. v. Sturgill, 279 Ky. 47 , 129 S.W.2d 1003, 1939 Ky. LEXIS 231 ( Ky. 1939 ); In re Independent Distillers of Kentucky, 34 F. Supp. 708, 1940 U.S. Dist. LEXIS 2634 (D. Ky. 1940 ); In re Kaufman, 142 F. Supp. 759, 1956 U.S. Dist. LEXIS 3195 (D. Ky. 1956 ); Walter J. Hieb Sand & Gravel, Inc. v. Universal C. I. T. Credit Corp., 332 S.W.2d 619, 1959 Ky. LEXIS 20 ( Ky. 1959 ).

A conditional sales contract was good against a purchaser for value without notice although it was not recorded, if it was made in a state which did not require recording. (decided under prior law) Fry Bros. v. Theobold, 205 Ky. 146 , 265 S.W. 498, 1924 Ky. LEXIS 63 ( Ky. 1924 ).

6.Purpose.

The purpose of this code is to uniformly regulate security devices concerning personal property and fixtures. (decided under prior law) In re Leckie Freeburn Coal Co., 405 F.2d 1043, 1969 U.S. App. LEXIS 9150 (6th Cir. Ky.), cert. denied, 395 U.S. 960, 89 S. Ct. 2101, 23 L. Ed. 2d 746, 1969 U.S. LEXIS 3173 (U.S. 1969).

7.Renewal Note.

A renewal note does not extinguish the original obligation unless there is a novation and a security agreement executed to secure the original obligation remains in effect. (decided under prior law) In re Cantrill Constr. Co., 418 F.2d 705, 1969 U.S. App. LEXIS 9946 (6th Cir. Ky. 1969 ), cert. denied, 397 U.S. 990, 90 S. Ct. 1124, 25 L. Ed. 2d 398, 1970 U.S. LEXIS 3561 (U.S. 1970).

8.Bona Fide Purchasers.

Where a search of county records by purchasers revealed no encumbrances upon the machinery, and purchasers had no knowledge of or reason to suspect a dispute between possessor and dealer, purchasers were bona fide purchasers in good faith and had good title as against dealer. (decided under prior law) United Road Machinery Co. v. Jasper, 568 S.W.2d 242, 1978 Ky. App. LEXIS 550 (Ky. Ct. App. 1978).

Where purchasers bought truck scales from corporation which had obtained them under lease-purchase agreement from dealer, purchasers had good title whether corporation had good title, voidable title or no title, since: in the first instance, they got good title; in the second instance, there was a transaction of purchase conferring good title, and, in the third instance, they were bona fide purchasers. (decided under prior law) United Road Machinery Co. v. Jasper, 568 S.W.2d 242, 1978 Ky. App. LEXIS 550 (Ky. Ct. App. 1978).

9.Equitable Lien.

The holder of an equitable lien did not have any rights superior to those of the general creditors of a corporation except perhaps as to those creditors who extended credit with actual knowledge of the lien or the facts giving rise to it. (decided under prior law) Omniflight Helicopters, Inc. v. Kennedy, 567 S.W.2d 123, 1978 Ky. App. LEXIS 541 (Ky. Ct. App. 1978).

10.Goods.

In those instances when previously extracted oil or gas is subsequently stored in underground reservoirs capable of being defined with certainty and the integrity of said reservoirs is capable of being maintained, title to such oil or gas is not lost and said minerals do not become subject to the rights of the owners of the surface above the storage fields. Such previously extracted oil or gas, thus stored, is “goods” under the Uniform Commercial Code of this Commonwealth, and the proper manner of encumbering an inventory of said minerals in storage is controlled thereby. (decided under prior law) Texas American Energy Corp. v. Citizens Fidelity Bank & Trust Co., 736 S.W.2d 25, 1987 Ky. LEXIS 235 ( Ky. 1987 ).

11.Transfers.

Although the 1987 version of the UCC does not clearly define the delivery requirement as the earlier version did, it is apparent that under both versions the transfer of an interest in a security requires that the transferor intend to make a transfer and that the transfer be completed by some manner of delivery. (decided under prior law) Meshew v. Whitlock, 9 S.W.3d 581, 1999 Ky. App. LEXIS 156 (Ky. Ct. App. 1999).

12.Assignment of Accounts for Liquidation.

No part of the Uniform Commercial Code applied to a written assignment of account between partners of funds presently due and owing for purpose of liquidation or satisfying prior obligation, for it was not a security transaction as defined in subsection (37) of KRS 355.1-201 nor a contract right as defined in former KRS 355.9-106 and subsequent attachment by creditor of assigning partner did not create a lien under former KRS 355.9-301 which would have priority over the assignment. (decided under prior law) Spurlin v. Sloan, 368 S.W.2d 314, 1963 Ky. LEXIS 41 ( Ky. 1963 ).

Opinions of Attorney General.

Since coal royalties are rentals or personal property, the naming of such royalties by a nonresident debtor as collateral to a secured party in a financing statement appears proper, and since the security interest was created in personal property, it is governed by the UCC, thus, in order to perfect such a security interest, the UCC requires the filing of a financial statement pursuant to former KRS 355.9-401 to 355.9-406 ; where it might be ruled by the courts that the nonresident debtor has a principal place of business in a certain county of this state, the secured party may file the financing statement in the clerk’s office of that county as well as in the office of the secretary of state. OAG 82-52 .

Research References and Practice Aids

Journal of Mineral Law & Policy.

Comments, Injected Gas: Realty or Personalty, 3 J.M.L. & P. 571 (1988).

Kentucky Law Journal.

Smith, Uniform Commercial Code — Assignments — Conditional Sales Contracts — Waiver of Defense Clauses, 58 Ky. L.J. 850 (1970).

Lester, Security Interests in Thoroughbred and Standardbred Horses: A Transactional Approach, 70 Ky. L.J. 1065 (1981-82).

Sales and Use Tax Planning for the Horse Industry, 78 Ky. L.J. 601 (1989-90).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

Treatises

Petrilli, Kentucky Family Law, Business Transactions, § 15.3.

355.9-110. Security interests arising under Article 2 or 2A.

A security interest arising under KRS 355.2-401 , 355.2-505 , 355.2-711 (3), or 355.2A-508 (5) is subject to this article. However, until the debtor obtains possession of the goods:

  1. The security interest is enforceable, even if KRS 355.9-203 (2)(c) has not been satisfied;
  2. Filing is not required to perfect the security interest;
  3. The rights of the secured party after default by the debtor are governed by Article 2 or 2A of this chapter; and
  4. The security interest has priority over a conflicting security interest created by the debtor.

History. Enact. Acts 1958, ch. 77, § 9-110, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 30, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-113.
  2. Background.  Former Section 9-113, from which this section derives, referred generally to security interests “arising solely under the Article on Sales (Article 2) or the Article on Leases (Article 2A).” Views differed as to the precise scope of that section. In contrast, Section 9-110 specifies the security interests to which it applies.
  3. Security Interests Under Articles 2 and 2A.  Section 2-505 explains how a seller of goods may reserve a security interest in them. Section 2-401 indicates that a reservation of title by the seller of goods, despite delivery to the buyer, is limited to reservation of a security interest. As did former Article 9, this Article governs a security interest arising solely under one of those sections; however, until the buyer obtains possession of the goods, the security interest is enforceable even in the absence of a security agreement, filing is not necessary to perfect the security interest, and the seller-secured party’s rights on the buyer’s default are governed by Article 2.

    Sections 2-711(3) and 2A-508(5) create a security interest in favor of a buyer or lessee in possession of goods that were rightfully rejected or as to which acceptance was justifiably revoked. As did former Article 9, this Article governs a security interest arising solely under one of those sections; however, until the seller or lessor obtains possession of the goods, the security interest is enforceable even in the absence of a security agreement, filing is not necessary to perfect the security interest, and the secured party’s (buyer’s or lessee’s) rights on the debtor’s (seller’s or lessor’s) default are governed by Article 2 or 2A, as the case may be.

  4. Priority.  This section adds to former Section 9-113 a priority rule. Until the debtor obtains possession of the goods, a security interest arising under one of the specified sections of Article 2 or 2A has priority over conflicting security interests created by the debtor. Thus, a security interest arising under Section 2-401 or 2-505 has priority over a conflicting security interest in the buyer’s after-acquired goods, even if the goods in question are inventory. Arguably, the same result would obtain under Section 9-322, but even if it would not, a purchase-money-like priority is appropriate. Similarly, a security interest under Section 2-711(3) or 2A-508(5) has priority over security interests claimed by the seller’s or lessor’s secured lender. This result is appropriate, inasmuch as the payments giving rise to the debt secured by the Article 2 or 2A security interest are likely to be included among the lender’s proceeds.
  5. Relationship to Other Rights and Remedies Under Articles 2 and 2A.  This article does not specifically address the conflict between (i) a security interest created by a buyer or lessee and (ii) the seller’s or lessor’s right to withhold delivery under section 2-702(1), 2-703(a), or 2A-525, the seller’s or lessor’s right to stop delivery under Section 2-705 or 2A-526, or the seller’s right to reclaim under Section 2-507(2) or 2-702(2). These conflicts are governed by the first sentence of Section 2-403(1), under which the buyer’s secured party obtains no greater rights in the goods than the buyer had or had power to convey, or Section 2A-307(1), under which creditors of the lessee take subject to the lease contract.

Example: Seller owns equipment subject to a security interest created by Seller in favor of Lender. Buyer pays for the equipment, accepts the goods, and then justifiably revokes acceptance. As long as Seller does not recover possession of the equipment, Buyer’s security interest under Section 2-711(3) is senior to that of Lender.

In the event that a security interest referred to in this section conflicts with a security interest that is created by a person other than the debtor, Section 9-325 applies. Thus, if Lender’s security interest in the example was created not by Seller but by the person from whom Seller acquired the goods, Section 9-325 would govern.

355.9-111. Applicability of bulk transfer laws. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 9-111, effective July 1, 1960) was repealed by Acts 1992, ch. 116, § 65, effective July 14, 1992.

355.9-112. Where collateral is not owned by debtor. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 9-112, effective July 1, 1960) was repealed by Acts 2000, ch. 408, § 186, effective July 1, 2001.

355.9-113. Security interest arising under article on sales or article on leases. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1958, ch. 77, § 9-113, effective July 1, 1960; 1990 ch. 363, § 81, effective January 1, 1991) was repealed by Acts 2000, ch. 408, § 186, effective July 1, 2001.

355.9-114. Consignment. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1986, ch. 118, § 59, effective July 1, 1987) was repealed by Acts 2000, ch. 408, § 186, effective July 1, 2001.

355.9-115. Investment property. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1996, ch. 130, § 168, effective January 1, 1997) was repealed by Acts 2000, ch. 408, § 186, effective July 1, 2001.

355.9-116. Security interest arising in purchase or delivery of financial asset. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1996, ch. 130, § 169, effective January 1, 1997) was repealed by Acts 2000, ch. 408, § 186, effective July 1, 2001.

Part 2. Effectiveness of Security Agreement; Attachment of Security Interest; Rights of Parties to Security Agreement

Subpart 1. Effectiveness and Attachment

355.9-201. General effectiveness of security agreement.

  1. Except as otherwise provided in this chapter, a security agreement is effective according to its terms between the parties, against purchasers of the collateral, and against creditors.
  2. A transaction subject to this article is subject to any applicable rule of law, statute, or regulation that establishes a different rule for consumers.
  3. In case of conflict between this article and a rule of law, statute, or regulation described in subsection (2) of this section, the rule of law, statute, or regulation controls. Failure to comply with a statute or regulation described in subsection (2) of this section has only the effect the statute or regulation specifies.
  4. This article does not:
    1. Validate any rate, charge, agreement, or practice that violates a rule of law, statute, or regulation described in subsection (2) of this section; or
    2. Extend the application of the rule of law, statute, or regulation to a transaction not otherwise subject to it.

History. Enact. Acts 1958, ch. 77, § 9-201, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 31, effective July 1, 2001.

Official Comment

  1. Source.  Former Sections 9-201, 9-203(4).
  2. Effectiveness of Security Agreement.  Subsection (a) provides that a security agreement is generally effective. With certain exceptions, a security agreement is effective between the debtor and secured party and is likewise effective against third parties. Note that “security agreement” is used here (and elsewhere in this Article) as it is defined in Section 9-102: “an agreement that creates or provides for a security interest.” It follows that subsection (a) does not provide that every term or provision contained in a record that contains a security agreement or that is so labeled is effective. Property read, former Section 9-201 was to the same effect. Exceptions to the general rule of subsection (a) arise where there is an overriding provision in this Article or any other Article of the UCC. For example, Section 9-317 subordinates unperfected security interests to lien creditors and certain buyers, and several provisions in Part 3 subordinate some security interests to other security interests and interests of purchasers.
  3. Law, Statutes, and Regulations Applicable to Certain Transactions.  Subsection (b) makes clear that certain transactions, although subject to this Article, also are subject to other applicable laws relating to consumers or specified in that subsection. Subsection (c) provides that the other law is controlling in the event of a conflict, and that a violation of other law does not ipso facto constitute a violation of this Article. Subsection (d) provides that this Article does not validate violations under or extend the application of the other applicable laws.

NOTES TO DECISIONS

1.Provisions for Renewal and Extensions.

A security agreement, to remain effective on the original obligation, need not provide for the renewal of the evidence of the old indebtedness and the extension of the time of payment. (decided under prior law) In re Cantrill Constr. Co., 418 F.2d 705, 1969 U.S. App. LEXIS 9946 (6th Cir. Ky. 1969 ), cert. denied, 397 U.S. 990, 90 S. Ct. 1124, 25 L. Ed. 2d 398, 1970 U.S. LEXIS 3561 (U.S. 1970).

2.Language and Agreement.

No magic words need be included in any security agreement to establish a valid security interest; rather, the language of the instrument need only lead to the logical conclusion that it was the intention of the parties that a security interest be created, and the intention of the parties may be gleaned from the transaction as a whole. (decided under prior law) In re Owensboro Canning Co., 82 B.R. 450, 1988 U.S. Dist. LEXIS 1109 (W.D. Ky. 1988 ).

The letter agreement executed by the debtor created a valid and enforceable security interest regarding its accounts receivable, inventory and raw materials even though it did not contain a “granting” clause. (decided under prior law) In re Owensboro Canning Co., 82 B.R. 450, 1988 U.S. Dist. LEXIS 1109 (W.D. Ky. 1988 ).

3.Relation to Bulk Sales Act.

A perfected secured party does not need the protection afforded by the Bulk Sales Act; absent specific exceptions, it has priority over both purchasers of the collateral or assets and against unsecured creditors. (decided under prior law) River City Products, Inc. v. AEJ, Inc., 774 S.W.2d 452, 1989 Ky. App. LEXIS 7 (Ky. Ct. App. 1989).

Opinions of Attorney General.

In order for interest to be collectible on expenses incurred in retaking and selling security, it would have to be specifically provided for in the security agreement, keeping in mind the provisions of this section in drafting such agreement. OAG 73-732 .

Research References and Practice Aids

Kentucky Law Journal.

Kripke, Kentucky Modernizes the Law of Chattel Security, 48 Ky. L.J. 369 (1960).

Spivack, Financing the Manufacturer: Article 9 of the Uniform Commercial Code, 48 Ky. L.J. 397 (1960).

Viles, The Uniform Commercial Code v. The Bankruptcy Act, 55 Ky. L.J. 636 (1967).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

355.9-202. Title to collateral immaterial.

Except as otherwise provided with respect to consignments or sales of accounts, chattel paper, payment intangibles, or promissory notes, the provisions of this article with regard to rights and obligations apply whether title to collateral is in the secured party or the debtor.

History. Enact. Acts 1958, ch. 77, § 9-202, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 32, effective July 1, 2001.

Official Comment

  1. Source . Former Section 9-202.
  2. Title Immaterial.  The rights and duties of parties to a secured transaction and affected third parties are provided in this article without reference to the location of “title” to the collateral. For example, the characteristics of a security interest that secures the purchase price of goods are the same whether the secured party appears to have retained title or the debtor appears to have obtained title and then conveyed title or a lien to the secured party.
  3. When Title Matters.
    1. Under This Article.  This section explicitly acknowledges two circumstances in which the effect of certain Article 9 provisions turns on ownership (title). First, in some respects sales of accounts, chattel paper, payment intangibles, and promissory notes receive special treatment. See, e.g., Sections 9-207(a), 9-210(b), 9-615(e). Buyers of receivables under former Article 9 were treated specially, as well. See, e.g., former Section 9-502(2). Second, the remedies of a consignor under a true consignment and, for the most part, the remedies of a buyer of accounts, chattel paper, payment intangibles, or promissory notes are determined by other law and not by Part 6. See Section 9-601(g).
    2. Under Other Law.  This article does not determine which line of interpretation (e.g., title theory or lien theory, retained title or conveyed title) should be followed in cases in which the applicability of another rule of law depends upon who has title. If, for example, a revenue law imposes a tax on the “legal” owner of goods or if a corporation law makes a vote of the stockholders prerequisite to a corporation “giving” a security interest but not if it acquires property “subject” to a security interest, this article does not attempt to define whether the secured party is a “legal” owner or whether the transaction “gives” a security interest for the purpose of such laws. Other rules of law or the agreement of the parties determines the location and source of title for those purposes.

NOTES TO DECISIONS

1.Conditional Sales Contracts.

Law which provided that property in specific gods passed when parties so intended authorized conditional sales contracts under which the title to the goods was reserved in the seller until complete payment of the purchase price was made. (decided under prior law) C. I. T. Corp. v. Thompson, 293 Ky. 637 , 169 S.W.2d 820, 1943 Ky. LEXIS 674 ( Ky. 1943 ).

Research References and Practice Aids

Kentucky Law Journal.

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

355.9-203. Attachment and enforceability of security interest — Proceeds — Supporting obligations — Formal requisites.

  1. A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment.
  2. Except as otherwise provided in subsections (3) to (9) of this section, a security interest is enforceable against the debtor and third parties with respect to the collateral only if:
    1. Value has been given;
    2. The debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and
    3. One (1) of the following conditions is met:
      1. The debtor has authenticated a security agreement that provides a description of the collateral and, if the security interest covers timber to be cut, a description of the land concerned;
      2. The collateral is not a certificated security and is in the possession of the secured party under KRS 355.9-313 pursuant to the debtor’s security agreement;
      3. The collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under KRS 355.8-301 pursuant to the debtor’s security agreement; or
      4. The collateral is deposit accounts, electronic chattel paper, investment property, letter-of-credit rights, or electronic documents, and the secured party has control under KRS 355.7-106 , 355.9-104 , 355.9-105 , 355.9-106 , or 355.9-107 pursuant to the debtor’s security agreement.
  3. Subsection (2) of this section is subject to KRS 355.4-210 on the security interest of a collecting bank, KRS 355.5-118 on the security interest of a letter-of-credit issuer or nominated person, KRS 355.9-110 on a security interest arising under Article 2 or 2A of this chapter, and KRS 355.9-206 on security interests in investment property.
  4. A person becomes bound as debtor by a security agreement entered into by another person if, by operation of law other than this article or by contract:
    1. The security agreement becomes effective to create a security interest in the person’s property; or
    2. The person becomes generally obligated for the obligations of the other person, including the obligation secured under the security agreement, and acquires or succeeds to all or substantially all of the assets of the other person.
  5. If a new debtor becomes bound as debtor by a security agreement entered into by another person:
    1. The agreement satisfies subsection (2)(c) of this section with respect to existing or after-acquired property of the new debtor to the extent the property is described in the agreement; and
    2. Another agreement is not necessary to make a security interest in the property enforceable.
  6. The attachment of a security interest in collateral gives the secured party the rights to proceeds provided by KRS 355.9-315 and is also attachment of a security interest in a supporting obligation for the collateral.
  7. The attachment of a security interest in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage, or other lien.
  8. The attachment of a security interest in a securities account is also attachment of a security interest in the security entitlements carried in the securities account.
  9. The attachment of a security interest in a commodity account is also attachment of a security interest in the commodity contracts carried in the commodity account.

History. Enact. Acts 1958, ch. 77, § 9-203, effective July 1, 1960; 1986, ch. 118, § 60, effective July 1, 1987; 1996, ch. 130, § 170, effective January 1, 1997; repealed and reenact., Acts 2000, ch. 408, § 33, effective July 1, 2001; repealed and reenact., Acts 2001, ch. 119, § 4, effective July 1, 2001; 2012, ch. 132, § 62, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

(7/14/2000). Although 2000 Acts ch. 408, sec. 33, has a reference to “Section 170 of this Act” (which was codified as KRS 355.8-106 ) in subsection (2)(c)3. of this statute, that reference has been codified as KRS 355.8-301 (which was Section 172 of Chapter 408) in order to match the official text of Revised Article 9. Amendments to the introduced version of this bill in the Senate inadvertently did not make the necessary adjustment to this internal reference; this failure was clearly a manifest typographical or clerical error and has been corrected in codification under KRS 7.136(1)(h).

(7/14/2000). Although 2000 Acts ch. 408, sec. 33, has a reference to “Section 165 of this Act” (which was codified as KRS 355.2A-307 ) in subsection (3) of this statute, that reference has been codified as KRS 355.4-210 (which was Section 167 of Chapter 408) in order to match the official text of Revised Article 9. Amendments to the introduced version of this bill in the Senate inadvertently did not make the necessary adjustment to this internal reference; this failure was clearly a manifest typographical or clerical error and has been corrected in codification under KRS 7.136(1)(h).

Official Comment

  1. Source.  Former Sections 9-115(2), (6) and 9-203.
  2. Creation, Attachment, and Enforceability.  Subsection (a) states the general rule that a security interest attaches to collateral only when it becomes enforceable against the debtor. Subsection (b) specifies the circumstances under which a security interest becomes enforceable. Subsection (b) states three basic prerequisites to the existence of a security interest: value (paragraph (1)), rights or power to transfer rights in collateral (paragraph (2)), and agreement plus satisfaction of an evidentiary requirement (paragraph (3)). When all of these elements exist, a security interest becomes enforceable between the parties and attaches under subsection (a). Subsection (c) identifies certain exceptions to the general rule of subsection (b).
  3. Security Agreement; Authentication.  Under subsection (b)(3), enforceability requires the debtor’s security agreement and compliance with an evidentiary requirement in the nature of a Statute of Frauds. Paragraph (3)(A) represents the most basic of the evidentiary alternatives, under which the debtor must authenticate a security agreement that provides a description of the collateral. Under Section 9-102, a “security agreement” is “an agreement that creates or provides for a security interest.” Neither that definition nor the requirement of paragraph (3)(A) rejects the deeply rooted doctrine that a bill of sale, although absolute in form, may be shown in fact to have been given as security. Under this Article, as under prior law, a debtor may show by parol evidence that a transfer purporting to be absolute was in fact for security. Similarly, a self-styled “lease” may serve as a security agreement if the agreement creates a security interest. See Section 1-201(37) (distinguishing security interest from lease).
  4. Possession, Delivery, or Control Pursuant to Security Agreement.  The other alternatives in subsection (b)(3) dispense with the requirement of an authenticated security agreement and provide alternative evidentiary tests. Under paragraph (3)(B), the secured party’s possession substitutes for the debtor’s authentication under paragraph (3)(A) if the secured party’s possession is “pursuant to the debtor’s security agreement.” That phrase refers to the debtor’s agreement to the secured party’s possession for the purpose of creating a security interest. The phrase should not be confused with the phrase “debtor has authenticated a security agreement,” used in paragraph (3)(A), which contemplates the debtor’s authentication of a record. In the unlikely event that possession is obtained without the debtor’s agreement, possession would not suffice as a substitute for an authenticated security agreement. However, once the security interest has become enforceable and has attached, it is not impaired by the fact that the secured party’s possession is maintained without the agreement of a subsequent debtor (e.g., a transferee). Possession as contemplated by Section 9-313 is possession for purposes of subsection (b)(3)(B), even though it may not constitute possession “pursuant to the debtor’s agreement” and consequently might not serve as a substitute for an authenticated security agreement under subsection (b)(3)(A). Subsection (b)(3)(C) provides that delivery of a certificated security to the secured party under Section 8-301 pursuant to the debtor’s security agreement is sufficient as a substitute for an authenticated security agreement. Similarly, under subsection (b)(3)(D), control of investment property, a deposit account, electronic chattel paper, or a letter-of-credit right satisfies the evidentiary test if control is pursuant to the debtor’s security agreement.
  5. Collateral Covered by Other Statute or Treaty.  One evidentiary purpose of the formal requisites stated in subsection (b) is to minimize the possibility of future disputes as to the terms of a security agreement (e.g., as to the property that stands as collateral for the obligation secured). One should distinguish the evidentiary functions of the formal requisites of attachment and enforceability (such as the requirement that a security agreement contain a description of the collateral) from the more limited goals of “notice filing” for financing statements under Part 5, explained in Section 9-502, Comment 2. When perfection is achieved by compliance with the requirements of a statute or treaty described in Section 9-311(a), such as a federal recording act or a certificate-of-title statute, the manner of describing the collateral in a registry imposed by the statute or treaty may or may not be adequate for purposes of this section and Section 9-108. However, the description contained in the security agreement, not the description in a public registry or on a certificate of title, controls for purposes of this section.
  6. Debtor’s Rights; Debtor’s Power to Transfer Rights.  Subsection (b)(2) conditions attachment on the debtor’s having “rights in the collateral or the power to transfer rights in the collateral to a secured party.” A debtor’s limited rights in collateral, short of full ownership, are sufficient for a security interest to attach. However, in accordance with basic personal property conveyancing principles, the baseline rule is that a security interest attaches only to whatever rights a debtor may have, broad or limited as those rights may be.

    Certain exceptions to the baseline rule enable a debtor to transfer, and a security interest to attach to, greater rights than the debtor has. See Part 3, Subpart 3 (priority rules). The phrase, “or the power to transfer rights in the collateral to a secured party,” accommodates those exceptions. In some cases, a debtor may have power to transfer another person’s rights only to a class of transferees that excludes secured parties. See, e.g., Section 2-403(2) (giving certain merchants power to transfer an entruster’s rights to a buyer in ordinary course of business). Under those circumstances, the debtor would not have the power to create a security interest in the other person’s rights, and the condition in subsection (b)(2) would not be satisfied.

  7. New Debtors.  Subsection (e) makes clear that the enforceability requirements of subsection (b)(3) are met when a new debtor becomes bound under an original debtor’s security agreement. If a new debtor becomes bound as debtor by a security agreement entered into by another person, the security agreement satisfies the requirement of subsection (b)(3) as to the existing and after-acquired property of the new debtor to the extent the property is described in the agreement.

    Subsection (d) explains when a new debtor becomes bound. Persons who become bound under paragraph (2) are limited to those who both become primarily liable for the original debtor’s obligations and succeed to (or acquire) its assets. Thus, the paragraph excludes sureties and other secondary obligors as well as persons who become obligated through veil piercing and other non-successorship doctrines. In many cases, paragraph (2) will exclude successors to the assets and liabilities of a division of a debtor. See also Section 9-508, Comment 3.

  8. Supporting Obligations.  Under subsection (f), a security interest in a “supporting obligation” (defined in Section 9-102) automatically follows from a security interest in the underlying, supported collateral. This result was implicit under former Article 9. Implicit in subsection (f) is the principle that the secured party’s interest in a supporting obligation extends to the supporting obligation only to the extent that it supports the collateral in which the secured party has a security interest. Complex issues may arise, however, if a supporting obligation supports many separate obligations of a particular account debtor and if the supported obligations are separately assigned as security to several secured parties. The problems may be exacerbated if a supporting obligation is limited to an aggregate amount that is less than the aggregate amount of the obligations it supports. This Article does not contain provisions dealing with competing claims to a limited supporting obligation. As under former Article 9, the law of suretyship and the agreements of the parties will control.
  9. Collateral Follows Right to Payment or Performance.  Subsection (g) codifies the common law rule that a transfer of an obligation secured by a security interest or other lien on personal or real property also transfers the security interest or lien. See Restatement (3d), Property (Mortgages) §  5.4(a) (1997). See also Section 9-308(e) (analogous rule for perfection).
  10. Investment Property.  Subsections (h) and (i) make clear that attachment of a security interest in a securities account or commodity account is also attachment in security entitlements or commodity contracts carried in the accounts.

NOTES TO DECISIONS

1.Valid Agreement.

A security agreement was not insufficient because it did not disclose the amount of the loan or the maturity date, where the security agreement specifically provided for future advances, and where there was no statutory requirement that the amount secured or the date of maturity be shown. In re Cooley, 624 F.2d 55, 1980 U.S. App. LEXIS 15952 (6th Cir. Ky. 1980 ) (decided under prior law).

Where security agreement described collateral as “all tobacco crops, including but not limited to . . . . . 1/2 of 5200 pounds on Dewey Allen,” such description was sufficient and, since the agreement also complied with other requirements of this section and KRS 355.9-204 , the agreement was valid. Mammoth Cave Production Credit Asso. v. Oldham, 569 S.W.2d 833, 1977 Tenn. App. LEXIS 331 (Tenn. Ct. App. 1977) (decided under prior law).

In determining whether a document or set of documents constitute a valid security agreement, a court must first resolve, as a question of law, whether the language embodied in the writing objectively indicates that the parties may have intended to create or provide for a security interest and secondly, a court must determine whether the parties actually intended to create a security interest. In re Owensboro Canning Co., 46 B.R. 607, 1985 Bankr. LEXIS 6683 (Bankr. W.D. Ky. 1985 ), aff’d, 82 B.R. 450, 1988 U.S. Dist. LEXIS 1109 (W.D. Ky. 1988 ) (decided under prior law).

Specific words formally granting a creditor a security interest in the collateral are not required for a valid security agreement. In re Owensboro Canning Co., 46 B.R. 607, 1985 Bankr. LEXIS 6683 (Bankr. W.D. Ky. 1985 ), aff’d, 82 B.R. 450, 1988 U.S. Dist. LEXIS 1109 (W.D. Ky. 1988 ) (decided under prior law).

Where the debtor’s bank had filed and perfected its security interest in the debtor’s assets under KRS 355.9-312 (5)(a), (7), 355.9-303 , 355.9-203 (1995), before the debtor’s shareholders sold their stock to the debtor and took a security interest in the debtor’s assets, the bank held a perfected, first, and prior lien on the debtor’s assets; a subordination provision in the stock purchase agreement between the debtor and the former shareholders, to which the bank was not a party, was not binding on the bank. Ralph v. Stock Yards Bank & Trust Co. (In re Kentuckiana Truck & Trailer Repair, Inc.), 291 B.R. 84, 2002 Bankr. LEXIS 1678 (Bankr. W.D. Ky. 2002 ).

2.Description of Collateral.

The description of the collateral contemplated by the statutes is not required to be by metes and bounds, and it does not have to be meticulous; it is only required to be in such words and terms that it can be readily located. Bank of Danville v. Farmers Nat'l Bank, 602 S.W.2d 160, 1980 Ky. LEXIS 235 ( Ky. 1980 ) (decided under prior law).

Where security agreement recited that the security in question was located “on the Dale Wilson farm located on Lancaster Road, four miles from Danville, Kentucky” such description was adequate and the agreement created a valid and perfected security interest. Bank of Danville v. Farmers Nat'l Bank, 602 S.W.2d 160, 1980 Ky. LEXIS 235 ( Ky. 1980 ) (decided under prior law).

Where creditor listed in security agreement the wrong serial number, by one digit, it was similar enough to put a bank claiming a security interest in a tractor on notice that creditor might be claiming a security interest in the same tractor or at the very least, the close similarity in serial numbers required bank to at least make further inquiry. Laurel Explosives, Inc. v. First Nat'l Bank & Trust Co., 801 S.W.2d 336, 1990 Ky. App. LEXIS 134 (Ky. Ct. App. 1990) (decided under prior law).

In a case in which a bank appealed a bankruptcy court’s order in favor of a bankruptcy trustee and reversed a payment on debtor’s defaulted loan from a Certificate of Deposit Account Registry Service account, there was not a sufficient description of the underlying financial assets; therefore, the bank’s security interest did not attach and perfect. Nothing in the security agreement described, or even acknowledged the existence of, underlying financial assets. Monticello Banking Co. v. Flener, 2010 U.S. Dist. LEXIS 132300 (W.D. Ky. Dec. 13, 2010), aff'd, 2011 U.S. App. LEXIS 26350 (6th Cir. Ky. Dec. 14, 2011).

3.Belated Perfection.

The debtors had “rights in the collateral” at the time they purchased the automobile, and in fact they had possession and control of the collateral on the date they purchased it from the dealer, and the trustee carried forward his burden of demonstrating that there was no genuine issue of material fact and that he was entitled to judgment as a matter of law that the belated perfection of a security interest by the creditor was a preferential transfer which he could avoid pursuant to federal bankruptcy law. Westenhoefer v. Chrysler Credit Corp. (In re Williams), 208 B.R. 882, 1997 Bankr. LEXIS 759 (Bankr. E.D. Ky. 1997 ) (decided under prior law).

4.Attachment Upon Delivery of Goods to Debtor.

In a Chapter 11 bankruptcy proceeding, a lender who had a security interest in all of debtor’s assets was entitled to the proceeds of a sale of goods delivered to debtor by a seller; because the goods were shipped “F.O.B. destination” and had arrived at property debtor leased, there had been a tender of delivery of the goods, and under KRS 355.2-401 (2), KRS 355.2-319 (1)(b), KRS 355.2-503 (1), and KRS 355.9-203 (1) and (2)(b), title to the goods had passed to debtor from the seller, and the lender’s security interest had attached to the goods. In re Ashland Steel Liquidating Co., 2004 Bankr. LEXIS 908 (Bankr. E.D. Ky. July 7, 2004).

Creditor had a first-priority blanket lien in the debtors’ equipment because debtor’s interest in equipment attached in August of 2017 when creditor disbursed the loaned money to debtors and no other creditor in this action was claiming that it perfected a blanket lien on the equipment prior to August of 2017. Nutrien AG Sols., Inc. v. Duvall (In re Duvall), 2021 Bankr. LEXIS 21 (Bankr. W.D. Ky. Jan. 7, 2021).

5.Proceeds.

Proceeds of a Chapter 13 debtor’s auto insurance policy after her car was totaled were property of her bankruptcy estate as the insurance payment was deemed to arise out of the actions of the third party driver and came from his obligation to the debtor based on his negligent actions; as the debtor had granted a credit union a security interest in the car, the credit union’s lien attached to any proceeds of the car by contract and statute. In re Granville, 2014 Bankr. LEXIS 1373 (Bankr. E.D. Ky. Apr. 4, 2014).

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Research References and Practice Aids

Kentucky Law Journal.

Weber, The Extension of the Voidable Title Principle Under the Code, 49 Ky. L.J. 437 (1961).

Whiteside, Lewis, Kentucky’s Commercial Code — Some Initial Problems in Security, 50 Ky. L.J. 61 (1961).

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

355.9-204. After-acquired property — Future advances.

  1. Except as otherwise provided in subsection (2) of this section, a security agreement may create or provide for a security interest in after-acquired collateral.
  2. A security interest does not attach under a term constituting an after-acquired property clause to:
    1. Consumer goods, other than an accession when given as additional security, unless the debtor acquires rights in them within ten (10) days after the secured party gives value; or
    2. A commercial tort claim.
  3. A security agreement may provide that collateral secures, or that accounts, chattel paper, payment intangibles, or promissory notes are sold in connection with, future advances or other value, whether or not the advances or value are given pursuant to commitment.

History. Enact. Acts 1958, ch. 77, § 9-204, effective July 1, 1960; 1986, ch. 118, § 61, effective July 1, 1987; repealed and reenact., Acts 2000, ch. 408, § 34, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-204.
  2. After-Acquired Property; Continuing General Lien.  Subsection (a) makes clear that a security interest arising by virtue of an after-acquired property clause is no less valid than a security interest in collateral in which the debtor has rights at the time value is given. A security interest in after-acquired property is not merely an “equitable” interest; no further action by the secured party—such as a supplemental agreement covering the new collateral—is required. This section adopts the principle of a “continuing general lien” or “floating lien.” It validates a security interest in the debtor’s existing and (upon acquisition) future assets, even though the debtor has liberty to use or dispose of collateral without being required to account for proceeds or substitute new collateral. See Section 9-205. Subsection (a), together with subsection (c), also validates “cross-collateral” clauses under which collateral acquired at any time secures advances whenever made.
  3. After-Acquired Consumer Goods.  Subsection (b)(1) makes ineffective an after-acquired property clause covering consumer goods (defined in Section 9-109), except as accessions (see Section 9-335), acquired more than 10 days after the secured party gives value. Subsection (b)(1) is unchanged in substance from the corresponding provision in former Section 9-204(2).
  4. Commercial Tort Claims.  Subsection (b)(2) provides that an after-acquired property clause in a security agreement does not reach future commercial tort claims. In order for a security interest in a tort claim to attach, the claim must be in existence when the security agreement is authenticated. In addition, the security agreement must describe the tort claim with greater specificity than simply “all tort claims.” See Section 9-108(e).
  5. Future Advances; Obligations Secured.  Under subsection (c) collateral may secure future as well as past or present advances if the security agreement so provides. This is in line with the policy of this Article toward security interests in after-acquired property under subsection (a). Indeed, the parties are free to agree that a security interest secures any obligation whatsoever. Determining the obligations secured by collateral is solely a matter of construing the parties’ agreement under applicable law. This Article rejects the holdings of cases decided under former Article 9 that applied other tests, such as whether a future advance or other subsequently incurred obligation was of the same or a similar type or class as earlier advances and obligations secured by the collateral.
  6. Sales of Receivables.  Subsections (a) and (c) expressly validate after-acquired property and future advance clauses not only when the transaction is for security purposes but also when the transaction is the sale of accounts, chattel paper, payment intangibles, or promissory notes.. This result was implicit under former Article 9.
  7. Financing Statements.  The effect of after-acquired property and future advance clauses as components of a security agreement should not be confused with the requirements applicable to financing statements under this Article’s system of perfection by notice filing. The references to after-acquired property clauses and future advance clauses in this section are limited to security agreements. There is no need to refer to after-acquired property or future advances or other obligations secured in a financing statement. See Section 9-502, Comment 2.

NOTES TO DECISIONS

1.After-Acquired Goods.

This section authorizes mortgages on after-acquired property. In re Leckie Freeburn Coal Co., 405 F.2d 1043, 1969 U.S. App. LEXIS 9150 (6th Cir. Ky.), cert. denied, 395 U.S. 960, 89 S. Ct. 2101, 23 L. Ed. 2d 746, 1969 U.S. LEXIS 3173 (U.S. 1969).

Although the Uniform Commercial Code permits mortgages on after-acquired goods, a mortgage executed in 1955 prior to its enactment by a partner to cover his one-fourth (1/4) interest in stock and fixtures of a partnership was illegal as to after-acquired stock of merchandise. (decided under prior law) Phelps v. Turner, 351 S.W.2d 176, 1961 Ky. LEXIS 150 ( Ky. 1961 ).

2.Other Value.

A renewal note which extends the time of payment but which is not taken in payment and satisfaction of an old indebtedness is not “other value” within the meaning of subsection (5) (now (3)) of this section, and it is not necessary that the security agreement provide for an extension or renewal of the indebtedness in order to remain in force on the original obligation. (decided under prior law) In re Cantrill Constr. Co., 418 F.2d 705, 1969 U.S. App. LEXIS 9946 (6th Cir. Ky. 1969 ), cert. denied, 397 U.S. 990, 90 S. Ct. 1124, 25 L. Ed. 2d 398, 1970 U.S. LEXIS 3561 (U.S. 1970).

3.Giving Value.

A bank’s security interest in an airplane attached when the bank gave “value” by taking a security interest in the airplane to secure a preexisting claim. (decided under prior law) Bank of Lexington v. Jack Adams Aircraft Sales, Inc., 570 F.2d 1220, 1978 U.S. App. LEXIS 11865 (5th Cir. Miss. 1978).

The term “new value” as used in former KRS 355.9-308 has neither been directly defined in Kentucky’s version of the U.C.C. nor by cases involving questions of priority under former U.C.C. § 9-308. However some guidance to the meaning of the term “new value” may be found in former U.C.C. § 9-108 which gives three examples of what constitutes new value: making an advance, incurring an obligation and releasing a perfected security interest. In official comment number 2 to this section, the U.C.C.’s draftsmen state that in other situations it is left to the courts to distinguish between “new” and “old” value. In re Dr. C. Huff Co., 44 B.R. 129, 1984 Bankr. LEXIS 4647 (Bankr. W.D. Ky. 1984 ).

4.Future Advances.

It is better practice to require the original creditor to provide in his agreement for future advances, if there is an agreement between the debtor and the creditor for such advances, since the statute requires this statement, and such a statement provides actual notice of the intention to a would-be subsequent creditor. (decided under prior law) ITT Industrial Credit Co. v. Union Bank & Trust Co., 615 S.W.2d 2, 1981 Ky. App. LEXIS 240 (Ky. Ct. App. 1981).

Where in November of 1977 debtors executed a promissory note which pledged their household furniture and appliances as collateral and included a future advances clause, a subsequent promissory note executed by the debtors in June of 1979 in favor of the same creditor, that contained no reference to the future advances clause of the previous agreement nor in any way indicated that it was a renewal or rewrite of the earlier indebtedness, would be treated as a separate and distinct transaction from the original obligation; since the second promissory note was entered into subsequent to the enactment date, November 6, 1978, of the Bankruptcy Code (11 USCS § 101 et seq.), the creditor was chargeable with notice of the avoiding authority of the Code and the creditor’s nonpurchase money, nonpossessory lien in debtor’s household goods was subject to avoidance. (decided under prior law) In re Hopper, 17 B.R. 292, 1982 Bankr. LEXIS 4955 (Bankr. W.D. Ky. 1982 ).

Where the parties executed a security agreement which provided that future advances and after acquired property, which came into the hands of the debtor subsequent to the execution of the security agreement, would stand as collateral for securing the debtor’s obligations to the creditor, a subsequent letter agreement, under which the parties agreed to an open account sale of dairy products by the creditor to the debtor, created an obligation that was secured by their earlier security agreement. (decided under prior law) In re Midwestern Food Stores, Inc., 21 B.R. 944, 1982 Bankr. LEXIS 3614 (Bankr. S.D. Ohio 1982).

Broad, boilerplate future advance clauses in adhesion contracts are not enforceable as to future transactions which are of a different type or class than the original secured transaction; specifically, such clauses in purchase money security agreements for consumer goods will be enforceable only where the latter transaction concerns a similar purchase money loan for consumer goods. (decided under prior law) Dalton v. First Nat'l Bank, 712 S.W.2d 954, 1986 Ky. App. LEXIS 1165 (Ky. Ct. App. 1986).

The payors could not have contemplated that by signing a security agreement to purchase a trailer they were securing an involuntary “loan” created by an overdraft, where the overdraft was the result of an error by the bank; therefore, even assuming that the bank had properly alleged the existence of such a “loan,” the loan would not be secured by the payor’s trailer, since the second loan would be a different type or class than the purchase money loan for the trailer. (decided under prior law) Dalton v. First Nat'l Bank, 712 S.W.2d 954, 1986 Ky. App. LEXIS 1165 (Ky. Ct. App. 1986).

Creditor’s motion for summary judgment was granted in the debtors’ adversary proceeding, which sought a release of the lien held on the first vehicle, where the debtors were not entitled to have the lien on the first promissory note and security agreement released by the creditor because (1) the future advance clause was enforceable because the transactions (two (2) promissory notes and security agreements) were in the same class, purchase money transactions, and the transactions were identical in that they both involved financing for the purchase of vehicles, (2) there was no proof that the debtors could have reasonably contemplated from the language in the first note that the first vehicle would not have also secured all future debt owed to the creditor, including the debt created by the second promissory note and security agreement, and (3) accordingly, even though the first note was paid in full, the collateral described therein, the first vehicle, remained encumbered as additional security for the second note. 312 B.R. 840, 2004 Bankr. LEXIS 1175.

Obligations covered by a security agreement may include future advances or other value and no new agreement will be necessary to secure the new advance. Future advance clauses are generally enforceable in Kentucky; whether a particular future advance clause is valid depends on whether it was clearly within the contemplation of the parties. 312 B.R. 840, 2004 Bankr. LEXIS 1175.

Broad, boilerplate future advance clauses in purchase money security agreements for consumer goods are only enforceable when the subsequent transaction involves a similar purchase money loan for consumer goods. 312 B.R. 840, 2004 Bankr. LEXIS 1175.

Appellate court agreed with appellee that a June 25, 2013 security agreement between a tobacco farmer and appellant did not contain a future advances clause, where the record before the appellate court indicated that, not only was appellant unaware of appellee’s prior-filed financing statement, but as a result, appellant made no attempt to obtain any security agreement between the farmer and appellant or otherwise investigate the state of the collateral prior to issuing a loan to the farmer. Such inaction was to appellant’s peril. Versailles Farm v. Haynes, 2021 Ky. App. LEXIS 17 (Ky. Ct. App. Feb. 12, 2021).

5.Gap in Security Interest.

Where first creditor held perfected security interest in trencher purchased in 1973 as evidence by recorded security agreement and financing statement which made no provision for future advances, debtor purchased additional trencher in 1975 from bank creditor using 1973 trencher as additional collateral and security agreement was recorded, debtor paid off initial loan in September 1977 and first creditor never filed termination agreement under KRS 355.9-404 , then debtor bought trucks and trailers from first creditor which took lien on 1973 trencher as new collateral in new agreement recorded in October 1977, bank creditor had priority over first creditor since security interest exists only when debtor owes obligation and original indebtedness had been paid off, thus a gap existed which gave priority to second creditor under KRS 355.9-312 and this section. (decided under prior law) ITT Industrial Credit Co. v. Union Bank & Trust Co., 615 S.W.2d 2, 1981 Ky. App. LEXIS 240 (Ky. Ct. App. 1981).

Where lessee of debtor took over operation of debtor’s business in casual manner with no attention to legal formalities, supplier who had entered into financing agreement with debtor that gave it a security interest in fertilizer it sold debtor but who did not enter into new security agreement with lessee did not have security interest in fertilizer it sold lessee even though lessee and debtor did not comply with certain legal requirements attendant to the transfer of a business for the security agreement never attached as there was no agreement between the parties and even if it had attached such agreement would be unperfected for the agreement between debtor and supplier did not meet the statutory requirements of KRS 355.9-402 covering a security agreement between lessee and supplier. (decided under prior law) In re Beaver Dam Grain, Inc., 43 B.R. 283, 1984 Bankr. LEXIS 4881 (Bankr. W.D. Ky. 1984 ).

6.Refinancing Transactions.

Where debtors who had executed a promissory note in October of 1977 pledging their household furniture as collateral, on three (3) occasions thereafter refinanced their account, each of the refinancing transactions would be treated as an entirely new loan rather than a mere renewal of the original obligation; therefore since the last refinancing agreement was executed subsequent to the enactment date, November 6, 1978, of the Bankruptcy Code (11 USCS § 101 et seq.), the creditor was chargeable with notice of the applicable avoiding authority of the Code and that portion of the creditor’s lien as it related to the debtor’s household furniture was subject to avoidance. (decided under prior law) In re Wilson, 17 B.R. 350, 1982 Bankr. LEXIS 4908 (Bankr. W.D. Ky. 1982 ).

Where the initial transaction between debtors and creditor took place in October, 1977, and the debtors refinanced the account on three (3) subsequent occasions, each time paying off the amount owed on the preceding loan and pledging their household furniture as security, each of the refinancing transactions would be treated as an entirely new loan rather than a mere renewal of the original obligation; therefore, since the last promissory note was executed subsequent to November 6, 1978, the date of the enactment of the Bankruptcy Code (11 USCS § 101 et seq.), the secured creditor was chargeable with notice of the applicable avoiding authority of the Code, and the lien on the debtor’s household goods was subject to avoidance. (decided under prior law) In re Harris, 17 B.R. 210, 1982 Bankr. LEXIS 5043 (Bankr. W.D. Ky. 1982 ).

Where a creditor was assigned a purchase money security interest in debtor’s stereo and subsequently on four (4) occasions the creditor advanced funds to the debtor and the debtor pledged as collateral her household furniture, including the stereo, the purchase money character of the original obligation was extinguished and each of the refinancing transactions would be treated as an entirely new loan; since the last three (3) refinancing agreements were executed subsequent to the enactment date of the Bankruptcy Code (11 USCS § 101 et seq.), and two (2) of those transactions were entered into subsequent to the Code’s effective date, October 1, 1979, the creditor was chargeable with notice of the applicable avoiding authority of the Code and the creditor’s nonpossessory, nonpurchase money lien on the debtor’s household goods was subject to avoidance. (decided under prior law) In re Calloway, 17 B.R. 212, 1982 Bankr. LEXIS 5045 (Bankr. W.D. Ky. 1982 ).

7.Separate Security Interests.

Where debtors executed a secured promissory note which included a future advances clause in favor of creditor prior to November 6, 1978, the date of the enactment of the Bankruptcy Reform Act of 1978 (11 USCS § 101 et seq.), and subsequently on March 27, 1979 the same parties executed another promissory note purportedly pledging the same collateral used to secure the first note, the differences in the terms and circumstances of the two (2) obligations and the fact that the second note made no reference whatsoever to the future advance clause contained in the previous agreement dictated a finding that two (2) separate and distinct security interests were intended by the parties, rather than a mere renewal of the original obligation; therefore, since the second transaction was consummated subsequent to the Bankruptcy Code’s enactment date, the creditor’s lien on the debtor’s household goods was subject to avoidance. (decided under prior law) In re Fulkerson, 17 B.R. 207, 1982 Bankr. LEXIS 5047 (Bankr. W.D. Ky. 1982 ).

8.Two-for-One Contracts.

Description in security agreement that included clause that stated “ . . . . . and all rights of the Debtor earned or yet to be earned under contracts to sell, or to render services, or any other contract rights, choses in action or general intangibles, of every kind whatsoever” was sufficient description to include “two-for-one contracts” as collateral securing interest of bank, even though such contracts were entered into subsequent to the filing of the security agreement. (decided under prior law) In re Padgett, 49 B.R. 212, 1985 Bankr. LEXIS 6230 (Bankr. W.D. Ky. 1985 ).

9.Release of Security Agreement.

Even though the security agreement was stamped “PAID,” the security agreement was never released because the debtor did in fact continue to borrow from the creditor and never abated its indebtedness to the creditor. (decided under prior law) First Nat'l Bank v. Citizens Deposit Bank & Trust, 735 S.W.2d 328, 1987 Ky. App. LEXIS 536 (Ky. Ct. App. 1987).

10.Personal Service Corporation.

Where debtor was the incorporator and sole shareholder of the corporate debtor and where the security agreement and financing statement clearly referred to the debtor’s dental practice, third parties could not fail to be put on notice that bank was claiming a security interest in personal property of the debtor as it related to his dental practice, whether he was identified as an individual or a personal services corporation; therefore, bank’s security interest attached in all the items covered by the security agreement. (decided under prior law) Estate of Conn by Bow v. First Nat'l Bank (In re Bush), 159 B.R. 209, 1993 Bankr. LEXIS 1419 (Bankr. E.D. Ky. 1993 ).

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

355.9-205. Use or disposition of collateral permissible.

  1. A security interest is not invalid or fraudulent against creditors solely because:
    1. The debtor has the right or ability to:
      1. Use, commingle, or dispose of all or part of the collateral, including returned or repossessed goods;
      2. Collect, compromise, enforce, or otherwise deal with collateral;
      3. Accept the return of collateral or make repossessions; or
      4. Use, commingle, or dispose of proceeds; or
    2. The secured party fails to require the debtor to account for proceeds or replace collateral.
  2. This section does not relax the requirements of possession if attachment, perfection, or enforcement of a security interest depends upon possession of the collateral by the secured party.

History. Enact. Acts 1958, ch. 77, § 9-205, effective July 1, 1960; 1986, ch. 118, § 62, effective July 1, 1987; repealed and reenact., Acts 2000, ch. 408, § 35, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-205.
  2. Validity of Unrestricted “Floating Lien.”  This article expressly validates the “floating lien” on shifting collateral. See Sections 9-201, 9-204, and Comment 2. This section provides that a security interest is not invalid or fraudulent by reason of the debtor’s liberty to dispose of the collateral without being required to account to the secured party for proceeds or substitute new collateral. As did former Section 9-205, this section repeals the rule of Benedict v. Ratner, 268 U.S. 353 (1925), and other cases which held such arrangements void as a matter of law because the debtor was given unfettered dominion or control over collateral. The Benedict rule did not effectively discourage or eliminate security transactions in inventory and receivables. Instead, it forced financing arrangements to be self-liquidating. Although this section repeals Benedict, the filing and other perfection requirements (see Part 3, Subpart 2, and Part 5) provide for public notice that overcomes any potential misleading effects of a debtor’s use and control of collateral. Moreover, nothing in this section prevents the debtor and secured party from agreeing to procedures by which the secured party polices or monitors collateral or to restrictions on the debtor’s dominion. However, this article leaves these matters to agreement based on business considerations, not on legal requirements.
  3. Possessory Security Interests.  Subsection (b) makes clear that this section does not relax the requirements for perfection by possession under Section 9-315. If a secured party allows the debtor access to and control over collateral its security interest may be or become unperfected.
  4. Permissible Freedom for Debtor to Enforce Collateral.  Former Section 9-205 referred to a debtor’s “liberty … to collect or compromise accounts or chattel paper.” This section recognizes the broader rights of a debtor to “enforce,” as well as to “collect” and “compromise” collateral. This section’s reference to collecting, compromising, and enforcing “collateral” instead of “accounts or chattel paper” contemplates the many other types of collateral that a debtor may wish to “collect, compromise, or enforce”: E.g., deposit accounts, documents, general intangibles, instruments, investment property, and letter-of-credit rights.

355.9-206. Security interest arising in purchase or delivery of financial asset.

  1. A security interest in favor of a securities intermediary attaches to a person’s security entitlement if:
    1. The person buys a financial asset through the securities intermediary in a transaction in which the person is obligated to pay the purchase price to the securities intermediary at the time of the purchase; and
    2. The securities intermediary credits the financial asset to the buyer’s securities account before the buyer pays the securities intermediary.
  2. The security interest described in subsection (1) of this section secures the person’s obligation to pay for the financial asset.
  3. A security interest in favor of a person that delivers a certificated security or other financial asset represented by a writing attaches to the security or other financial asset if:
    1. The security or other financial asset:
      1. In the ordinary course of business is transferred by delivery with any necessary indorsement or assignment; and
      2. Is delivered under an agreement between persons in the business of dealing with such securities or financial assets; and
    2. The agreement calls for delivery against payment.
  4. The security interest described in subsection (3) of this section secures the obligation to make payment for the delivery.

History. Enact. Acts 1958, ch. 77, § 9-206, effective July 1, 1960; 1964, ch. 130, § 22, effective July 1, 1964; repealed and reenact., Acts 2000, ch. 408, § 36, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-116.
  2. Codification of “Broker’s Lien.”  Depending upon a securities intermediary’s arrangements with its entitlement holders, the securities intermediary may treat the entitlement holder as entitled to financial assets before the entitlement holder has actually made payment for them. For example, many brokers permit retail customers to pay for financial assets by check. The broker may not receive final payment of the check until several days after the broker has credited the customer’s securities account for the financial assets. Thus, the customer will have acquired a security entitlement prior to payment. Subsection (a) provides that, in such circumstances, the securities intermediary has a security interest in the entitlement holder’s security entitlement. Under subsection (b) the security interest secures the customer’s obligation to pay for the financial asset in question. Subsections (a) and (b) codify and adapt to the indirect holding system the so-called “broker’s lien,” which has long been recognized. See Restatement, Security section 12.
  3. Financial Assets Delivered Against Payment.  Subsection (c) creates a security interest in favor of persons who deliver certificated securities or other financial assets in physical form, such as money market instruments, if the agreed payment is not received. In some arrangements for settlement of transactions in physical financial assets, the seller’s securities custodian will deliver physical certificates to the buyer’s securities custodian and receive a time-stamped delivery receipt. The buyer’s securities custodian will examine the certificate to ensure that it is in good order, and that the delivery matches a trade in which the buyer has instructed the seller to deliver to that custodian. If all is in order, the receiving custodian will settle with the delivering custodian through whatever funds settlement system has been agreed upon or is used by custom and usage in that market. The understanding of the trade, however, is that the delivery is conditioned upon payment, so that if payment is not made for any reason, the security will be returned to the deliverer. Subsection (c) clarifies the rights of persons making deliveries in such circumstances. It provides the person making delivery with a security interest in the securities or other financial assets; under subsection (d), the security interest secures the seller’s right to receive payment for the delivery. Section 8-301 specifies when delivery of a certificated security occurs; that section should be applied as well to other financial assets as well for purposes of this section.
  4. Automatic Attachment and Perfection.  Subsections (a) and (c) refer to attachment of a security interest. Attachment under this section has the same incidents (enforceability, right to proceeds, etc.) as attachment under Section 9-203. This section overrides the general attachment rules in Section 9-203. See Section 9-203(c). A securities intermediary’s security interest under subsection (a) is perfected by control without further action. See Section 8-106 (control); 9-314 (perfection). Security interests arising under subsection (c) are automatically perfected. See Section 9-309(9).

Subpart 2. Rights and Duties

355.9-207. Rights and duties of secured party having possession or control of collateral.

  1. Except as otherwise provided in subsection (4) of this section, a secured party shall use reasonable care in the custody and preservation of collateral in the secured party’s possession. In the case of chattel paper or an instrument, reasonable care includes taking necessary steps to preserve rights against prior parties unless otherwise agreed.
  2. Except as otherwise provided in subsection (4) of this section, if a secured party has possession of collateral:
    1. Reasonable expenses, including the cost of insurance and payment of taxes or other charges, incurred in the custody, preservation, use, or operation of the collateral are chargeable to the debtor and are secured by the collateral;
    2. The risk of accidental loss or damage is on the debtor to the extent of a deficiency in any effective insurance coverage;
    3. The secured party shall keep the collateral identifiable, but fungible collateral may be commingled; and
    4. The secured party may use or operate the collateral:
      1. For the purpose of preserving the collateral or its value;
      2. As permitted by an order of a court having competent jurisdiction; or
      3. Except in the case of consumer goods, in the manner and to the extent agreed by the debtor.
  3. Except as otherwise provided in subsection (4) of this section, a secured party having possession of collateral or control of collateral under KRS 355.7-106 , 355.9-104 , 355.9-105 , 355.9-106 , or 355.9-107 :
    1. May hold as additional security any proceeds, except money or funds, received from the collateral;
    2. Shall apply money or funds received from the collateral to reduce the secured obligation, unless remitted to the debtor; and
    3. May create a security interest in the collateral.
  4. If the secured party is a buyer of accounts, chattel paper, payment intangibles, or promissory notes or a consignor:
    1. Subsection (1) of this section does not apply unless the secured party is entitled under an agreement:
      1. To charge back uncollected collateral; or
      2. Otherwise to full or limited recourse against the debtor or a secondary obligor based on the nonpayment or other default of an account debtor or other obligor on the collateral; and
    2. Subsections (2) and (3) of this section do not apply.

History. Enact. Acts 1958, ch. 77, § 9-207; 1962, ch. 83, § 5; repealed and reenact., Acts 2000, ch. 408, § 37, effective July 1, 2001; 2012, ch. 132, § 63, effective July 1, 2013.

Official Comment

  1. Source.  Former Section 9-207.
  2. Duty of Care for Collateral in Secured Party’s Possession.  Like former Section 9-207, subsection (a) imposes a duty of care, similar to that imposed on a pledgee at common law, on a secured party in possession of collateral. See Restatement, Security §§  17 and 18. In many cases a secured party in possession of collateral may satisfy this duty by notifying the debtor of action that should be taken and allowing the debtor to take the action itself. If the secured party itself takes action, its reasonable expenses may be added to the secured obligation. The revised definitions of “collateral,” “debtor,” and “secured party” in Section 9-102 make this section applicable to collateral subject to an agricultural lien if the collateral is in the lienholder’s possession. Under Section 1-102 the duty to exercise reasonable care may not be disclaimed by agreement, although under that section the parties remain free to determine by agreement standards that are not manifestly unreasonable as to what constitutes reasonable care. Unless otherwise agreed, for a secured party in possession of chattel paper or an instrument, reasonable care includes the preservation of rights against prior parties. The secured party’s right to have instruments or documents indorsed or transferred to it or its order is dealt with in the relevant sections of Articles 3, 7, and 8. See Sections 3-201, 7-506, and 8-304(d).
  3. Specific Rules When Secured Party in Possession or Control of Collateral . Subsections (b) and (c) provide rules following common law precedents which apply unless the parties otherwise agree. The rules in subsection (b) apply to typical issues that may arise while a secured party is in possession of collateral, including expenses, insurance, and taxes, risk of loss or damage, identifiable and fungible collateral, and use or operation of collateral. Subsection (c) contains rules that apply in certain circumstances that may arise when a secured party is in either possession or control of collateral. These circumstances include the secured party’s receiving proceeds from the collateral and the secured party’s creation of a security interest in the collateral.
  4. Applicability Following Default.  This section applies when the secured party has possession of collateral either before or after default. See Sections 9-601(b), 9-609. Subsection (b)(4)(C) limits agreements concerning the use or operation of collateral to collateral other than consumer goods. Under Section 9-602(1), a debtor cannot waive or vary that limitation.
  5. “Repledges” and Right of Redemption.  Subsection (c)(3) eliminates the qualification in former section 9-207 to the effect that the terms of a “repledge” may not “impair” a debtor’s “right to redeem” collateral. The change is primarily for clarification. There is no basis on which to draw from subsection (c)(3) any inference concerning the debtor’s right to redeem the collateral. The debtor enjoys that right under section 9-623; this section need not address it. For example, if the collateral is a negotiable note that the secured party (SP-1) repledges to SP-2, nothing in this section suggests that the debtor (D) does not retain the right to redeem the note upon payment to SP-1 of all obligations secured by the note. But, as explained below, the debtor’s unimpaired right to redeem as against the debtor’s original secured party nevertheless may not be enforceable as against the new secured party.

    In resolving questions that arise from the creation of a security interest by SP-1, one must take care to distinguish D’s rights against SP-1 from D’s rights against SP-2. Once D discharges the secured obligation, D becomes entitled to the note; SP-1 has no legal basis upon which to withhold it. If, as a practical matter, SP-1 is unable to return the note because SP-2 holds it as collateral for SP-1’s unpaid debt, then SP-1 is liable to D under the law of conversion.

    Whether SP-2 would be liable to D depends on the relative priority of SP-2’s security interest and D’s interest. By permitting SP-1 to create a security interest in the collateral (repledge), subsection (c)(3) provides a statutory power for SP-1 to give SP-2 a security interest (subject, of course, to any agreement by SP-1 not to give a security interest). In the vast majority of cases where repledge rights are significant, the security interest of the second secured party, SP-2 in the example, will be senior to the debtor’s interest. By virtue of the debtor’s consent or applicable legal rules, SP-2 typically would cut off D’s rights in investment property or be immune from D’s claims. See Sections 3-306 and 9-331 (holder in due course), 8-303 (protected purchaser), 8-502 (acquisition of a security entitlement), and 8-503(e) (action by entitlement holder). Moreover, the expectations and business practices in some markets, such as the securities markets, are such that D’s consent to SP-2’s taking free of D’s rights inheres in D’s creation of SP-1’s security interest which gives rise to SP-1’s power under this section. In these situations, D would have no right to recover the collateral or recover damages from SP-2. Nevertheless, D would have a damage claim against SP-1 if SP-1 had given a security interest to SP-2 in breach of its agreement with D. Moreover, if SP-2’s security interest secures an amount that is less than the amount secured by SP-1’s security interest (granted by D), then D’s exercise of its right to redeem would provide value sufficient to discharge SP-1’s obligations to SP-2.

    For the most part this section does not change the law under former Section 9-207, although eliminating the reference to the debtor’s right of redemption may alter the secured party’s right to repledge in one respect. Former Section 9-207 could have been read to limit the secured party’s statutory right to repledge collateral to repledge transactions in which the collateral did not secure a greater obligation than that of the original debtor. Inasmuch as this is a matter normally dealt with by agreement between the debtor and secured party, any change would appear to have little practical effect.

  6. “Repledges” of Investment Property.  The following example will aid the discussion of “repledges” of investment property.
  7. Buyers of Chattel Paper and Other Receivables; Consignors.  This section has been revised to reflect the fact that a seller of accounts, chattel paper, payment intangibles, or promissory notes retains no interest in the collateral and so is not disadvantaged by the secured party’s noncompliance with the requirements of this section. Accordingly, subsection (d) provides that subsection (a) applies only to security interests that secure an obligation and to sales of receivables in which the buyer has recourse against the debtor. (Of course, a buyer of accounts or payment intangibles could not have “possession” of original collateral, but might have possession of proceeds, such as promissory notes or checks.) The meaning of “recourse” in this respect is limited to recourse arising out of the account debtor’s failure to pay or other default.

    Subsection (d) makes subsections (b) and (c) inapplicable to buyers of accounts, chattel paper, payment intangibles, or promissory notes and consignors. Of course, there is no reason to believe that a buyer of receivables or a consignor could not, for example, create a security interest or otherwise transfer an interest in the collateral, regardless of who has possession of the collateral. However, this section leaves the rights of those owners to law other than Article 9.

Example: Debtor grants Alpha Bank a security interest in a security entitlement that includes 1000 shares of XYZ Co. stock that Debtor holds through an account with Able & Co. Alpha does not have an account with Able. Alpha uses Beta Bank as its securities custodian. Debtor instructs Able to transfer the shares to Beta, for the account of Alpha, and Able does so. Beta then credits Alpha’s account. Alpha has control of the security entitlement for the 1000 shares under Section 8-106(d). (These are the facts of Example 2, Section 8-106, Comment 4.) Although, as between Debtor and Alpha, Debtor may have become the beneficial owner of the new securities entitlement with Beta, Beta has agreed to act on Alpha’s entitlement orders because, as between Beta and Alpha, Alpha has become the entitlement holder.

Next, Alpha grants Gamma Bank a security interest in the security entitlement with Beta that includes the 1000 shares of XYZ Co. stock. In order to afford Gamma control of the entitlement, Alpha instructs Beta to transfer the stock to Gamma’s custodian, Delta Bank, which credits Gamma’s account for 1000 shares. At this point Gamma holds its securities entitlement for its benefit as well as that of its debtor, Alpha. Alpha’s derivative rights also are for the benefit of Debtor.

In many, probably most, situations and at any particular point in time, it will be impossible for Debtor or Alpha to “trace” Alpha’s “repledge” to any particular securities entitlement or financial asset of Gamma or anyone else. Debtor would retain, of course, a right to redeem the collateral from Alpha upon satisfaction of the secured obligation. However, in the absence of a traceable interest, Debtor would retain only a personal claim against Alpha in the event Alpha failed to restore the security entitlement to Debtor. Moreover, even in the unlikely event that Debtor could trace a property interest, in the context of the financial markets, normally the operation of this section, Debtor’s explicit agreement to permit Alpha to create a senior security interest, or legal rules permitting Gamma to cut off Debtor’s rights or become immune from Debtor’s claims would effectively subordinate Debtor’s interest to the holder of a security interest created by Alpha. And, under the shelter principle, all subsequent transferees would obtain interests to which Debtor’s interest also would be subordinate.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

NOTES TO DECISIONS

1.Preservation of Rights Against Prior Parties.

Holder of collateral had duty to exercise ordinary diligence in prosecuting assigned claims and, if he failed to exercise it, he was liable to debtor for damages and debtor could plead the damages as a setoff or counterclaim. (decided under prior law) Charles I. Hudson & Co. v. Wood, 183 Ky. 16 , 208 S.W. 2, 1919 Ky. LEXIS 430 ( Ky. 1919 ).

Pledgee was a holder for value in the amount for which article was pledged and, in absence of an express agreement to sell, he was under a duty to enforce collection of a note and if he failed to use ordinary diligence to collect the note, he was liable to pledgor for loss. (decided under prior law) Erlanger Citizens Bank v. Williams, 286 Ky. 492 , 151 S.W.2d 381, 1941 Ky. LEXIS 300 ( Ky. 1941 ).

2.Default by Pledgor.

Pledgee could sell the property if pledgor defaulted. (decided under prior law) Byland v. Miller, 13 F. Supp. 137, 1936 U.S. Dist. LEXIS 1439 (D. Ky. 1936 ).

3.Wrongful Conversion.

The duty of the pledgee with collateral in its possession was to return to the pledgor the security pledged upon satisfaction or payment of the original debt and failure to do so amounted to a wrongful conversion of the security for which the pledgee was liable. (decided under prior law) Signer v. First Nat'l Bank & Trust Co., 455 F.2d 382, 1971 U.S. App. LEXIS 6557 (6th Cir. Ky. 1971 ).

4.Lack of Possession.

Where the terms and conditions of a continuing guaranty agreement executed by sureties made them jointly and severally liable for the full amount guaranteed and provided that the bank had no duty to enforce any right or pursue any remedy against debtor before looking to sureties for payment, and where bank never had possession of any assets other than accounts receivable, which it collected, sureties could not claim defense of impairment of collateral in action by bank against them. (decided under prior law) Kane v. Citizens Fidelity Bank & Trust Co., 668 S.W.2d 564, 1984 Ky. App. LEXIS 462 (Ky. Ct. App. 1984).

5.Impairment of Collateral.

Under KRS 355.3-606 (1)(b), a surety may be discharged when, without his consent, the creditor handles the collateral carelessly so as to reduce its value, make it unavailable to the surety, or otherwise impair the value of the security interest; in this respect, the creditor’s conduct with regard to the collateral is judged under the “reasonable care” standard of this section. (decided under prior law) Ramsey v. First Nat'l Bank & Trust Co., 683 S.W.2d 947, 1984 Ky. App. LEXIS 564 (Ky. Ct. App. 1984).

When a debtor pledged stock in his corporation as collateral for a loan from a bank, and defaulted on his agreement to maintain a certain loan-to-value ratio, which authorized the bank to sell the pledged stock, the bank was not required to sell the stock at a particular time, under KRS 355.9-207 . Layne v. Bank One, 395 F.3d 271, 2005 FED App. 0010P, 2005 U.S. App. LEXIS 332 (6th Cir. Ky. 2005 ).

Under Kentucky law a lender has no obligation to sell pledged stock held as collateral merely because of a market decline, and if the borrower is concerned with the decline in the share value, it is his responsibility, rather than that of the lender, to take appropriate remedial steps, such as paying off the loan in return for the collateral, substituting the pledged stock with other equally valued assets, or selling the pledged stock himself and paying off the loan. Layne v. Bank One, 395 F.3d 271, 2005 FED App. 0010P, 2005 U.S. App. LEXIS 332 (6th Cir. Ky. 2005 ).

Under Kentucky law, a lender is not under any duty or obligation to sell collateral in its possession merely because the collateral is declining in value, regardless of whether the loan is over-collateralized. Layne v. Bank One, 395 F.3d 271, 2005 FED App. 0010P, 2005 U.S. App. LEXIS 332 (6th Cir. Ky. 2005 ).

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-208. Additional duties of secured party having control of collateral.

  1. This section applies to cases in which there is no outstanding secured obligation and the secured party is not committed to make advances, incur obligations, or otherwise give value.
  2. Within ten (10) days after receiving an authenticated demand by the debtor:
    1. A secured party having control of a deposit account under KRS 355.9-104 (1)(b) shall send to the bank with which the deposit account is maintained an authenticated statement that releases the bank from any further obligation to comply with instructions originated by the secured party;
    2. A secured party having control of a deposit account under KRS 355.9-104 (1)(c) shall:
      1. Pay the debtor the balance on deposit in the deposit account; or
      2. Transfer the balance on deposit into a deposit account in the debtor’s name;
    3. A secured party, other than a buyer, having control of electronic chattel paper under KRS 355.9-105 shall:
      1. Communicate the authoritative copy of the electronic chattel paper to the debtor or its designated custodian;
      2. If the debtor designates a custodian that is the designated custodian with which the authoritative copy of the electronic chattel paper is maintained for the secured party, communicate to the custodian an authenticated record releasing the designated custodian from any further obligation to comply with instructions originated by the secured party and instructing the custodian to comply with instructions originated by the debtor; and
      3. Take appropriate action to enable the debtor or its designated custodian to make copies of or revisions to the authoritative copy which add or change an identified assignee of the authoritative copy without the consent of the secured party;
    4. A secured party having control of investment property under KRS 355.8-106 (4)(b) or 355.9-106 (2) shall send to the securities intermediary or commodity intermediary with which the security entitlement or commodity contract is maintained an authenticated record that releases the securities intermediary or commodity intermediary from any further obligation to comply with entitlement orders or directions originated by the secured party;
    5. A secured party having control of a letter-of-credit right under KRS 355.9-107 shall send to each person having an unfulfilled obligation to pay or deliver proceeds of the letter of credit to the secured party an authenticated release from any further obligation to pay or deliver proceeds of the letter of credit to the secured party; and
    6. A secured party having control of an electronic document shall:
      1. Give control of the electronic document to the debtor or its designated custodian;
      2. If the debtor designates a custodian that is the designated custodian with which the authoritative copy of the electronic document is maintained for the secured party, communicate to the custodian an authenticated record releasing the designated custodian from any further obligation to comply with instructions originated by the secured party and instructing the custodian to comply with instructions originated by the debtor; and
      3. Take appropriate action to enable the debtor or its designated custodian to make copies of or revisions to the authoritative copy which add or change an identified assignee of the authoritative copy without the consent of the secured party.

History. Enact. Acts 1958, ch. 77, § 9-208, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 38, effective July 1, 2001; repealed and reenact., Acts 2001, ch. 119, § 5, effective July 1, 2001; 2012, ch. 132, § 64, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  New.
  2. Scope and Purpose.  This section imposes duties on a secured party who has control of a deposit account, electronic chattel paper, investment property, or a letter-of-credit right. The duty to terminate the secured party’s control is analogous to the duty to file a termination statement, imposed by section 9-513. Under subsection (a), it applies only when there is no outstanding secured obligation and the secured party is not committed to give value. The requirements of this section can be varied by agreement under section 1-102(a)(3). For example, a debtor could by contract agree that the secured party may comply with subsection (b) by releasing control more than 10 days after demand. Also, duties under this section should not be read to conflict with the terms of the collateral itself. For example, if the collateral is a time deposit account, subsection (b)(2) should not require a secured party with control to make an early withdrawal of the funds (assuming that were possible) in order to pay them over to the debtor or put them in an account in the debtor’s name.
  3. Remedy for Failure to Relinquish Control.  If a secured party fails to comply with the requirements of subsection (b), the debtor has the remedy set forth in Section 9-625(e). This remedy is identical to that applicable to failure to provide or file a termination statement under Section 9-513.
  4. Duty to Relinquish Possession.  Although Section 9-207 addresses directly the duties of a secured party in possession of collateral, that section does not require the secured party to relinquish possession when the secured party ceases to hold a security interest. Under common law, absent agreement to the contrary, the failure to relinquish possession of collateral upon satisfaction of the secured obligation would constitute a conversion. Inasmuch as problems apparently have not surfaced in the absence of statutory duties under former Article 9 and the common law duty appears to have been sufficient, this article does not impose a statutory duty to relinquish possession.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Research References and Practice Aids

Kentucky Law Journal.

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

355.9-209. Duties of secured party if account debtor has been notified of assignment.

  1. Except as otherwise provided in subsection (3) of this section, this section applies if:
    1. There is no outstanding secured obligation; and
    2. The secured party is not committed to make advances, incur obligations, or otherwise give value.
  2. Within ten (10) days after receiving an authenticated demand by the debtor, a secured party shall send to an account debtor that has received notification of an assignment to the secured party as assignee under KRS 355.9-406 (1) an authenticated record that releases the account debtor from any further obligation to the secured party.
  3. This section does not apply to an assignment constituting the sale of an account, chattel paper, or payment intangible.

History. Enact. Acts 2000, ch. 408, § 39, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Scope and Purpose.  Like Sections 9-208 and 9-513, which require a secured party to relinquish control of collateral and to file or provide a termination statement for a financing statement, this section requires a secured party to free up collateral when there no longer is any outstanding secured obligation or any commitment to give value in the future. This section addresses the case in which account debtors have been notified to pay a secured party to whom the receivables have been assigned. It requires the secured party (assignee) to inform the account debtors that they no longer are obligated to make payment to the secured party. See subsection (b). It does not apply to account debtors whose obligations on an account, chattel paper, or payment intangible have been sold. See subsection (c).

355.9-210. Request for accounting — Request regarding list of collateral or statement of account.

  1. In this section:
    1. “Request” means a record of a type described in paragraph (b), (c), or (d) of this subsection.
    2. “Request for an accounting” means a record authenticated by a debtor requesting that the recipient provide an accounting of the unpaid obligations secured by collateral and reasonably identifying the transaction or relationship that is the subject of the request.
    3. “Request regarding a list of collateral” means a record authenticated by a debtor requesting that the recipient approve or correct a list of what the debtor believes to be the collateral securing an obligation and reasonably identifying the transaction or relationship that is the subject of the request.
    4. “Request regarding a statement of account” means a record authenticated by a debtor requesting that the recipient approve or correct a statement indicating what the debtor believes to be the aggregate amount of unpaid obligations secured by collateral as of a specified date and reasonably identifying the transaction or relationship that is the subject of the request.
  2. Subject to subsections (3), (4), (5), and (6) of this section, a secured party, other than a buyer of accounts, chattel paper, payment intangibles, or promissory notes or a consignor, shall comply with a request within fourteen (14) days after receipt:
    1. In the case of a request for an accounting, by authenticating and sending to the debtor an accounting; and
    2. In the case of a request regarding a list of collateral or a request regarding a statement of account, by authenticating and sending to the debtor an approval or correction.
  3. A secured party that claims a security interest in all of a particular type of collateral owned by the debtor may comply with a request regarding a list of collateral by sending to the debtor an authenticated record including a statement to that effect within fourteen (14) days after receipt.
  4. A person that receives a request regarding a list of collateral, claims no interest in the collateral when it receives the request, and claimed an interest in the collateral at an earlier time shall comply with the request within fourteen (14) days after receipt by sending to the debtor an authenticated record:
    1. Disclaiming any interest in the collateral; and
    2. If known to the recipient, providing the name and mailing address of any assignee of or successor to the recipient’s interest in the collateral.
  5. A person that receives a request for an accounting or a request regarding a statement of account, claims no interest in the obligations when it receives the request, and claimed an interest in the obligations at an earlier time shall comply with the request within fourteen (14) days after receipt by sending to the debtor an authenticated record:
    1. Disclaiming any interest in the obligations; and
    2. If known to the recipient, providing the name and mailing address of any assignee of or successor to the recipient’s interest in the obligations.
  6. A debtor is entitled without charge to one (1) response to a request under this section during any six (6) month period. The secured party may require payment of a charge not exceeding twenty-five dollars ($25) for each additional response.

History. Enact. Acts 2000, ch. 408, § 40, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-208.
  2. Scope and Purpose.  This section provides a procedure whereby a debtor may obtain from a secured party information about the secured obligation and the collateral in which the secured party may claim a security interest. It clarifies and resolves some of the issues that arose under former Section 9-208 and makes information concerning the secured indebtedness readily available to debtors, both before and after default. It applies to agricultural lien transactions (see the definitions of “debtor,” “secured party,” and “collateral” in Section 9-102), but generally not to sales of receivables. See subsection (b).
  3. Requests by Debtors Only.  A financing statement filed under part 5 may disclose only that a secured party may have a security interest in specified types of collateral. In most cases the financing statement will contain no indication of the obligation (if any) secured, whether any security interest actually exists, or the particular property subject to a security interest. Because creditors of and prospective purchasers from a debtor may have legitimate needs for more detailed information, it is necessary to provide a procedure under which the secured party will be required to provide information. On the other hand, the secured party should not be under a duty to disclose any details of the debtor’s financial affairs to any casual inquirer or competitor who may inquire. For this reason, this section gives the right to request information to the debtor only. The debtor may submit a request in connection with negotiations with subsequent creditors and purchasers, as well as for the purpose of determining the status of its credit relationship or demonstrating which of its assets are free of a security interest.
  4. Permitted Types of Requests for Information.  Subsection (a) contemplates that a debtor may request three types of information by submitting three types of “requests” to the secured party. First, the debtor may request the secured party to prepare and send an “accounting” (defined in Section 9-102). Second, the debtor may submit to the secured party a list of collateral for the secured party’s approval or correction. Third, the debtor may submit to the secured party for its approval or correction a statement of the aggregate amount of unpaid secured obligations. Inasmuch as a secured party may have numerous transactions and relationships with a debtor, each request must identify the relevant transactions or relationships. Subsections (b) and (c) require the secured party to respond to a request within 14 days following receipt of the request.
  5. Recipients Claiming No Interest in the Transaction.  A debtor may be unaware that a creditor with whom it has dealt has assigned its security interest or the secured obligation. Subsections (d) and (e) impose upon recipients of requests under this section the duty to inform the debtor that they claim no interest in the collateral or secured obligation, respectively, and to inform the debtor of the name and mailing address of any known assignee or successor. As under subsections (b) and (c), a response to a request under subsection (d) or (e) is due 14 days following receipt.
  6. Waiver; Remedy for Failure to Comply.  The debtor’s rights under this section may not be waived or varied. See Section 9-602(2). Section 9-625 sets forth the remedies for noncompliance with the requirements of this section.
  7. Limitation on Free Responses to Requests.  Under subsection (f), during a six-month period a debtor is entitled to receive from the secured party one free response to a request. The debtor is not entitled to a free response to each type of request (i.e., three free responses) during a six-month period.

Part 3. Perfection and Priority

Subpart 1. Law Governing Perfection and Priority

355.9-301. Law governing perfection and priority of security interests.

Except as otherwise provided in KRS 355.9-303 to 355.9-306 , the following rules determine the law governing perfection, the effect of perfection or nonperfection, and the priority of a security interest in collateral:

  1. Except as otherwise provided in this section, while a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in collateral.
  2. While collateral is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a possessory security interest in that collateral.
  3. Except as otherwise provided in subsection (4) of this section, while tangible negotiable documents, goods, instruments, money, or tangible chattel paper is located in a jurisdiction, the local law of that jurisdiction governs:
    1. Perfection of a security interest in the goods by filing a fixture filing;
    2. Perfection of a security interest in timber to be cut; and
    3. The effect of perfection or nonperfection and the priority of a nonpossessory security interest in the collateral.
  4. The local law of the jurisdiction in which the wellhead or minehead is located governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in as-extracted collateral.

History. Enact. Acts 1958, ch. 77, § 9-301; 1962, ch. 83, § 6; 1982, ch. 199, § 1, effective July 15, 1982; 1986, ch. 118, § 63, effective July 1, 1987; 1996, ch. 130, § 171, effective January 1, 1997; repealed and reenact., Acts 2000, ch. 408, § 41, effective July 1, 2001; 2012, ch. 132, § 65, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  Former Sections 9-103(1)(a) and (b), 9-103(3)(a) and (b), and 9-103(5), substantially modified.
  2. Scope of this Subpart.  Part 3, Subpart 1 (Sections 9-301 through 9-307) contains choice-of-law rules similar to those of former Section 9-103. Former Section 9-103 generally addresses which State’s law governs “perfection and the effect of perfection or non-perfection of” security interests. See, e.g., former Section 9-103(1)(b). This Article follows the broader and more precise formulation in former Section 9-103(6)(b), which was revised in connection with the promulgation of Revised Article 8 in 1994: “perfection, the effect of perfection or non-perfection, and the priority of” security interests. Priority, in this context, subsumes all of the rules in Part 3, including “cut off” or “take free” rules such as Sections 9-317(b), (c), and (d), 9-320(a), (b), and (d), and 9-332. This subpart does not address choice of law for other purposes. For example, the law applicable to issues such as attachment, validity, characterization (e.g., true lease or security interest), and enforcement is governed by the rules in Section 1-105; that governing law typically is specified in the same agreement that contains the security agreement. And, another jurisdiction’s law may govern other third-party matters addressed in this Article. See Section 9-401, Comment 3.
  3. Scope of Referral.  In designating the jurisdiction whose law governs, this article directs the court to apply only the substantive (“local”) law of a particular jurisdiction and not its choice of law rules.
  4. Law Governing Perfection: General Rule.  Paragraph (1) contains the general rule: the law governing perfection of security interests in both tangible and intangible collateral, whether perfected by filing or automatically, is the law of the jurisdiction of the debtor’s location, as determined under Section 9-307.

    Paragraph (1) substantially simplifies the choice-of-law rules. Former Section 9-103 contained different choice-of-law rules for different types of collateral. Under Section 9-301(1), the law of a single jurisdiction governs perfection with respect to most types of collateral, both tangible and intangible. Paragraph (1) eliminates the need for former Section 9-103(1)(c), which concerned purchase-money security interests in tangible collateral that is intended to move from one jurisdiction to the other. It is likely to reduce the frequency of cases in which the governing law changes after a financing statement is properly filed. (Presumably, debtors change their own location less frequently than they change the location of their collateral.) The approach taken in paragraph (1) also eliminates some difficult priority issues and the need to distinguish between “mobile” and “ordinary” goods, and it reduces the number of filing offices in which secured parties must file or search when collateral is located in several jurisdictions.

  5. Law Governing Perfection: Exceptions.  The general rule is subject to several exceptions. It does not apply to goods covered by a certificate of title (see Section 9-303), deposit accounts (see Section 9-304), investment property (see Section 9-305), or letter-of-credit rights (see Section 9-306). Nor does it apply to possessory security interests, i.e., security interests that the secured party has perfected by taking possession of the collateral (see paragraph (2)), security interests perfected by filing a fixture filing (see subparagraph (3)(A)), security interests in timber to be cut (subparagraph (3)(B)), or security interests in as-extracted collateral (see paragraph (4)).
    1. Possessory Security Interests.  Paragraph (2) applies to possessory security interests and provides that perfection is governed by the local law of the jurisdiction in which the collateral is located. This is the rule of former Section 9-103(1)(b), except paragraph (2) eliminates the troublesome “last event” test of former law.

      The distinction between nonpossessory and possessory security interests creates the potential for the same jurisdiction to apply two different choice-of-law rules to determine perfection in the same collateral. For example, were a secured party in possession of an instrument or document to relinquish possession in reliance on temporary perfection, the applicable law immediately would change from that of the location of the collateral to that of the location of the debtor. The applicability of two different choice-of-law rules for perfection is unlikely to lead to any material practical problems. The perfection rules of one Article 9 jurisdiction are likely to be identical to those of another. Moreover, under paragraph (3), the relative priority of competing security interests in tangible collateral is resolved by reference to the law of the jurisdiction in which the collateral is located, regardless of how the security interests are perfected.

    2. Fixtures.  Application of the general rule in paragraph (1) to perfection of a security interest in fixtures would yield strange results. For example, perfection of a security interest in fixtures located in Arizona and owned by a Delaware corporation would be governed by the law of Delaware. Although Delaware law would send one to a filing office in Arizona for the place to file a financing statement as a fixture filing, see Section 9-501, Delaware law would not take account of local, nonuniform, real-property filing and recording requirements that Arizona law might impose. For this reason, paragraph (3)(A) contains a special rule for security interests perfected by a fixture filing; the law of the jurisdiction in which the fixtures are located governs perfection, including the formal requisites of a fixture filing. Under paragraph (3)(C), the same law governs priority. Fixtures are “goods” as defined in Section 9-102.
    3. Timber to Be Cut.  Application of the general rule in paragraph (1) to perfection of a security interest in timber to be cut would yield undesirable results analogous to those described with respect to fixtures. Paragraph (3)(B) adopts a similar solution: perfection is governed by the law of the jurisdiction in which the timber is located. As with fixtures, under paragraph (3)(C), the same law governs priority. Timber to be cut also is “goods” as defined in Section 9-102.

      Paragraph (3)(B) applies only to “timber to be cut,” not to timber that has been cut. Consequently, once the timber is cut, the general choice-of-law rule in paragraph (1) becomes applicable. To ensure continued perfection, a secured party should file in both the jurisdiction in which the timber to be cut is located and in the state where the debtor is located. The former filing would be with the office in which a real property mortgage would be filed, and the latter would be a central filing. See Section 9-501.

    4. As-Extracted Collateral.  Paragraph (4) adopts the rule of former Section 9-103(5) with respect to certain security interests in minerals and related accounts. Like security interests in fixtures perfected by filing a fixture filing, security interests in minerals that are as-extracted collateral are perfected by filing in the office designated for the filing or recording of a mortgage on the real property. For the same reasons, the law governing perfection and priority is the law of the jurisdiction in which the wellhead or minehead is located.
  6. Change in Law Governing Perfection.  When the debtor changes its location to another jurisdiction, the jurisdiction whose law governs perfection under paragraph (1) changes, as well. Similarly, the law governing perfection of a possessory security interest in collateral under paragraph (2) changes when the collateral is removed to another jurisdiction. Nevertheless, these changes will not result in an immediate loss of perfection. See Section 9-316(a), (b).
  7. Law Governing Effect of Perfection and Priority: Goods, Documents, Instruments, Money, Negotiable Documents, and Tangible Chattel Paper.  Under former Section 9-103, the law of a single jurisdiction governed both questions of perfection and those of priority. This Article generally adopts that approach. See paragraph (1). But the approach may create problems if the debtor and collateral are located in different jurisdictions. For example, assume a security interest in equipment located in Pennsylvania is perfected by filing in Illinois, where the debtor is located. If the law of the jurisdiction in which the debtor is located were to govern priority, then the priority of an execution lien on goods located in Pennsylvania would be governed by rules enacted by the Illinois legislature.

    To address this problem, paragraph (3)(C) divorces questions of perfection from questions of “the effect of perfection or nonperfection and the priority of a security interest.” Under paragraph (3)(C), the rights of competing claimants to tangible collateral are resolved by reference to the law of the jurisdiction in which the collateral is located. A similar bifurcation applied to security interests in investment property under former Section 9-103(6). See Section 9-305.

    Paragraph (3)(C) applies the law of the situs to determine priority only with respect to goods (including fixtures), instruments, money, negotiable documents, and tangible chattel paper. Compare former Section 9-103(1), which applied the law of the location of the collateral to documents, instruments, and “ordinary” (as opposed to “mobile”) goods. This Article does not distinguish among types of goods. The ordinary/mobile goods distinction appears to address concerns about where to file and search, rather than concerns about priority. There is no reason to preserve this distinction under the bifurcated approach.

    Particularly serious confusion may arise when the choice-of-law rules of a given jurisdiction result in each of two competing security interests in the same collateral being governed by a different priority rule. The potential for this confusion existed under former Section 9-103(4) with respect to chattel paper: Perfection by possession was governed by the law of the location of the paper, whereas perfection by filing was governed by the law of the location of the debtor. Consider the mess that would have been created if the language or interpretation of former Section 9-308 were to differ in the two relevant States, or if one of the relevant jurisdictions (e.g., a foreign country) had not adopted Article 9. The potential for confusion could have been exacerbated when a secured party perfected both by taking possession in the State where the collateral is located (State A) and by filing in the State where the debtor is located (State B)—a common practice for some chattel paper financers. By providing that the law of the jurisdiction in which the collateral is located governs priority, paragraph (3) substantially diminishes this problem.

  8. Non-U.S. Debtors.  This Article applies the same choice-of-law rules to all debtors, foreign and domestic. For example, it adopts the bifurcated approach for determining the law applicable to security interests in goods and other tangible collateral. See Comment 5.a., above. The Article contains a new rule specifying the location of non-U.S. debtors for purposes of this Part. The rule appears in Section 9-307 and is explained in the Reporters’ Comments following that section. Former Section 9-103(3)(c), which contained a special choice-of-law rule governing security interests created by debtors located in a non-U.S. jurisdiction, proved unsatisfactory and was deleted.

Example 1: Litigation over the priority of a security interest in accounts arises in State X. State X has adopted the official text of this Article, which provides that priority is determined by the local law of the jurisdiction in which the debtor is located. See Section 9-301(1). The debtor is located in State Y. Even if State Y has retained former Article 9 or enacted a nonuniform choice-of-law rule (e.g., one that provides that perfection is governed by the law of State Z), a State X court should look only to the substantive law of State Y and disregard State Y’s choice-of-law rule. State Y’s substantive law (e.g., its Section 9-501) provides that financing statements should be filed in a filing office in State Y. Note, however, that if the identical perfection issue were to be litigated in State Y, the court would look to State Y’s former Section 9-103 or nonuniform 9-301 and conclude that a filing in State Y is ineffective.

Example 2: In the preceding Example, assume that State X has adopted the official text of this Article, and State Y has adopted a nonuniform Section 9-301(1) under which perfection is governed by the whole law of State X, including its choice-of-law rules. If litigation occurs in State X, the court should look to the substantive law of State Y, which provides that financing statements are to be filed in a filing office in State Y. If litigation occurs in State Y, the court should look to the law of State X, whose choice-of-law rule requires that the court apply the substantive law of State Y. Thus, regardless of the jurisdiction in which the litigation arises, the financing statement should be filed in State Y.

NOTES TO DECISIONS

1.Relating to Another Jurisdiction.

If recordation of conditional sale of automobile was required in state in which contract was made, a failure to observe this was fatal to seller’s remedy against innocent purchaser of creditor in Kentucky. (decided under prior law) Fry Bros. v. Theobold, 205 Ky. 146 , 265 S.W. 498, 1924 Ky. LEXIS 63 ( Ky. 1924 ).

Recording statute imposed no duty on the conditional seller who held valid title in a different state to record the contract in Kentucky, so he was not estopped to recover automobile from a bona fide purchaser in Kentucky. (decided under prior law) Fry Bros. v. Theobold, 205 Ky. 146 , 265 S.W. 498, 1924 Ky. LEXIS 63 ( Ky. 1924 ).

2.Legislative Intent.

Former KRS 355.9-103 (4) embodied and codified the legislative intent to eliminate conflict of laws problems and assure that the domestic law of a single jurisdiction will apply to a given security transaction regardless of the forum in which the case is litigated. (decided under prior law) In re McGrew, 20 B.R. 264, 1981 Bankr. LEXIS 2998 (Bankr. W.D. Ky. 1981 ).

3.Priority of Security Interests.

The fact that debtor had equipment in, and had done excavating in the state was not sufficient evidence by itself to allow the trial court to determine that Kentucky was the debtor’s seat of operations for the purpose of determining the priority of security interests in equipment in a multistate transaction. (decided under prior law) Westinghouse Credit Corp. v. Rovi Property & Management Corp., 607 S.W.2d 682, 1980 Ky. App. LEXIS 379 (Ky. Ct. App. 1980).

4.Perfection Noted on Title Certificate.

Where debtors, Kentucky residents, purchased a semi-trailer vehicle in Indiana, entering into a retail installment contract whereby a purchase money security interest was retained in the vehicle, and creditor was aware of debtors’ Kentucky residence but was under the impression that the debtor-husband was employed in Indiana, the vehicle to be used by him pursuant to his employment, creditor’s purchase money security interest was perfected under the law of Indiana by notation on the certificate of title, and remained perfected in all respects when the vehicle was subsequently removed to Kentucky. (decided under prior law) In re McGrew, 20 B.R. 264, 1981 Bankr. LEXIS 2998 (Bankr. W.D. Ky. 1981 ).

Opinions of Attorney General.

Where a security instrument has previously been filed on a vehicle in another state, the secured party should send the certificate of title and the financing statement to the county clerk of the county in which the purchaser resides and request him to contact the purchaser about licensing the automobile in Kentucky; when the purchaser appears, the clerk will file the financing statement, issue the license and note the security interest interest upon the license receipt he issues. OAG 63-939 .

The lienholder on a truck which belonged to a Kentucky resident debtor but was used, titled and subject to a security agreement in Indiana would not have to file the Indiana security agreement in Kentucky under the provisions of former KRS 355.9-103 (4) even if the truck should be required to be licensed in Kentucky due to the operation of the truck there for more than five (5) days, under the express language of subsection (2)(a) of KRS 186.045 . OAG 81-369 (Opinion prior to 1986 amendment of KRS 186.045 ).

Crops brought into the Commonwealth on which a security interest had attached would generally be governed by the law of the state in which the lien attached, rather than by the provisions of KRS 355.9-307 (3). This determination would have to be made on a case-by-case basis, however. OAG 82-503 .

If the state into which a grain crop from Kentucky is sold has a provision similar to this section, then it is possible that former KRS 355.9-307 (3), may be applicable. The exact determination would have to be made on a case-by-case basis considering the facts of the case and the law of the states involved. OAG 82-503 .

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Kentucky Law Journal.

Lester, Security Interests in Thoroughbred and Standardbred Horses: A Transactional Approach, 70 Ky. L.J. 1065 (1981-82).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

Hakes, A Quest for Justice in the Conversion of Security Interests, 82 Ky. L.J. 837 (1993-94).

355.9-302. Law governing perfection and priority of agricultural liens.

While farm products are located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of an agricultural lien on the farm products.

History. Enact. Acts 1958, ch. 77, § 9-302, effective July 1, 1960; 1964, ch. 118, § 1; 1966, ch. 164, § 1; 1968, ch. 50, § 1; 1986, ch. 118, § 64, effective July 1, 1987; 1996, ch. 130, § 172, effective January 1, 1997; repealed and reenact., Acts 2000, ch. 408, § 42, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Agricultural Liens.  This section provides choice of law rules for agricultural liens on farm products. Perfection, the effect of perfection or nonperfection, and priority all are governed by the law of the jurisdiction in which the farm products are located. Other choice of law rules, including Section 1-105, determine which jurisdiction’s law governs other matters, such as the secured party’s rights on default. See Section 9-301, comment 2. Inasmuch as no agricultural lien on proceeds arises under this article, this section does not expressly apply to proceeds of agricultural liens. However, if another statute creates an agricultural lien on proceeds, it may be appropriate for courts to apply the choice of law rule in this section to determine priority in the proceeds.

NOTES TO DECISIONS

1.Transferee of Standing Timber.

Where grantee, who had received all the trees that had been branded as of that date to be removed within ten years by a conveyance in the form of a deed, after recording the deed, indorsed on the bank of the deed all his right, title and interest to a third party, although the indorsement was a valid sale effective between the parties under law providing that contract for sale of standing timber must be in writing, the sale was of real estate and not personalty because of the ten-year period allowed for cutting, but even if the sale had been regarded as a sale of personalty, where indorsee failed to record the indorsement or rebrand or have the trees rebranded with his brand, the title was not perfected in the indorsee so as to protect him against the rights of a subsequent innocent purchaser for value from the original grantee when the purchaser recorded his deed which was in a form similar to the deed in which grantee received his interest. (decided under prior law) V. Bowerman & Co. v. Taylor, 127 Ky. 812 , 106 S.W. 846, 32 Ky. L. Rptr. 671 , 1908 Ky. LEXIS 23 ( Ky. 1908 ).

2.Interest in Crops.

Where the plaintiff secured a promissory note, security agreement and financing statement from an individual covering proceeds of crops and where the defendant subsequently advanced the same individual money to grow, harvest and sell the same crops, but failed to file a mortgage, security agreement or financing statement in the county clerk’s office, the defendant failed to perfect its interest in the crops for new value and the plaintiff was entitled to a first lien on the proceeds of the crops. (decided under prior law) United Tobacco Warehouse Co. v. Wells, 490 S.W.2d 152, 1973 Ky. LEXIS 611 ( Ky. 1973 ).

3.Possession.

Possession is a course of conduct, not an act and possession sufficient to dispense with the recording requirement must be unequivocal, absolute and notorious. (decided under prior law) Hutchison v. C.I.T. Corp., 576 F. Supp. 1, 1982 U.S. Dist. LEXIS 17609 (W.D. Ky. 1982 ), aff'd, 726 F.2d 300, 1984 U.S. App. LEXIS 25658 (6th Cir. Ky. 1984 ).

The evidence did not support the creditor tobacco warehouse’s claim that its crop money lien was perfected by “possession” when the debtors delivered their tobacco to the warehouse for purpose of selling the collateral at the seasonal auctions held by the warehouse, since no evidence was offered by the warehouse to show the necessary dominion and control over the property required for “possession” at common law, and the record also failed to show debtors’ relinquishment of control to accept or reject bids at the auction when the collateral was physically possessed by the creditor warehouse. (decided under prior law) In re Rogers, 39 B.R. 295, 1984 Bankr. LEXIS 6096 (Bankr. W.D. Ky. 1984 ).

Research References and Practice Aids

Kentucky Bench & Bar.

Schneiter, Equine Statutory Liens, Vol. 67, No. 4, July 2003, Ky. Bench & Bar 23.

Kentucky Law Journal.

Lester, Security Interests in Thoroughbred and Standardbred Horses: A Transactional Approach, 70 Ky. L.J. 1065 (1981-82).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Bland, Insolvencies in Farming and Agribusinesses, 73 Ky. L.J. 795 (1984-85).

355.9-303. Law governing perfection and priority of security interests in goods covered by a certificate of title.

  1. This section applies to goods covered by a certificate of title, even if there is no other relationship between the jurisdiction under whose certificate of title the goods are covered and the goods or the debtor.
  2. Goods become covered by a certificate of title when a valid application for the certificate of title and the applicable fee are delivered to the appropriate authority. Goods cease to be covered by a certificate of title at the earlier of the time the certificate of title ceases to be effective under the law of the issuing jurisdiction or the time the goods become covered subsequently by a certificate of title issued by another jurisdiction.
  3. The local law of the jurisdiction under whose certificate of title the goods are covered governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in goods covered by a certificate of title from the time the goods become covered by the certificate of title until the goods cease to be covered by the certificate of title.

History. Enact. Acts 1958, ch. 77, § 9-303, effective July 1, 1960; 1996, ch. 130, § 173, effective January 1, 1997; repealed and reenact., Acts 2000, ch. 408, § 43, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-103(2)(a) and (b), substantially revised.
  2. Scope of This Section.  This section applies to “goods covered by a certificate of title.” The new definition of “certificate of title” in Section 9-102 makes clear that this section applies not only to certificate-of-title statutes under which perfection occurs upon notation of the security interest on the certificate but also to those that contemplate notation but provide that perfection is achieved by another method, e.g., delivery of designated documents to an official. Subsection (a), which is new, makes clear that this section applies to certificates of a jurisdiction having no other contacts with the goods or the debtor. This result comports with most of the reported cases on the subject and with contemporary business practices in the trucking industry.
  3. Law Governing Perfection and Priority.  Subsection (c) is the basic choice of law rule for goods covered by a certificate of title. Perfection and priority of a security interest are governed by the law of the jurisdiction under whose certificate of title the goods are covered from the time the goods become covered by the certificate of title until the goods cease to be covered by the certificate of title.

    Normally, under the law of the relevant jurisdiction, the perfection step would consist of compliance with that jurisdiction’s certificate-of-title statute and a resulting notation of the security interest on the certificate of title. See Section 9-311(b). In the typical case of an automobile or over-the-road truck, a person who wishes to take a security interest in the vehicle can ascertain whether it is subject to any security interests by looking at the certificate of title. But certificates of title cover certain types of goods in some states but not in others. A secured party who does not realize this may extend credit and attempt to perfect by filing in the jurisdiction in which the debtor is located. If the goods had been titled in another jurisdiction, the lender would be unperfected.

    Subsection (b) explains when goods become covered by a certificate of title and when they cease to be covered. Goods may become covered by a certificate of title, even though no certificate of title has issued. Former Section 9-103(2)(b) provided that the law of the jurisdiction issuing the certificate ceases to apply upon “surrender” of the certificate. This article eliminates the concept of “surrender.” However, if the certificate is surrendered in conjunction with an appropriate application for a certificate to be issued by another jurisdiction, the law of the original jurisdiction ceases to apply because the goods became covered subsequently by a certificate of title from another jurisdiction. Alternatively, the law of the original jurisdiction ceases to apply when the certificate “ceases to be effective” under the law of that jurisdiction. Given the diversity in certificate-of-title statutes, the term “effective” is not defined.

  4. Continued Perfection.  The fact that the law of one state ceases to apply under subsection (b) does not mean that a security interest perfected under that law becomes unperfected automatically. In most cases, the security interest will remain perfected. See Section 9-316(d) and (e). Moreover, a perfected security interest may be subject to defeat by certain buyers and secured parties. See Section 9-337.
  5. Inventory.  Compliance with a certificate-of-title statute generally is not the method of perfecting security interests in inventory. Section 9-311(d) provides that a security interest created in inventory held by a person in the business of selling goods of that kind is subject to the normal filing rules; compliance with a certificate-of-title statute is not necessary or effective to perfect the security interest. Most certificate-of-title statutes are in accord.

    The following example explains the subtle relationship between this rule and the choice-of-law rules in Section 9-303 and former Section 9-103(2):

  6. External Constraints on This Section.  The need to coordinate article 9 with a variety of nonuniform certificate-of-title statutes, the need to provide rules to take account of situations in which multiple certificates of title are outstanding with respect to particular goods, and the need to govern the transition from perfection by filing in one jurisdiction to perfection by notation in another all create pressure for a detailed and complex set of rules. In an effort to minimize complexity, this article does not attempt to coordinate article 9 with the entire array of certificate-of-title statutes. In particular, Sections 9-303, 9-311, and 9-316(d) and (e) assume that the certificate-of-title statutes to which they apply do not have relation-back provisions (i.e., provisions under which perfection is deemed to occur at a time earlier than when the perfection steps actually are taken). A legislative note to Section 9-311 recommends the elimination of relation-back provisions in certificate-of-title statutes affecting perfection of security interests.

    Ideally, at any given time, only one certificate of title is outstanding with respect to particular goods. In fact, however, sometimes more than one jurisdiction issues more than one certificate of title with respect to the same goods. This situation results from defects in certificate-of-title laws and the interstate coordination of those laws, not from deficiencies in this article. As long as the possibility of multiple certificates of title remains, the potential for innocent parties to suffer losses will continue. At best, this article can identify clearly which innocent parties will bear the losses in familiar fact patterns.

Example: Goods are located in State A and covered by a certificate of title issued under the law of State A. The State A certificate of title is “clean”; it does not reflect a security interest. Owner takes the goods to State B and sells (trades in) the goods to Dealer, who is in the business of selling goods of that kind and is located (within the meaning of section 9-307) in State B. As is customary, Dealer retains the duly assigned State A certificate of title pending resale of the goods. Dealer’s inventory financer, SP, obtains a security interest in the goods under its after-acquired property clause.

Under Section 9-311(d) of both State A and State B, Dealer’s inventory financer, SP, must perfect by filing instead of complying with a certificate-of-title statute. If Section 9-303 were read to provide that the law applicable to perfection of SP’s security interest is that of State A, because the goods are covered by a State A certificate, then SP would be required to file in State A under State A’s Section 9-501. That result would be anomalous, to say the least, since the principle underlying Section 9-311(d) is that the inventory should be treated as ordinary goods.

Section 9-303 (and former Section 9-103(2)) should be read as providing that the law of State B, not State A, applies. A court looking to the forum’s Section 9-303(a) would find that Section 9-303 applies only if two conditions are met: (i) The goods are covered by the certificate as explained in Section 9-303(b), i.e., application had been made for a State (here, State A) to issue a certificate of title covering the goods and (ii) the certificate is a “certificate of title” as defined in Section 9-102, i.e., “a statute provides for the security interest in question to be indicated on the certificate as a condition or result of the security interest’s obtaining priority over the rights of a lien creditor.” Stated otherwise, Section 9-303 applies only when compliance with a certificate-of-title statute, and not filing, is the appropriate method of perfection. Under the law of State A, for purposes of perfecting SP’s security interest in the dealer’s inventory, the proper method of perfection is filing—not compliance with State A’s certificate-of-title statute. For that reason, the goods are not covered by a “certificate of title,” and the second condition is not met. Thus, Section 9-303 does not apply to the goods. Instead, Section 9-301 applies, and the applicable law is that of State B, where the debtor (dealer) is located.

NOTES TO DECISIONS

1.Motor Vehicles.

Proper filing of automobile financing statement perfects security interest and places subsequent repairmen on constructive notice. (decided under prior law) Corbin Deposit Bank v. King, 384 S.W.2d 302, 1964 Ky. LEXIS 83 ( Ky. 1964 ).

Where the debtor’s bank had filed and perfected its security interest in the debtor’s assets under KRS 355.9-312 (5)(a), (7), 355.9-303 , 355.9-203 , before the debtor’s shareholders sold their stock to the debtor and took a security interest in the debtor’s assets, the bank held a perfected, first, and prior lien on the debtor’s assets; a subordination provision in the stock purchase agreement between the debtor and the former shareholders, to which the bank was not a party, was not binding on the bank. Ralph v. Stock Yards Bank & Trust Co. (In re Kentuckiana Truck & Trailer Repair, Inc.), 291 B.R. 84, 2002 Bankr. LEXIS 1678 (Bankr. W.D. Ky. 2002 ).

2.Transfer.

Any collateral transferred from predecessor to debtor would be subject to bank’s security interest, which was perfected by financing statement. (decided under prior law) Bluegrass Ford-Mercury, Inc. v. Farmers Nat'l Bank, 942 F.2d 381, 1991 U.S. App. LEXIS 19123 (6th Cir. Ky. 1991 ).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Northern Kentucky Law Review.

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

355.9-304. Law governing perfection and priority of security interests in deposit accounts.

  1. The local law of a bank’s jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in a deposit account maintained with that bank.
  2. The following rules determine a bank’s jurisdiction for purposes of this part of this article:
    1. If an agreement between the bank and its customer governing the deposit account expressly provides that a particular jurisdiction is the bank’s jurisdiction for purposes of this part of this article, this article, or this chapter, that jurisdiction is the bank’s jurisdiction.
    2. If paragraph (a) of this subsection does not apply and an agreement between the bank and its customer governing the deposit account expressly provides that the agreement is governed by the law of a particular jurisdiction, that jurisdiction is the bank’s jurisdiction.
    3. If neither paragraph (a) nor (b) of this subsection applies and an agreement between the bank and its customer governing the deposit account expressly provides that the deposit account is maintained at an office in a particular jurisdiction, that jurisdiction is the bank’s jurisdiction.
    4. If none of the preceding paragraphs applies, the bank’s jurisdiction is the jurisdiction in which the office identified in an account statement as the office serving the customer’s account is located.
    5. If none of the preceding paragraphs applies, the bank’s jurisdiction is the jurisdiction in which the chief executive office of the bank is located.

History. Enact. Acts 1958, ch. 77, § 9-304, effective July 1, 1960; 1986, ch. 118, § 65, effective July 1, 1987; 1996, ch. 130, § 174, effective January 1, 1997; repealed and reenact., Acts 2000, ch. 408, § 44, effective July 1, 2001; 2006, ch. 242, § 58, effective July 12, 2006.

Official Comment

  1. Source.  New; derived from Section 8-110(e) and former Section 9-103(6).
  2. Deposit Accounts.  Under this section, the law of the “bank’s jurisdiction” governs perfection and priority of a security interest in deposit accounts. Subsection (b) contains rules for determining the “bank’s jurisdiction.” The substance of these rules is substantially similar to that of the rules determining the “security intermediary’s jurisdiction” under former Section 8-110(e), except that subsection (b)(1) provides more flexibility than the analogous provision in former Section 8-110(e)(1). Subsection (b)(1) permits the parties to choose the law of one jurisdiction to govern perfection and priority of security interests and a different governing law for other purposes. The parties’ choice is effective, even if the jurisdiction whose law is chosen bears no relationship to the parties or the transaction. Section 8-110(e)(1) has been conformed to subsection (b)(1) of this section, and Section 9-305(b)(1), concerning a commodity intermediary’s jurisdiction, makes a similar departure from former Section 9-103(6)(e)(i).
  3. Change in Law Governing Perfection.  When the bank’s jurisdiction changes, the jurisdiction whose law governs perfection under subsection (a) changes, as well. Nevertheless, the change will not result in an immediate loss of perfection. See Section 9-316(f) and (g).

355.9-305. Law governing perfection and priority of security interests in investment property.

  1. Except as otherwise provided in subsection (3) of this section, the following rules apply:
    1. While a security certificate is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in the certificated security represented thereby.
    2. The local law of the issuer’s jurisdiction as specified in KRS 355.8-110 (4) governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in an uncertificated security.
    3. The local law of the securities intermediary’s jurisdiction as specified in KRS 355.8-110 (5) governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in a security entitlement or securities account.
    4. The local law of the commodity intermediary’s jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in a commodity contract or commodity account.
  2. The following rules determine a commodity intermediary’s jurisdiction for purposes of this part of this article:
    1. If an agreement between the commodity intermediary and commodity customer governing the commodity account expressly provides that a particular jurisdiction is the commodity intermediary’s jurisdiction for purposes of this part of this article, this article, or this chapter, that jurisdiction is the commodity intermediary’s jurisdiction.
    2. If paragraph (a) of this subsection does not apply and an agreement between the commodity intermediary and commodity customer governing the commodity account expressly provides that the agreement is governed by the law of a particular jurisdiction, that jurisdiction is the commodity intermediary’s jurisdiction.
    3. If neither paragraph (a) nor paragraph (b) of this subsection applies and an agreement between the commodity intermediary and commodity customer governing the commodity account expressly provides that the commodity account is maintained at an office in a particular jurisdiction, that jurisdiction is the commodity intermediary’s jurisdiction.
    4. If none of the preceding paragraphs applies, the commodity intermediary’s jurisdiction is the jurisdiction in which the office identified in an account statement as the office serving the commodity customer’s account is located.
    5. If none of the preceding paragraphs applies, the commodity intermediary’s jurisdiction is the jurisdiction in which the chief executive office of the commodity intermediary is located.
  3. The local law of the jurisdiction in which the debtor is located governs:
    1. Perfection of a security interest in investment property by filing;
    2. Automatic perfection of a security interest in investment property created by a broker or securities intermediary; and
    3. Automatic perfection of a security interest in a commodity contract or commodity account created by a commodity intermediary.

History. Enact. Acts 1958, ch. 77, § 9-305, effective July 1, 1960; 1986, ch. 118, § 66, effective July 1, 1987; 1996, ch. 130, § 175, effective January 1, 1997; repealed and reenact., Acts 2000, ch. 408, § 45, effective July 1, 2001; repealed and reenact., Acts 2001, ch. 119, § 6, effective July 1, 2001.

Legislative Research Commission Note.

(7/14/2000). Although 2000 Acts ch. 408, sec. 45, has a reference to “subsection (4) of Section 169 of this Act” (which Section was codified as KRS 355.8-103 ) in subsection (1)(b) of this statute, that reference has been codified as KRS 355.8-110 (4) (which was subsection (4) of Section 171 of Chapter 408) in order to match the official text of Revised Article 9. Amendments to the introduced version of this bill in the Senate inadvertently did not make the necessary adjustment to this internal reference; this failure was clearly a manifest typographical or clerical error and has been corrected in codification under KRS 7.136(1)(h).

(7/14/2000). Although 2000 Acts ch. 408, sec. 45, has a reference to “subsection (5) of Section 169 of this Act” (which Section was codified as KRS 355.8-103 ) in subsection (1)(c) of this statute, that reference has been codified as KRS 355.8-110 (5) (which was subsection (5) of Section 171 of Chapter 408) in order to match the official text of Revised Article 9. Amendments to the introduced version of this bill in the Senate inadvertently did not make the necessary adjustment to this internal reference; this failure was clearly a manifest typographical or clerical error and has been corrected in codification under KRS 7.136(1)(h).

Official Comment

  1. Source.  Former Section 9-103(6).
  2. Investment Property: General Rules.  This section specifies choice-of-law rules for perfection and priority of security interests in investment property. Subsection (a)(1) covers security interests in certificated securities. Subsection (a)(2) covers security interests in uncertificated securities. Subsection (a)(3) covers security interests in security entitlements and securities accounts. Subsection (a)(4) covers security interests in commodity contracts and commodity accounts. The approach of each of these paragraphs is essentially the same. They identify the jurisdiction’s law that governs questions of perfection and priority by using the same principles that Article 8 uses to determine other questions concerning that form of investment property. Thus, for certificated securities, the law of the jurisdiction in which the certificate is located governs. Cf. Section 8-110(c). For uncertificated securities, the law of the issuer’s jurisdiction governs. Cf. Section 8-110(a). For security entitlements and securities accounts, the law of the securities intermediary’s jurisdiction governs. Cf. Section 8-110(b). For commodity contracts and commodity accounts, the law of the commodity intermediary’s jurisdiction governs. Because commodity contracts and commodity accounts are not governed by Article 8, subsection (b) contains rules that specify the commodity intermediary’s jurisdiction. These are analogous to the rules in Section 8-110(e) specifying a securities intermediary’s jurisdiction. Subsection (b)(1) affords the parties greater flexibility than did former Section 9-103(6)(3). See also Section 9-304(b) (bank’s jurisdiction); Revised Section 8-110(e)(1) (securities intermediary’s jurisdiction).
  3. Investment Property: Exceptions.  Subsection (c) establishes an exception to the general rules set out in subsection (a). It provides that perfection of a security interest by filing, automatic perfection of a security interest in investment property created by a debtor who is a broker or securities intermediary (see Section 9-309(10)), and automatic perfection of a security interest in a commodity contract or commodity account of a debtor who is a commodity intermediary (see Section 9-309(11) are governed by the law of the jurisdiction in which the debtor is located, as determined under Section 9-307.
  4. Examples:  The following examples illustrate the rules in this section:
  5. Change in Law Governing Perfection.  When the issuer’s jurisdiction, the securities intermediary’s jurisdiction, or commodity intermediary’s jurisdiction changes, the jurisdiction whose law governs perfection under subsection (a) changes, as well. Similarly, the law governing perfection of a possessory security interest in a certificated security changes when the collateral is removed to another jurisdiction, see subsection (a)(1), and the law governing perfection by filing changes when the debtor changes its location. See subsection (c). Nevertheless, these changes will not result in an immediate loss of perfection. See Section 9-316.

Example 1: A customer residing in New Jersey maintains a securities account with Able & Co. The agreement between the customer and Able specifies that it is governed by Pennsylvania law but expressly provides that the law of California is Able’s jurisdiction for purposes of the Uniform Commercial Code. Through the account the customer holds securities of a Massachusetts corporation, which Able holds through a clearing corporation located in New York. The customer obtains a margin loan from Able. Subsection (a)(3) provides that California law—the law of the securities intermediary’s jurisdiction—governs perfection and priority of the security interest, even if California has no other relationship to the parties or the transaction.

Example 2: A customer residing in New Jersey maintains a securities account with Able & Co. The agreement between the customer and Able specifies that it is governed by Pennsylvania law. Through the account the customer holds securities of a Massachusetts corporation, which Able holds through a clearing corporation located in New York. The customer obtains a loan from a lender located in Illinois. The lender takes a security interest and perfects by obtaining an agreement among the debtor, itself, and Able, which satisfies the requirement of Section 8-106(d)(2) to give the lender control. Subsection (a)(3) provides that Pennsylvania law—the law of the securities intermediary’s jurisdiction—governs perfection and priority of the security interest, even if Pennsylvania has no other relationship to the parties or the transaction.

Example 3: A customer residing in New Jersey maintains a securities account with Able & Co. The agreement between the customer and Able specifies that it is governed by Pennsylvania law. Through the account, the customer holds securities of a Massachusetts corporation, which Able holds through a clearing corporation located in New York. The customer borrows from SP-1, and SP-1 files a financing statement in New Jersey. Later, the customer obtains a loan from SP-2. SP-2 takes a security interest and perfects by obtaining an agreement among the debtor, itself, and Able, which satisfies the requirement of Section 8-106(d)(2) to give the SP-2 control. Subsection (c) provides that perfection of SP-1’s security interest by filing is governed by the location of the debtor, so the filing in New Jersey was appropriate. Subsection (a)(3), however, provides that Pennsylvania law—the law of the securities intermediary’s jurisdiction—governs all other questions of perfection and priority. Thus, Pennsylvania law governs perfection of SP-2’s security interest, and Pennsylvania law also governs the priority of the security interests of SP-1 and SP-2.

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Kentucky Law Journal.

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

355.9-306. Law governing perfection and priority of security interests in letter-of-credit rights.

  1. Subject to subsection (3) of this section, the local law of the issuer’s jurisdiction or a nominated person’s jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in a letter-of-credit right if the issuer’s jurisdiction or nominated person’s jurisdiction is a state.
  2. For purposes of this part of this article, an issuer’s jurisdiction or nominated person’s jurisdiction is the jurisdiction whose law governs the liability of the issuer or nominated person with respect to the letter-of-credit right as provided in KRS 355.5-116 .
  3. This section does not apply to a security interest that is perfected only under KRS 355.9-308 (4).

History. Enact. Acts 1958, ch. 77, § 9-306, effective July 1, 1960; 1986, ch. 118, § 67, effective July 1, 1987; 1996, ch. 130, § 176, effective January 1, 1997; repealed and reenact., Acts 2000, ch. 408, § 46, effective July 1, 2001.

Official Comment

  1. Source.  New; derived in part from Section 8-110(e) and former Section 9-103(6).
  2. Sui Generis Treatment.  This section governs the applicable law for perfection and priority of security interests in letter-of-credit rights, other than a security interest perfected only under Section 9-308(d) (i.e., as a supporting obligation). The treatment differs substantially from that provided in Section 9-304 for deposit accounts. The basic rule is that the law of the issuer’s or nominated person’s (e.g., confirmer’s) jurisdiction, derived from the terms of the letter of credit itself, controls perfection and priority, but only if the issuer’s or nominated person’s jurisdiction is a State, as defined in Section 9-102. If the issuer’s or nominated person’s jurisdiction is not a State, the baseline rule of Section 9-301 applies—perfection and priority are governed by the law of the debtor’s location, determined under Section 9-307. Export transactions typically involve a foreign issuer and a domestic nominated person, such as a confirmer, located in a State. The principal goal of this section is to reduce the likelihood that perfection and priority would be governed by the law of a foreign jurisdiction in a transaction that is essentially domestic from the standpoint of the debtor-beneficiary, its creditors, and a domestic nominated person.
  3. Issuer’s or Nominated Person’s Jurisdiction.  Subsection (b) defers to the rules established under Section 5-116 for determination of an issuer’s or nominated person’s jurisdiction.
  4. Scope of this section.  This section specifies only the law governing perfection, the effect of perfection or nonperfection, and priority of security interests. Section 5-116 specifies the law governing the liability of, and Article 5 (or other applicable law) deals with the rights and duties of, an issuer or nominated person. Perfection, nonperfection, and priority have no effect on those rights and duties.
  5. Change in Law Governing Perfection.  When the issuer’s jurisdiction, or nominated person’s jurisdiction changes, the jurisdiction whose law governs perfection under subsection (a) changes, as well. Nevertheless, this change will not result in an immediate loss of perfection. See sSction 9-316(f) and (g).

Example: An Italian bank issues a letter of credit that is confirmed by a New York bank. The beneficiary is a Connecticut corporation. The letter of credit provides that the issuer’s liability is governed by Italian law, and the confirmation provides that the confirmer’s liability is governed by the law of New York. Under Sections 9-306(b) and 5-116(a), Italy is the issuer’s jurisdiction and New York is the confirmer’s (nominated person’s) jurisdiction. Because the confirmer’s jurisdiction is a State, the law of New York governs perfection and priority of a security interest in the beneficiary’s letter-of-credit right against the confirmer. See Section 9-306(a). However, because the issuer’s jurisdiction is not a State, the law of that jurisdiction does not govern. See Section 9-306(a). Rather, the choice-of-law rule in Section 9-301(1) applies to perfection and priority of a security interest in the beneficiary’s letter-of-credit right against the issuer. Under that section, perfection and priority are governed by the law of the jurisdiction in which the debtor (beneficiary) is located. That jurisdiction is Connecticut. See Section 9-307.

NOTES TO DECISIONS

1.Certificates of Deposit.

Although disputed certificates of deposit were originally issued by the bank, assignee of the certificates had a superior lien on them because assignee deposited the certificates in the bank for safekeeping with a legend attached describing the assignment and acknowledging the certificates were held by the bank for safekeeping. (decided under prior law) Federal Deposit Ins. Corp. v. Cardinal Resources, Inc., 724 F. Supp. 466, 1989 U.S. Dist. LEXIS 13322 (E.D. Ky.), aff'd, 888 F.2d 127, 1989 U.S. App. LEXIS 16179 (6th Cir. Ky. 1989 ).

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Kentucky Law Journal.

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

Northern Kentucky Law Review.

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

355.9-307. Location of debtor.

  1. In this section, “place of business” means a place where a debtor conducts its affairs.
  2. Except as otherwise provided in this section, the following rules determine a debtor’s location:
    1. A debtor who is an individual is located at the individual’s principal residence.
    2. A debtor that is an organization and has only one (1) place of business is located at its place of business.
    3. A debtor that is an organization and has more than one (1) place of business is located at its chief executive office.
  3. Subsection (2) of this section applies only if a debtor’s residence, place of business, or chief executive office, as applicable, is located in a jurisdiction whose law generally requires information concerning the existence of a nonpossessory security interest to be made generally available in a filing, recording, or registration system as a condition or result of the security interest’s obtaining priority over the rights of a lien creditor with respect to the collateral. If subsection (2) of this section does not apply, the debtor is located in the District of Columbia.
  4. A person that ceases to exist, have a residence, or have a place of business continues to be located in the jurisdiction specified by subsections (2) and (3) of this section.
  5. A registered organization that is organized under the law of a state is located in that state.
  6. Except as otherwise provided in subsection (9) of this section, a registered organization that is organized under the law of the United States and a branch or agency of a bank that is not organized under the law of the United States or a state are located:
    1. In the state that the law of the United States designates, if the law designates a state of location;
    2. In the state that the registered organization, branch, or agency designates, if the law of the United States authorizes the registered organization, branch, or agency to designate its state of location, including by designating its main office, home office, or other comparable office; or
    3. In the District of Columbia, if neither paragraph (a) nor paragraph (b) of this subsection applies.
  7. A registered organization continues to be located in the jurisdiction specified by subsection (5) or (6) of this section notwithstanding:
    1. The suspension, revocation, forfeiture, or lapse of the registered organization’s status as such in its jurisdiction of organization; or
    2. The dissolution, winding up, or cancellation of the existence of the registered organization.
  8. The United States is located in the District of Columbia.
  9. A branch or agency of a bank that is not organized under the law of the United States or a state is located in the state in which the branch or agency is licensed, if all branches and agencies of the bank are licensed in only one (1) state.
  10. A foreign air carrier under the Federal Aviation Act of 1958, as amended, is located at the designated office of the agent upon which service of process may be made on behalf of the carrier.
  11. This section applies only for purposes of this part of this article.

History. Enact. Acts 1958, ch. 77, § 9-307, effective July 1, 1960; 1962, ch. 83, § 7; 1968, ch. 50, § 2; 1974, ch. 315, § 79; 1976, ch. 90, § 2; 1982, ch. 89, § 1, effective July 15, 1982; 1984, ch. 111, § 146, effective July 13, 1984; 1986, ch. 118, § 68, effective July 1, 1987; 1990, ch. 251, § 1, effective July 13, 1990; 1990, ch. 396, § 9, effective July 13, 1990; repealed and reenact., Acts 2000, ch. 408, § 47, effective July 1, 2001; 2012, ch. 132, § 66, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  Former Section 9-103(3)(d), substantially revised.
  2. General Rules.  As a general matter, the location of the debtor determines the jurisdiction whose law governs perfection of a security interest. See Sections 9-301(1), 9-305(c). It also governs priority of a security interest in certain types of intangible collateral, such as accounts, electronic chattel paper, and general intangibles. This section determines the location of the debtor for choice-of-law purposes, but not for other purposes. See subsection (k).

    Subsection (b) states the general rules: An individual debtor is deemed to be located at the individual’s principal residence with respect to both personal and business assets. Any other debtor is deemed to be located at its place of business if it has only one, or at its chief executive office if it has more than one place of business.

    As used in this section, a “place of business” means a place where the debtor conducts its affairs. See subsection (a). Thus, every organization, even eleemosynary institutions and other organizations that do not conduct “for profit” business activities, has a “place of business.” Under subsection (d), a person who ceases to exist, have a residence, or have a place of business continues to be located in the jurisdiction determined by subsection (b).

    The term “chief executive office” is not defined in this section or elsewhere in the Uniform Commercial Code. “Chief executive office” means the place from which the debtor manages the main part of its business operations or other affairs. This is the place where persons dealing with the debtor would normally look for credit information, and is the appropriate place for filing. With respect to most multistate debtors, it will be simple to determine which of the debtor’s offices is the “chief executive office.” Even when a doubt arises, it would be rare that there could be more than two possibilities. A secured party in such a case may protect itself by perfecting under the law of each possible jurisdiction.

    Similarly, the term “principal residence” is not defined. If the security interest in question is a purchase-money security interest in consumer goods which is perfected upon attachment, see Section 9-309(1), the choice of law may make no difference. In other cases, when a doubt arises, prudence may dictate perfecting under the law of each jurisdiction that might be the debtor’s “principal residence.”

    The general rule is subject to several exceptions, each of which is discussed below.

  3. Non-U.S. Debtors.  Under the general rules of this section, a non-U.S. debtor normally would be located in a foreign jurisdiction and, as a consequence, foreign law would govern perfection. When foreign law affords no public notice of security interests, the general rule yields unacceptable results.

    Accordingly, subsection (c) provides that the normal rules for determining the location of a debtor (i.e., the rules in subsection (b)) apply only if they yield a location that is “a jurisdiction whose law generally requires information concerning the existence of a nonpossessory security interest to be made generally available in a filing, recording, or registration system as a condition or result of the security interest’s obtaining priority over the rights of a lien creditor with respect to the collateral.” The phrase “generally requires” is meant to include legal regimes that generally require notice in a filing or recording system as a condition of perfecting nonpossessory security interests, but which permit perfection by another method (e.g., control, automatic perfection, temporary perfection) in limited circumstances. A jurisdiction that has adopted this article or an earlier version of this article is such a jurisdiction. If the rules in subsection (b) yield a jurisdiction whose law does not generally require notice in a filing or registration system, the debtor is located in the District of Columbia.

  4. Registered Organizations Organized Under Law of a State.  Under subsection (e), a registered organization (e.g., a corporation or limited partnership) organized under the law of a “state” (defined in Section 9-102) is located in its state of organization. Subsection (g) makes clear that events affecting the status of a registered organization, such as the dissolution of a corporation or revocation of its charter, do not affect its location for purposes of subsection (e). However, certain of these events may result in, or be accompanied by, a transfer of collateral from the registered organization to another debtor. This section does not determine whether a transfer occurs, nor does it determine the legal consequences of any transfer.

    Determining the registered organization-debtor’s location by reference to the jurisdiction of organization could provide some important side benefits for the filing systems. A jurisdiction could structure its filing system so that it would be impossible to make a mistake in a registered organization-debtor’s name on a financing statement. For example, a filer would be informed if a filed record designated an incorrect corporate name for the debtor. Linking filing to the jurisdiction of organization also could reduce pressure on the system imposed by transactions in which registered organizations cease to exist—as a consequence of merger or consolidation, for example. The jurisdiction of organization might prohibit such transactions unless steps were taken to ensure that existing filings were refiled against a successor or terminated by the secured party.

  5. Registered Organizations Organized Under Law of United States; Branches and Agencies of Banks Not Organized Under Law of United States.  Subsection (f) specifies the location of a debtor that is a registered organization organized under the law of the United States. It defers to law of the United States, to the extent that that law determines, or authorizes the debtor to determine, the debtor’s location. Thus, if the law of the United States designates a particular State as the debtor’s location, that State is the debtor’s location for purposes of this Article’s choice-of-law rules. Similarly, if the law of the United States authorizes the registered organization to designate its State of location, the State that the registered organization designates is the State in which it is located for purposes of this Article’s choice-of-law rules. In other cases, the debtor is located in the District of Columbia.

    In some cases, the law of the United States authorizes the registered organization to designate a main office, home office, or other comparable office. See, e.g., 12 U.S.C. Sections 22 and 1464(a); 12 C.F.R. Section 552.3. Designation of such an office constitutes the designation of the State of location for purposes of Section 9-307 (f)(2).

    Subsection (f) also specifies the location of a branch or agency in the United States of a foreign bank that has one or more branches or agencies in the United States. The law of the United States authorizes a foreign bank (or, on behalf of the bank, a federal agency) to designate a single home state for all of the foreign bank’s branches and agencies in the United States. See 12 U.S.C. Section 3103(c) and 12 C.F.R. Section 211.22. As authorized, the designation constitutes the State of location for the branch or agency for purposes of Section 9-307(f), unless all of a foreign bank’s branches or agencies that are in the United States are licensed in only one State, in which case the branches and agencies are located in that State. See subsection (i).

    In cases not governed by subsection (f) or (i), the location of a foreign bank is determined by subsections (b) and (c).

  6. United States.  To the extent that Article 9 governs (see Sections 1-105, 9-109(c)), the United States is located in the District of Columbia for purposes of this Article’s choice-of-law rules. See subsection (h).
  7. Foreign Air Carriers.  Subsection (j) follows former Section 9-103(3)(d). To the extent that it is applicable, the Convention on the International Recognition of Rights in Aircraft (Geneva Convention) supersedes state legislation on this subject, as set forth in Section 9-311(b), but some nations are not parties to that Convention.

Example 1: Debtor is an English corporation with 7 offices in the United States and its chief executive office in London, England. Debtor creates a security interest in its accounts. Under subsection (b)(3), Debtor would be located in England. However, subsection (c) provides that subsection (b) applies only if English law generally conditions perfection on giving public notice in a filing, recording, or registration system. Otherwise, Debtor is located in the District of Columbia. Under section 9-301(1), perfection, the effect of perfection, and priority are governed by the law of the jurisdiction of the debtor’s location—here, England or the District of Columbia (depending on the content of English law).

Example 2: Debtor is an English corporation with 7 offices in the United States and its chief executive office in London, England. Debtor creates a security interest in equipment located in London. Under subsection (b)(3) Debtor would be located in England. However, subsection (c) provides that subsection (b) applies only if English law generally conditions perfection on giving public notice in a filing, recording, or registration system. Otherwise, Debtor is located in the District of Columbia. Under section 9-301(1), perfection is governed by the law of the jurisdiction of the debtor’s location, whereas, under section 9-301(3), the law of the jurisdiction in which the collateral is located—here, England—governs priority.

The foregoing discussion assumes that each transaction bears an appropriate relation to the forum State. In the absence of an appropriate relation, the forum State’s entire UCC, including the choice-of-law provisions in Article 9 (Sections 9-301 through 9-307), will not apply. See Section 9-109, Comment 9.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Subpart 2. Perfection

355.9-308. When security interest or agricultural lien is perfected — Continuity of perfection.

  1. Except as otherwise provided in this section and KRS 355.9-309 , a security interest is perfected if it has attached and all of the applicable requirements for perfection in KRS 355.9-310 to 355.9-316 have been satisfied. A security interest is perfected when it attaches if the applicable requirements are satisfied before the security interest attaches.
  2. An agricultural lien is perfected if it has become effective and all of the applicable requirements for perfection in KRS 355.9-310 have been satisfied. An agricultural lien is perfected when it becomes effective if the applicable requirements are satisfied before the agricultural lien becomes effective.
  3. A security interest or agricultural lien is perfected continuously if it is originally perfected by one (1) method under this article and is later perfected by another method under this article, without an intermediate period when it was unperfected.
  4. Perfection of a security interest in collateral also perfects a security interest in a supporting obligation for the collateral.
  5. Perfection of a security interest in a right to payment or performance also perfects a security interest in a security interest, mortgage, or other lien on personal or real property securing the right.
  6. Perfection of a security interest in a securities account also perfects a security interest in the security entitlements carried in the securities account.
  7. Perfection of a security interest in a commodity account also perfects a security interest in the commodity contracts carried in the commodity account.

History. Enact. Acts 1958, ch. 77, § 9-308, effective July 1, 1960; 1986, ch. 118, § 69, effective July 1, 1987; repealed and reenact., Acts 2000, ch. 408, § 48, effective July 1, 2001.

Official Comment

  1. Source.  Former Sections 9-115(2) and 9-303.
  2. General Rule.  This article uses the term “attach” to describe the point at which property becomes subject to a security interest. The requisites for attachment are stated in Section 9-203. When it attaches, a security interest may be either perfected or unperfected. “Perfected” means that the security interest has attached and the secured party has taken all the steps required by this article as specified in Sections 9-310 through 9-316. A perfected security interest may still be or become subordinate to other interests. See, e.g., Sections 9-320 and 9-322. However, in general, after perfection the secured party is protected against creditors and transferees of the debtor and, in particular, against any representative of creditors in insolvency proceedings instituted by or against the debtor. See, e.g., Section 9-317.

    Subsection (a) explains that the time of perfection is when the security interest has attached and any necessary steps for perfection, such as taking possession or filing, have been taken. The “except” clause refers to the perfection-upon-attachment rules appearing in Section 9-309. It also reflects that other subsections of this section, e.g., subsection (d), contain automatic perfection rules. If the steps for perfection have been taken in advance, as when the secured party files a financing statement before giving value or before the debtor acquires rights in the collateral, then the security interest is perfected when it attaches.

  3. Agricultural Liens.  Subsection (b) is new. It describes the elements of perfection of an agricultural lien.
  4. Continuous Perfection.  The following example illustrates the operation of subsection (c):
  5. Supporting Obligations.  Subsection (d) is new. It provides for automatic perfection of a security interest in a supporting obligation for collateral if the security interest in the collateral is perfected. This is unlikely to effect any change in the law prior to adoption of this article.
  6. Rights to Payment Secured by Lien.  Subsection (e) is new. It deals with the situation in which a security interest is created in a right to payment that is secured by a security interest, mortgage, or other lien.
  7. Investment Property.  Subsections (f) and (g) follow former Section 9-115(2).

Example 1: Debtor, an importer, creates a security interest in goods that it imports and the documents of title that cover the goods. The secured party, Bank, takes possession of a negotiable bill of lading covering certain imported goods and thereby perfects its security interest in the bill of lading and the goods. See Sections 9-313(a), 9-312(c)(1). Bank releases the bill of lading to the debtor for the purpose of procuring the goods from the carrier and selling them. Under Section 9-312(f), Bank continues to have a perfected security interest in the document and goods for 20 days. Bank files a financing statement covering the collateral before the expiration of the 20-day period. Its security interest now continues perfected for as long as the filing is good.

If the successive stages of Bank’s security interest succeed each other without an intervening gap, the security interest is “perfected continuously,” and the date of perfection is when the security interest first became perfected (i.e., when Bank received possession of the bill of lading). If, however, there is a gap between stages—for example, if Bank does not file until after the expiration of the 20-day period specified in Section 9-312(f) and leaves the collateral in the debtor’s possession—then, the chain being broken, the perfection is no longer continuous. The date of perfection would now be the date of filing (after expiration of the 20-day period). Bank’s security interest would be vulnerable to any interests arising during the gap period which under Section 9-317 take priority over an unperfected security interest.

Example 2: Buyer is obligated to pay Debtor for goods sold. Buyer’s president guarantees the obligation. Debtor creates a security interest in the right to payment (account) in favor of Lender. Under Section 9-203(f), the security interest attaches to Debtor’s rights under the guarantee (supporting obligation). Under subsection (d), perfection of the security interest in the account constitutes perfection of the security interest in Debtor’s rights under the guarantee.

Example 3: Owner gives to Mortgagee a mortgage on Blackacre to secure a loan. Owner’s obligation to pay is evidenced by a promissory note. In need of working capital, Mortgagee borrows from Financer and creates a security interest in the note in favor of Financer. Section 9-203(g) adopts the traditional view that the mortgage follows the note; i.e., the transferee of the note acquires the mortgage, as well. This subsection adopts a similar principle: Perfection of a security interest in the right to payment constitutes perfection of a security interest in the mortgage securing it.

An important consequence of the rules in Section 9-203(g) and subsection (e) is that, by acquiring a perfected security interest in a mortgage (or other secured) note, the secured party acquires a security interest in the mortgage (or other lien) that is senior to the rights of a person who becomes a lien creditor of the mortgagee (Article 9 debtor). See Section 9-317(a)(2). This result helps prevent the separation of the mortgage (or other lien) from the note.

Under this Article, attachment and perfection of a security interest in a secured right to payment do not of themselves affect the obligation to pay. For example, if the obligation is evidenced by a negotiable note, then Article 3 dictates the person whom the maker must pay to discharge the note and any lien securing it. See Section 3-602. If the right to payment is a payment intangible, then Section 9-406 determines whom the account debtor must pay.

Similarly, this article does not determine who has the power to release a mortgage of record. That issue is determined by real property law.

Research References and Practice Aids

Kentucky Bench & Bar.

Schneiter, Equine Statutory Liens, Vol. 67, No. 4, July 2003, Ky. Bench & Bar 23.

355.9-309. Security interest perfected upon attachment.

The following security interests are perfected when they attach:

  1. A purchase-money security interest in consumer goods, except as otherwise provided in KRS 355.9-311 (2) with respect to consumer goods that are subject to a statute or treaty described in KRS 355.9-311 (1);
  2. An assignment of accounts or payment intangibles which does not by itself or in conjunction with other assignments to the same assignee transfer a significant part of the assignor’s outstanding accounts or payment intangibles;
  3. A sale of a payment intangible;
  4. A sale of a promissory note;
  5. A security interest created by the assignment of a health-care-insurance receivable to the provider of the health-care goods or services;
  6. A security interest arising under KRS 355.2-401 , 355.2-505 , 355.2-711 (3), or 355.2A-508 (5), until the debtor obtains possession of the collateral;
  7. A security interest of a collecting bank arising under KRS 355.4-210 ;
  8. A security interest of an issuer or nominated person arising under KRS 355.5-118 ;
  9. A security interest arising in the delivery of a financial asset under KRS 355.9-206 (3);
  10. A security interest in investment property created by a broker or securities intermediary;
  11. A security interest in a commodity contract or a commodity account created by a commodity intermediary;
  12. An assignment for the benefit of all creditors of the transferor and subsequent transfers by the assignee thereunder;
  13. A security interest created by an assignment of a beneficial interest in a decedent’s estate; and
  14. A sale by an individual of an account that is a right to payment of winnings in a lottery or other game of chance.

History. Enact. Acts 1958, ch. 77, § 9-309, effective July 1, 1960; 1986, ch. 118, § 70, effective July 1, 1987; 1996, ch. 130, § 177, effective January 1, 1997; repealed and reenact., Acts 2000, ch. 408, § 49, effective July 1, 2001; repealed and reenact., Acts 2001, ch. 119, § 7, effective July 1, 2001; 2006, ch. 242, § 59, effective July 12, 2006.

Official Comment

  1. Source.  Derived from former Sections 9-115(4)(c) and (d), 9-116, and 9-302(1).
  2. Automatic Perfection.  This section contains the perfection-upon-attachment rules previously located in former Sections 9-115(4)(c) and (d), 9-116, and 9-302(1). Rather than continue to state the rule by indirection, this section explicitly provides for perfection upon attachment.
  3. Purchase-Money Security Interest in Consumer Goods.  Former Section 9-302(1)(d) has been revised and appears here as paragraph (1). No filing or other step is required to perfect a purchase-money security interest in consumer goods, other than goods, such as automobiles, that are subject to a statute or treaty described in Section 9-311(a). However, filing is required to perfect a non-purchase-money security interest in consumer goods and is necessary to prevent a buyer of consumer goods from taking free of a security interest under Section 9-320(b). A fixture filing is required for priority over conflicting interests in fixtures to the extent provided in Section 9-334.
  4. Rights to Payment.  Paragraph (2) expands upon former Section 9-302(1)(e) by affording automatic perfection to certain assignments of payment intangibles as well as accounts. The purpose of paragraph (2) is to save from ex post facto invalidation casual or isolated assignments—assignments which no one would think of filing. Any person who regularly takes assignments of any debtor’s accounts or payment intangibles should file. In this connection Section 9-109(d)(4) through (7), which excludes certain transfers of accounts, chattel paper, payment intangibles, and promissory notes from this Article, should be consulted.

    Paragraphs (3) and (4), which are new, afford automatic perfection to sales of payment intangibles and promissory notes, respectively. They reflect the practice under former Article 9. Under that Article, filing a financing statement did not affect the rights of a buyer of payment intangibles or promissory notes, inasmuch as the former Article did not cover those sales. To the extent that the exception in paragraph (2) covers outright sales of payment intangibles, which automatically are perfected under paragraph (3), the exception is redundant.

  5. Health-Care-Insurance Receivables.  Paragraph (5) extends automatic perfection to assignments of health-care-insurance receivables if the assignment is made to the health-care provider that provided the health-care goods or services. The primary effect is that, when an individual assigns a right to payment under an insurance policy to the person who provided health-care goods or services, the provider has no need to file a financing statement against the individual. The normal filing requirements apply to other assignments of health-care-insurance receivables covered by this Article, e.g., assignments from the health-care provider to a financer.
  6. Investment Property.  Paragraph (9) replaces the last clause of former Section 9-116(2), concerning security interests that arise in the delivery of a financial asset.

    Paragraphs (10) and (11) replace former Section 9-115(4)(c) and (d), concerning secured financing of securities and commodity firms and clearing corporations. The former sections indicated that, with respect to certain security interests created by a securities intermediary or commodity intermediary, “(t)he filing of a financing statement … has no effect for purposes of perfection or priority with respect to that security interest.” No change in meaning is intended by the deletion of the quoted phrase.

    Secured financing arrangements for securities firms are currently implemented in various ways. In some circumstances, lenders may require that the transactions be structured as “hard pledges,” where the securities are transferred on the books of a clearing corporation from the debtor’s account to the lender’s account or to a special pledge account for the lender where they cannot be disposed of without the specific consent of the lender. In other circumstances, lenders are content with so-called “agreement to pledge” or “agreement to deliver” arrangements, where the debtor retains the positions in its own account, but reflects on its books that the positions have been hypothecated and promises that the securities will be transferred to the secured party’s account on demand.

    The perfection and priority rules of this article are designed to facilitate current secured financing arrangements for securities firms as well as to provide sufficient flexibility to accommodate new arrangements that develop in the future. Hard pledge arrangements are covered by the concept of control. See Sections 8-106, 9-106, and 9-314. Noncontrol secured financing arrangements for securities firms are covered by the automatic perfection rule of paragraph (10). Before the 1994 revision of articles 8 and 9, agreement to pledge arrangements could be implemented under a provision that a security interest in securities given for new value under a written security agreement was perfected without filing or possession for a period of 21 days. Although the security interests were temporary in legal theory, the financing arrangements could, in practice, be continued indefinitely by rolling over the loans at least every 21 days. Accordingly, a knowledgeable creditor of a securities firm realizes that the firm’s securities may be subject to security interests that are not discoverable from any public records. The automatic-perfection rule of paragraph (10) makes it unnecessary to engage in the purely formal practice of rolling over these arrangements every 21 days.

    In some circumstances, a clearing corporation may be the debtor in a secured financing arrangement. For example, a clearing corporation that settles delivery-versus-payment transactions among its participants on a net, same-day basis relies on timely payments from all participants with net obligations due to the system. If a participant that is a net debtor were to default on its payment obligation, the clearing corporation would not receive some of the funds needed to settle with participants that are net creditors to the system. To complete end-of-day settlement after a payment default by a participant, a clearing corporation that settles on a net, same-day basis may need to draw on credit lines and pledge securities of the defaulting participant or other securities pledged by participants in the clearing corporation to secure such drawings. The clearing corporation may be the top-tier securities intermediary for the securities pledged, so that it would not be practical for the lender to obtain control. Even where the clearing corporation holds some types of securities through other intermediaries, however, the clearing corporation is unlikely to be able to complete the arrangements necessary to convey “control” over the securities to be pledged in time to complete settlement in a timely manner. However, the term “securities intermediary” is defined in Section 8-102(a)(14) to include clearing corporations. Thus, the perfection rule of paragraph (x10) applies to security interests in investment property granted by clearing corporations.

  7. Beneficial Interests in Trusts.  Under former Section 9-302(1)(c), filing was not required to perfect a security interest created by an assignment of a beneficial interest in a trust. Because beneficial interests in trusts are now used as collateral with greater frequency in commercial transactions, under this article filing is required to perfect a security interest in a beneficial interest.
  8. Assignments for Benefit of Creditors.  No filing or other action is required to perfect an assignment for the benefit of creditors. These assignments are not financing transactions, and the debtor ordinarily will not be engaging in further credit transactions.

NOTES TO DECISIONS

1.Choses in Action and Claims for Debt.

The law which required recording of deeds and mortgages of real and personal estate did not embrace choses in action or claims for debt. (decided under prior law) National Surety Corp. v. Massachusetts Bonding & Ins. Co., 280 Ky. 785 , 134 S.W.2d 611, 1939 Ky. LEXIS 201 ( Ky. 1939 ).

2.Street Improvement Liens.

Recording law did not include street improvement liens; purchaser of property was chargeable with notice of ordinance and proceedings of city council by which improvement lien was created. (decided under prior law) Jackson's Heirs v. Willson, 226 Ky. 211 , 10 S.W.2d 816, 1928 Ky. LEXIS 58 ( Ky. 1928 ).

3.Bank Accounts.

A bank account could not be mortgaged but the depositor could make an assignment by trust agreement of the deposit, in whole or part, and the recording of the assignment relative to the bank account as a deed of trust gave constructive notice of its terms. (decided under prior law) Scoggan v. Dillon, 252 S.W.2d 35, 1952 Ky. LEXIS 974 ( Ky. 1952 ).

4.Trust Receipts.

A trust receipt was a “mortgage” and therefore, by virtue of the recording law, it could not prevail against general creditors if unrecorded. (decided under prior law) In re Draughn & Steel Motor Co., 49 F.2d 636, 1931 U.S. Dist. LEXIS 1329 (D. Ky. 1931 ), aff'd, 58 F.2d 910, 1932 U.S. App. LEXIS 4792 (6th Cir. Ky. 1932 ).

A trust receipt whereby the buyer was to hold the goods in trust for the seller, returnable on demand, and expressing an intention to presume the seller’s title until full payment had been made was a mortgage and had to be recorded. (decided under prior law) Commercial Inv. Trust Corp. v. Wilson, 58 F.2d 910, 1932 U.S. App. LEXIS 4792 (6th Cir. Ky. 1932 ); General Motors Acceptance Corp. v. Sharp Motor Sales Co., 233 Ky. 290 , 25 S.W.2d 405, 1930 Ky. LEXIS 542 ( Ky. 1930 ).

5.Pledgee of Warehouse Receipts.

Bank pledgee of warehouse receipts for value, in the regular course of business, without notice was not a mere general creditor but obtained a superior lien on property represented by the warehouse receipts to the extent of the debt for which the pledge was made. (decided under prior law) General Motors Acceptance Corp. v. Sharp Motor Sales Co., 233 Ky. 290 , 25 S.W.2d 405, 1930 Ky. LEXIS 542 ( Ky. 1930 ).

6.Trust of Negotiable Instrument.

The word “deed” meant a recordable instrument sufficient to create or declare a trust, and a recorded instrument acknowledged and signed by persons to whom a bond had been transferred with transferee to pay the interest from the bond to transferor for life and to keep a cemetery in repair after transferor’s death, if recorded, was sufficient to give claim preference over transferee’s general creditors. (decided under prior law) St. Catherine's Cemetery v. Fidelity Trust Co., 152 Ky. 797 , 154 S.W. 29, 1913 Ky. LEXIS 739 ( Ky. 1913 ).

7.Assignment of Sums Due.

Assignment in indemnity agreement by road contractor to surety on performance bond of sums due from department of highways was not such a recordable instrument as to require recording in order to create an equitable lien under the assignment, and equities created by assignment would prevail over others subsequent in time. (decided under prior law) National Surety Corp. v. Massachusetts Bonding & Ins. Co., 280 Ky. 785 , 134 S.W.2d 611, 1939 Ky. LEXIS 201 ( Ky. 1939 ).

8.Transferee of Standing Timber.

Where grantee, who had received all the trees that had been branded as of that date to be removed within ten years by a conveyance in the form of a deed, after recording the deed, indorsed on the bank of the deed all his right, title and interest to a third party, although the indorsement was a valid sale effective between the parties under law providing that contract for sale of standing timber must be in writing, the sale was of real estate and not personalty because of the ten-year period allowed for cutting, but even if the sale had been regarded as a sale of personalty, where indorsee failed to record the indorsement or rebrand or have the trees rebranded with his brand, the title was not perfected in the indorsee so as to protect him against the rights of a subsequent innocent purchaser for value from the original grantee when the purchaser recorded his deed which was in a form similar to the deed in which grantee received his interest. (decided under prior law) V. Bowerman & Co. v. Taylor, 127 Ky. 812 , 106 S.W. 846, 32 Ky. L. Rptr. 671 , 1908 Ky. LEXIS 23 ( Ky. 1908 ).

9.Chattel Mortgages.

Transaction amounted to nothing more than the lending of money to a bankrupt and the giving of mortgages upon automobiles to secure payment of the loans and was not an invalid conditional sales contract under law making a conveyance of personal property without delivery void as to purchaser without notice or creditor prior to recording of the instrument. (decided under prior law) National Bond & Inv. Co. v. Jones, 78 F.2d 601, 1935 U.S. App. LEXIS 3801 (6th Cir. Ky. 1935 ).

Where automobile agency bought automobiles with funds furnished by a third party and executed bills of sale and 90-day drafts to third party as security and third party assigned them to a fourth party, the transaction was not a conditional sale void against creditors under law but a mortgage. (decided under prior law) National Bond & Inv. Co. v. Jones, 78 F.2d 601, 1935 U.S. App. LEXIS 3801 (6th Cir. Ky. 1935 ).

Where seller of electrical appliances accepted notes indorsed by stockholders, it waived any rights it might have had under the unrecorded contract of sale, and mortgagee of the entire railroad property, which embraced the electrical appliances and which had been recorded six weeks prior to the actual arrival of the electrical appliances, had a prior lien on the electrical appliances. (decided under prior law) Westinghouse Electric Mfg. Co. v. Citizens S. R. Co., 68 S.W. 463, 24 Ky. L. Rptr. 334 , 1902 Ky. LEXIS 296 (Ky. Ct. App. 1902).

All valid liens upon the personal property of the tenant created before the property was carried upon leased premises prevailed against a landlord’s distress warrant for rent but a mortgage did not become a valid lien until recorded. (decided under prior law) Wonder Blue Gem Coal Co. v. Louisville Property Co., 137 Ky. 339 , 125 S.W. 732, 1910 Ky. LEXIS 577 ( Ky. 1910 ).

If title was retained as security for purchase price and obligation further to pay was not abated by a retaking of the property and retention of partial payments, then the transaction was not a pure conditional sale but an undertaking in the nature of a chattel mortgage. (decided under prior law) Munz v. National Bond & Inv. Co., 243 Ky. 293 , 47 S.W.2d 1055, 1932 Ky. LEXIS 72 ( Ky. 1932 ).

Regardless of the name or form of a transaction, if it was designed to hold personal property as security for debt, it was equivalent in law to a chattel mortgage and required to be recorded in order to be valid against innocent purchasers for value. (decided under prior law) Munz v. National Bond & Inv. Co., 243 Ky. 293 , 47 S.W.2d 1055, 1932 Ky. LEXIS 72 ( Ky. 1932 ); Kelley v. Brack, 214 Ky. 9 , 282 S.W. 190, 1926 Ky. LEXIS 256 ( Ky. 1926 ); In re Selman's, Inc., 58 F.2d 681, 1932 U.S. Dist. LEXIS 1215 (D. Ky. 1932 ).

Where bill of sale, in effect a chattel mortgage, was never recorded, it was not valid as a prior lien against tax liens of the state or city or against an attachment lien. (decided under prior law) Allin v. Harrodsburg, 247 Ky. 360 , 57 S.W.2d 45, 1933 Ky. LEXIS 406 ( Ky. 1933 ).

10.Conditional Sales Contracts.

A sale was not a conditional sale where it was to have been for cash and seller delivered the merchandise without collecting the selling price or securing a valid lien. (decided under prior law) Kloak Bros. & Co. v. Joseph, 150 Ky. 508 , 150 S.W. 651, 1912 Ky. LEXIS 927 ( Ky. 1912 ).

Courts of this state did not recognize conditional sales and had uniformly construed contracts of that character as passing title to the purchaser with a lien in favor of the seller for the unpaid consideration which could be enforced between the parties, but the liens were not favored in this jurisdiction, it being against public policy to carry secret liens, and they would yield to the claims of purchasers and creditors without actual notice. (decided under prior law) Fry Bros. v. Theobold, 205 Ky. 146 , 265 S.W. 498, 1924 Ky. LEXIS 63 ( Ky. 1924 ).

In a conditional sales contract or agreement, the title to the property could remain in the seller and the right of repossessing it could be given upon failure to pay any part of the unpaid purchase money when due, and this type conditional sales contract was not a mortgage back which would have given the seller only a lien on the chattel. (decided under prior law) Brown v. Woods Motor Co., 239 Ky. 312 , 39 S.W.2d 507, 1931 Ky. LEXIS 779 ( Ky. 1931 ), limited, Commonwealth v. Larson, 242 Ky. 317 , 46 S.W.2d 82, 1932 Ky. LEXIS 251 ( Ky. 1932 ). See White v. General Motors Acceptance Corp., 2 F. Supp. 406, 1932 U.S. Dist. LEXIS 1640 (D. Ky. 1932 ).

11.— Recording.

Recording of contract or “order” for restaurant equipment, which did not pass title, gave the seller no lien on the property as against subsequent mortgagees for value. (decided under prior law) John Van Range Co. v. Meade, 27 F.2d 206, 1928 U.S. App. LEXIS 3359 (6th Cir. Ky. 1928 ).

A conditional sales contract had to be recorded to be perfected as against subsequent lien creditors. (decided under prior law) In re Henry, 60 F.2d 605, 1932 U.S. Dist. LEXIS 1369 (D. Ky. 1932 ); In re Kaufman, 142 F. Supp. 759, 1956 U.S. Dist. LEXIS 3195 (D. Ky. 1956 ).

If recordation of conditional sale was required in state in which contract was made, failure to record was fatal to seller’s remedy against innocent purchaser or creditor elsewhere. (decided under prior law) Fry Bros. v. Theobold, 205 Ky. 146 , 265 S.W. 498, 1924 Ky. LEXIS 63 ( Ky. 1924 ).

A conditional sales contract had to be recorded to be valid against an innocent purchaser. (decided under prior law) Munz v. National Bond & Inv. Co., 243 Ky. 293 , 47 S.W.2d 1055, 1932 Ky. LEXIS 72 ( Ky. 1932 ); In re Draughn & Steel Motor Co., 49 F.2d 636, 1931 U.S. Dist. LEXIS 1329 (D. Ky. 1931 ), aff'd, 58 F.2d 910, 1932 U.S. App. LEXIS 4792 (6th Cir. Ky. 1932 ); Johnson v. Sauerman Bros., Inc., 243 Ky. 587 , 49 S.W.2d 331, 1932 Ky. LEXIS 152 (Ky. 1932); In re Selman's, Inc., 58 F.2d 681, 1932 U.S. Dist. LEXIS 1215 (D. Ky. 1932); In re Henry, 60 F.2d 605, 1932 U.S. Dist. LEXIS 1369 (D. Ky. 1932); White v. General Motors Acceptance Corp., 2 F. Supp. 406, 1932 U.S. Dist. LEXIS 1640 (D. Ky. 1932); Ashland Finance Co. v. Mollett, 252 Ky. 491 , 67 S.W.2d 717, 1934 Ky. LEXIS 814 ( Ky. 1934 ).

The rights and equities of seller arising from the transfer of property under unrecorded conditional sales contract were invalid and unenforceable as against purchasers or creditors without actual notice until such title or rights were placed on public record and constructive notice thereby given. (decided under prior law) Johnson v. Sauerman Bros., Inc., 243 Ky. 587 , 49 S.W.2d 331, 1932 Ky. LEXIS 152 ( Ky. 1932 ).

The mailing of a conditional sales contract to the clerk of the county court, accompanied by the amount of the recording fee, was sufficient lodging for record to satisfy law requiring recording of instruments for them to be valid against innocent purchasers and creditors, and such lodging for record was sufficient notice to creditors. (decided under prior law) Fields Motor Co. v. Sturgill, 279 Ky. 47 , 129 S.W.2d 1003, 1939 Ky. LEXIS 231 ( Ky. 1939 ).

12.Creditors.

“All creditors” under the recording law meant subsequent creditors, whether they were secured or unsecured, and such antecedent creditors who at some time prior to the recording of the mortgage or deed of trust had secured some equity in the property, and an unrecorded mortgage was not good as against antecedent creditors who, at some time prior to the recording of the mortgage or deed of trust, had secured some equity in the property, nor was it good against creditors who became such subsequent to the making of such mortgage and prior to its recording. (decided under prior law) Mason & Moody v. Scruggs, 207 Ky. 66 , 268 S.W. 833, 1925 Ky. LEXIS 16 ( Ky. 1925 ); Larimore v. Perkinson, 208 Ky. 382 , 271 S.W. 69, 1925 Ky. LEXIS 292 ( Ky. 1925 ); Kerrick v. West, 211 Ky. 807 , 278 S.W. 128, 1925 Ky. LEXIS 972 (Ky. 1925); Stone v. Keith, 218 Ky. 11 , 290 S.W. 1042, 1927 Ky. LEXIS 92 ( Ky. 1927 ); Reynolds v. Sizemore, 233 Ky. 122 , 25 S.W.2d 48, 1930 Ky. LEXIS 509 ( Ky. 1930 ); Sears v. Cain, 242 Ky. 702 , 47 S.W.2d 513, 1932 Ky. LEXIS 338 ( Ky. 1932 ); Calloway v. Howard, 247 Ky. 730 , 57 S.W.2d 677, 1933 Ky. LEXIS 451 ( Ky. 1933 ); Huff v. Russell, 267 Ky. 515 , 102 S.W.2d 984, 1937 Ky. LEXIS 343 ( Ky. 1937 ).

13.Pleadings.

Where, in action involving claims of various creditors, execution and filing of chattel mortgage alleged in one creditor’s pleading was not denied, it was not necessary for him to introduce proof as to priority of his mortgage over obligations subsequently incurred. (decided under prior law) McGlone v. Smith, 293 Ky. 131 , 168 S.W.2d 566, 1943 Ky. LEXIS 574 ( Ky. 1943 ).

14.Purchase Price of Farm Machinery.

Purchase price of farm machinery means the cash amount paid or agreed to be paid, plus the agreed value of any merchandise traded, but not including interest or finance charges. (decided under prior law) Mammoth Cave Production Credit Asso. v. York, 429 S.W.2d 26, 1968 Ky. LEXIS 729 ( Ky. 1968 ).

15.Motor Vehicles.

Court upheld decision of referee in bankruptcy that no liens had been entered on automobile’s registration certificate prior to filing of petition in bankruptcy where no filing had occurred under former KRS 355.9-401 as required by former KRS 355.9-302 (1)(d) prior to filing petition. (decided under prior law) In re Hall, 248 F. Supp. 124, 1965 U.S. Dist. LEXIS 6676 (E.D. Ky. 1965 ).

Former KRS 355.9-302 applied to security transactions covering vehicles. (decided under prior law) Lincoln Bank & Trust Co. v. Queenan, 344 S.W.2d 383, 1961 Ky. LEXIS 223 ( Ky. 1961 ).

16.Interest in Crops.

Where the plaintiff secured a promissory note, security agreement and financing statement from an individual covering proceeds of crops and where the defendant subsequently advanced the same individual money to grow, harvest and sell the same crops, but failed to file a mortgage, security agreement or financing statement in the county clerk’s office, the defendant failed to perfect its interest in the crops for new value and the plaintiff was entitled to a first lien on the proceeds of the crops. (decided under prior law) United Tobacco Warehouse Co. v. Wells, 490 S.W.2d 152, 1973 Ky. LEXIS 611 ( Ky. 1973 ).

17.Purchase Money Security Interest.

Where a retail installment contract for the purchase of a washer and dryer was assigned by the seller to a finance company, the finance company held a purchase money security interest in the washer and dryer and no document was required to be filed as a condition of perfection. (decided under prior law) In re Hobdy, 18 B.R. 70, 1982 Bankr. LEXIS 4883 (Bankr. W.D. Ky. 1982 ).

Where the sum due on the first contract for the purchase of a washer and dryer was simply added to the second contract for the purchase of a refrigerator, the purchase money character of the finance company’s security interest in the washer and dryer was extinguished by novation, thereby converting the finance company’s interest in the washer and dryer to one in the nature of a nonpossessory, nonpurchase money security interest which could be avoided in bankruptcy; however, since the second contract clearly delineated the amount due on the washer and dryer and listed the purchase price of the refrigerator, and there was no evidence that the buyer debtors had made any payments on the second contract, the finance company held a purchase money security interest for the value of the purchase price of the refrigerator which could not be avoided in bankruptcy. (decided under prior law) In re Hobdy, 18 B.R. 70, 1982 Bankr. LEXIS 4883 (Bankr. W.D. Ky. 1982 ).

Where debtors purchased a washer and dryer from seller and executed a security agreement and financing statement which was then assigned to creditor, assignment of the security agreement did not negate the character of the interest as “purchase money.” (decided under prior law) In re Smallwood, 20 B.R. 699, 1982 Bankr. LEXIS 4168 (Bankr. W.D. Ky. 1982 ).

All-terrain vehicle (ATV) was a consumer good as defined in KRS 355.9-102 (1)(w) because it was bought and used for personal purposes and thus, a creditor’s purchase-money security interest was automatically perfected upon attachment under KRS 355.9-309 without the necessity of the creditor filing a lien. Thus, a Chapter 7 trustee could not avoid the lien under 11 U.S.C.S. § 544 and failed to identify a preferential transfer for purposes of an 11 U.S.C.S. § 547 count. Higgason v. HSBC/Kawasaki (In re Winchester), 2011 Bankr. LEXIS 3465 (Bankr. E.D. Ky. Sept. 2, 2011).

18.Possession.

The actions of night watchman in looking after heavy equipment for secured party were insufficient to provide notice to purchaser of security agreement and there was no evidence that secured party ever exercised dominion or control over the equipment while it was being kept on another company’s property; consequently, secured party did not come within exception to recording requirements under former KRS 355.9-302 (1)(a). (decided under prior law) Hutchison v. C.I.T. Corp., 576 F. Supp. 1, 1982 U.S. Dist. LEXIS 17609 (W.D. Ky. 1982 ), aff'd, 726 F.2d 300, 1984 U.S. App. LEXIS 25658 (6th Cir. Ky. 1984 ).

Possession is a course of conduct, not an act and possession sufficient to dispense with the recording requirement must be unequivocal, absolute and notorious. (decided under prior law) Hutchison v. C.I.T. Corp., 576 F. Supp. 1, 1982 U.S. Dist. LEXIS 17609 (W.D. Ky. 1982 ), aff'd, 726 F.2d 300, 1984 U.S. App. LEXIS 25658 (6th Cir. Ky. 1984 ).

The evidence did not support the creditor tobacco warehouse’s claim that its crop money lien was perfected by “possession” when the debtors delivered their tobacco to the warehouse for purpose of selling the collateral at the seasonal auctions held by the warehouse, since no evidence was offered by the warehouse to show the necessary dominion and control over the property required for “possession” at common law, and the record also failed to show debtors’ relinquishment of control to accept or reject bids at the auction when the collateral was physically possessed by the creditor warehouse. (decided under prior law) In re Rogers, 39 B.R. 295, 1984 Bankr. LEXIS 6096 (Bankr. W.D. Ky. 1984 ).

19.Two-for-One Contracts.

Since two-for-one contracts were accounts and a security interest in an account can only be perfected by filing, bank which did not file to perfect its interest was an unperfected party, whose interest was defeated by second bank which had filed a financial statement with the county clerk as a perfected secured party. (decided under prior law) In re Padgett, 49 B.R. 212, 1985 Bankr. LEXIS 6230 (Bankr. W.D. Ky. 1985 ).

20.Transfer of Collateral.

Any collateral transferred from predecessor to debtor would be subject to bank’s security interest, which was perfected by financing statement. (decided under prior law) Bluegrass Ford-Mercury, Inc. v. Farmers Nat'l Bank, 942 F.2d 381, 1991 U.S. App. LEXIS 19123 (6th Cir. Ky. 1991 ).

21.Security Interest.

Since KRS 186A.190(2) and former KRS 355.9-302 (3) clearly and unambiguously provide that, as to any property for which a certificate of title is required by KRS Chapter 186A, a security interest in that property may be perfected or discharged only by a notation in that vein on the certificate of title, fact that mobile home was affixed to real estate was of no merit and notation on the certificate of title served as the exclusive method for perfecting bank’s security interest therein and bank was entitled to possess the mobile home upon default of promissory note. (decided under prior law) Hiers v. Bank One, 946 S.W.2d 196, 1996 Ky. App. LEXIS 167 (Ky. Ct. App. 1996).

Opinions of Attorney General.

Where finance company’s security interest was perfected and a financing statement was filed in the proper county clerk’s office, and where the finance company had not contracted its rights away, then it would seem that the perfected status of the security interest would continue against the transferee from the original debtor, even though a deputy court clerk failed to place notice of the security interest on a motor vehicle registration before the vehicle was transferred to a purchaser who had no actual notice of the lien on the vehicle. OAG 72-84 .

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Schneiter, Equine Statutory Liens, Vol. 67, No. 4, July 2003, Ky. Bench & Bar 23.

Kentucky Law Journal.

Spivack, Financing the Manufacturer: Article 9 of the Uniform Commercial Code, 48 Ky. L.J. 397 (1960).

Lawson, Security Interests in Motor Vehicles: A Conflict in Kentucky Law, 66 Ky. L.J. 924 (1977-1978).

Notes, Vehicular Registration in Kentucky: A Remnant of the Horse and Buggy Age, 69 Ky. L.J. 124 (1980-81).

Lester, Security Interests in Thoroughbred and Standardbred Horses: A Transactional Approach, 70 Ky. L.J. 1065 (1981-82).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Bland, Insolvencies in Farming and Agribusinesses, 73 Ky. L.J. 795 (1984-85).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

355.9-310. When filing required to perfect security interest or agricultural lien — Security interests and agricultural liens to which filing provisions do not apply.

  1. Except as otherwise provided in subsection (2) of this section and KRS 355.9-312 (2), a financing statement must be filed to perfect all security interests and agricultural liens.
  2. The filing of a financing statement is not necessary to perfect a security interest:
    1. That is perfected under KRS 355.9-308 (4), (5), (6), or (7);
    2. That is perfected under KRS 355.9-309 when it attaches;
    3. In property subject to a statute, regulation, or treaty described in KRS 355.9-311 (1);
    4. In goods in possession of a bailee which is perfected under KRS 355.9-312 (4)(a) or (b);
    5. In certificated securities, documents, goods, or instruments which is perfected without filing, control, or possession under KRS 355.9-312 (5), (6), or (7);
    6. In collateral in the secured party’s possession under KRS 355.9-313 ;
    7. In a certificated security which is perfected by delivery of the security certificate to the secured party under KRS 355.9-313 ;
    8. In deposit accounts, electronic chattel paper, electronic documents, investment property, or letter-of-credit rights which is perfected by control under KRS 355.9-314 ;
    9. In proceeds which is perfected under KRS 355.9-315 ; or
    10. That is perfected under KRS 355.9-316 .
  3. If a secured party assigns a perfected security interest or agricultural lien, a filing under this article is not required to continue the perfected status of the security interest against creditors of and transferees from the original debtor.

History. Enact. Acts 1958, ch. 77, § 9-310, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 50, effective July 1, 2001; 2012, ch. 132, § 67, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  Former Section 9-302(1), (2).
  2. General Rule.  Subsection (a) establishes a central Article 9 principle: Filing a financing statement is necessary for perfection of security interests and agricultural liens. However, filing is not necessary to perfect a security interest that is perfected by another permissible method, see subsection (b), nor does filing ordinarily perfect a security interest in a deposit account, letter-of-credit right, or money. See Section 9-312(b). Part 5 of the Article deals with the office in which to file, mechanics of filing, and operations of the filing office.
  3. Exemptions from Filing.  Subsection (b) lists the security interests for which filing is not required as a condition of perfection, because they are perfected automatically upon attachment (subsections (b)(2) and (b)(9)) or upon the occurrence of another event (subsections (b)(1), (b)(5), and (b)(9)), because they are perfected under the law of another jurisdiction (subsection (b)(10)), or because they are perfected by another method, such as by the secured party’s taking possession or control (subsections (b)(3), (b)(4), (b)(5), (b)(6), (b)(7), and (b)(8)).
  4. Assignments of Perfected Security Interests.  Subsection (c) concerns assignment of a perfected security interest or agricultural lien. It provides that no filing is necessary in connection with an assignment by a secured party to an assignee in order to maintain perfection as against creditors of and transferees from the original debtor.

Example 1: Buyer buys goods from Seller, who retains a security interest in them. After Seller perfects the security interest by filing, Seller assigns the perfected security interest to X. The security interest, in X’s hands and without further steps on X’s part, continues perfected against Buyer’s transferees and creditors.

Example 2: Dealer creates a security interest in specific equipment in favor of Lender. After Lender perfects the security interest in the equipment by filing, Lender assigns the chattel paper (which includes the perfected security interest in Dealer’s equipment) to X. The security interest in the equipment, in X’s hands and without further steps on X’s part, continues perfected against Dealer’s transferees and creditors. However, regardless of whether Lender made the assignment to secure Lender’s obligation to X or whether the assignment was an outright sale of the chattel paper, the assignment creates a security interest in the chattel paper in favor of X. Accordingly, X must take whatever steps may be required for perfection in order to be protected against Lender’s transferees and creditors with respect to the chattel paper.

Subsection (c) applies not only to an assignment of a security interest perfected by filing but also to an assignment of a security interest perfected by a method other than by filing, such as by control or by possession. Although subsection (c) addresses explicitly only the absence of an additional filing requirement, the same result normally will follow in the case of an assignment of a security interest perfected by a method other than by filing. For example, as long as possession of collateral is maintained by an assignee or by the assignor or another person on behalf of the assignee, no further perfection steps need be taken on account of the assignment to continue perfection as against creditors and transferees of the original debtor. Of course, additional action may be required for perfection of the assignee’s interest as against creditors and transferees of the assignor.

Similarly, subsection (c) applies to the assignment of a security interest perfected by compliance with a statute, regulation, or treaty under Section 9-311(b), such as a certificate-of-title statute. Unless the statute expressly provides to the contrary, the security interest will remain perfected against creditors of and transferees from the original debtor, even if the assignee takes no action to cause the certificate of title to reflect the assignment or to cause its name to appear on the certificate of title. See PEB Commentary No. 12, which discusses this issue under former Section 9-302(3). Compliance with the statute is “equivalent to filing” under Section 9-311(b).

NOTES TO DECISIONS

1.Transferee of Standing Timber.

Where grantee, who had received all the trees that had been branded as of that date to be removed within ten years by a conveyance in the form of a deed, after recording the deed, indorsed on the bank of the deed all his right, title and interest to a third party, although the indorsement was a valid sale effective between the parties under law providing that contract for sale of standing timber must be in writing, the sale was of real estate and not personalty because of the ten-year period allowed for cutting, but even if the sale had been regarded as a sale of personalty, where indorsee failed to record the indorsement or rebrand or have the trees rebranded with his brand, the title was not perfected in the indorsee so as to protect him against the rights of a subsequent innocent purchaser for value from the original grantee when the purchaser recorded his deed which was in a form similar to the deed in which grantee received his interest. (decided under prior law) V. Bowerman & Co. v. Taylor, 127 Ky. 812 , 106 S.W. 846, 32 Ky. L. Rptr. 671 , 1908 Ky. LEXIS 23 ( Ky. 1908 ).

2.Interest in Crops.

Where the plaintiff secured a promissory note, security agreement and financing statement from an individual covering proceeds of crops and where the defendant subsequently advanced the same individual money to grow, harvest and sell the same crops, but failed to file a mortgage, security agreement or financing statement in the county clerk’s office, the defendant failed to perfect its interest in the crops for new value and the plaintiff was entitled to a first lien on the proceeds of the crops. (decided under prior law) United Tobacco Warehouse Co. v. Wells, 490 S.W.2d 152, 1973 Ky. LEXIS 611 ( Ky. 1973 ).

3.Possession.

Possession is a course of conduct, not an act and possession sufficient to dispense with the recording requirement must be unequivocal, absolute and notorious. (decided under prior law) Hutchison v. C.I.T. Corp., 576 F. Supp. 1, 1982 U.S. Dist. LEXIS 17609 (W.D. Ky. 1982 ), aff'd, 726 F.2d 300, 1984 U.S. App. LEXIS 25658 (6th Cir. Ky. 1984 ).

The evidence did not support the creditor tobacco warehouse’s claim that its crop money lien was perfected by “possession” when the debtors delivered their tobacco to the warehouse for purpose of selling the collateral at the seasonal auctions held by the warehouse, since no evidence was offered by the warehouse to show the necessary dominion and control over the property required for “possession” at common law, and the record also failed to show debtors’ relinquishment of control to accept or reject bids at the auction when the collateral was physically possessed by the creditor warehouse. (decided under prior law) In re Rogers, 39 B.R. 295, 1984 Bankr. LEXIS 6096 (Bankr. W.D. Ky. 1984 ).

In this action to establish the priority of liens in certain equipment owned by debtors, the creditor was granted summary judgment because creditor had a valid priority purchase money security interests (PMSI) in the collateral securing the amounts owed in Claims 4 through 8, creditor’s interest in the collateral were prior and superior to any interest of defendants, and the creditor held a second priority security interest in the collateral, behind only the creditor’s valid PMSI’s, that secured the amounts owed in Claim 3-3 pursuant to a valid cross-collateralization clause. Nutrien Ag Sols., Inc. v. Duvall (In re Duvall), 2021 Bankr. LEXIS 22 (Bankr. W.D. Ky. Jan. 7, 2021).

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Research References and Practice Aids

Kentucky Bench & Bar.

Schneiter, Equine Statutory Liens, Vol. 67, No. 4, July 2003, Ky. Bench & Bar 23.

Kentucky Law Journal.

Lester, Security Interests in Thoroughbred and Standardbred Horses: A Transactional Approach, 70 Ky. L.J. 1065 (1981-82).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Bland, Insolvencies in Farming and Agribusinesses, 73 Ky. L.J. 795 (1984-85).

355.9-311. Perfection of security interests in property subject to certain statutes, regulations, and treaties.

  1. Except as otherwise provided in subsection (4) of this section, the filing of a financing statement is not necessary or effective to perfect a security interest in property subject to:
    1. A statute, regulation, or treaty of the United States whose requirements for a security interest’s obtaining priority over the rights of a lien creditor with respect to the property preempt KRS 355.9-310 (1);
    2. KRS Chapter 186A; or
    3. A statute of another jurisdiction which provides for a security interest to be indicated on a certificate of title as a condition or result of the security interest’s obtaining priority over the rights of a lien creditor with respect to the property.
  2. Compliance with the requirements of a statute, regulation, or treaty described in subsection (1) of this section for obtaining priority over the rights of a lien creditor is equivalent to the filing of a financing statement under this article. Except as otherwise provided in subsection (4) of this section and KRS 355.9-313 and 355.9-316 (4) and (5) for goods covered by a certificate of title, a security interest in property subject to a statute, regulation, or treaty described in subsection (1) of this section may be perfected only by compliance with those requirements, and a security interest so perfected remains perfected notwithstanding a change in the use or transfer of possession of the collateral.
  3. Except as otherwise provided in subsection (4) of this section and KRS 355.9-316 (4) and (5), duration and renewal of perfection of a security interest perfected by compliance with the requirements prescribed by a statute, regulation, or treaty described in subsection (1) of this section are governed by the statute, regulation, or treaty. In other respects, the security interest is subject to this article.
  4. During any period in which collateral subject to a statute specified in subsection (1)(b) of this section is inventory held for sale or lease by a person or leased by that person as lessor and that person is in the business of selling goods of that kind, this section does not apply to a security interest in that collateral created by that person.

History. Enact. Acts 1958, ch. 77, § 9-311, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 51, effective July 1, 2001; 2012, ch. 132, § 68, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  Former Section 9-302(3), (4).
  2. Federal Statutes, Regulations, and Treaties.  Subsection (a)(1) exempts from the filing provisions of this article transactions as to which a system of filing—state or federal—has been established under federal law. Subsection (b) makes clear that when such a system exists, perfection of a relevant security interest can be achieved only through compliance with that system (i.e., filing under this article is not a permissible alternative).

    An example of the type of federal statute referred to in subsection (a)(1) is 49 U.S.C. §§ 44107-11, for civil aircraft of the United States. The Assignment of Claims Act of 1940, as amended, provides for notice to contracting and disbursing officers and to sureties on bonds but does not establish a national filing system and therefore is not within the scope of subsection (a)(1). An assignee of a claim against the United States may benefit from compliance with the Assignment of Claims Act. But regardless of whether the assignee complies with that act, the assignee must file under this article in order to perfect its security interest against creditors and transferees of its assignor.

    Subsection (a)(1) provides explicitly that the filing requirement of this article defers only to federal statutes, regulations, or treaties whose requirements for a security interest’s obtaining priority over the rights of a lien creditor preempt Section 9-310(a). The provision eschews reference to the term “perfection,” inasmuch as Section 9-308 specifies the meaning of that term and a preemptive rule may use other terminology.

  3. State Statutes.  Subsections (a)(2) and (3) exempt from the filing requirements of this Article transactions covered by State certificate-of-title statutes covering motor vehicles and the like. The description of certificate-of-title statutes in subsections (a)(2) and (a)(3) tracks the language of the definition of “certificate of title” in Section 9-102. For a discussion of the operation of state certificate-of-title statutes in interstate contexts, see the Comments to Section 9-303.

    Some states have enacted central filing statutes with respect to secured transactions in kinds of property that are of special importance in the local economy. Subsection (a)(2) defers to these statutes with respect to filing for that property.

  4. Inventory Covered by Certificate of Title.  Under subsection (d), perfection of a security interest in the inventory of a person in the business of selling goods of that kind is governed by the normal perfection rules, even if the inventory is subject to a certificate-of-title statute. Compliance with a certificate-of-title statute is both unnecessary and ineffective to perfect a security interest in inventory to which this subsection applies. Thus, a secured party who finances an automobile dealer that is in the business of selling and leasing its inventory of automobiles can perfect a security interest in all the automobiles by filing a financing statement but not by compliance with a certificate-of-title statute.

    Subsection (d), and thus the filing and other perfection provisions of this article, does not apply to inventory that is subject to a certificate-of-title statute and is of a kind that the debtor is not in the business of selling. For example, if goods are subject to a certificate-of-title statute and the debtor is in the business of leasing but not of selling goods of that kind, the other subsections of this section govern perfection of a security interest in the goods. The fact that the debtor eventually sells the goods does not, of itself, mean that the debtor “is in the business of selling goods of that kind.”

    The filing and other perfection provisions of this article apply to goods subject to a certificate-of-title statute only “during any period in which collateral is inventory held for sale or lease or leased.” If the debtor takes goods of this kind out of inventory and uses them, say, as equipment, a filed financing statement would not remain effective to perfect a security interest.

  5. Compliance with Perfection Requirements of Other Statute.  Subsection (b) makes clear that compliance with the perfection requirements (i.e., the requirements for obtaining priority over a lien creditor), but not other requirements, of a statute, regulation, or treaty described in subsection (a), is sufficient for perfection under this article. Perfection of a security interest under such a statute, regulation, or treaty has all the consequences of perfection under this article.

    The interplay of this section with certain certificate-of-title statutes may create confusion and uncertainty. For example, statutes under which perfection does not occur until a certificate of title is issued will create a gap between the time that the goods are covered by the certificate under Section 9-303 and the time of perfection. If the gap is long enough, it may result in turning some unobjectionable transactions into avoidable preferences under Bankruptcy Code section 547. (The preference risk arises if more than 10 days (or 20 days, in the case of a purchase-money security interest) passes between the time a security interest attaches (or the debtor receives possession of the collateral, in the case of a purchase-money security interest) and the time it is perfected.) Accordingly, the legislative note to this section instructs the legislature to amend the applicable certificate-of-title statute to provide that perfection occurs upon receipt by the appropriate state official of a properly tendered application for a certificate of title on which the security interest is to be indicated.

    Under some certificate-of-title statutes, including the Uniform Motor Vehicle Certificate of Title and Anti-Theft Act, perfection generally occurs upon delivery of specified documents to a state official but may, under certain circumstances, relate back to the time of attachment. This relation-back feature can create great difficulties for the application of the rules in Sections 9-303 and 9-311(b). Accordingly, the legislative note also recommends to legislatures that they remove any relation-back provisions from certificate-of-title statutes affecting security interests.

  6. Compliance with Perfection Requirements of Other Statute as Equivalent to Filing.  Under subsection (b), compliance with the perfection requirements (i.e., the requirements for obtaining priority over a lien creditor) of a statute, regulation, or treaty described in subsection (a) “is equivalent to the filing of a financing statement.”

    The quoted phrase appeared in former Section 9-302(3). Its meaning was unclear, and many questions arose concerning the extent to which and manner in which Article 9 rules referring to “filing” were applicable to perfection by compliance with a certificate-of-title statute. This article takes a variety of approaches for applying Article 9’s filing rules to compliance with other statutes and treaties. First, as discussed above in Comment 5, it leaves the determination of some rules, such as the rule establishing time of perfection (Section 9-516(a)), to the other statutes themselves. Second, this article explicitly applies some Article 9 filing rules to perfection under other statutes or treaties. See, e.g., Section 9-505. Third, this article makes other Article 9 rules applicable to security interests perfected by compliance with another statute through the “equivalent to … filing” provision in the first sentence of Section 9-311(b). The third approach is reflected for the most part in occasional comments explaining how particular rules apply when perfection is accomplished under Section 9-311(b). See, e.g., Section 9-310, Comment 4; Section 9-315, Comment 6; and Section 9-317, Comment 8. The absence of a comment indicating that a particular filing provision applies to perfection pursuant to Section 9-311(b) does not mean the provision is inapplicable.

  7. Perfection by Possession of Goods Covered by Certificate-of-Title Statute.  A secured party who holds a security interest perfected under the law of State A in goods that subsequently are covered by a State B certificate of title may face a predicament. Ordinarily, the secured party will have four months under State B’s Section 9-316(c) and (d) in which to reperfect as against a purchaser of the goods by having its security interest noted on a State B certificate. This procedure is likely to require the cooperation of the debtor and any competing secured party whose security interest has been noted on the certificate. Comment 4(e) to former Section 9-103 observed that “that cooperation is not likely to be forthcoming from an owner who wrongfully procured the issuance of a new certificate not showing the out-of-state security interest, or from a local secured party finding himself in a priority contest with the out-of-state secured party.” According to that Comment, “the only solution for the out-of-state secured party under present certificate of title statutes seems to be to reperfect by possession, i.e., by repossessing the goods.” But the “solution” may not have worked: Former Section 9-302(4) provided that a security interest in property subject to a certificate-of-title statute “can be perfected only by compliance therewith.”

    Sections 9-311(c), 9-313(b), and 9-316(d) and (e) of this article resolve the conflict by providing that a security interest that remains perfected solely by virtue of Section 9-316(e) can be (re)perfected by the secured party’s taking possession of the collateral. These sections contemplate only that taking possession of goods covered by a certificate of title will work as a method of perfection. None of these sections creates a right to take possession. Section 9-609 and the agreement of the parties define the secured party’s right to take possession.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-312. Perfection of security interests in chattel paper, deposit accounts, documents, goods covered by documents, instruments, investment property, letter-of-credit rights, and money — Perfection by permissive filing — Temporary perfection without filing or transfer of possession.

  1. A security interest in chattel paper, negotiable documents, instruments, or investment property may be perfected by filing.
  2. Except as otherwise provided in KRS 355.9-315 (3) and (4) for proceeds:
    1. A security interest in a deposit account may be perfected only by control under KRS 355.9-314 ;
    2. And except as otherwise provided in KRS 355.9-308 (4), a security interest in a letter-of-credit right may be perfected only by control under KRS 355.9-314 ; and
    3. A security interest in money may be perfected only by the secured party’s taking possession under KRS 355.9-313 .
  3. While goods are in the possession of a bailee that has issued a negotiable document covering the goods:
    1. A security interest in the goods may be perfected by perfecting a security interest in the document; and
    2. A security interest perfected in the document has priority over any security interest that becomes perfected in the goods by another method during that time.
  4. While goods are in the possession of a bailee that has issued a nonnegotiable document covering the goods, a security interest in the goods may be perfected by:
    1. Issuance of a document in the name of the secured party;
    2. The bailee’s receipt of notification of the secured party’s interest; or
    3. Filing as to the goods.
  5. A security interest in certificated securities, negotiable documents, or instruments is perfected without filing or the taking of possession or control for a period of twenty (20) days from the time it attaches to the extent that it arises for new value given under an authenticated security agreement.
  6. A perfected security interest in a negotiable document or goods in possession of a bailee, other than one that has issued a negotiable document for the goods, remains perfected for twenty (20) days without filing if the secured party makes available to the debtor the goods or documents representing the goods for the purpose of:
    1. Ultimate sale or exchange; or
    2. Loading, unloading, storing, shipping, transshipping, manufacturing, processing, or otherwise dealing with them in a manner preliminary to their sale or exchange.
  7. A perfected security interest in a certificated security or instrument remains perfected for twenty (20) days without filing if the secured party delivers the security certificate or instrument to the debtor for the purpose of:
    1. Ultimate sale or exchange; or
    2. Presentation, collection, enforcement, renewal, or registration of transfer.
  8. After the twenty (20) day period specified in subsection (5), (6), or (7) of this section expires, perfection depends upon compliance with this article.

History. Enact. Acts 1958, ch. 77, § 9-312; 1962, ch. 83, § 8; 1982, ch. 199, § 2, effective July 15, 1982; 1986, ch. 118, § 71, effective July 1, 1987; 1996, ch. 130, § 178, effective January 1, 1997; repealed and reenact., Acts 2000, ch. 408, § 52, effective July 1, 2001; 2012, ch. 132, § 69, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  Former Section 9-304, with additions and some changes.
  2. Instruments.  Under subsection (a), a security interest in instruments may be perfected by filing. This rule represents an important change from former Article 9, under which the secured party’s taking possession of an instrument was the only method of achieving long-term perfection. The rule is likely to be particularly useful in transactions involving a large number of notes that a debtor uses as collateral but continues to collect from the makers. A security interest perfected by filing is subject to defeat by certain subsequent purchasers (including secured parties). Under sSection 9-330(d), purchasers for value who take possession of an instrument without knowledge that the purchase violates the rights of the secured party generally would achieve priority over a security interest in the instrument perfected by filing. In addition, Section 9-331 provides that filing a financing statement does not constitute notice that would preclude a subsequent purchaser from becoming a holder in due course and taking free of all claims under Section 3-306.
  3. Chattel Paper; Negotiable Documents.  Subsection (a) further provides that filing is available as a method of perfection for security interests in chattel paper and negotiable documents. Tangible chattel paper is sometimes delivered to the assignee, and sometimes left in the hands of the assignor for collection. Subsection (a) allows the assignee to perfect its security interest by filing in the latter case. Alternatively, the assignee may perfect by taking possession. See Section 9-313(a). An assignee of electronic chattel paper may perfect by taking control. See Sections 9-314(a), 9-105. The security interest of an assignee who takes possession or control may qualify for priority over a competing security interest perfected by filing. See Section 9-330.

    Negotiable documents may be, and usually are, delivered to the secured party. The secured party’s taking possession will suffice as a perfection step. See Section 9-313(a). However, as is the case with chattel paper, a security interest in a negotiable document may be perfected by filing.

  4. Investment Property.  A security interest in investment property, including certificated securities, uncertificated securities, security entitlements, and securities accounts, may be perfected by filing. However, security interests created by brokers, securities intermediaries, or commodity intermediaries are automatically perfected; filing is of no effect. See Section 9-309(10), (11). A security interest in all kinds of investment property also may be perfected by control, see Sections 9-314, 9-106, and a security interest in a certificated security also may be perfected by the secured party’s taking delivery under Section 8-301. See Section 9-313(a). A security interest perfected only by filing is subordinate to a conflicting security interest perfected by control or delivery. See Section 9-328(1), (5). Thus, although filing is a permissible method of perfection, a secured party who perfects by filing takes the risk that the debtor has granted or will grant a security interest in the same collateral to another party who obtains control. Also, perfection by filing would not give the secured party protection against other types of adverse claims, since the Article 8 adverse claim cut-off rules require control. See Section 8-510.
  5. Deposit Accounts.  Under new subsection (b)(1), the only method of perfecting a security interest in a deposit account as original collateral is by control. Filing is ineffective, except as provided in Section 9-315 with respect to proceeds. As explained in Section 9-104, “control” can arise as a result of an agreement among the secured party, debtor, and bank, whereby the bank agrees to comply with instructions of the secured party with respect to disposition of the funds on deposit, even though the debtor retains the right to direct disposition of the funds. Thus, subsection (b)(1) takes an intermediate position between certain non-UCC law, which conditions the effectiveness of a security interest on the secured party’s enjoyment of such dominion and control over the deposit account that the debtor is unable to dispose of the funds, and the approach this Article takes to securities accounts, under which a secured party who is unable to reach the collateral without resort to judicial process may perfect by filing. By conditioning perfection on “control,” rather than requiring the secured party to enjoy absolute dominion to the exclusion of the debtor, subsection (b)(1) permits perfection in a wide variety of transactions, including those in which the secured party actually relies on the deposit account in extending credit and maintains some meaningful dominion over it, but does not wish to deprive the debtor of access to the funds altogether.
  6. Letter-of-Credit Rights.  Letter-of-credit rights commonly are “supporting obligations,” as defined in Section 9-102. Perfection as to the related account, chattel paper, document, general intangible, instrument, or investment property will perfect as to the letter-of-credit rights. See Section 9-308(d). Subsection (b)(2) provides that, in other cases, a security interest in a letter-of-credit right may be perfected only by control. “Control,” for these purposes, is explained in Section 9-107.
  7. Goods Covered by Document of Title.  Subsection (c) applies to goods in the possession of a bailee who has issued a negotiable document covering the goods. Subsection (d) applies to goods in the possession of a bailee who has issued a nonnegotiable document of title, including a document of title that is “non-negotiable” under Section 7-104. Section 9-313 governs perfection of a security interest in goods in the possession of a bailee who has not issued a document of title.

    Subsection (c) clarifies the perfection and priority rules in former Section 9-304(2). Consistently with the provisions of article 7, subsection (c) takes the position that, as long as a negotiable document covering goods is outstanding, title to the goods is, so to say, locked up in the document. Accordingly, a security interest in goods covered by a negotiable document may be perfected by perfecting a security interest in the document. The security interest also may be perfected by another method, e.g., by filing. The priority rule in subsection (c) governs only priority between (i) a security interest in goods which is perfected by perfecting in the document and (ii) a security interest in the goods which becomes perfected by another method while the goods are covered by the document.

  8. Temporary Perfection Without Having First Otherwise Perfected.  Subsection (e) follows former Section 9-304(4) in giving perfected status to security interests in certificated securities, instruments, and negotiable documents for a short period (reduced from 21 to 20 days, which is the time period generally applicable in this article), although there has been no filing and the collateral is in the debtor’s possession. The 20-day temporary perfection runs from the date of attachment. There is no limitation on the purpose for which the debtor is in possession, but the secured party must have given “new value” (defined in section 9-102) under an authenticated security agreement.
  9. Maintaining Perfection After Surrendering Possession.  There are a variety of legitimate reasons—many of them are described in subsections (f) and (g)—why certain types of collateral must be released temporarily to a debtor. No useful purpose would be served by cluttering the files with records of such exceedingly short term transactions.

    Subsection (f) affords the possibility of 20-day perfection in negotiable documents and goods in the possession of a bailee but not covered by a negotiable document. Subsection (g) provides for 20-day perfection in certificated securities and instruments. These subsections derive from former Section 9-305(5). However, the period of temporary perfection has been reduced from 21 to 20 days, which is the time period generally applicable in this article, and “enforcement” has been added in subsection (g) as one of the special and limited purposes for which a secured party can release an instrument or certificated security to the debtor and still remain perfected. The period of temporary perfection runs from the date a secured party who already has a perfected security interest turns over the collateral to the debtor. There is no new value requirement, but the turnover must be for one or more of the purposes stated in subsection (f) or (g). The 20-day period may be extended by perfecting as to the collateral by another method before the period expires. However, if the security interest is not perfected by another method until after the 20-day period expires, there will be a gap during which the security interest is unperfected.

    Temporary perfection extends only to the negotiable document or goods under subsection (f) and only to the certificated security or instrument under subsection (g). It does not extend to proceeds. If the collateral is sold, the security interest will continue in the proceeds for the period specified in Section 9-315.

    Subsections (f) and (g) deal only with perfection. Other sections of this article govern the priority of a security interest in goods after surrender of the document covering them. In the case of a purchase-money security interest in inventory, priority may be conditioned upon giving notification to a prior inventory financer. See Section 9-324.

Example 1: While wheat is in a grain elevator and covered by a negotiable warehouse receipt, Debtor creates a security interest in the wheat in favor of SP-1 and SP-2. SP-1 perfects by filing a financing statement covering “wheat.” Thereafter, SP-2 perfects by filing a financing statement describing the warehouse receipt. Subsection (c)(1) provides that SP-2’s security interest is perfected. Subsection (c)(2) provides that SP-2’s security interest is senior to SP-1’s.

Example 2: The facts are as in Example 1, but SP-1’s security interest attached and was perfected before the goods were delivered to the grain elevator. Subsection (c)(2) does not apply, because SP-1’s security interest did not become perfected during the time that the wheat was in the possession of a bailee. Rather, the first-to-file-or-perfect priority rule applies. See Section 9-322.

A secured party may become “a holder to whom a negotiable document of title has been duly negotiated” under Section 7-501. If so, the secured party acquires the rights specified by Article 7. Article 9 does not limit those rights, which may include the right to priority over an earlier-perfected security interest. See Section 9-331(a).

Subsection (d) takes a different approach to the problem of goods covered by a nonnegotiable document. Here, title to the goods is not looked on as being locked up in the document, and the secured party may perfect its security interest directly in the goods by filing as to them. The subsection provides two other methods of perfection: Issuance of the document in the secured party’s name (as consignee of a straight bill of lading or the person to whom delivery would be made under a nonnegotiable warehouse receipt) and receipt of notification of the secured party’s interest by the bailee. Perfection under subsection (d) occurs when the bailee receives notification of the secured party’s interest in the goods, regardless of who sends the notification. Receipt of notification is effective to perfect, regardless of whether the bailee responds. Unlike former Section 9-304(3), from which it derives, subsection (d) does not apply to goods in the possession of a bailee who has not issued a document of title. Section 9-313(c) covers that case and provides that perfection by possession as to goods not covered by a document requires the bailee’s acknowledgment.

NOTES TO DECISIONS

1.Warehouse Receipts.

Bank pledgee of warehouse receipts for value, in regular course of business, without notice was not a mere general creditor but obtained a lien on the property represented by the warehouse receipts and had priority to the extent of the debt to secure that for which the pledge was made. (decided under prior law) General Motors Acceptance Corp. v. Sharp Motor Sales Co., 233 Ky. 290 , 25 S.W.2d 405, 1930 Ky. LEXIS 542 ( Ky. 1930 ).

Valid pledge of warehouse receipts taken without notice of unrecorded mortgage and for value was undoubtedly superior to that of the unrecorded mortgage. (decided under prior law) General Motors Acceptance Corp. v. Sharp Motor Sales Co., 233 Ky. 290 , 25 S.W.2d 405, 1930 Ky. LEXIS 542 ( Ky. 1930 ).

Attachment liens had priority over warehouse receipts issued by owner’s bookkeeper against owner’s goods which had been segregated. (decided under prior law) Continental Can Co. v. Jessamine Canning Co., 286 Ky. 365 , 150 S.W.2d 922, 1941 Ky. LEXIS 268 ( Ky. 1941 ).

2.Certificates of Deposit.

Although disputed certificates of deposit were originally issued by the bank, assignee of the certificates had a superior lien on them because assignee deposited the certificates in the bank for safekeeping with a legend attached describing the assignment and acknowledging the certificates were held by the bank for safekeeping. (decided under prior law) Federal Deposit Ins. Corp. v. Cardinal Resources, Inc., 724 F. Supp. 466, 1989 U.S. Dist. LEXIS 13322 (E.D. Ky.), aff'd, 888 F.2d 127, 1989 U.S. App. LEXIS 16179 (6th Cir. Ky. 1989 ).

Chapter 7 trustee was allowed to avoid a banking company’s action transferring $190,629 out of a debtor’s account to partially offset a debt the debtor owed the company because the company did not have a properly and continuously perfected security interest in the funds, as required by KRS 355.9-312 (2)(a). The funds were paid to the banking company shortly before the debtor declared bankruptcy, when certificates of deposit the company purchased for the debtor from other banks matured, and under that scenario the debtor was an “entitlement holder,” as that term was defined by KRS 355.8-102 (1)(g) and the banking company was a “securities intermediary,” as that term was defined by § 355.8-102 (1)(n)(2). Flener v. Alexander (In re Alexander), 429 B.R. 876, 2010 Bankr. LEXIS 1705 (Bankr. W.D. Ky. 2010 ), aff'd, 2010 U.S. Dist. LEXIS 132300 (W.D. Ky. Dec. 13, 2010).

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Kentucky Law Journal.

Lester, Security Interests in Thoroughbred and Standardbred Horses: A Transactional Approach, 70 Ky. L.J. 1065 (1981-82).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

355.9-313. When possession by or delivery to secured party perfects security interest without filing.

  1. Except as otherwise provided in subsection (2) of this section, a secured party may perfect a security interest in tangible negotiable documents, goods, instruments, money, or tangible chattel paper by taking possession of the collateral. A secured party may perfect a security interest in certificated securities by taking delivery of the certificated securities under KRS 355.8-301 .
  2. With respect to goods covered by a certificate of title issued by this Commonwealth, a secured party may perfect a security interest in the goods by taking possession of the goods only in the circumstances described in KRS 355.9-316 (4).
  3. With respect to collateral other than certificated securities and goods covered by a document, a secured party takes possession of collateral in the possession of a person other than the debtor, the secured party, or a lessee of the collateral from the debtor in the ordinary course of the debtor’s business, when:
    1. The person in possession authenticates a record acknowledging that it holds possession of the collateral for the secured party’s benefit; or
    2. The person takes possession of the collateral after having authenticated a record acknowledging that it will hold possession of collateral for the secured party’s benefit.
  4. If perfection of a security interest depends upon possession of the collateral by a secured party, perfection occurs no earlier than the time the secured party takes possession and continues only while the secured party retains possession.
  5. A security interest in a certificated security in registered form is perfected by delivery when delivery of the certificated security occurs under KRS 355.8-301 and remains perfected by delivery until the debtor obtains possession of the security certificate.
  6. A person in possession of collateral is not required to acknowledge that it holds possession for a secured party’s benefit.
  7. If a person acknowledges that it holds possession for the secured party’s benefit:
    1. The acknowledgment is effective under subsection (3) of this section or KRS 355.8-301 (1), even if the acknowledgment violates the rights of a debtor; and
    2. Unless the person otherwise agrees or law other than this article otherwise provides, the person does not owe any duty to the secured party and is not required to confirm the acknowledgment to another person.
  8. A secured party having possession of collateral does not relinquish possession by delivering the collateral to a person other than the debtor or a lessee of the collateral from the debtor in the ordinary course of the debtor’s business if the person was instructed before the delivery or is instructed contemporaneously with the delivery:
    1. To hold possession of the collateral for the secured party’s benefit; or
    2. To redeliver the collateral to the secured party.
  9. A secured party does not relinquish possession, even if a delivery under subsection (8) of this section violates the rights of a debtor. A person to which collateral is delivered under subsection (8) of this section does not owe any duty to the secured party and is not required to confirm the delivery to another person unless the person otherwise agrees or law other than this article otherwise provides.

History. Enact. Acts 1958, ch. 77, § 9-313, effective July 1, 1960; 1986, ch. 118, § 72, effective July 1, 1987; repealed and reenact., Acts 2000, ch. 408, § 53, effective July 1, 2001; repealed and reenact., Acts 2001, ch. 119, § 8, effective July 1, 2001; 2012, ch. 132, § 70, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  Former Sections 9-115(6) and 9-305.
  2. Perfection by Possession.  As under the common law of pledge, no filing is required by this article to perfect a security interest if the secured party takes possession of the collateral. See section 9-310(b)(6).

    This section permits a security interest to be perfected by the taking of possession only when the collateral is goods, instruments, negotiable documents, money, or tangible chattel paper. Accounts, commercial tort claims, deposit accounts, investment property, letter-of-credit rights, letters of credit, and oil, gas, or other minerals before extraction are excluded. (But see Comment 6, below, regarding certificated securities.) A security interest in accounts and payment intangibles—property not ordinarily represented by any writing whose delivery operates to transfer the right to payment—may under this article be perfected only by filing. This rule would not be affected by the fact that a security agreement or other record described the assignment of such collateral as a “pledge.” Section 9-309(2) exempts from filing certain assignments of accounts or payment intangibles which are out of the ordinary course of financing. These exempted assignments are perfected when they attach. Similarly, under section 9-309(3), sales of payment intangibles are automatically perfected.

  3. “Possession.”  This section does not define “possession.” It adopts the general concept as it developed under former Article 9. As under former Article 9, in determining whether a particular person has possession, the principles of agency apply. For example, if the collateral is in possession of an agent of the secured party for the purposes of possessing on behalf of the secured party, and if the agent is not also an agent of the debtor, the secured party has taken actual possession, and subsection (c) does not apply. Sometimes a person holds collateral both as an agent of the secured party and as an agent of the debtor. The fact of dual agency is not of itself inconsistent with the secured party’s having taken possession (and thereby having rendered subsection (c) inapplicable). The debtor cannot qualify as an agent for the secured party for purposes of the secured party’s taking possession. And, under appropriate circumstances, a court may determine that a person in possession is so closely connected to or controlled by the debtor that the debtor has retained effective possession, even though the person may have agreed to take possession on behalf of the secured party. If so, the person’s taking possession would not constitute the secured party’s taking possession and would not be sufficient for perfection. See also Section 9-205(b). In a typical escrow arrangement, where the escrowee has possession of collateral as agent for both the secured party and the debtor, the debtor’s relationship to the escrowee is not such as to constitute retention of possession by the debtor.
  4. Goods in Possession of Third Party: Perfection.  Former Section 9-305 permitted perfection of a security interest by notification to a bailee in possession of collateral. This article distinguishes between goods in the possession of a bailee who has issued a document of title covering the goods and goods in the possession of a third party who has not issued a document. Section 9-312(c) or (d) applies to the former, depending on whether the document is negotiable. Section 9-313(c) applies to the latter. It provides a method of perfection by possession when the collateral is possessed by a third person who is not the secured party’s agent.

    Notification of a third person does not suffice to perfect under Section 9-313(c). Rather, perfection does not occur unless the third person authenticates an acknowledgment that it holds possession of the collateral for the secured party’s benefit. Compare Section 9-312(d), under which receipt of notification of the security party’s interest by a bailee holding goods covered by a nonnegotiable document is sufficient to perfect, even if the bailee does not acknowledge receipt of the notification. A third person may acknowledge that it will hold for the secured party’s benefit goods to be received in the future. Under these circumstances, perfection by possession occurs when the third person obtains possession of the goods.

    Under subsection (c), acknowledgment of notification by a “lessee… in … ordinary course of … business” (defined in Section 2A-103) does not suffice for possession. The section thus rejects the reasoning of In re Atlantic Systems, Inc. , 135 B.R. 463 (Bankr. S.D.N.Y. 1992) (holding that notification to debtor-lessor’s lessee sufficed to perfect security interest in leased goods). See Steven O. Weise, Perfection by Possession: The Need for an Objective Test , 29 Idaho Law Rev. 705 (1992-93) (arguing that lessee’s possession in ordinary course of debtor-lessor’s business does not provide adequate public notice of possible security interest in leased goods). Inclusion of a per se rule concerning lessees is not meant to preclude a court, under appropriate circumstances, from determining that a third person is so closely connected to or controlled by the debtor that the debtor has retained effective possession. If so, the third person’s acknowledgment would not be sufficient for perfection.

    In some cases, it may be uncertain whether a person who has possession of collateral is an agent of the secured party or a non-agent bailee. Under those circumstances, prudence might suggest that the secured party obtain the person’s acknowledgment to avoid litigation and ensure perfection by possession regardless of how the relationship between the secured party and the person is characterized.

  5. No Relation Back.  Former Section 9-305 provided that a security interest is perfected by possession from the time possession is taken “without a relation back.” As the comment to former section 9-305 observed, the relation-back theory, under which the taking of possession was deemed to relate back to the date of the original security agreement, has had little vitality since the 1938 revision of the Federal Bankruptcy Act. The theory is inconsistent with former article 9 and with this article. See Section 9-313(d). Accordingly, this article deletes the quoted phrase as unnecessary. Where a pledge transaction is contemplated, perfection dates only from the time possession is taken, although a security interest may attach, unperfected. The only exceptions to this rule are the short, 20-day periods of perfection provided in Section 9-312(e), (f), and (g), during which a debtor may have possession of specified collateral in which there is a perfected security interest.
  6. Certificated Securities.  The second sentence of subsection (a) reflects the traditional rule for perfection of a security interest in certificated securities. Compare Sections 8-313(1)(a) and 8-321 (1978 Official Text); Section 9-115(6) (1994 Official Text); and Section 9-305 (1972 Official Text). It has been modified to refer to “delivery” under Section 8-301. Corresponding changes appear in Section 9-203(b).

    Subsections (e), (f), and (g), which are new, apply to a person in possession of security certificates or holding security certificates for the secured party’s benefit under section 8-301. For delivery to occur when a person other than a secured party holds possession for the secured party, the person may not be a securities intermediary.

    Under subsection (e), a possessory security interest in a certificated security remains perfected until the debtor obtains possession of the security certificate. This rule is analogous to that of Section 9-314(c), which deals with perfection of security interests in investment property by control. See Section 9-314, Comment 3.

  7. Goods Covered by Certificate of Title.  Subsection (b) is necessary to effect changes to the choice-of-law rules governing goods covered by a certificate of title. These changes are described in the comments to Section 9-311. Subsection (b), like subsection (a), does not create a right to take possession. Rather, it indicates the circumstances under which the secured party’s taking possession of goods covered by a certificate of title is effective to perfect a security interest in the goods: The goods become covered by a certificate of title issued by this state at a time when the security interest is perfected by any method under the law of another jurisdiction.
  8. Goods in Possession of Third Party: No Duty to Acknowledge; Consequences of Acknowledgment.  Subsections (f) and (g) are new and address matters as to which former Article 9 was silent. They derive in part from Section 8-106(g). Subsection (f) provides that a person in possession of collateral is not required to acknowledge that it holds for a secured party. Subsection (g)(1) provides that an acknowledgment is effective even if wrongful as to the debtor. Subsection (g)(2) makes clear that an acknowledgment does not give rise to any duties or responsibilities under this article. Arrangements involving the possession of goods are hardly standardized. They include bailments for services to be performed on the goods (such as repair or processing), for use (leases), as security (pledges), for carriage, and for storage. This article leaves to the agreement of the parties and to any other applicable law the imposition of duties and responsibilities upon a person who acknowledges under subsection (c). For example, by acknowledging, a third party does not become obliged to act on the secured party’s direction or to remain in possession of the collateral unless it agrees to do so or other law so provides.
  9. Delivery to Third Party by Secured Party.  New subsections (h) and (i) address the practice of mortgage warehouse lenders. These lenders typically send mortgage notes to prospective purchasers under cover of letters advising the prospective purchasers that the lenders hold security interests in the notes. These lenders relied on notification to maintain perfection under former 9-305. Requiring them to obtain authenticated acknowledgments from each prospective purchaser under subsection (c) could be unduly burdensome and disruptive of established practices. Under subsection (h), when a secured party in possession itself delivers the collateral to a third party, instructions to the third party would be sufficient to maintain perfection by possession; an acknowledgment would not be necessary. Under subsection (i), the secured party does not relinquish possession by making a delivery under subsection (h), even if the delivery violates the rights of the debtor. That subsection also makes clear that a person to whom collateral is delivered under subsection (h) does not owe any duty to the secured party and is not required to confirm the delivery to another person unless the person otherwise agrees or law other than this Article provides otherwise.

NOTES TO DECISIONS

1.Possession.

The UCC permits perfection by possession because possession can give notice to third parties that the creditor has an interest in the collateral. Thus, in order to effect perfection, possession must be unequivocal, absolute and notorious, so that third parties may be advised. (decided under prior law) Hutchison v. C.I.T. Corp., 726 F.2d 300, 1984 U.S. App. LEXIS 25658 (6th Cir. Ky. 1984 ).

The evidence did not support the creditor tobacco warehouse’s claim that its crop money lien was perfected by “possession” when the debtors delivered their tobacco to the warehouse for purpose of selling the collateral at the seasonal auctions held by the warehouse, since no evidence was offered by the warehouse to show the necessary dominion and control over the property required for “possession” at common law, and the record also failed to show debtors’ relinquishment of control to accept or reject bids at the auction when the collateral was physically possessed by the creditor warehouse. (decided under prior law) In re Rogers, 39 B.R. 295, 1984 Bankr. LEXIS 6096 (Bankr. W.D. Ky. 1984 ).

2.Possession by Pledgee.

Tenant’s agreement to turn over 1932 potato crop to landlord to apply on unpaid rent for 1931 in lieu of attachment and distress being levied on the crop was a pledge and did not constitute a landlord’s contract lien which would give landlord priority in absence of delivery. (decided under prior law) Martin v. St. Matthews Produce Exchange, 265 Ky. 26 , 95 S.W.2d 1119, 1936 Ky. LEXIS 445 ( Ky. 1936 ).

3.Repossession by Conditional Seller.

Purchaser could not recover for conversion of an automobile peaceably repossessed by seller under an accelerated maturity clause in the conditional sales contract. (decided under prior law) General Motors Acceptance Corp. v. Shuey, 243 Ky. 74 , 47 S.W.2d 968, 1932 Ky. LEXIS 45 ( Ky. 1932 ).

4.Notifying Bailee of Interest.

Even if owner of property on which heavy equipment was stored were a bailee of the equipment, the saving provisions of this section were nevertheless unavailable to secured party since he did not notify property owner of his interest. (decided under prior law) Hutchison v. C.I.T. Corp., 576 F. Supp. 1, 1982 U.S. Dist. LEXIS 17609 (W.D. Ky. 1982 ), aff'd, 726 F.2d 300, 1984 U.S. App. LEXIS 25658 (6th Cir. Ky. 1984 ).

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Research References and Practice Aids

Kentucky Bench & Bar.

Schneiter, Equine Statutory Liens, Vol. 67, No. 4, July 2003, Ky. Bench & Bar 23.

355.9-314. Perfection by control.

  1. A security interest in investment property, deposit accounts, letter-of-credit rights, electronic chattel paper, or electronic documents may be perfected by control of the collateral under KRS 355.7-106 , 355.9-104 , 355.9-105 , 355.9-106 , or 355.9-107 .
  2. A security interest in deposit accounts, electronic chattel paper, letter-of-credit rights, or electronic documents is perfected by control under KRS 355.7-106 , 355.9-104 , 355.9-105 , or 355.9-107 when the secured party obtains control and remains perfected by control only while the secured party retains control.
  3. A security interest in investment property is perfected by control under KRS 355.9-106 from the time the secured party obtains control and remains perfected by control until:
    1. The secured party does not have control; and
    2. One (1) of the following occurs:
      1. If the collateral is a certificated security, the debtor has or acquires possession of the security certificate;
      2. If the collateral is an uncertificated security, the issuer has registered or registers the debtor as the registered owner; or
      3. If the collateral is a security entitlement, the debtor is or becomes the entitlement holder.

History. Enact. Acts 1958, ch. 77, § 9-314, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 54, effective July 1, 2001; 2012, ch. 132, § 71, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  Substantially new; derived in part from former Section 9-115(4).
  2. Control.  This section provides for perfection by control with respect to investment property, deposit accounts, letter-of-credit rights, and electronic chattel paper. For explanations of how a secured party takes control of these types of collateral, see Sections 9-104 through 9-107. Subsection (b) explains when a security interest is perfected by control and how long a security interest remains perfected by control. Like Section 9-313(d) and for the same reasons, subsection (b) makes no reference to the doctrine of “relation back.” See Section 9-313, Comment 5.
  3. Investment Property.  Subsection (c) provides a special rule for investment property. Once a secured party has control, its security interest remains perfected by control until the secured party ceases to have control and the debtor receives possession of collateral that is a certificated security, becomes the registered owner of collateral that is an uncertificated security, or becomes the entitlement holder of collateral that is a security entitlement. The result is particularly important in the “repledge” context. See Section 9-207, Comment 5.

    In a transaction in which a secured party who has control grants a security interest in investment property or sells outright the investment property, by virtue of the debtor’s consent or applicable legal rules, a purchaser from the secured party typically will cut off the debtor’s rights in the investment property or be immune from the debtor’s claims. See Section 9-207, Comments 5 and 6. If the investment property is a security, the debtor normally would retain no interest in the security following the purchase from the secured party, and a claim of the debtor against the secured party for redemption (Section 9-623) or otherwise with respect to the security would be a purely personal claim. If the investment property transferred by the secured party is a financial asset in which the debtor had a security entitlement credited to a securities account maintained with the secured party as a securities intermediary, the debtor’s claim against the secured party could arise as a part of its securities account notwithstanding its personal nature. (This claim would be analogous to a “credit balance” in the securities account, which is a component of the securities account even though it is a personal claim against the intermediary.) In the case in which the debtor may retain an interest in investment property notwithstanding a repledge or sale by the secured party, subsection (c) makes clear that the security interest will remain perfected by control.

NOTES TO DECISIONS

1.Deposit Account.

Transfer of payments to a secured creditor could not be considered as preferential because the transfer was made out of a deposit account that was part of the collateral for the creditor’s secured loan transaction and the creditor did not receive more than it would have received in a Chapter 7 proceeding. The creditor had a properly perfected security interest in the collateral. Dunlap v. Independence Bank (In re Nationwide Tower Co.), 2008 Bankr. LEXIS 1738 (Bankr. W.D. Ky. June 16, 2008).

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-315. Secured party’s rights on disposition of collateral and in proceeds.

  1. Except as otherwise provided in this article and in KRS 355.2-403 (2):
    1. A security interest or agricultural lien continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest or agricultural lien; and
    2. A security interest attaches to any identifiable proceeds of collateral.
  2. Proceeds that are commingled with other property are identifiable proceeds:
    1. If the proceeds are goods, to the extent provided by KRS 355.9-336 ; and
    2. If the proceeds are not goods, to the extent that the secured party identifies the proceeds by a method of tracing, including application of equitable principles, that is permitted under law other than this article with respect to commingled property of the type involved.
  3. A security interest in proceeds is a perfected security interest if the security interest in the original collateral was perfected.
  4. A perfected security interest in proceeds becomes unperfected on the twenty-first day after the security interest attaches to the proceeds unless:
    1. The following conditions are satisfied:
      1. A filed financing statement covers the original collateral;
      2. The proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed; and
      3. The proceeds are not acquired with cash proceeds;
    2. The proceeds are identifiable cash proceeds; or
    3. The security interest in the proceeds is perfected other than under subsection (3) of this section when the security interest attaches to the proceeds or within twenty (20) days thereafter.
  5. If a filed financing statement covers the original collateral, a security interest in proceeds which remains perfected under subsection (4)(a) of this section becomes unperfected at the later of:
    1. When the effectiveness of the filed financing statement lapses under KRS 355.9-515 or is terminated under KRS 355.9-513 ; or
    2. The twenty-first day after the security interest attaches to the proceeds.

History. Enact. Acts 1958, ch. 77, § 9-315, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 55, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-306.
  2. Continuation of Security Interest or Agricultural Lien Following Disposition of Collateral.  Subsection (a)(1), which derives from former Section 9-306(2), contains the general rule that a security interest survives disposition of the collateral. In these cases, the secured party may repossess the collateral from the transferee or, in an appropriate case, maintain an action for conversion. The secured party may claim both any proceeds and the original collateral but, of course, may have only one satisfaction.

    In many cases, a purchaser or other transferee of collateral will take free of a security interest, and the secured party’s only right will be to proceeds. For example, the general rule does not apply, and a security interest does not continue in collateral, if the secured party authorized the disposition, in the agreement that contains the security agreement or otherwise. Subsection (a)(1) adopts the view of PEB Commentary No. 3 and makes explicit that the authorized disposition to which it refers is an authorized disposition “free of” the security interest or agricultural lien. The secured party’s right to proceeds under this section or under the express terms of an agreement does not in itself constitute an authorization of disposition. The change in language from former Section 9-306(2) is not intended to address the frequently litigated situation in which the effectiveness of the secured party’s consent to a disposition is conditioned upon the secured party’s receipt of the proceeds. In that situation, subsection (a) leaves the determination of authorization to the courts, as under former Article 9.

    This Article contains several provisions under which a transferee takes free of a security interest or agricultural lien. For example, Section 9-317 states when transferees take free of unperfected security interests; Sections 9-320 and 9-321 on goods, 9-321 on general intangibles, 9-330 on chattel paper and instruments, and 9-331 on negotiable instruments, negotiable documents, and securities state when purchasers of such collateral take free of a security interest, even though perfected and even though the disposition was not authorized. Section 9-332 enables most transferees (including non-purchasers) of funds from a deposit account and most transferees of money to take free of a perfected security interest in the deposit account or money.

    Likewise, the general rule that a security interest survives disposition does not apply if the secured party entrusts goods collateral to a merchant who deals in goods of that kind and the merchant sells the collateral to a buyer in ordinary course of business. Section 2-403(2) gives the merchant the power to transfer all the secured party’s rights to the buyer, even if the sale is wrongful as against the secured party. Thus, under subsection (a)(1), an entrusting secured party runs the same risk as any other entruster.

  3. Secured Party’s Right to Identifiable Proceeds.  Under subsection (a)(2), which derives from former Section 9-306(2), a security interest attaches to any identifiable “proceeds,” as defined in Section 9-102. See also Section 9-203(f). Subsection (b) is new. It indicates when proceeds commingled with other property are identifiable proceeds and permits the use of whatever methods of tracing other law permits with respect to the type of property involved. Among the “equitable principles” whose use other law may permit is the “lowest intermediate balance rule.” See Restatement (2d), Trusts §  202.
  4. Automatic Perfection in Proceeds: General Rule.  Under subsection (c), a security interest in proceeds is a perfected security interest if the security interest in the original collateral was perfected. This article extends the period of automatic perfection in proceeds from 10 days to 20 days. Generally, a security interest in proceeds becomes unperfected on the 21st day after the security interest attaches to the proceeds. See subsection (d). The loss of perfected status under subsection (d) is prospective only. Compare, e.g., Section 9-515(c) (deeming security interest unperfected retroactively).
  5. Automatic Perfection in Proceeds: Proceeds Acquired with Cash Proceeds.  Subsection (d)(1) derives from former Section 9-306(3)(a). It carries forward the basic rule that a security interest in proceeds remains perfected beyond the period of automatic perfection if a filed financing statement covers the original collateral (e.g., inventory) and the proceeds are collateral in which a security interest may be perfected by filing in the office where the financing statement has been filed (e.g., equipment). A different rule applies if the proceeds are acquired with cash proceeds, as is the case if the original collateral (inventory) is sold for cash (cash proceeds) that is used to purchase equipment (proceeds). Under these circumstances, the security interest in the equipment proceeds remains perfected only if the description in the filed financing statement indicates the type of property constituting the proceeds (e.g., “equipment”).

    This section reaches the same result but takes a different approach. It recognizes that the treatment of proceeds acquired with cash proceeds under former Section 9-306(3)(a) essentially was superfluous. In the example, had the filing covered “equipment” as well as “inventory,” the security interest in the proceeds would have been perfected under the usual rules governing after-acquired equipment (see former Sections 9-302 and 9-303); paragraph (3)(a) added only an exception to the general rule. Subsection (d)(1)(C) of this section takes a more direct approach. It makes the general rule of continued perfection inapplicable to proceeds acquired with cash proceeds, leaving perfection of a security interest in those proceeds to the generally applicable perfection rules under subsection (d)(3).

  6. Automatic Perfection in Proceeds: Lapse or Termination of Financing Statement During 20-Day Period; Perfection Under Other Statute or Treaty.  Subsection (e) provides that a security interest in proceeds perfected under subsection (d)(1) ceases to be perfected when the financing statement covering the original collateral lapses or is terminated. If the lapse or termination occurs before the 21st day after the security interest attaches, however, the security interest in the proceeds remains perfected until the 21st day. Section 9-311(b) provides that compliance with the perfection requirements of a statute or treaty described in Section 9-311(a) “is equivalent to the filing of a financing statement.” It follows that collateral subject to a security interest perfected by such compliance under Section 9-311(b) is covered by a “filed financing statement” within the meaning of Section 9-315(d) and (e).
  7. Automatic Perfection in Proceeds: Continuation of Perfection in Cash Proceeds.  Former Section 9-306(3)(b) provided that if a filed financing statement covered original collateral, a security interest in identifiable cash proceeds of the collateral remained perfected beyond the ten-day period of automatic perfection. Former Section 9-306(3)(c) contained a similar rule with respect to identifiable cash proceeds of investment property. Subsection (d)(2) extends the benefits of former sections 9-306(3)(b) and (3)(c) to identifiable cash proceeds of all types of original collateral in which a security interest is perfected by any method. Under subsection (d)(2), if the security interest in the original collateral was perfected, a security interest in identifiable cash proceeds will remain perfected indefinitely, regardless of whether the security interest in the original collateral remains perfected. In many cases, however, a purchaser or other transferee of the cash proceeds will take free of the perfected security interest. See, e.g., Sections 9-330(d) (purchaser of check), 9-331 (holder in due course of check), and 9-332 (transferee of money or funds from a deposit account).
  8. Insolvency Proceedings; Returned and Repossessed Goods.  This article deletes former Section 9-306(4), which dealt with proceeds in insolvency proceedings. Except as otherwise provided by the Bankruptcy Code, the debtor’s entering into bankruptcy does not affect a secured party’s right to proceeds.

    This article also deletes former Section 9-306(5), which dealt with returned and repossessed goods. Section 9-330, Comments 9 to 11, explain and clarify the application of priority rules to returned and repossessed goods as proceeds of chattel paper.

  9. Proceeds of Collateral Subject to Agricultural Lien.  This article does not determine whether a lien extends to proceeds of farm products encumbered by an agricultural lien. If, however, the proceeds are themselves farm products on which an “agricultural lien” (defined in Section 9-102) arises under other law, then the agricultural-lien provisions of this article apply to the agricultural lien on the proceeds in the same way in which they would apply had the farm products not been proceeds.

Example 1: Lender perfects a security interest in Debtor’s inventory by filing a financing statement covering “inventory.” Debtor sells the inventory and deposits the buyer’s check into a deposit account. Debtor draws a check on the deposit account and uses it to pay for equipment. Under the “lowest intermediate balance rule,” which is a permitted method of tracing in the relevant jurisdiction, see Comment 3, the funds used to pay for the equipment were identifiable proceeds of the inventory. Because the proceeds (equipment) were acquired with cash proceeds (deposit account), subsection (d)(i) does not extend perfection beyond the 20-day automatic period.

Example 2: Lender perfects a security interest in Debtor’s inventory by filing a financing statement covering “all debtor’s property.” As in Example 1, Debtor sells the inventory, deposits the buyer’s check into a deposit account, draws a check on the deposit account, and uses the check to pay for equipment. Under the “lowest intermediate balance rule,” which is a permitted method of tracing in the relevant jurisdiction, see Comment 3, the funds used to pay for the equipment were identifiable proceeds of the inventory. Because the proceeds (equipment) were acquired with cash proceeds (deposit account), subsection (d)(1) does not extend perfection beyond the 20-day automatic period. However, because the financing statement is sufficient to perfect a security interest in debtor’s equipment, under subsection (d)(3) the security interest in the equipment proceeds remains perfected beyond the 20-day period.

NOTES TO DECISIONS

1.Continuation of Security Interest.

Where a bankruptcy debtor’s former spouse purchased a vehicle and the vehicle was subsequently awarded to the debtor in divorce proceedings, under KRS 355.9-315 (1)(a) the debtor’s equitable interest in the vehicle remained subject to a security interest granted to a creditor by the spouse. In re Lawson, 2004 Bankr. LEXIS 740 (Bankr. E.D. Ky. May 28, 2004).

Where a debtor and/or his landscaping company sold a piece of equipment to a purchaser, a creditor’s security interest in the equipment continued despite the sale pursuant to KRS 355.9-315 (1)(a), as the sale was made without the creditor’s consent or knowledge. Even if the purchaser had no knowledge of the creditor’s security interest, which was belied by judicial admissions that he made in his complaint, the exception in KRS 355.9-320 for a buyer in the ordinary course of business did not apply, as neither the debtor nor his company was in the business of selling equipment of this kind. Teague v. Taylor (In re Taylor), 2012 Bankr. LEXIS 2825 (Bankr. E.D. Ky. June 19, 2012).

Proceeds of a Chapter 13 debtor’s auto insurance policy after her car was totaled were property of her bankruptcy estate as the insurance payment was deemed to arise out of the actions of the third party driver and came from his obligation to the debtor based on his negligent actions; as the debtor had granted a credit union a security interest in the car, the credit union’s lien attached to any proceeds of the car by contract and statute. In re Granville, 2014 Bankr. LEXIS 1373 (Bankr. E.D. Ky. Apr. 4, 2014).

2.Priority in Insolvency Proceedings.

Conditional seller’s contract for coal mining equipment sold to a lessee which was recorded prior to the property being placed on lessor’s premises was entitled to priority in proceeds of sale of assets of lessee by receiver over the lessor’s lien for coal royalties (rent). (decided under prior law) Montgomery Coal Corp. v. Allais, 223 Ky. 107 , 3 S.W.2d 180, 1928 Ky. LEXIS 290 ( Ky. 1928 ).

3.Estoppel.

Both assignee with knowledge of installation and assignor of conditional sales contract for purchase of trucks were estopped from claiming lien on dump beds installed on trucks by partnership prior to formalization and recording of the conditional sales contract, and the partnership was allowed full value of the dump beds when the trucks were sold for default in payments less their proportionate share of the costs of the sale. (decided under prior law) Walter J. Hieb Sand & Gravel, Inc. v. Universal C. I. T. Credit Corp., 332 S.W.2d 619, 1959 Ky. LEXIS 20 ( Ky. 1959 ).

4.Sale Authorized by Security Agreement.

Where a floor plan financing security contract provided that the motor company “shall have liberty to exhibit and to sell each chattel in the ordinary course of trade and for the respective principal obligations shown in the respective statements,” and a bank refinanced a car claimed to be owned by an employe of an automobile dealership but listed as owned by the dealership under the floor plan inventory, the effect of the provisions of the security agreement and this section was to release the lien. (decided under prior law) Universal C. I. T. Credit Corp. v. Middlesboro Motor Sales, Inc., 424 S.W.2d 409, 1968 Ky. LEXIS 455 ( Ky. 1968 ).

5.Tobacco Crops.

Former KRS 355.9-307 (1) was one of the statutory “or otherwise” exceptions to former KRS 355.9-306 (2). (decided under prior law) Cessna Finance Corp. v. Skyways Enterprises, Inc., 580 S.W.2d 491, 1979 Ky. LEXIS 249 ( Ky. 1979 ).

In an action for a tobacco warehouse’s wrongful payment of proceeds which were subject to a lien, summary judgment was improper where a genuine issue of material fact existed as to the amount of damages. (decided under prior law) Paducah Burley Floors, Inc. v. Peoples First Nat'l Bank & Trust Co., 757 S.W.2d 196, 1988 Ky. App. LEXIS 50 (Ky. Ct. App. 1988).

It is unlikely that “advances” paid before the actual sale of tobacco could ever be considered proceeds, accordingly, former KRS 355.9-307 (2) requires only that notice be given prior to the payment of proceeds as they are defined, and not before any “advances” are made. (decided under prior law) Paducah Burley Floors, Inc. v. Peoples First Nat'l Bank & Trust Co., 757 S.W.2d 196, 1988 Ky. App. LEXIS 50 (Ky. Ct. App. 1988).

6.Contractual Right to Proceeds.

Since former KRS 355.9-306 (1) expressly defined “proceeds” to include an account such as arose by assignment of debtor to creditor of the right to receive payment of milk sales, some payments of which were made within 90 days of filing of financial statements by creditor, such statements were sufficient to perfect creditor’s interest in such accounts and thus such assignment was a nonpreferential transfer. (decided under prior law) In re Pendleton, 40 B.R. 306, 1984 Bankr. LEXIS 6271 (Bankr. W.D. Ky. 1984 ).

7.Resales by Buyer.

Since the security agreement between the manufacturer of farm equipment and a dealer authorized the dealer to make resales for cash, pursuant to former KRS 355.9-306 (2), when the items of farm equipment were sold to bona fide purchasers and left the inventory of the dealer, the lien of the manufacturer in the said equipment at that point ceased to exist, and pursuant to former KRS 355.9-308 , the financing company, to which the retail installment contracts were assigned, obtained priority in the chattel paper executed by the purchasers of the equipment to the dealer; the manufacturer retained a secondary security interest in the chattel paper as proceeds of the equipment. (decided under prior law) J.I. Case Co. v. Borg-Warner Acceptance Corp., 669 S.W.2d 543, 1984 Ky. App. LEXIS 450 (Ky. Ct. App. 1984).

8.Reattachment of Security Interest.

If the goods sold secure an obligation of the seller to the secured party which remains unpaid at the time the goods are repossessed or returned, the original security interest reattaches to the goods pursuant to former KRS 355.9-306 (5)(a). (decided under prior law) J.I. Case Co. v. Borg-Warner Acceptance Corp., 669 S.W.2d 543, 1984 Ky. App. LEXIS 450 (Ky. Ct. App. 1984).

9.Priority of Interests.

The lien of an unpaid transferee of chattel paper obtained by former KRS 355.9-306 (5)(b) was superior to the lien of the transferor of the goods which reattached pursuant to former KRS 355.9-306 (5)(a), even though the unpaid transferee’s lien had become unperfected as to the goods. (decided under prior law) J.I. Case Co. v. Borg-Warner Acceptance Corp., 669 S.W.2d 543, 1984 Ky. App. LEXIS 450 (Ky. Ct. App. 1984).

Where the bank, in essence, made loans to the car dealer in the amount of the overdrafts paid, and since the bank had no security for such loans, it was an unsecured creditor of the car dealership and could not enforce as if it was a secured creditor. (decided under prior law) GMAC v. Lincoln Nat'l Bank, 18 S.W.3d 337, 2000 Ky. LEXIS 2 ( Ky. 2000 ).

10.Conversion Action.

The Uniform Commercial Code recognizes a secured creditor’s right for wrongful conversion of collateral against the transferee of the original debtor. (decided under prior law) Ranier v. Gilford, 688 S.W.2d 753, 1985 Ky. App. LEXIS 503 (Ky. Ct. App. 1985).

The moneys received by the second creditor as a result of the debtor’s cattle sales were subject to the secured creditor’s continuing perfected security interest, where there was no language in the secured creditor’s security agreement expressly authorizing sale, and no conduct or representations by the secured creditor sufficient to otherwise authorize sale; therefore, retention of the proceeds by the second creditor constituted wrongful conversion. (decided under prior law) Nolin Production Credit Asso. v. Canmer Deposit Bank, 726 S.W.2d 693, 1986 Ky. App. LEXIS 1466 (Ky. Ct. App. 1986).

Where the cattle subject to the secured creditor’s security agreement had long been sold to unknown transferees and were not capable of recovery, the proceeds, to the extent of the indebtedness secured, were the subject of the conversion by the second creditor of the secured creditor’s funds. (decided under prior law) Nolin Production Credit Asso. v. Canmer Deposit Bank, 726 S.W.2d 693, 1986 Ky. App. LEXIS 1466 (Ky. Ct. App. 1986).

Third-party tort-feasor’s insurance carrier was guilty of converting an automobile when it took possession after an accident despite constructive notice of a secured creditor’s lien; however, after paying owner for the value of the automobile, the carrier was only liable to the lien holder for the salvage value of the vehicle and not for the amount paid to the owner. (decided under prior law) State Auto. Mut. Ins. Co. v. Chrysler Credit Corp., 792 S.W.2d 626, 1990 Ky. App. LEXIS 89 (Ky. Ct. App. 1990).

11.— Attorney’s Fees.

Attorney’s fees incurred by a secured creditor in a conversion action for collateral against the transferee of the original creditor are not recoverable. (decided under prior law) Ranier v. Gilford, 688 S.W.2d 753, 1985 Ky. App. LEXIS 503 (Ky. Ct. App. 1985).

12.Settlement.

Moneys received in settlement of a tort claim for the tortious damage or destruction of secured collateral are “proceeds” under the provisions of this section. (decided under prior law) In re Stone, 52 B.R. 305, 1985 Bankr. LEXIS 5466 (Bankr. W.D. Ky. 1985 ).

13.Right to Nominate.

Where the debtor holding a fractional share of a syndicated stallion had the right to nominate a mare to be bred to the stallion and had not yet defaulted on the security agreement when the nomination was sold, and where the right to sell the nomination, or to use any such nomination sold, was not limited in either the syndicate agreement or the security agreement, in the event of default on the obligation to the secured party, the authorized sale of the collateral extinguished the security interest in the collateral, and the purchasers, not the secured party, had the right to nominate. (decided under prior law) Trimble v. North Ridge Farms, Inc., 700 S.W.2d 396, 1985 Ky. LEXIS 256 ( Ky. 1985 ).

14.Transfer.

Any collateral transferred from predecessor to debtor would be subject to bank’s security interest, which was perfected by financing statement. (decided under prior law) Bluegrass Ford-Mercury, Inc. v. Farmers Nat'l Bank, 942 F.2d 381, 1991 U.S. App. LEXIS 19123 (6th Cir. Ky. 1991 ).

15.Exceptions.

Former KRS 355.9-307 (2) was one of the statutory “or otherwise” exceptions to former KRS 355.9-306 (2). (decided under prior law) Farmer's Bank v. Dykes Tobacco Warehouse, 945 S.W.2d 433, 1997 Ky. App. LEXIS 44 (Ky. Ct. App. 1997).

The exception in commentary 2(c) of former 9-306 does not apply when a bank seizes funds deposited in a customer’s account and applies such funds to payment of overdrafts or antecedent debts; such an interpretation would eviscerate the security interest in proceeds of collateral contrary to former KRS 355.9-306 (2) and permit a bank that had made an unsecured loan to leapfrog secured creditors. (decided under prior law) GMAC v. Lincoln Nat'l Bank, 18 S.W.3d 337, 2000 Ky. LEXIS 2 ( Ky. 2000 ).

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Schneiter, Equine Statutory Liens, Vol. 67, No. 4, July 2003, Ky. Bench & Bar 23.

Kentucky Law Journal.

Spivack, Financing the Manufacturer: Article 9 of the Uniform Commercial Code, 48 Ky. L.J. 397 (1960).

Kentucky Law Survey, Weinberg, Commercial Law and Consumer Credit, 65 Ky. L.J. 370 (1976-77).

Lester, Security Interests in Thoroughbred and Standardbred Horses: A Transactional Approach, 70 Ky. L.J. 1065 (1981-82).

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Smith, Implied and Conditional Consent in the Sale of Horse Shares or Seasons, 74 Ky. L.J. 839 (1985-86).

Protecting Security Interests in Equine Collateral Under the Clear Title Provisions of the Food Security Act of 1985, 78 Ky. L.J. 447 (1989-90).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

Hakes, A Quest for Justice in the Conversion of Security Interests, 82 Ky. L.J. 837 (1993-94).

355.9-316. Continued perfection of security interest following change in governing law.

  1. A security interest perfected pursuant to the law of the jurisdiction designated in KRS 355.9-301 (1) or 355.9-305 (3) remains perfected until the earliest of:
    1. The time perfection would have ceased under the law of that jurisdiction;
    2. The expiration of four (4) months after a change of the debtor’s location to another jurisdiction; or
    3. The expiration of one (1) year after a transfer of collateral to a person that thereby becomes a debtor and is located in another jurisdiction.
  2. If a security interest described in subsection (1) of this section becomes perfected under the law of the other jurisdiction before the earliest time or event described in that subsection, it remains perfected thereafter. If the security interest does not become perfected under the law of the other jurisdiction before the earliest time or event, it becomes unperfected and is deemed never to have been perfected as against a purchaser of the collateral for value.
  3. A possessory security interest in collateral, other than goods covered by a certificate of title and as-extracted collateral consisting of goods, remains continuously perfected if:
    1. The collateral is located in one jurisdiction and subject to a security interest perfected under the law of that jurisdiction;
    2. Thereafter the collateral is brought into another jurisdiction; and
    3. Upon entry into the other jurisdiction, the security interest is perfected under the law of the other jurisdiction.
  4. Except as otherwise provided in subsection (5) of this section, a security interest in goods covered by a certificate of title which is perfected by any method under the law of another jurisdiction when the goods become covered by a certificate of title from this Commonwealth remains perfected until the security interest would have become unperfected under the law of the other jurisdiction had the goods not become so covered.
  5. A security interest described in subsection (4) of this section becomes unperfected as against a purchaser of the goods for value and is deemed never to have been perfected as against a purchaser of the goods for value if the applicable requirements for perfection under KRS 355.9-311 (2) or 355.9-313 are not satisfied before the earlier of:
    1. The time the security interest would have become unperfected under the law of the other jurisdiction had the goods not become covered by a certificate of title from this Commonwealth; or
    2. The expiration of four (4) months after the goods had become so covered.
  6. A security interest in deposit accounts, letter-of-credit rights, or investment property which is perfected under the law of the bank’s jurisdiction, the issuer’s jurisdiction, a nominated person’s jurisdiction, the securities intermediary’s jurisdiction, or the commodity intermediary’s jurisdiction, as applicable, remains perfected until the earlier of:
    1. The time the security interest would have become unperfected under the law of that jurisdiction; or
    2. The expiration of four (4) months after a change of the applicable jurisdiction to another jurisdiction.
  7. If a security interest described in subsection (6) of this section becomes perfected under the law of the other jurisdiction before the earlier of the time or the end of the period described in that subsection, it remains perfected thereafter. If the security interest does not become perfected under the law of the other jurisdiction before the earlier of that time or the end of that period, it becomes unperfected and is deemed never to have been perfected as against a purchaser of the collateral for value.
  8. The following rules apply to collateral to which a security interest attaches within four (4) months after the debtor changes its location to another jurisdiction:
    1. A financing statement filed before the change pursuant to the law of the jurisdiction designated in KRS 355.9-301 (1) or 355.9-305 (3) is effective to perfect a security interest in the collateral if the financing statement would have been effective to perfect a security interest in the collateral if the debtor had not changed its location; and
    2. If a security interest that is perfected by a financing statement that is effective under paragraph (a) of this subsection becomes perfected under the law of the other jurisdiction before the earlier of the time the financing statement would have become ineffective under the law of the jurisdiction designated in KRS 355.9-301 (1) or 355.9-305 (3) or the expiration of the four (4) month period, it remains perfected thereafter. If the security interest does not become perfected under the law of the other jurisdiction before the earlier time or event, it becomes unperfected and is deemed never to have been perfected as against a purchaser of the collateral for value.
  9. If a financing statement naming an original debtor is filed pursuant to the law of the jurisdiction designated in KRS 355.9-301 (1) or 355.9-305 (3) and the new debtor is located in another jurisdiction, the following rules apply:
    1. The financing statement is effective to perfect a security interest in collateral in which the new debtor has or acquires rights before or within four (4) months after the new debtor becomes bound under KRS 355.9-203 (4), if the financing statement would have been effective to perfect a security interest in the collateral if the collateral had been acquired by the original debtor; and
    2. A security interest that is perfected by the financing statement and which becomes perfected under the law of the other jurisdiction before the earlier of the expiration of the four (4) month period or the time the financing statement would have become ineffective under the law of the jurisdiction designated in KRS 355.9-301 (1) or 355.9-305 (3) remains perfected thereafter. A security interest that is perfected by the financing statement but which does not become perfected under the law of the other jurisdiction before the earlier time or event becomes unperfected and is deemed never to have been perfected as against a purchaser of the collateral for value.

History. Enact. Acts 1958, ch. 77, § 9-316, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 56, effective July 1, 2001; 2012, ch. 132, § 72, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  Former Section 9-103(1)(d), (2)(b), (3)(e), as modified.
  2. Continued Perfection . Subsections (a) through (g) deal with continued perfection of security interests that have been perfected under the law of another jurisdiction. The fact that the law of a particular jurisdiction ceases to govern perfection under Sections 9-301 through 9-307 does not necessarily mean that a security interest perfected under that law automatically becomes unperfected. To the contrary: This section generally provides that a security interest perfected under the law of one jurisdiction remains perfected for a fixed period of time (four months or one year, depending on the circumstances), even though the jurisdiction whose law governs perfection changes. However, cessation of perfection under the law of the original jurisdiction cuts short the fixed period. The four-month and one-year periods are long enough for a secured party to discover in most cases that the law of a different jurisdiction governs perfection and to reperfect (typically by filing) under the law of that jurisdiction. If a secured party properly reperfects a security interest before it becomes unperfected under subsection (a), then the security interest remains perfected continuously thereafter. See subsection (b).
  3. Retroactive Unperfection.  Subsection (b) sets forth the consequences of the failure to reperfect before perfection ceases under subsection (a): the security interest becomes unperfected prospectively and, as against purchasers for value, including buyers and secured parties, but not as against donees or lien creditors, retroactively. The rule applies to agricultural liens, as well. See also Section 9-515 (taking the same approach with respect to lapse). Although this approach creates the potential for circular priorities, the alternative-retroactive unperfection against lien creditors—would create substantial and unjustifiable preference risks.
  4. Possessory Security Interests.  Subsection (c) deals with continued perfection of possessory security interests. It applies not only to security interests perfected solely by the secured party’s having taken possession of the collateral. It also applies to security interests perfected by a method that includes as an element of perfection the secured party’s having taken possession, such as perfection by taking delivery of a certificated security in registered form, see Section 9-313(a), and perfection by obtaining control over a certificated security. See Section 9-314(a).
  5. Goods Covered by Certificate of Title.  Subsections (d) and (e) address continued perfection of a security interest in goods covered by a certificate of title. The following examples explain the operation of those subsections.
  6. Deposit Accounts, Letter-of-Credit Rights, and Investment Property.  Subsections (f) and (g) address changes in the jurisdiction of a bank, issuer of an uncertificated security, issuer of or nominated person under a letter of credit, securities intermediary, and commodity intermediary. The provisions are analogous to those of subsections (a) and (b).
  7. Security Interests that Attach after Debtor Changes Location.   In contrast to subsections (a) and (b), which address security interests that are perfected (i.e., that have attached and as to which any required perfection step has been taken) before the debtor changes its location, subsection (h) addresses security interests that attach within four months after the debtor changes its location. Under subsection (h), a filed financing statement that would have been effective to perfect a security interest in the collateral if the debtor had not changed its location is effective to perfect a security interest in collateral acquired within four months after the relocation.
  8. Collateral Acquired by New Debtor.  Subsection (i) is similar to subsection (h). Whereas subsection (h) addresses security interests that attach within four months after a debtor changes its location, subsection (i) addresses security interests that attach within four months after a new debtor becomes bound as debtor by a security agreement entered into by another person. Subsection (i) also addresses collateral acquired by the new debtor before it becomes bound.
  9. Agricultural Liens.  This section does not apply to agricultural liens.

Example 1: Debtor is a general partnership whose chief executive office is in Pennsylvania. Lender perfects a security interest in Debtor’s equipment by filing in Pennsylvania on May 15, 2002. On April 1, 2005, without Lender’s knowledge, Debtor moves its chief executive office to New Jersey. Lender’s security interest remains perfected for four months after the move. See subsection (a)(2).

Example 2: Debtor is a general partnership whose chief executive office is in Pennsylvania. Lender perfects a security interest in Debtor’s equipment by filing in Pennsylvania on May 15, 2002. On April 1, 2007, without Lender’s knowledge, Debtor moves its chief executive office to New Jersey. Lender’s security interest remains perfected only through May 14, 2007, when the effectiveness of the filed financing statement lapses. See subsection (a)(1). Although, under these facts, Lender would have only a short period of time to discover that Debtor had relocated and to reperfect under New Jersey law, Lender could have protected itself by filing a continuation statement in Pennsylvania before Debtor relocated. By doing so, Lender would have prevented lapse and allowed itself the full four months to discover Debtor’s new location and refile there or, if Debtor is in default, to perfect by taking possession of the equipment.

Example 3: Under the facts of Example 2, Lender files a financing statement in New Jersey before the effectiveness of the Pennsylvania financing statement lapses. Under subsection (b), Lender’s security interest is continuously perfected beyond May 14, 2007, for a period determined by New Jersey’s Article 9.

Subsection (a)(3) allows a one-year period in which to reperfect. The longer period is necessary, because, even with the exercise of due diligence, the secured party may be unable to discover that the collateral has been transferred to a person located in another jurisdiction. In any event, the period is cut short if the financing statement becomes ineffective under the law of the jurisdiction in which it is filed.

Example 4: Debtor is a Pennsylvania corporation. On January 1, Lender perfects a security interest in Debtor’s equipment by filing in Pennsylvania. Debtor’s shareholders decide to “reincorporate” in Delaware. On March 1, they form a Delaware corporation (Newcorp) into which they merge Debtor. The merger effectuates a transfer of the collateral from Debtor to Newcorp, which thereby becomes a debtor and is located in another jurisdiction. Under subsection (a)(3), the security interest remains perfected for one year after the merger. If a financing statement is filed in Delaware against Newcorp within the year following the merger, then the security interest remains perfected thereafter for a period determined by Delaware’s Article 9.

Note that although Newcorp is a “new debtor” as defined in Section 9-102, the application of subsection (a)(3) is not limited to transferees who are new debtors. Note also that, under Section 9-507, the financing statement naming Debtor remains effective even though Newcorp has become the debtor.

Subsection (a) addresses security interests that are perfected (i.e., that have attached and as to which any required perfection step has been taken) before the debtor changes its location. Subsection (h) applies to security interests that have not attached before the location changes. See Comment 7.

Example 5: Under the facts of Example 4, six months after the merger, Buyer bought from Newcorp some equipment formerly owned by Debtor. At the time of the purchase, Buyer took subject to Lender’s perfected security interest, of which Buyer was unaware. See Section 9-315(a)(1). However, subsection (b) provides that if Lender fails to reperfect in Delaware within a year after the merger, its security interest becomes unperfected and is deemed never to have been perfected against Buyer. Having given value and received delivery of the equipment without knowledge of the security interest and before it was perfected, Buyer would take free of the security interest. See Section 9-317(b).

Example 6: Under the facts of Example 4, one month before the merger, Debtor created a security interest in certain equipment in favor of Financer, who perfected by filing in Pennsylvania. At that time, Financer’s security interest is subordinate to Lender’s. See Section 9-322(a)(1). Financer reperfects by filing in Delaware within a year after the merger, but Lender fails to do so. Under subsection (b), Lender’s security interest is deemed never to have been perfected against Financer, a purchaser for value. Consequently, under Section 9-322(a)(2), Financer’s security interest is now senior.

Of course, the expiration of the time period specified in subsection (a) does not of itself prevent the secured party from later reperfecting under the law of the new jurisdiction. If the secured party does so, however, there will be a gap in perfection, and the secured party may lose priority as a result. Thus, in Example 6, if Lender perfects by filing in Delaware more than one year under the merger, it will have a new date of filing and perfection for purposes of Section 9-322(a)(1). Financer’s security interest, whose perfection dates back to the filing in Pennsylvania under subsection (b), will remain senior.

Example 7: Debtor’s automobile is covered by a certificate of title issued by Illinois. Lender perfects a security interest in the automobile by complying with Illinois’ certificate-of-title statute. Thereafter, Debtor applies for a certificate of title in Indiana. Six months thereafter, Creditor acquires a judicial lien on the automobile. Under Section 9-303(b), Illinois law ceases to govern perfection; rather, once Debtor delivers the application and applicable fee to the appropriate Indiana authority, Indiana law governs. Nevertheless, under Indiana’s Section 9-316(d), Lender’s security interest remains perfected until it would become unperfected under Illinois law had no certificate of title been issued by Indiana. (For example, Illinois’ certificate-of-title statute may provide that the surrender of an Illinois certificate of title in connection with the issuance of a certificate of title by another jurisdiction causes a security interest noted thereon to become unperfected.) If Lender’s security interest remains perfected, it is senior to Creditor’s judicial lien.

Example 8: Under the facts in Example 8, five months after Debtor applies for an Indiana certificate of title, Debtor sells the automobile to Buyer. Under subsection (e)(2), because Lender did not reperfect within the four months after the goods became covered by the Indiana certificate of title, Lender’s security interest is deemed never to have been perfected against Buyer. Under Section 9-317(b), Buyer is likely to take free of the security interest. Lender could have protected itself by perfecting its security interest either under Indiana’s certificate-of-title statute, see Section 9-311, or, if it had a right to do so under an agreement or Section 9-609, by taking possession of the automobile. See Section 9-313(b).

The results in Examples 7 and 8 do not depend on the fact that the original perfection was achieved by notation on a certificate of title. Subsection (d) applies regardless of the method by which a security interest is perfected under the law of another jurisdiction when the goods became covered by a certificate of title from this State.

Section 9-337 affords protection to a limited class of persons buying or acquiring a security interest in the goods while a security interest is perfected under the law of another jurisdiction but after this State has issued a clean certificate of title.

Example 9: Debtor, an individual whose principal residence is in Pennsylvania, grants to Lender a security interest in Debtor’s existing and after-acquired inventory. Lender perfects the security interest by filing a proper financing statement in Pennsylvania on January 2, 2014. On March 31, 2014, Debtor’s principal residence is relocated to New Jersey. Upon the relocation, New Jersey law governs perfection of a security interest in Debtor’s inventory. See Sections 9-301, 9-307. Under New Jersey’s Section 9-316(a), Lender’s security interest in Debtor’s inventory on hand at the time of the relocation remains perfected for four months thereafter. Had Debtor not relocated, the financing statement filed in Pennsylvania would have been effective to perfect Lender’s security interest in inventory acquired by Debtor after March 31, 2014. Accordingly, under subsection (h), the financing statement is effective to perfect Lender’s security interest in inventory that Debtor acquires within the four months after Debtor’s location changed.

In Example 9, Lender’s security interest in the inventory acquired within the four months after Debtor’s relocation will be perfected when it attaches. It will remain perfected if, before the expiration of the four-month period, the security interest is perfected under the law of New Jersey. Otherwise, the security interest will become unperfected at the end of the four-month period and will be deemed never to have been perfected as against a purchaser for value. See subsection (h)(2).

Example 10: Debtor, a Pennsylvania corporation, grants to Lender a security interest in Debtor’s existing and after-acquired inventory. Lender perfects the security interest by filing a proper financing statement in Pennsylvania on January 2, 2014. On March 31, 2014, Debtor merges into Survivor, a Delaware corporation. Because Survivor is located in Delaware, Delaware law governs perfection of a security interest in Survivor’s inventory. See Sections 9-301, 9-307. Under Delaware’s Section 9-316(a), Lender’s security interest in the inventory that Survivor acquired from Debtor remains perfected for one year after the transfer. See Comment 2. By virtue of the merger, Survivor becomes bound as debtor by Debtor’s security agreement. See Section 9-203(d). As a consequence, Lender’s security interest attaches to all of Survivor’s inventory under Section 9-203, and Lender’s collateral now includes inventory in which Debtor never had an interest. The financing statement filed in Pennsylvania against Debtor is effective under Delaware’s Section 9-316(i) to perfect Lender’s security interest in inventory that Survivor acquired before, and within the four months after, becoming bound as debtor by Debtor’s security agreement. This is because the financing statement filed in Pennsylvania would have been effective to perfect Lender’s security interest in this collateral had Debtor, rather than Survivor, acquired it.

If the financing statement is effective, Lender’s security interest in the collateral that Survivor acquired before, and within four months after, Survivor became bound as debtor will be perfected upon attachment. It will remain perfected if, before the expiration of the four-month period, the security interest is perfected under Delaware law. Otherwise, the security interest will become unperfected at the end of the four-month period and will be deemed never to have been perfected as against a purchaser for value.

Section 9-325 contains special rules governing the priority of competing security interests in collateral that is transferred, by merger or otherwise, to a new debtor or other person who becomes a debtor with respect to the collateral. Section 9-326 contains special rules governing the priority of competing security interests in collateral acquired by a new debtor other than by transfer from the original debtor.

Example 11: Supplier holds an agricultural lien on corn. The lien arises under an Iowa statute. Supplier perfects by filing a financing statement in Iowa, where the corn is located. See Section 9-302. Debtor stores the corn in Missouri. Assume the Iowa agricultural lien survives or an agricultural lien arises under Missouri law (matters that this Article does not govern). Once the corn is located in Missouri, Missouri becomes the jurisdiction whose law governs perfection. See Section 9-302. Thus, the agricultural lien will not be perfected unless Supplier files a financing statement in Missouri.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Subpart 3. Priority

355.9-317. Interests that take priority over or take free of security interest or agricultural lien.

  1. A security interest or agricultural lien is subordinate to the rights of:
    1. A person entitled to priority under KRS 355.9-322 ; and
    2. Except as otherwise provided in subsection (5) of this section, a person that becomes a lien creditor before the earlier of the time:
      1. The security interest or agricultural lien is perfected; or
      2. One (1) of the conditions specified in KRS 355.9-203 (2)(c) is met and a financing statement covering the collateral is filed.
  2. Except as otherwise provided in subsection (5) of this section, a buyer, other than a secured party, of tangible chattel paper, documents, goods, instruments, or a certificated security takes free of a security interest or agricultural lien if the buyer gives value and receives delivery of the collateral without knowledge of the security interest or agricultural lien and before it is perfected.
  3. Except as otherwise provided in subsection (5) of this section, a lessee of goods takes free of a security interest or agricultural lien if the lessee gives value and receives delivery of the collateral without knowledge of the security interest or agricultural lien and before it is perfected.
  4. A licensee of a general intangible or a buyer, other than a secured party, of collateral other than tangible chattel paper, tangible documents, goods, instruments, or a certificated security takes free of a security interest if the licensee or buyer gives value without knowledge of the security interest and before it is perfected.
  5. Except as otherwise provided in KRS 355.9-320 and 355.9-321 , if a person files a financing statement with respect to a purchase-money security interest before or within twenty (20) days after the debtor receives delivery of the collateral, the security interest takes priority over the rights of a buyer, lessee, or lien creditor which arise between the time the security interest attaches and the time of filing.

History. Enact. Acts 1958, ch. 77, § 9-317, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 57, effective July 1, 2001; 2012, ch. 132, § 73, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  Former Sections 2A-307(2) and 9-301.
  2. Scope of This Section.  As did former Section 9-301, this section lists the classes of persons who take priority over, or take free of, an unperfected security interest. Section 9-308 explains when a security interest or agricultural lien is “perfected.” A security interest that has attached (see Section 9-203) but as to which a required perfection step has not been taken is “unperfected.” Certain provisions have been moved from former Section 9-301. The definition of “lien creditor” now appears in Section 9-102, and the rules governing priority in future advances are found in Section 9-323.
  3. Competing Security Interests.  Section 9-322 states general rules for determining priority among conflicting security interests and refers to other sections that state special rules of priority in a variety of situations. The security interests given priority under Section 9-322 and the other sections to which it refers take priority in general even over a perfected security interest. A fortiori they take priority over an unperfected security interest.
  4. Filed but Unattached Security Interest vs. Lien Creditor.  Under former Section 9-301(1)(b), a lien creditor’s rights had priority over an unperfected security interest. Perfection required attachment (former Section 9-303) and attachment required the giving of value (former Section 9-203). It followed that, if a secured party had filed a financing statement, but the debtor had not entered into a security agreement and value had not yet been given, an intervening lien creditor whose lien arose after filing but before attachment of the security interest acquired rights that are senior to those of the secured party who later gives value. This result comported with the nemo dat concept: When the security interest attached, the collateral was already subject to the judicial lien.

    On the other hand, this approach treated the first secured advance differently from all other advances, even in circumstances in which a security agreement covering the collateral had been entered into before the judicial lien attached. The special rule for future advances in former Section 9-301(4) (substantially reproduced in Section 9-323(b)) afforded priority to a discretionary advance made by a secured party within 45 days after the lien creditor’s rights arose as long as the secured party was “perfected” when the lien creditor’s lien arose—i.e., as long as the advance was not the first one and an earlier advance had been made.

    Subsection (a)(2) revises former Section 9-301(1)(b) and, in appropriate cases, treats the first advance the same as subsequent advances. More specifically, a judicial lien that arises after the security-agreement condition of Section 9-203(b)(3) is satisfied and a financing statement is filed, but before the security interest attaches and becomes perfected is subordinate to all advances secured by the security interest, even the first advance, except as otherwise provided in Section 9-323(b). However, if the security interest becomes unperfected (e.g., because the effectiveness of the filed financing statement lapses) before the judicial lien arises, the security interest is subordinate. If a financing statement is filed but a security interest does not attach, then no priority contest arises. The lien creditor has the only enforceable claim to the property.

  5. Security Interest of Consignor or Receivables Buyer vs. Lien Creditor.  Section 1-201(37) defines “security interest” to include the interest of most true consignors of goods and the interest of most buyers of certain receivables (accounts, chattel paper, payment intangibles, and promissory notes). A consignee of goods or a seller of accounts or chattel paper each is deemed to have rights in the collateral which a lien creditor may reach, as long as the competing security interest of the consignor or buyer is unperfected. This is so even though, as between the consignor and the debtor-consignee, the latter has only limited rights, and, as between the buyer and debtor-seller, the latter does not have any rights in the collateral. See Sections 9-318 (seller) and 9-319 (consignee). Security interests arising from sales of payment intangibles and promissory notes are automatically perfected. See Section 9-309. Accordingly, a subsequent judicial lien always would be subordinate to the rights of a buyer of those types of receivables.
  6. Purchasers Other Than Secured Parties.  Subsections (b), (c), and (d) afford priority over an unperfected security interest to certain purchasers (other than secured parties) of collateral. They derive from former Sections 2A-307(2), 9-301(1)(c), and 9-301(1)(d). Former Section 9-301(1)(c) and (1)(d) provided that unperfected security interests are “subordinate” to the rights of certain purchasers. But, as former Comment 9 suggested, the practical effect of subordination in this context is that the purchaser takes free of the security interest. To avoid any possible misinterpretation, subsections (b) and (d) of this section use the phrase “takes free.”

    Subsection (b) governs goods, as well as intangibles of the type whose transfer is effected by physical delivery of the representative piece of paper (tangible chattel paper, documents, instruments, and security certificates). To obtain priority, a buyer must both give value and receive delivery of the collateral without knowledge of the existing security interest and before perfection. Even if the buyer gave value without knowledge and before perfection, the buyer would take subject to the security interest if perfection occurred before physical delivery of the collateral to the buyer. Subsection (c) contains a similar rule with respect to lessees of goods. Note that a lessee of goods in ordinary course of business takes free of all security interests created by the lessor, even if perfected. See Section 9-321.

    Normally, there will be no question when a buyer of chattel paper, documents, instruments, or security certificates “receives delivery” of the property. See Section 1-201 (defining “delivery”). However, sometimes a buyer or lessee of goods, such as complex machinery, takes delivery of the goods in stages and completes assembly at its own location. Under those circumstances, the buyer or lessee “receives delivery” within the meaning of subsections (b) and (c) when, after an inspection of the portion of the goods remaining with the seller or lessor, it would be apparent to a potential lender to the seller or lessor that another person might have an interest in the goods.

    The rule of subsection (b) obviously is not appropriate where the collateral consists of intangibles and there is no representative piece of paper whose physical delivery is the only or the customary method of transfer. Therefore, with respect to such intangibles (accounts, electronic chattel paper, general intangibles, and investment property other than certificated securities), subsection (d) gives priority to any buyer who gives value without knowledge, and before perfection, of the security interest. A licensee of a general intangible takes free of an unperfected security interest in the general intangible under the same circumstances. Note that a licensee of a general intangible in ordinary course of business takes rights under a nonexclusive license free of security interests created by the licensor, even if perfected. See Section 9-321.

    Unless Section 9-109 excludes the transaction from this article, a buyer of accounts, chattel paper, payment intangibles, or promissory notes is a “secured party” (defined in section 9-102), and subsections (b) and (d) do not determine priority of the security interest created by the sale. Rather, the priority rules generally applicable to competing security interests apply. See Section 9-322.

  7. Agricultural Liens.  Subsections (a), (b), and (c) subordinate unperfected agricultural liens in the same manner in which they subordinate unperfected security interests.
  8. Purchase-Money Security Interests.  Subsection (e) derives from former Section 9-301(2). It provides that, if a purchase-money security interest is perfected by filing no later than 20 days after the debtor receives delivery of the collateral, the security interest takes priority over the rights of buyers, lessees, or lien creditors which arise between the time the security interest attaches and the time of filing. Subsection (e) differs from former Section 9-301(2) in two significant respects. First, subsection (e) protects a purchase-money security interest against all buyers and lessees, not just against transferees in bulk. Second, subsection (e) conditions this protection on filing within 20, as opposed to ten, days after delivery.

    Section 9-311(b) provides that compliance with the perfection requirements of a statute or treaty described in Section 9-311(a) “is equivalent to the filing of a financing statement.” It follows that a person who perfects a security interest in goods covered by a certificate of title by complying with the perfection requirements of an applicable certificate-of-title statute “files a financing statement” within the meaning of subsection (e).

NOTES TO DECISIONS

1.Applicability.

Assignment of account between partners for past-due debt was not a security transaction as defined in subsection (37) of KRS 355.1-201 nor a contract right as defined in former KRS 355.9-106 and subsequent attachment by creditor of assigning partner did not create a lien under former KRS 355.9-301 which would have priority over the assignment. Spurlin v. Sloan, 368 S.W.2d 314, 1963 Ky. LEXIS 41 ( Ky. 1963 ).

The right of reclamation of a defrauded seller under subsection (2) of KRS 355.2-702 is not a “security interest” within the meaning of this section and it is not applicable in determining the priority of claims between the reclaiming seller and attaching creditors. (decided under prior law) In re Mel Golde Shoes, Inc., 403 F.2d 658, 1968 U.S. App. LEXIS 4652 (6th Cir. Ky. 1968 ).

A judgment creditor loses its status as a lien creditor, and its interest becomes subordinate to an unperfected security interest, if its writ of execution is returned unsatisfied because the debtor had no property to attach or levy, and the creditor fails to continue to deliver writs of execution until an attachment or levy is made. (decided under prior law) South Bay Enters. v. Mirada Bay Petroleum, 957 S.W.2d 287, 1997 Ky. App. LEXIS 97 (Ky. Ct. App. 1997).

2.Trustee in Bankruptcy.

The subject involved was one on which the federal circuit court must follow the Kentucky Court of Appeals as to any rule clearly established by the state court. (decided under prior law) In re Frost, 12 F.2d 1, 1926 U.S. App. LEXIS 3140 (6th Cir. Ky. 1926 ).

Automobile was part of the assets of a bankrupt free from any claim on the part of corporation holding an unrecorded trust receipt executed by the bankrupt prior to the bankruptcy to secure a time draft executed simultaneously with the trust receipt, since the trust receipt was a “security title” or “mortgage” within recording law and was not valid against general creditors unless it was recorded. (decided under prior law) In re Draughn & Steel Motor Co., 49 F.2d 636, 1931 U.S. Dist. LEXIS 1329 (D. Ky. 1931 ), aff'd, 58 F.2d 910, 1932 U.S. App. LEXIS 4792 (6th Cir. Ky. 1932 ).

Since a trust receipt was a “security title” or “mortgage” within the recording law, it was not valid against general creditors in a bankruptcy proceeding unless it was recorded. (decided under prior law) In re Draughn & Steel Motor Co., 49 F.2d 636, 1931 U.S. Dist. LEXIS 1329 (D. Ky. 1931 ), aff'd, 58 F.2d 910, 1932 U.S. App. LEXIS 4792 (6th Cir. Ky. 1932 ).

Where trustee in bankruptcy represented only antecedent creditors, none of whom held any equity in the property prior to the filing of the petition in bankruptcy, a mortgage not recorded until within four months of bankruptcy was good and was not voidable as a preference. (decided under prior law) In re Gibson, 65 F.2d 921, 1933 U.S. App. LEXIS 3209 (6th Cir. Ky. 1933 ); see also National Bond & Inv. Co. v. Jones, 78 F.2d 601, 1935 U.S. App. LEXIS 3801 (6th Cir. Ky. 1935 ).

Where creditors extended credit to bankrupt without notice of unrecorded conditional sales contract, claim of holder of conditional sales contract was properly allowed as general unsecured claim. (decided under prior law) In re Independent Distillers of Kentucky, 34 F. Supp. 708, 1940 U.S. Dist. LEXIS 2634 (D. Ky. 1940 ).

A nonpossessory security interest in personal property, if unperfected at the time of the filing of a petition for bankruptcy, is inferior to the lien of the trustee in bankruptcy. (decided under prior law) In re Leckie Freeburn Coal Co., 405 F.2d 1043, 1969 U.S. App. LEXIS 9150 (6th Cir. Ky.), cert. denied, 395 U.S. 960, 89 S. Ct. 2101, 23 L. Ed. 2d 746, 1969 U.S. LEXIS 3173 (U.S. 1969).

A renewal note does not extinguish the original obligation unless there is a novation, and a security agreement executed to secure the original obligation remains in effect and, if otherwise perfected prior to a petition in bankruptcy, is superior to the lien of the trustee. (decided under prior law) In re Cantrill Constr. Co., 418 F.2d 705, 1969 U.S. App. LEXIS 9946 (6th Cir. Ky. 1969 ), cert. denied, 397 U.S. 990, 90 S. Ct. 1124, 25 L. Ed. 2d 398, 1970 U.S. LEXIS 3561 (U.S. 1970).

Where no security interest on automobile was recorded under former KRS 355.9-401 prior to one given for attorney fees when trustee in bankruptcy took over estate, the auto was an unencumbered asset. (decided under prior law) In re Hall, 248 F. Supp. 124, 1965 U.S. Dist. LEXIS 6676 (E.D. Ky. 1965 ).

3.Perfection by Possession.

The UCC permits perfection by possession because possession can give notice to third parties that the creditor has an interest in the collateral. Thus, in order to effect perfection, possession must be unequivocal, absolute and notorious, so that third parties may be advised. (decided under prior law) Hutchison v. C.I.T. Corp., 726 F.2d 300, 1984 U.S. App. LEXIS 25658 (6th Cir. Ky. 1984 ).

4.Government Seizure.

Where claimant’s interest in seized aircraft used to transport marijuana was unrecorded and he had not filed a financing statement required by former KRS 355.9-302 , his interest in the aircraft was unperfected at the time of the seizure by the United States which acquired title to the aircraft at that time; because claimant did not have a legally recognizable ownership interest in the aircraft prior to its seizure, he did not have standing to contest the forfeiture. (decided under prior law) United States v. One 1965 Cessna 320C Twin Engine Airplane, 715 F. Supp. 808, 1989 U.S. Dist. LEXIS 7473 (E.D. Ky. 1989 ).

5.Transferee in Bulk.

A wife was estopped from asserting her claim to her husband’s stock of goods under a recorded mortgage where she allowed the stock to be sold for a fair price to someone who had no actual knowledge of her mortgage and allowed a relative to foreclose buyer’s subsequent mortgage. (decided under prior law) Pool v. Stephenson, 146 Ky. 784 , 143 S.W. 419, 1912 Ky. LEXIS 167 ( Ky. 1912 ).

6.Intangible Personal Property.

The word “deed” meant a recordable instrument sufficient to create or declare a trust, and a recorded instrument acknowledged and signed by person to whom a bond (intangible personal property) was transferred, with transferee to pay interest to transferor for life and to keep a cemetery in repair after transferor’s death, was sufficient to give the claim preference over transferee’s general creditors. (decided under prior law) St. Catherine's Cemetery v. Fidelity Trust Co., 152 Ky. 797 , 154 S.W. 29, 1913 Ky. LEXIS 739 ( Ky. 1913 ).

7.Assignee for Benefit of Creditors.

As an assignee for benefit of creditors acquired an equitable title by delivery to him of deed of assignment duly executed and acknowledged, although not lodged of record, his equity was superior to that created by subsequent levy of attachment upon assigned property. (decided under prior law) First Nat'l Bank v. D. Keefer Milling Co., 95 Ky. 97 , 23 S.W. 675, 15 Ky. L. Rptr. 457 , 1893 Ky. LEXIS 128 ( Ky. 1893 ).

8.Priority.

Second mortgage holder had a priority security interest in a manufactured home because a lis pendens did not apply to personal property, the mere filing of a notice of lis pendens was insufficient to independently create a security interest, and it did not affect the priority of competing security interests. A first mortgage holder did not perfect a security interest in the home as personal property by placing a notation on a certificate of title, as required by KRS 186A.190 , and the manufactured home remained personal property due to a failure to comply with KRS 186A.297 . Citizens Nat'l Bank v. Wash. Mut. Bank, 309 S.W.3d 792, 2010 Ky. App. LEXIS 67 (Ky. Ct. App. 2010).

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Research References and Practice Aids

Cross-References.

Conveyances and encumbrances, KRS Ch. 382.

Defendant’s property, creation of lien on, KRS 426.383 .

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Schneiter, Equine Statutory Liens, Vol. 67, No. 4, July 2003, Ky. Bench & Bar 23.

Kentucky Law Journal.

Viles, The Uniform Commercial Code v. The Bankruptcy Act, 55 Ky. L.J. 636 (1967).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

Hakes, A Quest for Justice in the Conversion of Security Interests, 82 Ky. L.J. 837 (1993-94).

355.9-318. No interest retained in right to payment that is sold — Rights and title of seller of account or chattel paper with respect to creditors and purchasers.

  1. A debtor that has sold an account, chattel paper, payment intangible, or promissory note does not retain a legal or equitable interest in the collateral sold.
  2. For purposes of determining the rights of creditors of, and purchasers for value of an account or chattel paper from, a debtor that has sold an account or chattel paper, while the buyer’s security interest is unperfected, the debtor is deemed to have rights and title to the account or chattel paper identical to those the debtor sold.

History. Enact. Acts 1958, ch. 77, § 9-318, effective July 1, 1960; 1986, ch. 118, § 73, effective July 1, 1987; repealed and reenact., Acts 2000, ch. 408, § 58, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Sellers of Accounts, Chattel Paper, Payment Intangibles, and Promissory Notes.  Section 1-201(37) defines “security interest” to include the interest of a buyer of accounts, chattel paper, payment intangibles, or promissory notes. See also Section 9-109(a) and Comment 5. Subsection (a) makes explicit what was implicit, but perfectly obvious, under former Article 9: The fact that a sale of an account or chattel paper gives rise to a “security interest” does not imply that the seller retains an interest in the property that has been sold. To the contrary, a seller of an account or chattel paper retains no interest whatsoever in the property to the extent that it has been sold. Subsection (a) also applies to sales of payment intangibles and promissory notes, transactions that were not covered by former article 9. Neither this article nor the definition of “security interest” in Section 1-201 provides rules for distinguishing sales transactions from those that create a security interest securing an obligation.
  3. Buyers of Accounts and Chattel Paper.  Another aspect of sales of accounts and chattel paper also was implicit, and equally obvious, under former Article 9: If the buyer’s security interest is unperfected, then for purposes of determining the rights of certain third parties, the seller (debtor) is deemed to have all rights and title that the seller sold. The seller is deemed to have these rights even though, as between the parties, it has sold all its rights to the buyer. Subsection (b) makes this explicit. As a consequence of subsection (b), if the buyer’s security interest is unperfected, the seller can transfer, and the creditors of the seller can reach, the account or chattel paper as if it had not been sold.
  4. Effect of Perfection.  If the security interest of a buyer of accounts or chattel paper is perfected the usual result would take effect: Transferees from and creditors of the seller could not acquire an interest in the sold accounts or chattel paper. The same result would occur if payment intangibles or promissory notes were sold, inasmuch as the buyer’s security interest is automatically perfected under Section 9-309.

Example: Debtor sells accounts or chattel paper to Buyer-1 and retains no interest in them. Buyer-1 does not file a financing statement. Debtor then sells the same receivables to Buyer-2. Buyer-2 files a proper financing statement. Having sold the receivables to Buyer-1, Debtor would not have any rights in the collateral so as to permit Buyer-2’s security (ownership) interest to attach. Nevertheless, under this section, for purposes of determining the rights of purchasers for value from Debtor, Debtor is deemed to have the rights that Debtor sold. Accordingly, Buyer-2’s security interest attaches, is perfected by the filing, and, under Section 9-322, is senior to Buyer-1’s interest.

355.9-319. Rights and title of consignee with respect to creditors and purchasers.

  1. Except as otherwise provided in subsection (2) of this section, for purposes of determining the rights of creditors of, and purchasers for value of goods from, a consignee, while the goods are in the possession of the consignee, the consignee is deemed to have rights and title to the goods identical to those the consignor had or had power to transfer.
  2. For purposes of determining the rights of a creditor of a consignee, law other than this article determines the rights and title of a consignee while goods are in the consignee’s possession if, under this part of this article, a perfected security interest held by the consignor would have priority over the rights of the creditor.

History. Enact. Acts 1976, ch. 90, § 1, effective June 19, 1976; repealed and reenact., Acts 2000, ch. 408, § 59, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Consignments.  This section takes an approach to consignments similar to that taken by Section 9-318 with respect to buyers of accounts and chattel paper. Revised Section 1-201(37) defines “security interest” to include the interest of a consignor of goods under many true consignments. Section 9-319(a) provides that, for purposes of determining the rights of certain third parties, the consignee is deemed to acquire all rights and title that the consignor had, if the consignor’s security interest is unperfected. The consignee acquires these rights even though, as between the parties, it purchases a limited interest in the goods (as would be the case in a true consignment, under which the consignee acquires only the interest of a bailee). As a consequence of this section, creditors of the consignee can acquire judicial liens and security interests in the goods.

    Insofar as creditors of the consignee are concerned, this Article to a considerable extent reformulates the former law, which appeared in former Sections 2-326 and 9-114, without changing the results. However, neither Article 2 nor former Article 9 specifically addresses the rights of non-ordinary course buyers from the consignee. Former Section 9-114 contained priority rules applicable to security interests in consigned goods. Under this Article, the priority rules for purchase-money security interests in inventory apply to consignments. See Section 9-103(d). Accordingly, a special section containing priority rules for consignments no longer is needed. Section 9-317 determines whether the rights of a judicial lien creditor are senior to the interest of the consignor, Sections 9-322 and 9-324 govern competing security interests in consigned goods, and Sections 9-317, 9-315, and 9-320 determine whether a buyer takes free of the consignor’s interest.

    The following example explains the operation of this section:

  3. Effect of Perfection.  Subsection (b) contains a special rule with respect to consignments that are perfected. If application of this article would result in the consignor having priority over a competing creditor, then other law determines the rights and title of the consignee.

Example 1: SP-1 delivers goods to Debtor in a transaction constituting a “consignment” as defined in Section 9-102. SP-1 does not file a financing statement. Debtor then grants a security interest in the goods to SP-2. SP-2 files a proper financing statement. Assuming Debtor is a mere bailee, as in a “true” consignment, Debtor would not have any rights in the collateral (beyond those of a bailee) so as to permit SP-2’s security interest to attach to any greater rights. Nevertheless, under this section, for purposes of determining the rights of Debtor’s creditors, Debtor is deemed to acquire SP-1’s rights. Accordingly, SP-2’s security interest attaches, is perfected by the filing, and, under Section 9-322, is senior to SP-1’s interest.

Example 2: SP-1 delivers goods to Debtor in a transaction constituting a “consignment” as defined in Section 9-102. SP-1 files a proper financing statement. Debtor then grants a security interest in the goods to SP-2. Under Section 9-322, SP-1’s security interest is senior to SP-2’s. Subsection (b) indicates that, for purposes of determining SP-2’s rights, other law determines the rights and title of the consignee. If, for example, a consignee obtains only the special property of a bailee, then SP-2’s security interest would attach only to that special property.

Example 3: SP-1 obtains a security interest in all Debtor’s existing and after-acquired inventory. SP-1 perfects its security interest with a proper filing. Then SP-2 delivers goods to Debtor in a transaction constituting a “consignment” as defined in Section 9-102. SP-2 files a proper financing statement but does not send notification to SP-1 under Section 9-324(b). Accordingly, SP-2’s security interest is junior to SP-1’s under Section 9-322(a). Under Section 9-319(a), Debtor is deemed to have the consignor’s rights and title, so that SP-1’s security interest attaches to SP-2’s ownership interest in the goods. Thereafter, Debtor grants a security interest in the goods to SP-3, and SP-3 perfects by filing. Because SP-2’s perfected security interest is senior to SP-3’s under Section 9-322(a), Section 9-319(b) applies: Other law determines Debtor’s rights and title to the goods insofar as SP-3 is concerned, and SP-3’s security interest attaches to those rights.

355.9-320. Buyer of goods.

  1. Except as otherwise provided in subsection (5) of this section, a buyer in ordinary course of business, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.
  2. Except as otherwise provided in subsection (5) of this section, a buyer of goods from a person who used or bought the goods for use primarily for personal, family, or household purposes takes free of a security interest, even if perfected, if the buyer buys:
    1. Without knowledge of the security interest;
    2. For value;
    3. Primarily for the buyer’s personal, family, or household purposes; and
    4. Before the filing of a financing statement covering the goods.
  3. To the extent that it affects the priority of a security interest over a buyer of goods under subsection (2) of this section, the period of effectiveness of a filing made in the jurisdiction in which the seller is located is governed by KRS 355.9-316 (1) and (2).
  4. A buyer in ordinary course of business buying oil, gas, or other minerals at the wellhead or minehead or after extraction takes free of an interest arising out of an encumbrance.
  5. Subsections (1) and (2) of this section do not affect a security interest in goods in the possession of the secured party under KRS 355.9-313 .
  6. If any horse of a registered breed, the racing of which is regulated by KRS Chapter 230, or any interest in such a horse (including stallion shares and seasons), is subject to a lien or a security interest and that horse or interest is sold at public auction in the ordinary course of business by an organization engaged in the business of selling these horses or interests at public auction, a bona fide purchaser for value of the horse or interest takes title to the horse or interest free and clear of the lien or security interest, and the organization selling the horse or interest is not liable in any manner to the holder of the lien or security interest, except to the extent provided by the Federal Food Security Act, 7 U.S.C. sec. 1631 . However, the lien or security interest attaches to the proceeds from the sale to the extent provided in KRS 355.9-315 (1)(b).

History. Enact. Acts 2000, ch. 408, § 60, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-307.
  2. Scope of This Section.  This section states when buyers of goods take free of a security interest even though perfected. Of course, a buyer who takes free of a perfected security interest takes free of an unperfected one. Section 9-317 should be consulted to determine what purchasers, in addition to the buyers covered in this section, take free of an unperfected security interest. Article 2 states general rules on purchase of goods from a seller with defective or voidable title (Section 2-403).
  3. Buyers in Ordinary Course.  Subsection (a) derives from former Section 9-307(1). The definition of “buyer in ordinary course of business” in Section 1-201 restricts its application to buyers “from a person, other than a pawnbroker, in the business of selling goods of that kind.” Thus subsection (a) applies primarily to inventory collateral. The subsection further excludes from its operation buyers of “farm products” (defined in Section 9-102) from a person engaged in farming operations. The buyer in ordinary course of business is defined as one who buys goods “in good faith, without knowledge that the sale violates the rights of another person and in the ordinary course.” Subsection (a) provides that such a buyer takes free of a security interest, even though perfected, and even though the buyer knows the security interest exists. Reading the definition together with the rule of law results in the buyer’s taking free if the buyer merely knows that a security interest covers the goods but taking subject if the buyer knows, in addition, that the sale violates a term in an agreement with the secured party.

    As did former Section 9-307(1), subsection (a) applies only to security interests created by the seller of the goods to the buyer in ordinary course. However, under certain circumstances a buyer in ordinary course who buys goods that were encumbered with a security interest created by a person other than the seller may take free of the security interest, as Example 2 explains. See also Comment 6, below.

  4. Buyers of Farm Products.  This section does not enable a buyer of farm products to take free of a security interest created by the seller, even if the buyer is a buyer in ordinary course of business. However, a buyer of farm products may take free of a security interest under section 1324 of the Food Security Act of 1985, 7 U.S.C. §  1631.
  5. Buyers of Consumer Goods.  Subsection (b), which derives from former Section 9-307(2), deals with buyers of collateral that the debtor-seller holds as “consumer goods” (defined in section 9-102). Under Section 9-309(1), a purchase-money interest in consumer goods, except goods that are subject to a statute or treaty described in Section 9-311(a) (such as automobiles that are subject to a certificate-of-title statute), is perfected automatically upon attachment. There is no need to file to perfect. Under subsection (b) a buyer of consumer goods takes free of a security interest, even though perfected, if the buyer buys (1) without knowledge of the security interest, (2) for value, (3) primarily for the buyer’s own personal, family, or household purposes, and (4) before a financing statement is filed.

    As to purchase money-security interests which are perfected without filing under Section 9-309(1): A secured party may file a financing statement, although filing is not required for perfection. If the secured party does file, all buyers take subject to the security interest. If the secured party does not file, a buyer who meets the qualifications stated in the preceding paragraph takes free of the security interest.

    As to security interests for which a perfection step is required: This category includes all non-purchase-money security interests, and all security interests, whether or not purchase-money, in goods subject to a statute or treaty described in Section 9-311(a), such as automobiles covered by a certificate-of-title statute. As long as the required perfection step has not been taken and the security interest remains unperfected, not only the buyers described in subsection (b) but also the purchasers described in Section 9-317 will take free of the security interest. After a financing statement has been filed or the perfection requirements of the applicable certificate-of-title statute have been complied with (compliance is the equivalent of filing a financing statement; see Section 9-311(b)), all subsequent buyers, under the rule of subsection (b), are subject to the security interest.

    The rights of a buyer under subsection (b) turn on whether a financing statement has been filed against consumer goods. Occasionally, a debtor changes his or her location after a filing is made. Subsection (c), which derives from former Section 9-103(1)(d)(iii), deals with the continued effectiveness of the filing under those circumstances. It adopts the rules of Section 9-316(a) and (b). These rules are explained in the comments to that section.

  6. Authorized Dispositions.  The limitations that subsections (a) and (b) impose on the persons who may take free of a security interest apply of course only to unauthorized sales by the debtor. If the secured party authorized the sale in an express agreement or otherwise, the buyer takes free under Section 9-315(a) without regard to the limitations of this section. (That section also states the right of a secured party to the proceeds of a sale, authorized or unauthorized.) Moreover, the buyer also takes free if the secured party waived or otherwise is precluded from asserting its security interest against the buyer. See Section 1-103.
  7. Oil, Gas, and Other Minerals.  Under subsection (d), a buyer in ordinary course of business of minerals at the wellhead or minehead or after extraction takes free of a security interest created by the seller. Specifically, it provides that qualified buyers take free not only of Article 9 security interests but also of interests “arising out of an encumbrance.” As defined in section 9-102, the term “encumbrance” means “a right, other than an ownership interest, in real property.” Thus, to the extent that a mortgage encumbers minerals not only before but also after extraction, subsection (d) enables a buyer in ordinary course of the minerals to take free of the mortgage. This subsection does not, however, enable these buyers to take free of interests arising out of ownership interests in the real property. This issue is significant only in a minority of states. Several of them have adopted special statutes and nonuniform amendments to article 9 to provide special protections to mineral owners, whose interests often are highly fractionalized in the case of oil and gas. See Terry I. Cross, Oil and Gas Product Liens—Statutory Security Interests for Producers and Royalty Owners Under the Statutes of Kansas, New Mexico, Oklahoma, Texas and Wyoming, 50 Consumer Fin. L. Q. Rep. 418 (1996). Inasmuch as a complete resolution of the issue would require the addition of complex provisions to this article, and there are good reasons to believe that a uniform solution would not be feasible, this article leaves its resolution to other legislation.
  8. Possessory Security Interests.  Subsection (e) is new. It rejects the holding of Tanbro Fabrics Corp. v. Deering Milliken, Inc., 350 N.E.2d 590 (N.Y. 1976) and, together with Section 9-317(b), prevents a buyer of goods collateral from taking free of a security interest if the collateral is in the possession of the secured party. “The secured party” referred in subsection (e) is the holder of the security interest referred to in subsection (a) or (b). Section 9-313 determines whether a secured party is in possession for purposes of this section. Under some circumstances, Section 9-313 provides that a secured party is in possession of collateral even if the collateral is in the physical possession of a third party.

Example 1: Manufacturer, who is in the business of manufacturing appliances, owns manufacturing equipment subject to a perfected security interest in favor of Lender. Manufacturer sells the equipment to Dealer, who is in the business of buying and selling used equipment. Buyer buys the equipment from Dealer. Even if Buyer qualifies as a buyer in the ordinary course of business, Buyer does not take free of Lender’s security interest under subsection (a), because Dealer did not create the security interest; Manufacturer did.

Example 2: Manufacturer, who is in the business of manufacturing appliances, owns manufacturing equipment subject to a perfected security interest in favor of Lender. Manufacturer sells the equipment to Dealer, who is in the business of buying and selling used equipment. Lender learns of the sale but does nothing to assert its security interest. Buyer buys the equipment from Dealer. Inasmuch as Lender’s acquiescence constitutes an “entrusting” of the goods to Dealer within the meaning of Section 2-403(c) Buyer takes free of Lender’s security interest under Section 2-403(b) if Buyer qualifies as a buyer in ordinary course of business.

NOTES TO DECISIONS

1.Buyer in Ordinary Course of Business.

An employee of an automobile dealership who refinances a car with a bank while knowing that the car involved is included in a floor plan financing arrangement by the dealer with another lender does not meet the “good faith” requirement to qualify as “a buyer in the ordinary course of business.” (decided under prior law) Universal C. I. T. Credit Corp. v. Middlesboro Motor Sales, Inc., 424 S.W.2d 409, 1968 Ky. LEXIS 455 ( Ky. 1968 ).

Ordinarily with inventory financing the lien of the wholesale financier is automatically extinguished under this section upon sale. (decided under prior law) Universal C. I. T. Credit Corp. v. Middlesboro Motor Sales, Inc., 424 S.W.2d 409, 1968 Ky. LEXIS 455 ( Ky. 1968 ).

Where defendant, a dealer in airplanes, purchased a Cessna aircraft from a third party, also a dealer in aircraft, without knowledge of plaintiff’s rights in it, such sale was one in the ordinary course of business and the defendant took free of plaintiff’s security interest which was destroyed by the sale. (decided under prior law) Cessna Finance Corp. v. Skyways Enterprises, Inc., 580 S.W.2d 491, 1979 Ky. LEXIS 249 ( Ky. 1979 ).

Because the statutory duties of KRS 186A.220 of the motor vehicle code concerning transfer of title govern in this situation and were not performed by purchaser of the vehicle in question, and the Uniform Commercial Code provisions of former KRS 355.9-307 (1) did not govern the determination of whether a sale had occurred in this situation, there was no sale completed by debtor to purchaser and debtor/seller of vehicle was justified in liquidating the vehicle to satisfy its security interest. (decided under prior law) SCT Motor Cars v. Automotive Fin. Corp. (In re Cunningham Used Cars), 182 B.R. 22, 1995 Bankr. LEXIS 656 (Bankr. E.D. Ky. 1995 ).

Recycling firm did not take good title to mechanized underground roof supports under the KRS 355.9-320 (1) exception, as it failed to qualify as a buyer in the ordinary course of business, and when a debtor transferred the supports to a dealer, who in turn sold it to the unsuspecting recycling firm, the security interest remained attached. Madison Capital Co., LLC v. S & S Salvage, LLC, 765 F. Supp. 2d 923, 2011 U.S. Dist. LEXIS 4791 (W.D. Ky. 2011 ).

Where a debtor and/or his landscaping company sold a piece of equipment to a purchaser, a creditor’s security interest in the equipment continued despite the sale pursuant to KRS 355.9-315 (1)(a), as the sale was made without the creditor’s consent or knowledge. Even if the purchaser had no knowledge of the creditor’s security interest, which was belied by judicial admissions that he made in his complaint, the exception in KRS 355.9-320 for a buyer in the ordinary course of business did not apply, as neither the debtor nor his company was in the business of selling equipment of this kind. Teague v. Taylor (In re Taylor), 2012 Bankr. LEXIS 2825 (Bankr. E.D. Ky. June 19, 2012).

2.Crop Mortgage.

The United States, as mortgagee of tobacco crop grown in Indiana, could recover from Kentucky warehouse company for conversion where the mortgage was properly recorded in Indiana county where the tobacco was grown and mortgagor removed the tobacco to the Kentucky warehouse company which sold the tobacco without any accounting to the mortgagee for proceeds of sale. (decided under prior law) United States v. Covington Independent Tobacco Warehouse Co., 152 F. Supp. 612, 1957 U.S. Dist. LEXIS 3446 (D. Ky. 1957 ).

3.Tobacco Crops.

Former KRS 355.9-307 (1) was one of the statutory “or otherwise” exceptions to former KRS 355.9-306 (2). (decided under prior law) Cessna Finance Corp. v. Skyways Enterprises, Inc., 580 S.W.2d 491, 1979 Ky. LEXIS 249 ( Ky. 1979 ).

It is unlikely that “advances” paid before the actual sale of tobacco could ever be considered proceeds, accordingly, former KRS 355.9-307 (2) required only that notice be given prior to the payment of proceeds as they are defined, and not before any “advances” are made. (decided under prior law) Paducah Burley Floors, Inc. v. Peoples First Nat'l Bank & Trust Co., 757 S.W.2d 196, 1988 Ky. App. LEXIS 50 (Ky. Ct. App. 1988).

In an action for a tobacco warehouse’s wrongful payment of proceeds which were subject to a lien, summary judgment was improper where a genuine issue of material fact existed as to the amount of damages. (decided under prior law) Paducah Burley Floors, Inc. v. Peoples First Nat'l Bank & Trust Co., 757 S.W.2d 196, 1988 Ky. App. LEXIS 50 (Ky. Ct. App. 1988).

Former KRS 355.9-307 (2) exception was clearly carved out to protect warehousemen who unknowingly sell tobacco subject to a security interest from the potential of double liability — once from the farmer and once again from the lender who sues them for conversion; it was not intended to protect a warehouseman in its capacity as creditor of the debtor. (decided under prior law) Farmer's Bank v. Dykes Tobacco Warehouse, 945 S.W.2d 433, 1997 Ky. App. LEXIS 44 (Ky. Ct. App. 1997).

4.— Notice of Lien.

Where a letter received by the tobacco warehouse indicated that all of the debtor’s tobacco was covered by the secured party’s lien, the description was adequate to put the warehouse on notice of the lien. (decided under prior law) Paducah Burley Floors, Inc. v. Peoples First Nat'l Bank & Trust Co., 757 S.W.2d 196, 1988 Ky. App. LEXIS 50 (Ky. Ct. App. 1988).

A tobacco warehouse may not be protected under former KRS 355.9-307 (2) when it admits actual receipt of notice, albeit through regular mail service; the requirement of certified mail is intended to protect the warehouse when notice is in dispute. (decided under prior law) Paducah Burley Floors, Inc. v. Peoples First Nat'l Bank & Trust Co., 757 S.W.2d 196, 1988 Ky. App. LEXIS 50 (Ky. Ct. App. 1988).

5.Proper Description.

The use of the phrase “proper description” is something less than a legal description but it has no fixed meaning as a term of art; the description should identify the property and associate it with an owner/customer/grower. (decided under prior law) Paducah Burley Floors, Inc. v. Peoples First Nat'l Bank & Trust Co., 757 S.W.2d 196, 1988 Ky. App. LEXIS 50 (Ky. Ct. App. 1988).

6.Recording.

A conditional sales contract had to be recorded or filed in order to be valid against innocent purchasers. (decided under prior law) Munz v. National Bond & Inv. Co., 243 Ky. 293 , 47 S.W.2d 1055, 1932 Ky. LEXIS 72 ( Ky. 1932 ); In re Draughn & Steel Motor Co., 49 F.2d 636, 1931 U.S. Dist. LEXIS 1329 (D. Ky. 1931 ), aff'd, 58 F.2d 910, 1932 U.S. App. LEXIS 4792 (6th Cir. Ky. 1932 ); Johnson v. Sauerman Bros., Inc., 243 Ky. 587 , 49 S.W.2d 331, 1932 Ky. LEXIS 152 (Ky. 1932); In re Selman's, Inc., 58 F.2d 681, 1932 U.S. Dist. LEXIS 1215 (D. Ky. 1932); In re Henry, 60 F.2d 605, 1932 U.S. Dist. LEXIS 1369 (D. Ky. 1932); White v. General Motors Acceptance Corp., 2 F. Supp. 406, 1932 U.S. Dist. LEXIS 1640 (D. Ky. 1932); Ashland Finance Co. v. Mollett, 252 Ky. 491 , 67 S.W.2d 717, 1934 Ky. LEXIS 814 ( Ky. 1934 ).

The rights and equities of an Illinois seller, arising from the transfer of property under a conditional sales contract for machinery to be used primarily for levee building in Kentucky which required recording under Illinois law but shipped to Tennessee where recording of the conditional sales contract was not required to be valid against innocent purchasers and creditors, were invalid and unenforceable as against creditors who attached the machinery while it was being used in Kentucky until the conditional sales contract was recorded and constructive notice given. (decided under prior law) Johnson v. Sauerman Bros., Inc., 243 Ky. 587 , 49 S.W.2d 331, 1932 Ky. LEXIS 152 ( Ky. 1932 ).

7.Conditional Sales Contracts.

Contract was a conditional sales agreement with the title of the truck remaining in the seller and the right of repossessing it given upon failure to pay any part of the unpaid purchase money when due and was not a mortgage back which would have given the seller only a lien on the chattel. (decided under prior law) Brown v. Woods Motor Co., 239 Ky. 312 , 39 S.W.2d 507, 1931 Ky. LEXIS 779 ( Ky. 1931 ), limited, Commonwealth v. Larson, 242 Ky. 317 , 46 S.W.2d 82, 1932 Ky. LEXIS 251 ( Ky. 1932 ).

Purchaser could not recover for conversion of an automobile peaceably repossessed by seller under an accelerated maturity clause in the conditional sales contract. (decided under prior law) General Motors Acceptance Corp. v. Shuey, 243 Ky. 74 , 47 S.W.2d 968, 1932 Ky. LEXIS 45 ( Ky. 1932 ).

Opinions of Attorney General.

Crops brought into the commonwealth on which a security interest had attached would generally be governed by the law of the state in which the lien attached, rather than by the provisions of former KRS 355.9-307 (3). This determination would have to be made on a case-by-case basis, however. OAG 82-503 .

If the state into which a grain crop from Kentucky is sold has a provision similar to former KRS 355.9-103 , then it is possible that former KRS 355.9-307 (3) may be applicable. The exact determination would have to be made on a case-by-case basis considering the facts of the case and the law of the states involved. OAG 82-503 .

The notification requirement of former KRS 355.9-307 (3), as amended in 1982, will not be retroactive in application as it will apply only to sales of grain or soybeans which occur after July 15, 1982. It is the sale which the statute addresses, not the original lien attachment; therefore, while a lien may have attached to a crop prior to July 15, 1982, as long as the sale does not occur until after that date, this section is applicable. OAG 82-503 .

Research References and Practice Aids

Kentucky Bench & Bar.

Mapother, Kentucky’s New Prejudgement Seizure Law, Vol. 40, No. 3, July 1976, Ky. Bench & Bar 20.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Schneiter, Equine Statutory Liens, Vol. 67, No. 4, July 2003, Ky. Bench & Bar 23.

Kentucky Law Journal.

Lester, Security Interests in Thoroughbred and Standardbred Horses: A Transactional Approach, 70 Ky. L.J. 1065 (1981-82).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Rasor and Wadley, The Secured Farm Creditor’s Interest in Federal Price Supports: Policies and Priorities, 73 Ky. L.J. 595 (1984-85).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Bland, Insolvencies in Farming and Agribusinesses, 73 Ky. L.J. 795 (1984-85).

Kropp, Landen and Donath, The Prevention and Treatment of Breeding Contract Controversies, 74 Ky. L.J. 715 (1985-86).

Protecting Security Interests in Equine Collateral Under the Clear Title Provisions of the Food Security Act of 1985, 78 Ky. L.J. 447 (1989-90).

Sales and Use Tax Planning for the Horse Industry, 78 Ky. L.J. 601 (1989-90).

Thoroughbred Certificate Law: A Proposal, 78 Ky. L.J. 659 (1989-90).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

Hakes, A Quest for Justice in the Conversion of Security Interests, 82 Ky. L.J. 837 (1993-94).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Verified Motion for Writ of Possession, Form 152.03.

355.9-321. Licensee of general intangible and lessee of goods in ordinary course of business.

  1. In this section, “licensee in ordinary course of business” means a person that becomes a licensee of a general intangible in good faith, without knowledge that the license violates the rights of another person in the general intangible, and in the ordinary course from a person in the business of licensing general intangibles of that kind. A person becomes a licensee in the ordinary course if the license to the person comports with the usual or customary practices in the kind of business in which the licensor is engaged or with the licensor’s own usual or customary practices.
  2. A licensee in ordinary course of business takes its rights under a nonexclusive license free of a security interest in the general intangible created by the licensor, even if the security interest is perfected and the licensee knows of its existence.
  3. A lessee in ordinary course of business takes its leasehold interest free of a security interest in the goods created by the lessor, even if the security interest is perfected and the lessee knows of its existence.

History. Enact. Acts 2000, ch. 408, § 61, effective July 1, 2001.

Official Comment

  1. Source.  Derived from Sections 2A-103(1)(o) and 2A-307(3).
  2. Licensee in Ordinary Course.  Like the analogous rules in Section 9-320(a) with respect to buyers in ordinary course and subsection (c) with respect to lessees in ordinary course, the new rule in subsection (b) reflects the expectations of the parties and the marketplace: A licensee under a nonexclusive license takes subject to a security interest unless the secured party authorizes the license free of the security interest or other, controlling law such as that of this section (protecting ordinary-course licensees) dictates a contrary result. See Sections 9-201 and 9-315. The definition of “licensee in ordinary course of business” in subsection (a) is modeled upon that of “buyer in ordinary course of business.”
  3. Lessee in Ordinary Course.  Subsection (c) contains the rule formerly found in Section 2A-307(3). The rule works in the same way as that of Section 9-320(a).

355.9-322. Priorities among conflicting security interests in and agricultural liens on same collateral.

  1. Except as otherwise provided in this section, priority among conflicting security interests and agricultural liens in the same collateral is determined according to the following rules:
    1. Conflicting perfected security interests and agricultural liens rank according to priority in time of filing or perfection. Priority dates from the earlier of the time a filing covering the collateral is first made or the security interest or agricultural lien is first perfected, if there is no period thereafter when there is neither filing nor perfection.
    2. A perfected security interest or agricultural lien has priority over a conflicting unperfected security interest or agricultural lien.
    3. The first security interest or agricultural lien to attach or become effective has priority if conflicting security interests and agricultural liens are unperfected.
  2. For the purposes of subsection (1)(a) of this section:
    1. The time of filing or perfection as to a security interest in collateral is also the time of filing or perfection as to a security interest in proceeds; and
    2. The time of filing or perfection as to a security interest in collateral supported by a supporting obligation is also the time of filing or perfection as to a security interest in the supporting obligation.
  3. Except as otherwise provided in subsection (6) of this section, a security interest in collateral which qualifies for priority over a conflicting security interest under KRS 355.9-327 , 355.9-328 , 355.9-329 , 355.9-330 , or 355.9-331 also has priority over a conflicting security interest in:
    1. Any supporting obligation for the collateral; and
    2. Proceeds of the collateral if:
      1. The security interest in proceeds is perfected;
      2. The proceeds are cash proceeds or of the same type as the collateral; and
      3. In the case of proceeds that are proceeds of proceeds, all intervening proceeds are cash proceeds, proceeds of the same type as the collateral, or an account relating to the collateral.
  4. Subject to subsection (5) of this section and except as otherwise provided in subsection (6) of this section, if a security interest in chattel paper, deposit accounts, negotiable documents, instruments, investment property, or letter-of-credit rights is perfected by a method other than filing, conflicting perfected security interests in proceeds of the collateral rank according to priority in time of filing.
  5. Subsection (4) of this section applies only if the proceeds of the collateral are not cash proceeds, chattel paper, negotiable documents, instruments, investment property, or letter-of-credit rights.
  6. Subsections (1) to (5) of this section are subject to:
    1. Subsection (7) of this section and the other provisions of this part of this article;
    2. KRS 355.4-210 with respect to a security interest of a collecting bank;
    3. KRS 355.5-118 with respect to a security interest of an issuer or nominated person; and
    4. KRS 355.9-110 with respect to a security interest arising under Article 2 or 2A of this chapter.
  7. A perfected agricultural lien on collateral has priority over a conflicting security interest in or agricultural lien on the same collateral if the statute creating the agricultural lien so provides.

History. Enact. Acts 2000, ch. 408, § 62, effective July 1, 2001; repealed and reenact., Acts 2001, ch. 119, § 9, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-312(5), (6).
  2. Scope of This Section.  In a variety of situations, two or more people may claim a security interest in the same collateral. This section states general rules of priority among conflicting security interests. As subsection (f) provides, the general rules in subsections (a) through (e) are subject to the rule in subsection (g) governing perfected agricultural liens and to the other rules in this Part of this Article. Rules that override this section include those applicable to purchase-money security interests (Section 9-324) and those qualifying for special priority in particular types of collateral. See, e.g., Section 9-327 (deposit accounts); Section 9-328 (investment property); Section 9-329 (letter-of-credit rights); Section 9-330 (chattel paper and instruments); Section 9-334 (fixtures). In addition, the general rules of sections (a) through (e) are subject to priority rules governing security interests arising under Articles 2, 2A, 4, and 5.
  3. General Rules.  Subsection (a) contains three general rules. Subsection (a)(1) governs the priority of competing perfected security interests. Subsection (a)(2) governs the priority of competing security interests if one is perfected and the other is not. Subsection (a)(3) governs the priority of competing unperfected security interests. The rules may be regarded as adaptations of the idea, deeply rooted at common law, of a race of diligence among creditors. The first two rules are based on precedence in the time as of which the competing secured parties either filed their financing statements or obtained perfected security interests. Under subsection (a)(1), the first secured party who files or perfects has priority. Under subsection (a)(2), which is new, a perfected security interest has priority over an unperfected one. Under subsection (a)(3), if both security interests are unperfected, the first to attach has priority. Note that Section 9-709(b) may affect the application of subsection (a) to a filing that occurred before the effective date of this Article and which would be ineffective to perfect a security interest under former Article 9 but effective under this Article.
  4. Competing Perfected Security Interests.  When there is more than one perfected security interest, the security interests rank according to priority in time of filing or perfection. “Filing,” of course, refers to the filing of an effective financing statement. “Perfection” refers to the acquisition of a perfected security interest, i.e., one that has attached and as to which any required perfection step has been taken. See Sections 9-308 and 9-309.
  5. Priority in After-Acquired Property.  The application of the priority rules to after-acquired property must be considered separately for each item of collateral. Priority does not depend only on time of perfection but may also be based on priority in filing before perfection.
  6. Priority in Proceeds: General Rule.  Subsection (b)(1) follows former sSection 9-312(6). It provides that the baseline rules of subsection (a) apply generally to priority conflicts in proceeds except where otherwise provided (e.g., as in subsections (c) through (e)). Under Section 9-203, attachment cannot occur (and therefore, under Section 9-308, perfection cannot occur) as to particular collateral until the collateral itself comes into existence and the debtor has rights in it. Thus, a security interest in proceeds of original collateral does not attach and is not perfected until the proceeds come into existence and the debtor acquires rights in them.
  7. Priority in Proceeds: Special Rules.  Subsections (c), (d), and (e), which are new, provide additional priority rules for proceeds of collateral in situations where the temporal (first-in-time) rules of subsection (a)(1) are not appropriate. These new provisions distinguish what these comments refer to as “non-filing collateral” from what they call “filing collateral.” As used in these comments, non-filing collateral is collateral of a type for which perfection may be achieved by a method other than filing (possession or control, mainly) and for which secured parties who so perfect generally do not expect or need to conduct a filing search. More specifically, non-filing collateral is chattel paper, deposit accounts, negotiable documents, instruments, investment property, and letter-of-credit rights. Other collateral—accounts, commercial tort claims, general intangibles, goods, nonnegotiable documents, and payment intangibles—is filing collateral.
  8. Proceeds of Non-Filing Collateral: Non-Temporal Priority.  Subsection (c)(2) provides a baseline priority rule for proceeds of non-filing collateral which applies if the secured party has taken the steps required for non-temporal priority over a conflicting security interest in non-filing collateral (e.g., control, in the case of deposit accounts, letter-of-credit rights, and investment property). This rule determines priority in proceeds of non-filing collateral whether or not there exists an actual conflicting security interest in the original non-filing collateral. Under subsection (c)(2), the priority in the original collateral continues in proceeds if the security interest in proceeds is perfected and the proceeds are cash proceeds or non-filing proceeds “of the same type” as the original collateral. As used in subsection (c)(2), “type” means a type of collateral defined in the Uniform Commercial Code and should be read broadly. For example, a security is “of the same type” as a security entitlement (i.e., investment property), and a promissory note is “of the same type” as a draft (i.e., an instrument).
  9. Proceeds of Nonfiling Collateral: Special Temporal Priority.  Under subsections (d) and (e), if a security interest in nonfiling collateral is perfected by a method other than filing (e.g., control or possession), it does not retain its priority over a conflicting security interest in proceeds that are filing collateral. Moreover, it is not entitled to priority in proceeds under the first-to-file-or-perfect rule of subsections (a)(1) and (b). Instead, under subsection (d), priority is determined by a new first-to-file rule.
  10. Priority in Supporting Obligations.  Under subsections (b)(2) and (c)(1), a security interest having priority in collateral also has priority in a supporting obligation for that collateral. However, the rules in these subsections are subject to the special rule in Section 9-329 governing the priority of security interests in a letter-of-credit right. See subsection (f). Under Section 9-329, a secured party’s failure to obtain control (Section 9-107) of a letter-of-credit right that serves as supporting collateral leaves its security interest exposed to a priming interest of a party who does take control.
  11. Unperfected Security Interests.  Under subsection (a)(3), if conflicting security interests are unperfected, the first to attach has priority. This rule may be of merely theoretical interest, inasmuch as it is hard to imagine a situation where the case would come into litigation without either secured party’s having perfected its security interest. If neither security interest had been perfected at the time of the filing of a petition in bankruptcy, ordinarily neither would be good against the trustee in bankruptcy under the Bankruptcy Code.
  12. Agricultural Liens.  Statutes other than this article may purport to grant priority to an agricultural lien as against a conflicting security interest or agricultural lien. Under subsection (g), if another statute grants priority to an agricultural lien, the agricultural lien has priority only if the same statute creates the agricultural lien and the agricultural lien is perfected. Otherwise, subsection (a) applies the same priority rules to an agricultural lien as to a security interest, regardless of whether the agricultural lien conflicts with another agricultural lien or with a security interest.

    Inasmuch as no agricultural lien on proceeds arises under this article, subsections (b) through (e) do not apply to proceeds of agricultural liens. However, if an agricultural lien has priority under subsection (g) and the statute creating the agricultural lien gives the secured party a lien on proceeds of the collateral subject to the lien, a court should apply the principle of subsection (g) and award priority in the proceeds to the holder of the perfected agricultural lien.

Example 1: On February 1, A files a financing statement covering a certain item of Debtor’s equipment. On March 1, B files a financing statement covering the same equipment. On April 1, B makes a loan to Debtor and obtains a security interest in the equipment. On May 1, A makes a loan to Debtor and obtains a security interest in the same collateral. A has priority even though B’s loan was made earlier and was perfected when made. It makes no difference whether A knew of B’s security interest when A made its advance.

The problem stated in Example 1 is peculiar to a notice-filing system under which filing may occur before the security interest attaches (see Section 9-502). The justification for determining priority by order of filing lies in the necessity of protecting the filing system—that is, of allowing the first secured party who has filed to make subsequent advances without each time having to check for subsequent filings as a condition of protection. Note, however, that this first-to-file protection is not absolute. For example, Section 9-324 affords priority to certain purchase-money security interests, even if a competing secured party was the first to file or perfect.

Example 2: A and B make non-purchase-money advances secured by the same collateral. The collateral is in Debtor’s possession, and neither security interest is perfected when the second advance is made. Whichever secured party first perfects its security interest (by taking possession of the collateral or by filing) takes priority. It makes no difference whether that secured party knows of the other security interest at the time it perfects its own.

The rule of subsection (a)(1), affording priority to the first to file or perfect, applies to security interests that are perfected by any method, including temporarily (Section 9-312) or upon attachment (Section 9-309), even though there may be no notice to creditors or subsequent purchasers and notwithstanding any common-law rule to the contrary. The form of the claim to priority, i.e., filing or perfection, may shift from time to time, and the rank will be based on the first filing or perfection as long as there is no intervening period without filing or perfection. See Section 9-308(c).

Example 3: On October 1, A acquires a temporarily perfected (20-day) security interest, unfiled, in a negotiable document in the debtor’s possession under Section 9-312(e). On October 5, B files and thereby perfects a security interest that previously had attached to the same document. On October 10, A files. A has priority, even after the 20-day period expires, regardless of whether A knows of B’s security interest when A files. A was the first to perfect and maintained continuous perfection or filing since the start of the 20-day period. However, the perfection of A’s security interest extends only “to the extent it arises for new value given.” To the extent A’s security interest secures advances made by A beyond the 20-day period, its security interest would be subordinate to B’s, inasmuch as B was the first to file.

In general, the rule in subsection (a)(1) does not distinguish among various advances made by a secured party. The priority of every advance dates from the earlier of filing or perfection. However, in rare instances, the priority of an advance dates from the time the advance is made. See Example 3 and Section 9-323.

Example 4: On February 1, A makes advances to Debtor under a security agreement covering “all Debtor’s machinery, both existing and after-acquired.” A promptly files a financing statement. On April 1, B takes a security interest in all Debtor’s machinery, existing and after-acquired, to secure an outstanding loan. The following day, B files a financing statement. On May 1, Debtor acquires a new machine. When Debtor acquires rights in the new machine, both A and B acquire security interests in the machine simultaneously. Both security interests are perfected simultaneously. However, A has priority because A filed before B.

When after-acquired collateral is encumbered by more than one security interest, one of the security interests often is a purchase-money security interest that is entitled to special priority under Section 9-324.

Example 5: On April 1, Debtor authenticates a security agreement granting to A a security interest in all Debtor’s existing and after-acquired inventory. The same day, A files a financing statement covering inventory. On May 1, Debtor authenticates a security agreement granting B a security interest in all Debtor’s existing and future accounts. On June 1, Debtor sells inventory to a customer on 30-day unsecured credit. When Debtor acquires the account, B’s security interest attaches to it and is perfected by B’s financing statement. At the very same time, A’s security interest attaches to the account as proceeds of the inventory and is automatically perfected. See Section 9-315. Under subsection (b) of this section, for purposes of determining A’s priority in the account, the time of filing as to the original collateral (April 1, as to inventory) is also the time of filing as to proceeds (account). Accordingly, A’s security interest in the account has priority over B’s. Of course, had B filed its financing statement before A filed (e.g., on March 1), then B would have priority in the accounts.

Section 9-324 governs the extent to which a special purchase-money priority in goods or software carries over into the proceeds of the original collateral.

Example 6: SP-1 perfects its security interest in investment property by filing. SP-2 perfects subsequently by taking control of a certificated security. Debtor receives cash proceeds of the security (e.g., dividends deposited into Debtor’s deposit account). If the first-to-file-or-perfect rule of subsection (a)(1) were applied, SP-1’s security interest in the cash proceeds would be senior, although SP-2’s security interest continues perfected under Section 9-315 beyond the 20-day period of automatic perfection. This was the result under former Article 9. Under subsection (c), however, SP-2’s security interest is senior.

Note that a different result would obtain in Example 6 (i.e., SP-1’s security interest would be senior) if SP-1 were to obtain control of the deposit-account proceeds. This is so because subsection (c) is subject to subsection (f), which in turn provides that the priority rules under subsections (a) through (e) are subject to “the other provisions of this part.” One of those “other provisions” is Section 9-327, which affords priority to a security interest perfected by control. See Section 9-327(1).

Example 7: SP-1 perfects its security interest in investment property by filing. SP-2 perfects subsequently by taking control of a certificated security. Debtor receives proceeds of the security consisting of a new certificated security issued as a stock dividend on the original collateral. Although the new security is of the same type as the original collateral (i.e., investment property), once the 20-day period of automatic perfection expires (see Section 9-315(d)), SP-2’s security interest is unperfected. (SP-2 has not filed or taken delivery or control, and no temporary-perfection rule applies.) Consequently, once the 20-day period expires, subsection (c) does not confer priority, and, under subsection (a)(2), SP-1’s security interest in the security is senior. This was the result under former article 9.

Example 8: SP-1 perfects its security interest in investment property by filing. SP-2 perfects subsequently by taking control of a certificated security and also by filing against investment property. Debtor receives proceeds of the security consisting of a new certificated security issued as a stock dividend of the collateral. Because the new security is of the same type as the original collateral (i.e., investment property) and (unlike example 7) SP-2’s security interest is perfected by filing, SP-2’s security interest is senior under subsection (c). If the new security were redeemed by the issuer upon surrender and yet another security were received by Debtor, SP-2’s security interest would continue to enjoy priority under subsection (c). The new security would be proceeds of proceeds.

Example 9: SP-1 perfects its security interest in investment property by filing. SP-2 subsequently perfects its security interest in investment property by taking control of a certificated security and also by filing against investment property. Debtor receives proceeds of the security consisting of a dividend check that it deposits to a deposit account. Because the check and the deposit account are cash proceeds, SP-1’s and SP-2’s security interests in the cash proceeds are perfected under Section 9-315 beyond the 20-day period of automatic perfection. However, SP-2’s security interest is senior under subsection (c).

Example 10: SP-1 perfects its security interest in investment property by filing. SP-2 perfects subsequently by taking control of a certificated security and also by filing against investment property. Debtor receives an instrument as proceeds of the security. (Assume that the instrument is not cash proceeds.) Because the instrument is not of the same type as the original collateral (i.e., investment property), SP-2’s security interest, although perfected by filing, does not achieve priority under subsection (c). Under the first-to-file-or-perfect rule of subsection (a)(1), SP-1’s security interest in the proceeds is senior.

The proceeds of proceeds are themselves proceeds. See Section 9-102 (defining “proceeds” and “collateral”). Sometimes competing security interests arise in proceeds that are several generations removed from the original collateral. As the following example explains, the applicability of subsection (c) may turn on the nature of the intervening proceeds.

Example 11: SP-1 perfects its security interest in Debtor’s deposit account by obtaining control. Thereafter, SP-2 files against inventory, (presumably) searches, finds no indication of a conflicting security interest, and advances against Debtor’s existing and after-acquired inventory. Debtor uses funds from the deposit account to purchase inventory, which SP-1 can trace as identifiable proceeds of its security interest in Debtor’s deposit account, and which SP-2 claims as original collateral. The inventory is sold and the proceeds deposited into another deposit account, as to which SP-1 has not obtained control. Subsection (c) does not govern priority in this other deposit account. This deposit account is cash proceeds and is also the same type of collateral as SP-1’s original collateral, as required by subsections (c)(2)(A) and (B). However, SP-1’s security interest does not satisfy subsection (c)(2)(C) because the inventory proceeds, which intervened between the original deposit account and the deposit account constituting the proceeds at issue, are not cash proceeds, proceeds of the same type as the collateral (original deposit account), or an account relating to the collateral. Stated otherwise, once proceeds other than cash proceeds, proceeds of the same type as the original collateral, or an account relating to the original collateral intervene in the chain of proceeds, priority under subsection (c) is thereafter unavailable. The special priority rule in subsection (d) also is inapplicable to this case. See Comment 9, Example 13, below. Instead, the general first-to-file-or-perfect rule of subsections (a) and (b) apply. Under that rule, SP-1 has priority unless its security interest in the inventory proceeds became unperfected under Section 9-315(d). Had SP-2 filed against inventory before SP-1 obtained control of the original deposit account, the SP-2 would have had priority even if SP-1’s security interest in the inventory proceeds remained perfected.

Example 12: SP-1 perfects its security interest in Debtor’s deposit account by obtaining control. Thereafter, SP-2 files against equipment, (presumably) searches, finds no indication of a conflicting security interest, and advances against Debtor’s equipment. SP-1 then files against Debtor’s equipment. Debtor uses funds from the deposit account to purchase equipment, which SP-1 can trace as proceeds of its security interest in Debtor’s deposit account. If the first-to-file-or-perfect rule were applied, SP-1’s security interest would be senior under subsections (a)(1) and (b), because it was the first to perfect in the original collateral and there was no period during which its security interest was unperfected. Under subsection (d), however, SP-2’s security interest would be senior because it filed first. This corresponds with the likely expectations of the parties.

Note that under subsection (e), the first-to-file rule of subsection (d) applies only if the proceeds in question are other than nonfiling collateral (i.e., if the proceeds are filing collateral). If the proceeds are nonfiling collateral, either the first-to-file-or-perfect rule under subsections (a) and (b) or the nontemporal priority rule in subsection (c) would apply, depending on the facts.

Example 13: SP-1 perfects its security interest in Debtor’s deposit account by obtaining control. Thereafter, SP-2 files against inventory, (presumably) searches, finds no indication of a conflicting security interest, and advances against Debtor’s existing and after-acquired inventory. Debtor uses funds from the deposit account to purchase inventory, which SP-1 can trace as identifiable proceeds of its security interest in Debtor’s deposit account, and which SP-2 claims as original collateral. The inventory is sold and the proceeds deposited into another deposit account, as to which SP-1 has not obtained control. As discussed above in Comment 8, Example 11, subsection (c) does not govern priority in this deposit account. Subsection (d) also does not govern, because the proceeds at issue (the deposit account) are cash proceeds. See subsection (e). Rather, the general rules of subsections (a) and (b) govern.

NOTES TO DECISIONS

Analysis

1.Applicability.

The right of reclamation of a defrauded seller under KRS 355.2-702 (2) is not a “security interest” within the meaning of Article 9, especially former KRS 355.9-301 , and that section is not applicable in determining the priority of claims between the reclaiming seller and attaching creditors. (decided under prior law) In re Mel Golde Shoes, Inc., 403 F.2d 658, 1968 U.S. App. LEXIS 4652 (6th Cir. Ky. 1968 ).

2.Chattel Mortgages.

A materialman’s lien was not superior to prior recorded mortgages. (decided under prior law) Indiana Truck Corp. v. Hurry Up Broadway Co., 222 Ky. 521 , 1 S.W.2d 990, 1928 Ky. LEXIS 202 ( Ky. 1928 ).

3.— Crop.

A mortgage on a growing tobacco crop which was prior in time but recorded after a subsequent mortgage on the same tobacco was superior to the subsequent mortgage where mortgagee had knowledge of the prior mortgage. (decided under prior law) Holt v. Farmers' Loose Leaf Tobacco Warehouse Co., 201 Ky. 184 , 256 S.W. 6, 1923 Ky. LEXIS 246 ( Ky. 1923 ).

4.Purchase Money Security Interests.

An unrecorded lien for the purchase price of personal property was inferior to the lien subsequently acquired by a mortgagee for money advanced to purchaser who had recorded his mortgage six weeks before delivery of the personal property to purchaser. (decided under prior law) Westinghouse Electric Mfg. Co. v. Citizens S. R. Co., 68 S.W. 463, 24 Ky. L. Rptr. 334 , 1902 Ky. LEXIS 296 (Ky. Ct. App. 1902).

Purchase money chattel mortgage on truck, properly recorded, was superior to subsequent statutory lien for tires. (decided under prior law) Indiana Truck Corp. v. Hurry Up Broadway Co., 222 Ky. 521 , 1 S.W.2d 990, 1928 Ky. LEXIS 202 ( Ky. 1928 ).

5.Conditional Sales Contracts.

A conditional sales contract for 20 buggies was a chattel mortgage within the recording law, so that one who subsequently advanced money to the purchaser to pay freight on carriages, taking a mortgage on the carriages as security, was entitled to priority over the wholesaler who failed to record the conditional sales contract. (decided under prior law) Rankin v. McFarlane Carriage Co., 75 S.W. 221, 25 Ky. L. Rptr. 258 (1903).

Where unrecorded contract for purchase of cars by corporation which was executed by one of the directors contained retention provisions, directors of the corporation who took a mortgage on the cars and purchased the cars at sale under the mortgage were chargeable with conversion and seller was entitled to priority over mortgagees. (decided under prior law) Enterprise Foundry & Machine Works v. Miners' Elkhorn Coal Co., 241 Ky. 779 , 45 S.W.2d 470, 1931 Ky. LEXIS 164 ( Ky. 1931 ).

6.Failure to File in Correct County.

Lessors of coal land with lien on 50 mine cars under the terms of their lease were required to record their lease in county where lessee corporation had its principal offices and their failure to do so gave bank who had no knowledge of lessor’s lien a first lien under their chattel mortgage on the 50 mine cars. (decided under prior law) North Star Co. v. Howard, 341 S.W.2d 251, 1960 Ky. LEXIS 74 ( Ky. 1960 ).

7.Purchase Money Security Interests.

Where a purchase money security interest was not perfected by filing within the ten-day grace period given by this section, the purchase money security interest is to be treated as any other security interest in determining priority and, if both are to be perfected by filing, the one filed first has priority. (decided under prior law) Mammoth Cave Production Credit Asso. v. York, 429 S.W.2d 26, 1968 Ky. LEXIS 729 ( Ky. 1968 ).

The seller of personal property to a now bankrupt company held a purchase money security interest in the property, rather than a security interest. The difference is critical. The PMSI is recognized as superior to any other UCC security interest, including those which themselves are superior to the general tax lien of KRS 134.420(2). Thus, the seller had a lien superior to that of the state, and the state could not enforce a tax lien against the property in question. (decided under prior law) Whayne Supply Co. v. Commonwealth Revenue Cabinet, 925 S.W.2d 185, 1996 Ky. LEXIS 64 ( Ky. 1996 ).

8.Liens by Operation of Law.

Granting statutory repairman’s lien on automobile, created by KRS 376.270 , priority over prior perfected security interest was not denial of due process or contravention of established public policy. (decided under prior law) Corbin Deposit Bank v. King, 384 S.W.2d 302, 1964 Ky. LEXIS 83 ( Ky. 1964 ).

9.Gap in Security Interest.

Where first creditor held perfected security interest in trencher purchased in 1973 as evidenced by recorded security agreement and financing statement which made no provision for future advances, debtor purchased additional trencher in 1975 from bank creditor using 1973 trencher as additional collateral and security agreement was recorded, debtor paid off initial loan in September 1977 and first creditor never filed termination agreement under former KRS 355.9-404 , then debtor bought trucks and trailers from first creditor which took lien on 1973 trencher as new collateral in new agreement recorded in October 1977, bank creditor had priority over first creditor since security interest exists only when debtor owes obligation and original indebtedness had been paid off, thus a gap existed which gave priority to second creditor under former KRS 355.9-312 and former KRS 355.9-204 . (decided under prior law) ITT Industrial Credit Co. v. Union Bank & Trust Co., 615 S.W.2d 2, 1981 Ky. App. LEXIS 240 (Ky. Ct. App. 1981).

10.Notice of Unsecured Interest.

Even assuming that purchaser of security agreements on equipment, through its agent, had notice of unrecorded security interest, the provisions of former KRS 355.9-312 (5)(a) and (b) compelled a finding that purchaser’s recorded security interest was superior to the unrecorded security interest. (decided under prior law) Hutchison v. C.I.T. Corp., 576 F. Supp. 1, 1982 U.S. Dist. LEXIS 17609 (W.D. Ky. 1982 ), aff'd, 726 F.2d 300, 1984 U.S. App. LEXIS 25658 (6th Cir. Ky. 1984 ).

11.Possession.

Although the Uniform Commercial Code does not contain a definition of the term “possession” or “receives possession,” there is strong support for the proposition that the term “possession,” as used in former KRS 355.9-312 (4), refers to actual, physical possession as opposed to constructive possession. (decided under prior law) In re Ivy, 37 B.R. 285, 1983 Bankr. LEXIS 5101 (Bankr. E.D. Ky. 1983 ).

The evidence did not support the creditor tobacco warehouse’s claim that its crop money lien was perfected by “possession” when the debtors delivered their tobacco to the warehouse for purpose of selling the collateral at the seasonal auctions held by the warehouse, since no evidence was offered by the warehouse to show the necessary dominion and control over the property required for “possession” at common law, and the record also failed to show debtors’ relinquishment of control to accept or reject bids at the auction when the collateral was physically possessed by the creditor warehouse. (decided under prior law) In re Rogers, 39 B.R. 295, 1984 Bankr. LEXIS 6096 (Bankr. W.D. Ky. 1984 ).

12.Earlier Perfected Interest.

Where the security agreement of the parties at the outset provided for periodic accrual of interest on debtors’ obligations, and that agreement was properly filed in June 1981, the credit association’s later filing in August of 1981 to reflect current total debt secured by the debtors’ 1981 tobacco crops and proceeds merely insured the credit association’s interest in collateral to the extent of value represented by interest charges or miscellaneous expenses; since the act of filing anew did not erode the credit association’s earlier status as secured creditor of debtors’ 1981 tobacco crops and proceeds, the credit association possessed the “earlier perfected security interest” required for application of former KRS 355.9-312 (2). (decided under prior law) In re Rogers, 39 B.R. 295, 1984 Bankr. LEXIS 6096 (Bankr. W.D. Ky. 1984 ).

Where the debtor’s bank had filed and perfected its security interest in the debtor’s assets under former KRS 355.9-312 (5)(a), (7), 355.9-303 , 355.9-203 , before the debtor’s shareholders sold their stock to the debtor and took a security interest in the debtor’s assets, the bank held a perfected, first, and prior lien on the debtor’s assets; a subordination provision in the stock purchase agreement between the debtor and the former shareholders, to which the bank was not a party, was not binding on the bank. (decided under prior law) Ralph v. Stock Yards Bank & Trust Co. (In re Kentuckiana Truck & Trailer Repair, Inc.), 291 B.R. 84, 2002 Bankr. LEXIS 1678 (Bankr. W.D. Ky. 2002 ).

A person who becomes a lien creditor before a security interest is perfected will defeat the security interest even if the lien creditor has knowledge of the security interest; however, a perfected security interest is not subordinate to the rights of a subsequent judgment lien creditor. (decided under prior law) In re Lynum, 246 B.R. 537, 2000 Bankr. LEXIS 338 (Bankr. E.D. Ky. 2000 ).

Notes to Unpublished Decisions

1.Applicability.

Unpublished decision: Appellant claimant’s arguments that her claim against a corporation had priority over an investment company’s interest in the corporation were meritless; although the claimant’s claim was best characterized as simply a contract claim (her judgment against the corporation was obtained during the litigation stay and she had not shown, or even asserted, that she converted her judgment into a lien), even if it was assumed that the claimant obtained a lien on the assets of the corporation, her claim would still have been subordinate to the investment company’s claim under any of the priority schemes that might have applied. United States v. Capital Across Am., L.P., 369 Fed. Appx. 674, 2010 FED App. 0161N, 2010 U.S. App. LEXIS 5457 (6th Cir. Tenn. 2010).

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Schneiter, Equine Statutory Liens, Vol. 67, No. 4, July 2003, Ky. Bench & Bar 23.

Kentucky Law Journal.

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Bland, Insolvencies in Farming and Agribusinesses, 73 Ky. L.J. 795 (1984-85).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

Hakes, A Quest for Justice in the Conversion of Security Interests, 82 Ky. L.J. 837 (1993-94).

Northern Kentucky Law Review.

Cox, Lender Liability in the Bluegrass: Are New Theories Emerging Under Kentucky Law?, 16 N. Ky. L. Rev. 43 (1988).

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

355.9-323. Future advances.

  1. Except as otherwise provided in subsection (3) of this section, for purposes of determining the priority of a perfected security interest under KRS 355.9-322 (1)(a), perfection of the security interest dates from the time an advance is made to the extent that the security interest secures an advance that:
    1. Is made while the security interest is perfected only:
      1. Under KRS 355.9-309 when it attaches; or
      2. Temporarily under KRS 355.9-312 (5), (6), or (7); and
    2. Is not made pursuant to a commitment entered into before or while the security interest is perfected by a method other than under KRS 355.9-309 or 355.9-312 (5), (6), or (7).
  2. Except as otherwise provided in subsection (3) of this section, a security interest is subordinate to the rights of a person that becomes a lien creditor to the extent that the security interest secures an advance made more than forty-five (45) days after the person becomes a lien creditor unless the advance is made:
    1. Without knowledge of the lien; or
    2. Pursuant to a commitment entered into without knowledge of the lien.
  3. Subsections (1) and (2) of this section do not apply to a security interest held by a secured party that is a buyer of accounts, chattel paper, payment intangibles, or promissory notes or a consignor.
  4. Except as otherwise provided in subsection (5) of this section, a buyer of goods other than a buyer in ordinary course of business takes free of a security interest to the extent that it secures advances made after the earlier of:
    1. The time the secured party acquires knowledge of the buyer’s purchase; or
    2. Forty-five (45) days after the purchase.
  5. Subsection (4) of this section does not apply if the advance is made pursuant to a commitment entered into without knowledge of the buyer’s purchase and before the expiration of the forty-five (45) day period.
  6. Except as otherwise provided in subsection (7) of this section, a lessee of goods, other than a lessee in ordinary course of business, takes the leasehold interest free of a security interest to the extent that it secures advances made after the earlier of:
    1. The time the secured party acquires knowledge of the lease; or
    2. Forty-five (45) days after the lease contract becomes enforceable.
  7. Subsection (6) of this section does not apply if the advance is made pursuant to a commitment entered into without knowledge of the lease and before the expiration of the forty-five (45) day period.

History. Enact. Acts 2000, ch. 408, § 63, effective July 1, 2001.

Official Comment

  1. Source.  Former Sections 2A-307(4), 9-301(4), 9-307(3), and 9-312(7).
  2. Scope of This Section.  A security agreement may provide that collateral secures future advances. See Section 9-204(c). This section collects all of the special rules dealing with the priority of advances made by a secured party after a third party acquires an interest in the collateral. Subsection (a) applies when the third party is a competing secured party. It replaces and clarifies former Section 9-312(7). Subsection (b) deals with lien creditors and replaces former Section 9-301(4). Subsections (d) and (e) deal with buyers and replace former Section 9-307(3). Subsections (f) and (g) deal with lessees and replace former Section 2A-307(4).
  3. Competing Security Interests.  Under a proper reading of the first-to-file-or-perfect rule of Section 9-322(a)(1) (and former Section 9-312(5)), it is abundantly clear that the time when an advance is made plays no role in determining priorities among conflicting security interests except when a financing statement was not filed and the advance is the giving of value as the last step for attachment and perfection. Thus, a secured party takes subject to all advances secured by a competing security interest having priority under Section 9-322(a)(1). This result generally obtains regardless of how the competing security interest is perfected and regardless of whether the advances are made “pursuant to commitment” (Section 9-102). Subsection (a) of this section states the only other instance when the time of an advance figures in the priority scheme in Section 9-322: When the security interest is perfected only automatically under Section 9-309 or temporarily under Section 9-312(e), (f), or (g), and the advance is not made pursuant to a commitment entered into while the security interest was perfected by another method. Thus, an advance has priority from the date it is made only in the rare case in which it is made without commitment and while the security interest is perfected only temporarily under Section 9-312.

    The new formulation in subsection (a) clarifies the result when the initial advance is paid and a new (“future”) advance is made subsequently. Under former Section 9-312(7), the priority of the new advance turned on whether it was “made while a security interest is perfected.” This section resolves any ambiguity by omitting the quoted phrase.

  4. Competing Lien Creditors.  Subsection (b) replaces former section 9-301(4) and addresses the rights of a “lien creditor,” as defined in section 9-102. Under Section 9-317(a)(2), a security interest is senior to the rights of a person who becomes a lien creditor, unless the person becomes a lien creditor before the security interest is perfected and before a financing statement covering the collateral is filed and Section 9-203(b)(3) is satisfied. Subsection (b) of this section provides that a security interest is subordinate to those rights to the extent that the specified circumstances occur. Subsection (b) does not elevate the priority of a security interest that is subordinate to the rights of a lien creditor under Section 9-317(a)(2); it only subordinates.

    As under former Section 9-301(4), a secured party’s knowledge does not cut short the 45-day period during which future advances can achieve priority over an intervening lien creditor’s interest. Rather, because of the impact of the rule in subsection (b) on the question whether the security interest for future advances is “protected” under Section 6323(c)(2) and (d) of the Internal Revenue Code as amended by the Federal Tax Lien Act of 1966, the priority of the security interest for future advances over a lien creditor is made absolute for 45 days regardless of knowledge of the secured party concerning the lien. If, however, the advance is made after the 45 days, the advance will not have priority unless it was made or committed without knowledge of the lien.

  5. Sales of Receivables; Consignments.  Subsections (a) and (b) do not apply to outright sales of accounts, chattel paper, payment intangibles, or promissory notes, nor do they apply to consignments.
  6. Competing Buyers and Lessees.  Under subsections (d) and (e), a buyer will not take subject to a security interest to the extent it secures advances made after the secured party has knowledge that the buyer has purchased the collateral or more than 45 days after the purchase unless the advances were made pursuant to a commitment entered into before the expiration of the 45-day period and without knowledge of the purchase. Subsections (f) and (g) provide an analogous rule for lessees. Of course, a buyer in ordinary course who takes free of the security interest under section 9-320 and a lessee in ordinary course who takes free under section 9-321 are not subject to any future advances. Subsections (d) and (e) replace former Section 9-307(3), and subsections (f) and (g) replace former Section 2A-307(4). No change in meaning is intended.

Example 1: On February 1, A makes an advance secured by machinery in the debtor’s possession and files a financing statement. On March 1, B makes an advance secured by the same machinery and files a financing statement. On April 1, A makes a further advance, under the original security agreement, against the same machinery. A was the first to file and so, under the first-to-file-or-perfect rule of Section 9-322(a)(1), A’s security interest has priority over B’s, both as to the February 1 and as to the April 1 advance. It makes no difference whether A knows of B’s intervening advance when A makes the second advance. Note that, as long as A was the first to file or perfect, A would have priority with respect to both advances if either A or B had perfected by taking possession of the collateral. Likewise, A would have priority if A’s April 1 advance was not made under the original agreement with the debtor, but was under a new agreement.

Example 2: On October 1, A acquires a temporarily perfected (20-day) security interest, unfiled, in a negotiable document in the debtor’s possession under Section 9-312(e) or (f). The security interest secures an advance made on that day as well as future advances. On October 5, B files and thereby perfects a security interest that previously had attached to the same document. On October 8, A makes an additional advance. On October 10, A files. Under Section 9-322(a)(i), because A was the first to perfect and maintained continuous perfection or filing since the start of the 20-day period, A has priority, even after the 20-day period expires. See section 9-322, comment 4, example 3. However, under this section, for purposes of Section 9-322(a)(1), to the extent A’s security interest secures the October 8 advance, the security interest was perfected on October 8. Inasmuch as B perfected on October 5, B has priority over the October 8 advance.

The rule in subsection (a) is more liberal toward the priority of future advances than the corresponding rules applicable to intervening lien creditors (subsection (b)), buyers (subsections (d) and (e)), and lessees (subsections (f) and (g)).

NOTES TO DECISIONS

1.Lien Creditors.

Attachment levied for landlord’s lien under law providing a lien for rent and its priority had priority over seller of property where the sale was to have been for cash and seller delivered the merchandise without collecting the selling price, since seller should have protected himself at the time of sale by demanding cash or securing a valid lien. (decided under prior law) Kloak Bros. & Co. v. Joseph, 150 Ky. 508 , 150 S.W. 651, 1912 Ky. LEXIS 927 ( Ky. 1912 ).

Where the partnership agreement between two men and another by which the latter acquired an equity in coal rights was never recorded, and there was no allegation of actual notice, such instruments were not valid as against judgment creditor of joint owners, and levy of his execution gave him a prior lien. (decided under prior law) Mann Bros. v. Ball, 230 Ky. 129 , 18 S.W.2d 946, 1929 Ky. LEXIS 27 ( Ky. 1929 ).

Seller’s lien on cash register sold to bankrupt under conditional sales contract dated in January and recorded in April was invalid as to indebtedness incurred between dates of sale and recordation of contract. (decided under prior law) In re Henry, 60 F.2d 605, 1932 U.S. Dist. LEXIS 1369 (D. Ky. 1932 ).

Unrecorded mortgage was not good as against creditors, irrespective of whether creditors acquired lien by legal or equitable proceedings or by voluntary conveyance. (decided under prior law) Peck v. Trail, 251 Ky. 377 , 65 S.W.2d 83, 1933 Ky. LEXIS 883 ( Ky. 1933 ).

It was only an antecedent creditor who had to, in order to come within the protection of the recording statute, acquire a lien on the property prior to the recording of the instrument transferring or encumbering it. (decided under prior law) Davis v. Allen, 280 Ky. 798 , 134 S.W.2d 617, 1939 Ky. LEXIS 203 ( Ky. 1939 ).

Lien of attachment was properly adjudged superior to alleged vendors’ lien, where vendors delivered possession of the goods to vendee and, under their alleged conditional sales contract, did nothing to protect themselves. (decided under prior law) Meade v. Wells, 309 Ky. 748 , 218 S.W.2d 972, 1949 Ky. LEXIS 803 ( Ky. 1949 ).

A conditional sales contract had to be recorded to be perfected as against subsequent lien creditors. (decided under prior law) In re Kaufman, 142 F. Supp. 759, 1956 U.S. Dist. LEXIS 3195 (D. Ky. 1956 ).

Filing in accordance with former KRS 355.9-401 is required in order to perfect a security interest in an automobile according to formerKRS 355.9-302 (1)(d) so long as it is not shown that all the creditors knew of the unperfected security interest. (decided under prior law) In re Hall, 248 F. Supp. 124, 1965 U.S. Dist. LEXIS 6676 (E.D. Ky. 1965 ).

A person who becomes a lien creditor before a security interest is perfected will defeat the security interest even if the lien creditor has knowledge of the security interest; however, a perfected security interest is not subordinate to the rights of a subsequent judgment lien creditor. (decided under prior law) In re Lynum, 246 B.R. 537, 2000 Bankr. LEXIS 338 (Bankr. E.D. Ky. 2000 ).

2.— Without Knowledge.

The lien acquired by the levy of an attachment had priority over an unrecorded mortgage which was in existence, but of which the attaching creditor had no notice, at the time his debt was created. (decided under prior law) Wicks v. McConnell, 102 Ky. 434 , 43 S.W. 205, 20 Ky. L. Rptr. 84 , 1897 Ky. LEXIS 85 ( Ky. 1897 ).

Where possession of the property was taken by the purchaser, and maintained thereafter, it operated as notice to creditors and purchasers. (decided under prior law) Warden v. Addington, 131 Ky. 296 , 115 S.W. 241, 1909 Ky. LEXIS 35 ( Ky. 1909 ); Stone v. Keith, 218 Ky. 11 , 290 S.W. 1042, 1927 Ky. LEXIS 92 ( Ky. 1927 ); Chrisman v. Greer, 239 Ky. 373 , 39 S.W.2d 676, 1931 Ky. LEXIS 795 ( Ky. 1931 ); Ashland Grocery Co. v. Martin, 267 Ky. 677 , 103 S.W.2d 72, 1937 Ky. LEXIS 364 ( Ky. 1937 ).

Subsequent parties without notice of an unrecorded chattel mortgage were not “creditors” unless they had secured a lien upon the mortgaged property by attachment or otherwise. (decided under prior law) Holt v. Crucible Steel Co., 224 U.S. 262, 32 S. Ct. 414, 56 L. Ed. 756, 1912 U.S. LEXIS 2301 (U.S. 1912).

The only creditors included by the recording law prior to the 1916 amendment were such subsequent creditors without notice as had acquired by their own activity a hold or lien on the property before the instrument involved was recorded. (decided under prior law) In re Watson, 201 F. 962, 1912 U.S. Dist. LEXIS 1069 (D. Ky. 1912 ), aff'd, 216 F. 483, 1914 U.S. App. LEXIS 1361 (6th Cir. Ky. 1914 ).

A person with an unliquidated claim for damages caused by an automobile, to whom the owner pledged the automobile for damages, was a creditor under law that provided no deed or mortgage conveying legal or equitable title to realty or personalty was valid against a purchaser for value without notice, and had a lien prior to the unrecorded purchase money lien of which he had no knowledge when he caused an attachment to levy. (decided under prior law) Jewell v. Cecil, 177 Ky. 822 , 198 S.W. 199, 1917 Ky. LEXIS 661 ( Ky. 1917 ).

The words “without notice” in the recording law applied to creditors as well as purchasers for a valuable consideration and the possession of the grantee in unrecorded deed was sufficient notice. (decided under prior law) Stone v. Keith, 218 Ky. 11 , 290 S.W. 1042, 1927 Ky. LEXIS 92 ( Ky. 1927 ). See Sears v. Cain, 242 Ky. 702 , 47 S.W.2d 513, 1932 Ky. LEXIS 338 ( Ky. 1932 ).

Although the description in chattel mortgage was insufficient to make record constructive notice as it failed to give address of mortgagor, location of property or other descriptive details, it was valid against an attachment creditor who had actual knowledge of the mortgage prior to filing an amended affidavit to cure a defect in his original affidavit. (decided under prior law) Hart County Deposit Bank v. Hatfield, 236 Ky. 725 , 33 S.W.2d 660, 1930 Ky. LEXIS 815 ( Ky. 1930 ).

An execution lien obtained without prior actual knowledge of a chattel mortgage had priority over the recorded chattel mortgage which failed to give constructive notice because it did not give the address of mortgagor, the location of the property or other descriptive details. (decided under prior law) Hart County Deposit Bank v. Hatfield, 236 Ky. 725 , 33 S.W.2d 660, 1930 Ky. LEXIS 815 ( Ky. 1930 ).

Unrecorded mortgage was valid against all creditors with notice. (decided under prior law) Eastern Const. Co. v. Carson Const. Co.'s Trustee, 242 Ky. 648 , 47 S.W.2d 67, 1932 Ky. LEXIS 331 ( Ky. 1932 ).

Where debtor sold automobile under conditional sales contract prior to attachment by a creditor but did not deliver possession of the automobile or record the bill of sale, the creditor who had no actual knowledge of the sale prevailed over the purchaser under the conditional sales contract. (decided under prior law) General Motors Acceptance Corp. v. Wigger, 249 Ky. 722 , 61 S.W.2d 620, 1933 Ky. LEXIS 596 ( Ky. 1933 ).

A general creditor could not obtain by attachment a lien superior to a prior unrecorded mortgage on the property attached if he had legal notice of the prior mortgage. (decided under prior law) C. I. T. Corp. v. Studebaker Sales of Kentucky, 251 Ky. 349 , 65 S.W.2d 84, 1933 Ky. LEXIS 884 ( Ky. 1933 ).

Where creditors who obtained and levied their execution on store real estate and stock were each notified of the conveyance by grandfather to his son and grandson at the time or shortly after the conveyance was made and the son and grandson immediately took charge of the stock, changed the firm name and commenced dealing with the creditors in the changed and altered name, the creditors did not have a superior lien to grantees even though their execution was levied before grantees’ deed was recorded. (decided under prior law) Ashland Grocery Co. v. Martin, 267 Ky. 677 , 103 S.W.2d 72, 1937 Ky. LEXIS 364 ( Ky. 1937 ).

If indebtedness out of which creditor’s judgment arose was incurred subsequent to date of unrecorded conveyance, the sole question would be whether creditor had knowledge of conveyance at time he extended credit, and it would be immaterial whether he had notice at time execution was levied, and possession by purchaser was notice but burden of proof was on grantee under an unrecorded instrument. (decided under prior law) Davis v. Allen, 280 Ky. 798 , 134 S.W.2d 617, 1939 Ky. LEXIS 203 ( Ky. 1939 ).

The sale of a Corvette by owner to leasing company, without any notation of a lien on the certificate of title, did not render that sale void, and plaintiff, a good-faith purchaser, must prevail over the lienholder who holds an unperfected security interest. (decided under prior law) McKenzie v. Oliver, 571 S.W.2d 102, 1978 Ky. App. LEXIS 586 (Ky. Ct. App. 1978).

Research References and Practice Aids

Cross-References.

Conveyances and encumbrances, KRS Ch. 382.

Defendant’s property, creation of lien on, KRS 426.383 .

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

355.9-324. Priority of purchase-money security interests.

  1. Except as otherwise provided in subsection (7) of this section, a perfected purchase-money security interest in goods other than inventory or livestock has priority over a conflicting security interest in the same goods, and, except as otherwise provided in KRS 355.9-327 , a perfected security interest in its identifiable proceeds also has priority, if the purchase-money security interest is perfected when the debtor receives possession of the collateral or within twenty (20) days thereafter.
  2. Subject to subsection (3) of this section and except as otherwise provided in subsection (7) of this section, a perfected purchase-money security interest in inventory has priority over a conflicting security interest in the same inventory, has priority over a conflicting security interest in chattel paper or an instrument constituting proceeds of the inventory and in proceeds of the chattel paper, if so provided in KRS 355.9-330 , and, except as otherwise provided in KRS 355.9-327 , also has priority in identifiable cash proceeds of the inventory to the extent the identifiable cash proceeds are received on or before the delivery of the inventory to a buyer, if:
    1. The purchase-money security interest is perfected when the debtor receives possession of the inventory;
    2. The purchase-money secured party sends an authenticated notification to the holder of the conflicting security interest;
    3. The holder of the conflicting security interest receives the notification within five (5) years before the debtor receives possession of the inventory; and
    4. The notification states that the person sending the notification has or expects to acquire a purchase-money security interest in inventory of the debtor and describes the inventory.
  3. Subsection (2)(b) to (d) of this section apply only if the holder of the conflicting security interest had filed a financing statement covering the same types of inventory:
    1. If the purchase-money security interest is perfected by filing, before the date of the filing; or
    2. If the purchase-money security interest is temporarily perfected without filing or possession under KRS 355.9-312 (6), before the beginning of the twenty (20) day period thereunder.
  4. Subject to subsection (5) of this section and except as otherwise provided in subsection (7) of this section, a perfected purchase-money security interest in livestock that are farm products has priority over a conflicting security interest in the same livestock, and, except as otherwise provided in KRS 355.9-327 , a perfected security interest in their identifiable proceeds and identifiable products in their unmanufactured states also has priority, if:
    1. The purchase-money security interest is perfected when the debtor receives possession of the livestock;
    2. The purchase-money secured party sends an authenticated notification to the holder of the conflicting security interest;
    3. The holder of the conflicting security interest receives the notification within six (6) months before the debtor receives possession of the livestock; and
    4. The notification states that the person sending the notification has or expects to acquire a purchase-money security interest in livestock of the debtor and describes the livestock.
  5. Subsection (4)(b) to (d) of this section apply only if the holder of the conflicting security interest had filed a financing statement covering the same types of livestock:
    1. If the purchase-money security interest is perfected by filing, before the date of the filing; or
    2. If the purchase-money security interest is temporarily perfected without filing or possession under KRS 355.9-312 (6), before the beginning of the twenty (20) day period thereunder.
  6. Except as otherwise provided in subsection (7) of this section, a perfected purchase-money security interest in software has priority over a conflicting security interest in the same collateral, and, except as otherwise provided in KRS 355.9-327 , a perfected security interest in its identifiable proceeds also has priority, to the extent that the purchase-money security interest in the goods in which the software was acquired for use has priority in the goods and proceeds of the goods under this section.
  7. If more than one security interest qualifies for priority in the same collateral under subsection (1), (2), (4), or (6) of this section:
    1. A security interest securing an obligation incurred as all or part of the price of the collateral has priority over a security interest securing an obligation incurred for value given to enable the debtor to acquire rights in or the use of collateral; and
    2. In all other cases, KRS 355.9-322 (1) applies to the qualifying security interests.

History. Enact. Acts 2000, ch. 408, § 64, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-312(3) and (4).
  2. Priority of Purchase-Money Security Interests.  This section contains the priority rules applicable to purchase-money security interests, as defined in Section 9-103. It affords a special, nontemporal priority to those purchase-money security interests that satisfy the statutory conditions. In most cases, priority will be over a security interest asserted under an after-acquired property clause. See Section 9-204 on the extent to which security interests in after-acquired property are validated.

    A purchase-money security interest can be created only in goods and software. See Section 9-103. Section 9-324(a), which follows former Section 9-312(4), contains the general rule for purchase-money security interests in goods. It is subject to subsections (b) and (c), which derive from former Section 9-312(3) and apply to purchase-money security interests in inventory, and subsections (d) and (e), which apply to purchase-money security interests in livestock that are farm products. Subsection (f) applies to purchase-money security interests in software. Subsection (g) deals with the relatively unusual case in which a debtor creates two purchase-money security interests in the same collateral and both security interests qualify for special priority under one of the other subsections.

    Former Section 9-312(2) contained a rule affording special priority to those who provided secured credit that enabled a debtor to produce crops. This rule proved unworkable and has been eliminated from this article. Instead, model Section 9-324A contains a revised production-money priority rule. That section is a model, not uniform, provision. The sponsors of the UCC have taken no position as to whether it should be enacted, instead leaving the matter for state legislatures to consider if they are so inclined.

  3. Purchase-Money Priority in Goods Other Than Inventory and Livestock.  Subsection (a) states a general rule applicable to all types of goods except inventory and farm-products livestock: The purchase-money interest takes priority if it is perfected when the debtor receives possession of the collateral or within 20 days thereafter. (As to the 20-day “grace period,” compare Section 9-317(e). Former Sections 9-301(2) and 9-312(4) contained a 10-day grace period.) The perfection requirement means that the purchase-money secured party either has filed a financing statement before that time or has a temporarily perfected security interest in goods covered by documents under Section 9-312(e) and (f) which is continued in a perfected status by filing before the expiration of the 20-day period specified in that section. A purchase-money security interest qualifies for priority under subsection (a), even if the purchase-money secured party knows that a conflicting security interest has been created and/or that the holder of the conflicting interest has filed a financing statement covering the collateral.

    Normally, there will be no question when “the debtor receives possession of the collateral” for purposes of subsection (a). However, sometimes a debtor buys goods and takes possession of them in stages, and then assembly and testing are completed (by the seller or debtor-buyer) at the debtor’s location. Under those circumstances, the buyer “takes possession” within the meaning of subsection (a) when, after an inspection of the portion of the goods in the debtor’s possession, it would be apparent to a potential lender to the debtor that the debtor has acquired an interest in the goods taken as a whole.

    A similar issue concerning the time when “the debtor receives possession” arises when a person acquires possession of goods under a transaction that is not governed by this article and then later agrees to buy the goods on secured credit. For example, a person may take possession of goods as lessee under a lease contract and then exercise an option to purchase the goods from the lessor on secured credit. Under Section 2A-307(1), creditors of the lessee generally take subject to the lease contract; filing a financing statement against the lessee is unnecessary to protect the lessor’s leasehold or residual interest. Once the lease is converted to a security interest, filing a financing statement is necessary to protect the seller’s (former lessor’s) security interest. Accordingly, the 20-day period in subsection (a) does not commence until the goods become “collateral” (defined in Section 9-102), i.e., until they are subject to a security interest.

  4. Purchase-Money Security Interests in Inventory.  Subsections (b) and (c) afford a means by which a purchase-money security interest in inventory can achieve priority over an earlier-filed security interest in the same collateral. To achieve priority, the purchase-money security interest must be perfected when the debtor receives possession of the inventory. For a discussion of when “the debtor receives possession,” see Comment 3, above. The 20-day grace period of subsection (a) does not apply.

    The arrangement between an inventory secured party and its debtor typically requires the secured party to make periodic advances against incoming inventory or periodic releases of old inventory as new inventory is received. A fraudulent debtor may apply to the secured party for advances even though it has already given a purchase-money security interest in the inventory to another secured party. For this reason, subsections (b)(2) through (4) and (c) impose a second condition for the purchase-money security interest’s achieving priority: The purchase-money secured party must give notification to the holder of a conflicting security interest who filed against the same item or type of inventory before the purchase-money secured party filed or its security interest became perfected temporarily under Section 9-312(e) or (f). The notification requirement protects the non-purchase-money inventory secured party in such a situation: If the inventory secured party has received notification, it presumably will not make an advance; if it has not received notification (or if the other security interest does not qualify as purchase-money), any advance the inventory secured party may make ordinarily will have priority under Section 9-322. Inasmuch as an arrangement for periodic advances against incoming goods is unusual outside the inventory field, subsection (a) does not contain a notification requirement.

  5. Notification to Conflicting Inventory Secured Party: Timing.  Under subsection (b)(3), the perfected purchase-money security interest achieves priority over a conflicting security interest only if the holder of the conflicting security interest receives a notification within five years before the debtor receives possession of the purchase-money collateral. If the debtor never receives possession, the five-year period never begins, and the purchase-money security interest has priority, even if notification is not given. However, where the purchase-money inventory financing began by the purchase-money secured party’s possession of a negotiable document of title, to retain priority the secured party must give the notification required by subsection (b) at or before the usual time, i.e., when the debtor gets possession of the inventory, even though the security interest remains perfected for 20 days under Section 9-312(e) or (f).

    Some people have mistakenly read former Section 9-312(3)(b) to require, as a condition of purchase-money priority in inventory, that the purchase-money secured party give the notification before it files a financing statement. Read correctly, the “before” clauses compare (i) the time when the holder of the conflicting security interest filed a financing statement with (ii) the time when the purchase-money security interest becomes perfected by filing or automatically perfected temporarily. Only if (i) occurs before (ii) must notification be given to the holder of the conflicting security interest. Subsection (c) has been rewritten to clarify this point.

  6. Notification to Conflicting Inventory Secured Party: Address.  Inasmuch as the address provided as that of the secured party on a filed financing statement is an “address that is reasonable under the circumstances,” the holder of a purchase-money security interest may satisfy the requirement to “send” notification to the holder of a conflicting security interest in inventory by sending a notification to that address, even if the address is or becomes incorrect. See section 9-102 (definition of “send”). Similarly, because the address is “held out by (the holder of the conflicting security interest) as the place for receipt of such communications (i.e., communications relating to security interests),” the holder is deemed to have “received” a notification delivered to that address. See Section 1-201(a)(26).
  7. Consignments.  Subsections (b) and (c) also determine the priority of a consignor’s interest in consigned goods as against a security interest in the goods created by the consignee. Inasmuch as a consignment subject to this article is defined to be a purchase-money security interest, see Section 9-103(d), no inference concerning the nature of the transaction should be drawn from the fact that a consignor uses the term “security interest” in its notice under subsection (b)(4). Similarly, a notice stating that the consignor has delivered or expects to deliver goods, properly described, “on consignment” meets the requirements of subsection (b)(4), even if it does not contain the term “security interest,” and even if the transaction subsequently is determined to be a security interest. Cf. Section 9-505 (use of “consignor” and “consignee” in financing statement).
  8. Priority in Proceeds: General.  When the purchase-money secured party has priority over another secured party, the question arises whether this priority extends to the proceeds of the original collateral. Subsections (a), (d), and (f) give an affirmative answer, but only as to proceeds in which the security interest is perfected (see Section 9-315). Although this qualification did not appear in former Section 9-312(4), it was implicit in that provision.

    In the case of inventory collateral under subsection (b), where financing frequently is based on the resulting accounts, chattel paper, or other proceeds, the special priority of the purchase-money secured interest carries over into only certain types of proceeds. As under former Section 9-312(3), the purchase-money priority in inventory under subsection (b) carries over into identifiable cash proceeds (defined in Section 9-102) received on or before the delivery of the inventory to a buyer.

    As a general matter, also like former Section 9-312(3), the purchase-money priority in inventory does not carry over into proceeds consisting of accounts or chattel paper. Many parties financing inventory are quite content to protect their first-priority security interest in the inventory itself. They realize that when the inventory is sold, someone else will be financing the resulting receivables (accounts or chattel paper), and the priority for inventory will not run forward to the receivables constituting the proceeds. Indeed, the cash supplied by the receivables financer often will be used to pay the inventory financing. In some situations, the party financing the inventory on a purchase-money basis makes contractual arrangements that the proceeds of receivables financing by another be devoted to paying off the inventory security interest.

    However, the purchase-money priority in inventory does carry over to proceeds consisting of chattel paper and its proceeds (and also to instruments) to the extent provided in Section 9-330. Under Section 9-330(e), the holder of a purchase-money security interest in inventory is deemed to give new value for proceeds consisting of chattel paper. Taken together, Sections 9-324(b) and 9-330(e) enable a purchase-money inventory secured party to obtain priority in chattel paper constituting proceeds of the inventory, even if the secured party does not actually give new value for the chattel paper, provided the purchase-money secured party satisfies the other conditions for achieving priority.

    When the proceeds of original collateral (goods or software) consist of a deposit account, Section 9-327 governs priority to the extent it conflicts with the priority rules of this section.

  9. Priority in Accounts Constituting Proceeds of Inventory.  The application of the priority rules in subsection (b) is shown by the following examples:
  10. Purchase-Money Security Interests in Livestock.  New subsections (d) and (e) provide a purchase-money priority rule for farm-products livestock. They are patterned on the purchase-money priority rule for inventory found in subsections (b) and (c) and include a requirement that the purchase-money secured party notify earlier-filed parties. Two differences between subsections (b) and (d) are noteworthy. First, unlike the purchase-money inventory lender, the purchase-money livestock lender enjoys priority in all proceeds of the collateral. Thus, under subsection (d), the purchase-money secured party takes priority in accounts over an earlier-filed accounts financer. Second, subsection (d) affords priority in certain products of the collateral as well as proceeds.
  11. Purchase-Money Security Interests in Aquatic Farm Products.  Aquatic goods produced in aquacultural operations (e.g., catfish raised on a catfish farm) are farm products. See Section 9-102 (definition of “farm products”). The definition does not indicate whether aquatic goods are “crops,” as to which the model production money security interest priority in Section 9-324A applies, or “livestock,” as to which the purchase-money priority in subsection (d) of this section applies. This Article leaves courts free to determine the classification of particular aquatic goods on a case-by-case basis, applying whichever priority rule makes more sense in the overall context of the debtor’s business.
  12. Purchase-Money Security Interests in Software.  Subsection (f) governs the priority of purchase-money security interests in software. Under Section 9-103(c), a purchase-money security interest arises in software only if the debtor acquires its interest in the software for the principal purpose of using the software in goods subject to a purchase-money security interest. Under subsection (f), a purchase-money security interest in software has the same priority as the purchase-money security interest in the goods in which the software was acquired for use. This priority is determined under subsections (b) and (c) (for inventory) or (a) (for other goods).
  13. Multiple Purchase-Money Security Interests.  New subsection (g) governs priority among multiple purchase-money security interests in the same collateral. It grants priority to purchase-money security interests securing the price of collateral (i.e., created in favor of the seller) over purchase-money security interests that secure enabling loans. Section 7.2(c) of the Restatement (3d) of the Law of Property (Mortgages) (1997) adopts this rule with respect to real property mortgages. As comment d to that section explains:

    the equities favor the vendor. Not only does the vendor part with specific real estate rather than money, but the vendor would never relinquish it at all except on the understanding that the vendor will be able to use it to satisfy the obligation to pay the price. This is the case even though the vendor may know that the mortgagor is going to finance the transaction in part by borrowing from a third party and giving a mortgage to secure that obligation. In the final analysis, the law is more sympathetic to the vendor’s hazard of losing real estate previously owned than to the third party lender’s risk of being unable to collect from an interest in real estate that never previously belonged to it.

    The first-to-file-or-perfect rule of Section 9-322 applies to multiple purchase-money security interests securing enabling loans.

Example 1: Debtor creates a security interest in its existing and after-acquired inventory in favor of SP-1, who files a financing statement covering inventory. SP-2 subsequently takes a purchase-money security interest in certain inventory and, under subsection (b), achieves priority in this inventory over SP-1. This inventory is then sold, producing accounts. Accounts are not cash proceeds, and so the special purchase-money priority in the inventory does not control the priority in the accounts. Rather, the first-to-file-or-perfect rule of Section 9-322(a)(1) applies. The time of SP-1’s filing as to the inventory is also the time of filing as to the accounts under Section 9-322(b). Assuming that each security interest in the accounts proceeds remains perfected under Section 9-315, SP-1 has priority as to the accounts.

Example 2: In Example 1, if SP-2 had filed directly against accounts, the date of that filing as to accounts would be compared with the date of SP-1’s filing as to the inventory. The first filed would prevail under Section 9-322(a)(1).

Example 3: If SP-3 had filed against accounts in Example 1 before either SP-1 or SP-2 filed against inventory, SP-3’s filing against accounts would have priority over the filings of SP-1 and SP-2. This result obtains even though the filings against inventory are effective to continue the perfected status of SP-1’s and SP-2’s security interest in the accounts beyond the 20-day period of automatic perfection. See section 9-315. SP-1’s and SP-2’s position as to the inventory does not give them a claim to accounts (as proceeds of the inventory) which is senior to someone who has filed earlier against accounts. If, on the other hand, either SP-1’s or SP-2’s filing against the inventory preceded SP-3’s filing against accounts, SP-1 or SP-2 would outrank SP-3 as to the accounts.

NOTES TO DECISIONS

1.Applicability.

The right of reclamation of a defrauded seller under KRS 355.2-702 (2) is not a “security interest” within the meaning of Article 9, especially former KRS 355.9-301 , and that section is not applicable in determining the priority of claims between the reclaiming seller and attaching creditors. (decided under prior law) In re Mel Golde Shoes, Inc., 403 F.2d 658, 1968 U.S. App. LEXIS 4652 (6th Cir. Ky. 1968 ).

2.Chattel Mortgages.

A materialman’s lien was not superior to prior recorded mortgages. (decided under prior law) Indiana Truck Corp. v. Hurry Up Broadway Co., 222 Ky. 521 , 1 S.W.2d 990, 1928 Ky. LEXIS 202 ( Ky. 1928 ).

3.— Crop.

A mortgage on a growing tobacco crop which was prior in time but recorded after a subsequent mortgage on the same tobacco was superior to the subsequent mortgage where mortgagee had knowledge of the prior mortgage. (decided under prior law) Holt v. Farmers' Loose Leaf Tobacco Warehouse Co., 201 Ky. 184 , 256 S.W. 6, 1923 Ky. LEXIS 246 ( Ky. 1923 ).

4.Purchase Money Security Interests.

An unrecorded lien for the purchase price of personal property was inferior to the lien subsequently acquired by a mortgagee for money advanced to purchaser who had recorded his mortgage six weeks before delivery of the personal property to purchaser. (decided under prior law) Westinghouse Electric Mfg. Co. v. Citizens S. R. Co., 68 S.W. 463, 24 Ky. L. Rptr. 334 , 1902 Ky. LEXIS 296 (Ky. Ct. App. 1902).

Purchase money chattel mortgage on truck, properly recorded, was superior to subsequent statutory lien for tires. (decided under prior law) Indiana Truck Corp. v. Hurry Up Broadway Co., 222 Ky. 521 , 1 S.W.2d 990, 1928 Ky. LEXIS 202 ( Ky. 1928 ).

5.Conditional Sales Contracts.

A conditional sales contract for 20 buggies was a chattel mortgage within the recording law, so that one who subsequently advanced money to the purchaser to pay freight on carriages, taking a mortgage on the carriages as security, was entitled to priority over the wholesaler who failed to record the conditional sales contract. (decided under prior law) Rankin v. McFarlane Carriage Co., 75 S.W. 221, 25 Ky. L. Rptr. 258 (1903).

Where unrecorded contract for purchase of cars by corporation which was executed by one of the directors contained retention provisions, directors of the corporation who took a mortgage on the cars and purchased the cars at sale under the mortgage were chargeable with conversion and seller was entitled to priority over mortgagees. (decided under prior law) Enterprise Foundry & Machine Works v. Miners' Elkhorn Coal Co., 241 Ky. 779 , 45 S.W.2d 470, 1931 Ky. LEXIS 164 ( Ky. 1931 ).

6.Failure to File in Correct County.

Lessors of coal land with lien on 50 mine cars under the terms of their lease were required to record their lease in county where lessee corporation had its principal offices and their failure to do so gave bank who had no knowledge of lessor’s lien a first lien under their chattel mortgage on the 50 mine cars. (decided under prior law) North Star Co. v. Howard, 341 S.W.2d 251, 1960 Ky. LEXIS 74 ( Ky. 1960 ).

7.Purchase Money Security Interests.

Where a purchase money security interest was not perfected by filing within the ten-day grace period given by this section, the purchase money security interest is to be treated as any other security interest in determining priority and, if both are to be perfected by filing, the one filed first has priority. (decided under prior law) Mammoth Cave Production Credit Asso. v. York, 429 S.W.2d 26, 1968 Ky. LEXIS 729 ( Ky. 1968 ).

The seller of personal property to a now bankrupt company held a purchase money security interest in the property, rather than a security interest. The difference is critical. The PMSI is recognized as superior to any other UCC security interest, including those which themselves are superior to the general tax lien of KRS 134.420(2). Thus, the seller had a lien superior to that of the state, and the state could not enforce a tax lien against the property in question. (decided under prior law) Whayne Supply Co. v. Commonwealth Revenue Cabinet, 925 S.W.2d 185, 1996 Ky. LEXIS 64 ( Ky. 1996 ).

8.Liens by Operation of Law.

Granting statutory repairman’s lien on automobile, created by KRS 376.270 , priority over prior perfected security interest was not denial of due process or contravention of established public policy. (decided under prior law) Corbin Deposit Bank v. King, 384 S.W.2d 302, 1964 Ky. LEXIS 83 ( Ky. 1964 ).

9.Gap in Security Interest.

Where first creditor held perfected security interest in trencher purchased in 1973 as evidenced by recorded security agreement and financing statement which made no provision for future advances, debtor purchased additional trencher in 1975 from bank creditor using 1973 trencher as additional collateral and security agreement was recorded, debtor paid off initial loan in September 1977 and first creditor never filed termination agreement under former KRS 355.9-404 , then debtor bought trucks and trailers from first creditor which took lien on 1973 trencher as new collateral in new agreement recorded in October 1977, bank creditor had priority over first creditor since security interest exists only when debtor owes obligation and original indebtedness had been paid off, thus a gap existed which gave priority to second creditor under former KRS 355.9-312 and former KRS 355.9-204 . (decided under prior law) ITT Industrial Credit Co. v. Union Bank & Trust Co., 615 S.W.2d 2, 1981 Ky. App. LEXIS 240 (Ky. Ct. App. 1981).

10.Notice of Unsecured Interest.

Even assuming that purchaser of security agreements on equipment, through its agent, had notice of unrecorded security interest, the provisions of former KRS 355.9-312 (5)(a) and (b) compelled a finding that purchaser’s recorded security interest was superior to the unrecorded security interest. (decided under prior law) Hutchison v. C.I.T. Corp., 576 F. Supp. 1, 1982 U.S. Dist. LEXIS 17609 (W.D. Ky. 1982 ), aff'd, 726 F.2d 300, 1984 U.S. App. LEXIS 25658 (6th Cir. Ky. 1984 ).

11.Possession.

Although the Uniform Commercial Code does not contain a definition of the term “possession” or “receives possession,” there is strong support for the proposition that the term “possession,” as used in former subsection (4) of this section, refers to actual, physical possession as opposed to constructive possession. (decided under prior law) In re Ivy, 37 B.R. 285, 1983 Bankr. LEXIS 5101 (Bankr. E.D. Ky. 1983 ).

The evidence did not support the creditor tobacco warehouse’s claim that its crop money lien was perfected by “possession” when the debtors delivered their tobacco to the warehouse for purpose of selling the collateral at the seasonal auctions held by the warehouse, since no evidence was offered by the warehouse to show the necessary dominion and control over the property required for “possession” at common law, and the record also failed to show debtors’ relinquishment of control to accept or reject bids at the auction when the collateral was physically possessed by the creditor warehouse. (decided under prior law) In re Rogers, 39 B.R. 295, 1984 Bankr. LEXIS 6096 (Bankr. W.D. Ky. 1984 ).

12.Earlier Perfected Interest.

Where the security agreement of the parties at the outset provided for periodic accrual of interest on debtors’ obligations, and that agreement was properly filed in June 1981, the credit association’s later filing in August of 1981 to reflect current total debt secured by the debtors’ 1981 tobacco crops and proceeds merely insured the credit association’s interest in collateral to the extent of value represented by interest charges or miscellaneous expenses; since the act of filing anew did not erode the credit association’s earlier status as secured creditor of debtors’ 1981 tobacco crops and proceeds, the credit association possessed the “earlier perfected security interest” required for application of former KRS 355.9-312 (2). (decided under prior law) In re Rogers, 39 B.R. 295, 1984 Bankr. LEXIS 6096 (Bankr. W.D. Ky. 1984 ).

Where the debtor’s bank had filed and perfected its security interest in the debtor’s assets under former KRS 355.9-312 (5)(a), (7), 355.9-303 , 355.9-203 , before the debtor’s shareholders sold their stock to the debtor and took a security interest in the debtor’s assets, the bank held a perfected, first, and prior lien on the debtor’s assets; a subordination provision in the stock purchase agreement between the debtor and the former shareholders, to which the bank was not a party, was not binding on the bank. (decided under prior law) Ralph v. Stock Yards Bank & Trust Co. (In re Kentuckiana Truck & Trailer Repair, Inc.), 291 B.R. 84, 2002 Bankr. LEXIS 1678 (Bankr. W.D. Ky. 2002 ).

A person who becomes a lien creditor before a security interest is perfected will defeat the security interest even if the lien creditor has knowledge of the security interest; however, a perfected security interest is not subordinate to the rights of a subsequent judgment lien creditor. (decided under prior law) In re Lynum, 246 B.R. 537, 2000 Bankr. LEXIS 338 (Bankr. E.D. Ky. 2000 ).

13.Livestock.

Defendant never sent plaintiff the “authenticated notification” required by the provision regarding conflicting security interests in livestock, which by itself rendered defendant’s security interest subordinate to plaintiff’s security interest in the debtor’s cattle, and, by extension, the proceeds of the sale of the cattle. Agri-Max Fin. Servs., LP v. Springfield State Bank (In re Smith), 2013 Bankr. LEXIS 3513 (Bankr. W.D. Ky. Aug. 27, 2013).

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Kentucky Law Journal.

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Bland, Insolvencies in Farming and Agribusinesses, 73 Ky. L.J. 795 (1984-85).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

Hakes, A Quest for Justice in the Conversion of Security Interests, 82 Ky. L.J. 837 (1993-94).

Northern Kentucky Law Review.

Cox, Lender Liability in the Bluegrass: Are New Theories Emerging Under Kentucky Law?, 16 N. Ky. L. Rev. 43 (1988).

355.9-325. Priority of security interests in transferred collateral.

  1. Except as otherwise provided in subsection (2) of this section, a security interest created by a debtor is subordinate to a security interest in the same collateral created by another person if:
    1. The debtor acquired the collateral subject to the security interest created by the other person;
    2. The security interest created by the other person was perfected when the debtor acquired the collateral; and
    3. There is no period thereafter when the security interest is unperfected.
  2. Subsection (1) of this section subordinates a security interest only if the security interest:
    1. Otherwise would have priority solely under KRS 355.9-322 (1) or KRS 355.9-324 ; or
    2. Arose solely under KRS 355.2-711 (3) or 355.2A-508 (5).

History. Enact. Acts 2000, ch. 408, § 65, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. “Double Debtor” Problem.  This section addresses the “double debtor” problem, which arises when a debtor acquires property that is subject to a security interest created by another debtor.
  3. Taking Subject to Perfected Security Interest.  Consider the following scenario:
  4. Taking Subject to Unperfected Security Interest.  This section applies only if the security interest in the transferred collateral was perfected when the transferee acquired the collateral. See subsection (a)(2). If this condition is not met, then the normal priority rules apply.
  5. Taking Subject to Perfected Security Interest that Becomes Unperfected.  This section applies only if the security interest in the transferred collateral did not become unperfected at any time after the transferee acquired the collateral. See subsection (a)(3). If this condition is not met, then the normal priority rules apply.
  6. Unusual Situations.  The appropriateness of the rule of subsection (a) is most apparent when it works to subordinate security interests having priority under the basic priority rules of Section 9-322(a) or the purchase-money priority rules of Section 9-324. The rule also works properly when applied to the security interest of a buyer under Section 2-711(3) or a lessee under Section 2A-508(5). However, subsection (a) may provide an inappropriate resolution of the “double debtor” problem in some of the wide variety of other contexts in which the problem may arise. Although subsection (b) limits the application of subsection (a) to those cases in which subordination is known to be appropriate, courts should apply the rule in other settings, if necessary to promote the underlying purposes and policies of the Uniform Commercial Code. See Section 1-102(a).

Example 1: A owns an item of equipment subject to a perfected security interest in favor of SP-A. A sells the equipment to B, not in the ordinary course of business. B acquires its interest subject to SP-A’s security interest. See Sections 9-201, 9-315(a)(1). Under this section, if B creates a security interest in the equipment in favor of SP-B, SP-B’s security interest is subordinate to SP-A’s security interest, even if SP-B filed against B before SP-A filed against A, and even if SP-B took a purchase-money security interest. Normally, SP-B could have investigated the source of the equipment and discovered SP-A’s filing before making an advance against the equipment, whereas SP-A had no reason to search the filings against someone other than its debtor, A.

Example 2: A owns an item of equipment subject to an unperfected security interest in favor of SP-A. A sells the equipment to B, who gives value and takes delivery of the equipment without knowledge of the security interest. B takes free of the security interest. See Section 9-317(b). If B then creates a security interest in favor of SP-B, no priority issue arises; SP-B has the only security interest in the equipment.

Example 3: The facts are as in Example 2, except that B knows of SP-A’s security interest and therefore takes the equipment subject to it. If B creates a security interest in the equipment in favor of SP-B, this section does not determine the relative priority of the security interests. Rather, the normal priority rules govern. If SP-B perfects its security interest, then, under Section 9-322(a)(2), SP-A’s unperfected security interest will be junior to SP-B’s perfected security interest. The award of priority to SP-B is premised on the belief that SP-A’s failure to file could have misled SP-B.

Example 4: As in Example 1, A owns an item of equipment subject to a perfected security interest in favor of SP-A. A sells the equipment to B, not in the ordinary course of business. B acquires its interest subject to SP-A’s security interest. See Sections 9-201, 9-315(a)(1). B creates a security interest in favor of SP-B, and SP-B perfects its security interest. This section provides that SP-A’s security interest is senior to SP-B’s. However, if SP-A’s financing statement lapses while SP-B’s security interest is perfected, then the normal priority rules would apply, and SP-B’s security interest would become senior to SP-A’s security interest. See Sections 9-322(a)(2) and 9-515(c).

Research References and Practice Aids

Kentucky Law Journal.

Lester, Security Interests in Thoroughbred and Standardbred Horses: A Transactional Approach, 70 Ky. L.J. 1065 (1981-82).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Smith, Implied and Conditional Consent in the Sale of Horse Shares or Seasons, 74 Ky. L.J. 839 (1985-86).

Protecting Security Interests in Equine Collateral Under the Clear Title Provisions of the Food Security Act of 1985, 78 Ky. L.J. 447 (1989-90).

355.9-326. Priority of security interests created by new debtor.

  1. Subject to subsection (2) of this section, a security interest that is created by a new debtor in collateral in which the new debtor has or acquires rights and perfected by a filed financing statement that would be ineffective to perfect the security interest but for the application of KRS 355.9-508 , or KRS 355.9-316 (9)(a) and 355.9-508 , is subordinate to a security interest in the same collateral which is perfected other than by a filed financing statement that is effective solely under KRS 355.9-508.
  2. The other provisions of this part of this article determine the priority among conflicting security interests in the same collateral perfected by filed financing statements described in subsection (1) of this section. However, if the security agreements to which a new debtor became bound as debtor were not entered into by the same original debtor, the conflicting security interests rank according to priority in time of the new debtor’s having become bound.

History. Enact. Acts 2000, ch. 408, § 66, effective July 1, 2001; 2012, ch. 132, § 74, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  New.
  2. Subordination of Security Interests Created by New Debtor.  This section addresses the priority contests that may arise when a new debtor becomes bound by the security agreement of an original debtor and each debtor has a secured creditor.

    Subsection (a) subordinates the original debtor’s secured party’s security interest perfected against the new debtor by a filed financing statement that would be ineffective to perfect the security interest but for Section 9-508 or, if the original debtor and new debtor are located in different jurisdictions, Section 9-316(i)(1). The security interest is subordinated to security interests in the same collateral perfected by another method, e.g., by filing against the new debtor. This section does not subordinate a security interest perfected by a new initial financing statement providing the name of the new debtor, even if the initial financing statement is filed to maintain the effectiveness of a financing statement under the circumstances described in Section 9-508(b). Nor does it subordinate a security interest perfected by a financing statement filed against the original debtor which remains effective against collateral transferred by the original debtor to the new debtor. See Section 9-508(c). Concerning priority contests involving transferred collateral, see Sections 9-325 and 9-507.

  3. Other Priority Rules.  Subsection (b) addresses the priority among security interests created by the original debtor (X Corp). By invoking the other priority rules of this subpart, as applicable, subsection (b) preserves the relative priority of security interests created by the original debtor.

Example 1: SP-X holds a perfected-by-filing security interest in X Corp’s existing and after-acquired inventory, and SP-Z holds a perfected-by-possession security interest in an item of Z Corp’s inventory. Both X Corp and Z Corp are located in the same jurisdiction under Section 9-307. Z Corp becomes bound as debtor by X Corp’s security agreement (e.g., Z Corp buys X Corp’s assets and assumes its security agreement). See Section 9-203(d). But for Section 9-508, SP-X’s financing statement would be ineffective to perfect a security interest in the item of inventory in which Z Corp has rights. However, subsection (a) provides that SP-X’s perfected security interest is subordinate to SP-Z’s, regardless of whether SP-X’s financing statement was filed before SP-Z perfected its security interest.

Example 2: SP-X holds a perfected-by-filing security interest in X Corp’s existing and after-acquired inventory, and SP-Z holds a perfected-by-filing security interest in Z Corp’s existing and after-acquired inventory. Both X Corp and Z Corp are located in the same jurisdiction under Section 9-307. Z Corp becomes bound as debtor by X Corp’s security agreement. Immediately thereafter, and before the effectiveness of SP-X’s financing statement lapses, Z Corp acquires a new item of inventory. But for Section 9-508, SP-X’s financing statement would be ineffective to perfect a security interest in the new item of inventory in which Z Corp has rights. However, because SP-Z’s security interest was perfected by a filing whose effectiveness does not depend on Section 9-316(i)(1) or 9-508, subsection (a) subordinates SP-X’s perfected security interest to SP-Z’s. This would be the case even if SP-Z filed after Z Corp became bound by X Corp’s security agreement, and regardless of which financing statement was filed first.

The same result would obtain if X Corp and Z Corp were located in different jurisdictions. SP-X’s security interest would be perfected by a financing statement that would be ineffective but for Section 9-316(i)(1), whereas the effectiveness of SP-Z’s filing does not depend on Section 9-316(i)(1) or 9-508.

Example 3: Under the facts of Example 2, SP-Y also holds a perfected-by-filing security interest in X Corp’s existing and after-acquired inventory. SP-Y filed after SP-X. Inasmuch as both SP-X’s and SP-Y’s security interests in inventory acquired by Z Corp after it became bound would be unperfected but for the application of Section 9-508, the normal priority rules determine their relative priorities. Under the “first-to-file-or-perfect” rule of Section 9-322(a)(1), SP-X has priority over SP-Y.

Example 4: Under the facts of Example 3, after Z Corp became bound by X Corp’s security agreement, SP-Y promptly filed a new initial financing statement against Z Corp. SP-X’s security interest remains perfected only by virtue of its original filing against X Corp which “would be ineffective to perfect the security interest but for the application of Section 9-508.” Because SP-Y’s security interest is perfected by the filing of a financing statement whose effectiveness does not depend on Section 9-508 or 9-316(i)(1), subsection (a) subordinates SP-X’s security interest to SP-Y’s. If both SP-X and SP-Y file a new initial financing statement against Z Corp, then the “first-to-file-or-perfect” rule of Section 9-322(a)(1) governs their priority inter se as well as their priority against SP-Z.

The second sentence of subsection (b) effectively limits the applicability of the first sentence to situations in which a new debtor has become bound by more than one security agreement entered into by the same original debtor. When the new debtor has become bound by security agreements entered into by different original debtors, the second sentence provides that priority is based on priority in time of the new debtor’s becoming bound.

Example 5: Under the facts of Example 2, SP-W holds a perfected-by-filing security interest in W Corp’s existing and after-acquired inventory. After Z Corp became bound by X Corp’s security agreement in favor of SP-X, Z Corp became bound by W Corp’s security agreement. Under subsection (b), SP-W’s security interest in inventory acquired by Z Corp is subordinate to that of SP-X, because Z Corp became bound under SP-X’s security agreement before it became bound under SP-W’s security agreement. This is the result regardless of which financing statement (SP-X’s or SP-W’s) was filed first.

The second sentence of subsection (b) reflects the generally accepted view that priority based on the first-to-file rule is inappropriate for resolving priority disputes when the filings were made against different debtors. Like subsection (a) and the first sentence of subsection (b), however, the second sentence of subsection (b) relates only to priority conflicts among security interests that would be unperfected but for the application of Section 9-316(i)(1) or 9-508.

Example 6: Under the facts of Example 5, after Z Corp became bound by W Corp’s security agreement, SP-W promptly filed a new initial financing statement against Z Corp. At that time, SP-X’s security interest was perfected only pursuant to its original filing against X Corp which “would be ineffective to perfect the security interest but for the application of Section 9-508.” Because SP-W’s security interest is perfected by the filing of a financing statement whose effectiveness does not depend on Section 9-316(i)(1) or 9-508, subsection (a) subordinates SP-X’s security interest to SP-W’s. If both SP-X and SP-W file a new initial financing statement against Z Corp, then the “first-to-file-or-perfect” rule of Section 9-322(a)(1) governs their priority inter se as well as their priority against SP-Z.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-327. Priority of security interests in deposit account.

The following rules govern priority among conflicting security interests in the same deposit account:

  1. A security interest held by a secured party having control of the deposit account under KRS 355.9-104 has priority over a conflicting security interest held by a secured party that does not have control.
  2. Except as otherwise provided in subsections (3) and (4) of this section, security interests perfected by control under KRS 355.9-314 rank according to priority in time of obtaining control.
  3. Except as otherwise provided in subsection (4) of this section, a security interest held by the bank with which the deposit account is maintained has priority over a conflicting security interest held by another secured party.
  4. A security interest perfected by control under KRS 355.9-104 (1)(c) has priority over a security interest held by the bank with which the deposit account is maintained.

History. Enact. Acts 2000, ch. 408, § 67, effective July 1, 2001.

Official Comment

  1. Source.  New; derived from former Section 9-115(5).
  2. Scope of This Section.  This section contains the rules governing the priority of conflicting security interests in deposit accounts. It overrides conflicting priority rules. See Sections 9-322(f)(1) and 9-324(a), (b), (d), and (f). This section does not apply to accounts evidenced by an instrument (e.g., certain certificates of deposit), which by definition are not “deposit accounts.”
  3. Control.  Under paragraph (1), security interests perfected by control (Sections 9-104 and 9-314) take priority over those perfected otherwise, e.g., as identifiable cash proceeds under Section 9-315. Secured parties for whom the deposit account is an integral part of the credit decision will, at a minimum, insist upon the right to immediate access to the deposit account upon the debtor’s default (i.e., control). Those secured parties for whom the deposit account is less essential will not take control, thereby running the risk that the debtor will dispose of funds on deposit (either outright or for collateral purposes) after default but before the account can be frozen by court order or the secured party can obtain control.

    Paragraph (2) governs the case (expected to be very rare) in which a bank enters into a Section 9-104(a)(2) control agreement with more than one secured party. It provides that the security interests rank according to time of obtaining control. If the bank is solvent and the control agreements are well drafted, the bank will be liable to each secured party, and the priority rule will have no practical effect.

  4. Priority of Bank.  Under paragraph (3), the security interest of the bank with which the deposit account is maintained normally takes priority over all other conflicting security interests in the deposit account, regardless of whether the deposit account constitutes the competing secured party’s original collateral or its proceeds. A rule of this kind enables banks to extend credit to their depositors without the need to examine either the public record or their own records to determine whether another party might have a security interest in the deposit account.

    A secured party who takes a security interest in the deposit account as original collateral can protect itself against the results of this rule in one of two ways. It can take control of the deposit account by becoming the bank’s customer. Under paragraph (4), this arrangement operates to subordinate the bank’s security interest. Alternatively, the secured party can obtain a subordination agreement from the bank. See section 9-339.

    A secured party who claims the deposit account as proceeds of other collateral can reduce the risk of becoming junior by obtaining the debtor’s agreement to deposit proceeds into a specific cash-collateral account and obtaining the agreement of that bank to subordinate all its claims to those of the secured party. But if the debtor violates its agreement and deposits funds into a deposit account other than the cash-collateral account, the secured party risks being subordinated.

  5. Priority in Proceeds of, and Funds Transferred from, Deposit Account.  The priority afforded by this section does not extend to proceeds of a deposit account. Rather, Section 9-322(c) through (e) and the provisions referred to in Section 9-322(f) govern priorities in proceeds of a deposit account. Section 9-315(d) addresses continuation of perfection in proceeds of deposit accounts. As to funds transferred from a deposit account that serves as collateral, see Section 9-332.

NOTES TO DECISIONS

Cited:

Ky. Highlands Inv. Corp. v. Bank of Corbin, Inc., 217 S.W.3d 851, 2006 Ky. App. LEXIS 286 (Ky. Ct. App. 2006).

355.9-328. Priority of security interests in investment property.

The following rules govern priority among conflicting security interests in the same investment property:

  1. A security interest held by a secured party having control of investment property under KRS 355.9-106 has priority over a security interest held by a secured party that does not have control of the investment property.
  2. Except as otherwise provided in subsections (3) and (4) of this section, conflicting security interests held by secured parties each of which has control under KRS 355.9-106 rank according to priority in time of:
    1. If the collateral is a security, obtaining control;
    2. If the collateral is a security entitlement carried in a securities account and:
      1. If the secured party obtained control under KRS 355.8-106 (4)(a), the secured party’s becoming the person for which the securities account is maintained;
      2. If the secured party obtained control under KRS 355.8-106 (4)(b), the securities intermediary’s agreement to comply with the secured party’s entitlement orders with respect to security entitlements carried or to be carried in the securities account; or
      3. If the secured party obtained control through another person under KRS 355.8-106(4)(c), the time on which priority would be based under this paragraph if the other person were the secured party; or
    3. If the collateral is a commodity contract carried with a commodity intermediary, the satisfaction of the requirement for control specified in KRS 355.9-106 (2)(b) with respect to commodity contracts carried or to be carried with the commodity intermediary.
  3. A security interest held by a securities intermediary in a security entitlement or a securities account maintained with the securities intermediary has priority over a conflicting security interest held by another secured party.
  4. A security interest held by a commodity intermediary in a commodity contract or a commodity account maintained with the commodity intermediary has priority over a conflicting security interest held by another secured party.
  5. A security interest in a certificated security in registered form which is perfected by taking delivery under KRS 355.9-313 (1) and not by control under KRS 355.9-314 has priority over a conflicting security interest perfected by a method other than control.
  6. Conflicting security interests created by a broker, securities intermediary, or commodity intermediary which are perfected without control under KRS 355.9-106 rank equally.
  7. In all other cases, priority among conflicting security interests in investment property is governed by KRS 355.9-322 and 355.9-323 .

History. Enact. Acts 2000, ch. 408, § 68, effective July 1, 2001; repealed and reenact., Acts 2001, ch. 119, § 10, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-115(5).
  2. Scope of This Section.  This section contains the rules governing the priority of conflicting security interests in investment property. Paragraph (1) states the most important general rule—that a secured party who obtains control has priority over a secured party who does not obtain control. Paragraphs (2) through (4) deal with conflicting security interests each of which is perfected by control. Paragraph (5) addresses the priority of a security interest in a certificated security which is perfected by delivery but not control. Paragraph (6) deals with the relatively unusual circumstance in which a broker, securities intermediary, or commodity intermediary has created conflicting security interests none of which is perfected by control. Paragraph (7) provides that the general priority rules of Sections 9-322 and 9-323 apply to cases not covered by the specific rules in this section. The principal application of this residual rule is that the usual first in time of filing rule applies to conflicting security interests that are perfected only by filing. Because the control priority rule of paragraph (1) provides for the ordinary cases in which persons purchase securities on margin credit from their brokers, there is no need for special rules for purchase-money security interests. See also section 9-103 (limiting purchase-money collateral to goods and software).
  3. General Rule: Priority of Security Interest Perfected by Control.  Under paragraph (1), a secured party who obtains control has priority over a secured party who does not obtain control. The control priority rule does not turn on either temporal sequence or awareness of conflicting security interests. Rather, it is a structural rule, based on the principle that a lender should be able to rely on the collateral without question if the lender has taken the necessary steps to assure itself that it is in a position where it can foreclose on the collateral without further action by the debtor. The control priority rule is necessary because the perfection rules provide considerable flexibility in structuring secured financing arrangements. For example, at the “retail” level, a secured lender to an investor who wants the full measure of protection can obtain control, but the creditor may be willing to accept the greater measure of risk that follows from perfection by filing. Similarly, at the “wholesale” level, a lender to securities firms can leave the collateral with the debtor and obtain a perfected security interest under the automatic perfection rule of Section 9-309(a)(10), but a lender who wants to be entirely sure of its position will want to obtain control. The control priority rule of paragraph (1) is an essential part of this system of flexibility. It is feasible to provide more than one method of perfecting security interests only if the rules ensure that those who take the necessary steps to obtain the full measure of protection do not run the risk of subordination to those who have not taken such steps. A secured party who is unwilling to run the risk that the debtor has granted or will grant a conflicting control security interest should not make a loan without obtaining control of the collateral.

    As applied to the retail level, the control priority rule means that a secured party who obtains control has priority over a conflicting security interest perfected by filing without regard to inquiry into whether the control secured party was aware of the filed security interest. Prior to the 1994 revisions to Articles 8 and 9, Article 9 did not permit perfection of security interests in securities by filing. Accordingly, parties who deal in securities never developed a practice of searching the UCC files before conducting securities transactions. Although filing is now a permissible method of perfection, in order to avoid disruption of existing practices in this business it is necessary to give perfection by filing a different and more limited effect for securities than for some other forms of collateral. The priority rules are not based on the assumption that parties who perfect by the usual method of obtaining control will search the files. Quite the contrary, the control priority rule is intended to ensure that, with respect to investment property, secured parties who do obtain control are entirely unaffected by filings. To state the point another way, perfection by filing is intended to affect only general creditors or other secured creditors who rely on filing. The rule that a security interest perfected by filing can be primed by a control security interest, without regard to awareness, is a consequence of the system of perfection and priority rules for investment property. These rules are designed to take account of the circumstances of the securities markets, where filing is not given the same effect as for some other forms of property. No implication is made about the effect of filing with respect to security interests in other forms of property, nor about other Article 9 rules, e.g., Section 9-330, which govern the circumstances in which security interests in other forms of property perfected by filing can be primed by subsequent perfected security interests.

    The following examples illustrate the application of the priority rule in paragraph (1):

  4. Conflicting Security Interests Perfected by Control: Priority of Securities Intermediary or Commodity Intermediary.  Paragraphs (2) through (4) govern the priority of conflicting security interests each of which is perfected by control. The following example explains the application of the rules in paragraphs (3) and (4):
  5. Conflicting Security Interests Perfected by Control: Temporal Priority.  Former Section 9-115 introduced into Article 9 the concept of conflicting security interests that rank equally. Paragraph (2) of this section governs priority in those circumstances in which more than one secured party (other than a broker, securities intermediary, or commodity intermediary) has control. It replaces the equal-priority rule for conflicting security interests in investment property with a temporal rule. For securities, both certificated and uncertificated, under paragraph (2)(A) priority is based on the time that control is obtained. For security entitlements carried in securities accounts, the treatment is more complex. Paragraph (2)(B) bases priority on the timing of the steps taken to achieve control. The following example illustrates the application of paragraph (2).
  6. Certificated Securities.  A long-standing practice has developed whereby secured parties whose collateral consists of a security evidenced by a security certificate take possession of the security certificate. If the security certificate is in bearer form, the secured party’s acquisition of possession constitutes “delivery” under Section 8-301(a)(1), and the delivery constitutes “control” under Section 8-106(a). Comment 5 discusses the priority of security interests perfected by control of investment property.

    If the security certificate is in registered form, the secured party will not achieve control over the security unless the security certificate contains an appropriate indorsement or is (re)registered in the secured party’s name. See Section 8-106(b). However, the secured party’s acquisition of possession constitutes “delivery” of the security certificate under Section 8-301 and serves to perfect the security interest under Section 9-313(a), even if the security certificate has not been appropriately indorsed and has not been (re)registered in the secured party’s name. A security interest perfected by this method has priority over a security interest perfected other than by control (e.g., by filing). See paragraph (5).

    The priority rule stated in paragraph (5) may seem anomalous, in that it can afford less favorable treatment to purchasers who buy collateral outright than to those who take a security interest in it. For example, a buyer of a security certificate would cut off a security interest perfected by filing only if the buyer achieves the status of a protected purchaser under Section 8-303. The buyer would not be a protected purchaser, for example, if it does not obtain “control” under Section 8-106 (e.g., if it fails to obtain a proper indorsement of the certificate) or if it had notice of an adverse claim under Section 8-105. The apparent anomaly disappears, however, when one understands the priority rule not as one intended to protect careless or guilty parties, but as one that eliminates the need to conduct a search of the public records only insofar as necessary to serve the needs of the securities markets.

  7. Secured Financing of Securities Firms.  Priority questions concerning security interests granted by brokers and securities intermediaries are governed by the general control-beats-non-control priority rule of paragraph (1), as supplemented by the special rules set out in paragraphs (2) (temporal priority—first to control), (3) (special priority for securities intermediary), and (6) (equal priority for noncontrol). The following examples illustrate the priority rules as applied to this setting. (In all cases it is assumed that the debtor retains sufficient other securities to satisfy all customers’ claims. This section deals with the relative rights of secured lenders to a securities firm. Disputes between a secured lender and the firm’s own customers are governed by Section 8-511.)
  8. Relation to Other Law.  Section 1-103 provides that “unless displaced by particular provisions of the Uniform Commercial Code, the principles of law and equity … shall supplement its provisions.” There may be circumstances in which a secured party’s action in acquiring a security interest that has priority under this section constitutes conduct that is wrongful under other law. Though the possibility of such resort to other law may provide an appropriate “escape valve” for cases of egregious conduct, care must be taken to ensure that this does not impair the certainty and predictability of the priority rules. Whether a court may appropriately look to other law to impose liability upon or estop a secured party from asserting its Article 9 priority depends on an assessment of the secured party’s conduct under the standards established by such other law as well as a determination of whether the particular application of such other law is displaced by the UCC.

    Some circumstances in which other law is clearly displaced by the UCC rules are readily identifiable. Common law “first in time, first in right” principles, or correlative tort liability rules such as common law conversion principles under which a purchaser may incur liability to a person with a prior property interest without regard to awareness of that claim, are necessarily displaced by the priority rules set out in this section since these rules determine the relative ranking of security interests in investment property. So too, Article 8 provides protections against adverse claims to certain purchasers of interests in investment property. In circumstances where a secured party not only has priority under Section 9-328, but also qualifies for protection against adverse claims under Section 8-303, 8-502, or 8-510, resort to other law would be precluded.

    In determining whether it is appropriate in a particular case to look to other law, account must also be taken of the policies that underlie the commercial law rules on securities markets and security interests in securities. A principal objective of the 1994 revision of article 8 and the provisions of article 9 governing investment property was to ensure that secured financing transactions can be implemented on a simple, timely, and certain basis. One of the circumstances that led to the revision was the concern that uncertainty in the application of the rules on secured transactions involving securities and other financial assets could contribute to systemic risk by impairing the ability of financial institutions to provide liquidity to the markets in times of stress. The control priority rule is designed to provide a clear and certain rule to ensure that lenders who have taken the necessary steps to establish control do not face a risk of subordination to other lenders who have not done so.

    The control priority rule does not turn on an inquiry into the state of a secured party’s awareness of potential conflicting claims because a rule under which a person’s rights depended on that sort of after-the-fact inquiry could introduce an unacceptable measure of uncertainty. If an inquiry into awareness could provide a complete and satisfactory resolution of the problem in all cases, the priority rules of this section would have incorporated that test. The fact that they do not necessarily means that resort to other law based solely on that factor is precluded, though the question whether a control secured party induced or encouraged its financing arrangement with actual knowledge that the debtor would be violating the rights of another secured party may, in some circumstances, appropriately be treated as a factor in determining whether the control party’s action is the kind of egregious conduct for which resort to other law is appropriate.

Example 1: Debtor borrows from Alpha and grants Alpha a security interest in a variety of collateral, including all of Debtor’s investment property. At that time Debtor owns 1000 shares of XYZ Co. stock for which Debtor has a certificate. Alpha perfects by filing. Later, Debtor borrows from Beta and grants Beta a security interest in the 1000 shares of XYZ Co. stock. Debtor delivers the certificate, properly indorsed, to Beta. Alpha and Beta both have perfected security interests in the XYZ Co. stock. Beta has control, see Section 8-106(b)(1), and hence has priority over Alpha.

Example 2: Debtor borrows from Alpha and grants Alpha a security interest in a variety of collateral, including all of Debtor’s investment property. At that time Debtor owns 1000 shares of XYZ Co. stock, held through a securities account with Able & Co. Alpha perfects by filing. Later, Debtor borrows from Beta and grants Beta a security interest in the 1000 shares of XYZ Co. stock. Debtor instructs Able to have the 1000 shares transferred through the clearing corporation to Custodian Bank, to be credited to Beta’s account with Custodian Bank. Alpha and Beta both have perfected security interests in the XYZ Co. stock. Beta has control, see Section 8-106(d)(1), and hence has priority over Alpha.

Example 3: Debtor borrows from Alpha and grants Alpha a security interest in a variety of collateral, including all of Debtor’s investment property. At that time Debtor owns 1000 shares of XYZ Co. stock, which is held through a securities account with Able & Co. Alpha perfects by filing. Later, Debtor borrows from Beta and grants Beta a security interest in the 1000 shares of XYZ Co. stock. Debtor, Able, and Beta enter into an agreement under which Debtor will continue to receive dividends and distributions, and will continue to have the right to direct dispositions, but Beta will also have the right to direct dispositions and receive the proceeds. Alpha and Beta both have perfected security interests in the XYZ Co. stock (more precisely, in the Debtor’s security entitlement to the financial asset consisting of the XYZ Co. stock). Beta has control, see Section 8-106(d)(2), and hence has priority over Alpha.

Example 4: Debtor borrows from Alpha and grants Alpha a security interest in a variety of collateral, including all of Debtor’s investment property. At that time Debtor owns 1000 shares of XYZ Co. stock, held through a securities account with Able & Co. Alpha perfects by filing. Debtor’s agreement with Able & Co. provides that Able has a security interest in all securities carried in the account as security for any obligations of Debtor to Able. Debtor incurs obligations to Able and later defaults on the obligations to Alpha and Able. Able has control by virtue of the rule of Section 8-106(e) that if a customer grants a security interest to its own intermediary, the intermediary has control. Since Alpha does not have control, Able has priority over Alpha under the general control priority rule of paragraph (1).

Example 5: Debtor holds securities through a securities account with Able & Co. Debtor’s agreement with Able & Co. provides that Able has a security interest in all securities carried in the account as security for any obligations of Debtor to Able. Debtor borrows from Beta and grants Beta a security interest in 1000 shares of XYZ Co. stock carried in the account. Debtor, Able, and Beta enter into an agreement under which Debtor will continue to receive dividends and distributions and will continue to have the right to direct dispositions, but Beta will also have the right to direct dispositions and receive the proceeds. Debtor incurs obligations to Able and later defaults on the obligations to Beta and Able. Both Beta and Able have control, so the general control priority rule of paragraph (1) does not apply. Compare Example 4. Paragraph (3) provides that a security interest held by a securities intermediary in positions of its own customer has priority over a conflicting security interest of an external lender, so Able has priority over Beta. (Paragraph (4) contains a parallel rule for commodity intermediaries.) The agreement among Able, Beta, and Debtor could, of course, determine the relative priority of the security interests of Able and Beta, see section 9-339, but the fact that the intermediary has agreed to act on the instructions of a secured party such as Beta does not itself imply any agreement by the intermediary to subordinate.

Example 6: Debtor borrows from Alpha and grants Alpha a security interest in a variety of collateral, including all of Debtor’s investment property. At that time Debtor owns a security entitlement that includes 1000 shares of XYZ Co. stock that Debtor holds through a securities account with Able & Co. Debtor, Able, and Alpha enter into an agreement under which Debtor will continue to receive dividends and distributions, and will continue to have the right to direct dispositions, but Alpha will also have the right to direct dispositions and receive the proceeds. Later, Debtor borrows from Beta and grants Beta a security interest in all its investment property, existing and after-acquired. Debtor, Able, and Beta enter into an agreement under which Debtor will continue to receive dividends and distributions, and will continue to have the right to direct dispositions, but Beta will also have the right to direct dispositions and receive the proceeds. Alpha and Beta both have perfected-by-control security interests in the security entitlement to the XYZ Co. stock by virtue of their agreements with Able. See Sections 8-106(d)(2), 9-106(a), and 9-314(a). Under paragraph (2)(B)(ii), the priority of each security interest dates from the time of the secured party’s agreement with Able. Because Alpha’s agreement was first in time, Alpha has priority. This priority applies equally to security entitlements to financial assets credited to the account after the agreement was entered into.

The priority rule is analogous to “first-to-file” priority under Section 9-322 with respect to after-acquired collateral. Paragraphs (2)(B)(i) and (2)(B)(iii) provide similar rules for security entitlements as to which control is obtained by other methods, and paragraph (2)(C) provides a similar rule for commodity contracts carried in a commodity account. Section 8-510 also has been revised to provide a temporal priority conforming to paragraph (2)(B).

Example 7: Able & Co., a securities dealer, enters into financing arrangements with two lenders, Alpha Bank and Beta Bank. In each case the agreements provide that the lender will have a security interest in the securities identified on lists provided to the lender on a daily basis, that the debtor will deliver the securities to the lender on demand, and that the debtor will not list as collateral any securities which the debtor has pledged to any other lender. Upon Able’s insolvency it is discovered that Able has listed the same securities on the collateral lists provided to both Alpha and Beta. Alpha and Beta both have perfected security interests under the automatic-perfection rule of Section 9-309(a)(10). Neither Alpha nor Beta has control. Paragraph (6) provides that the security interests of Alpha and Beta rank equally, because each of them has a noncontrol security interest granted by a securities firm. They share pro-rata.

Example 8: Able enters into financing arrangements, with Alpha Bank and Beta Bank as in Example 7. At some point, however, Beta decides that it is unwilling to continue to provide financing on a noncontrol basis. Able directs the clearing corporation where it holds its principal inventory of securities to move specified securities into Beta’s account. Upon Able’s insolvency it is discovered that a list of collateral provided to Alpha includes securities that had been moved to Beta’s account. Both Alpha and Beta have perfected security interests; Alpha under the automatic-perfection rule of Section 9-309(a)(10), and Beta under that rule and also the perfection-by-control rule in Section 9-314(a). Beta has control but Alpha does not. Beta has priority over Alpha under paragraph (1).

Example 9: Able & Co. carries its principal inventory of securities through Clearing Corporation, which offers a “shared control” facility whereby a participant securities firm can enter into an arrangement with a lender under which the securities firm will retain the power to trade and otherwise direct dispositions of securities carried in its account, but Clearing Corporation agrees that, at any time the lender so directs, Clearing Corporation will transfer any securities from the firm’s account to the lender’s account or otherwise dispose of them as directed by the lender. Able enters into financing arrangements with two lenders, Alpha and Beta, each of which obtains such a control agreement from Clearing Corporation. The agreement with each lender provides that Able will designate specific securities as collateral on lists provided to the lender on a daily or other periodic basis, and that it will not pledge the same securities to different lenders. Upon Able’s insolvency, it is discovered that Able has listed the same securities on the collateral lists provided to both Alpha and Beta. Both Alpha and Beta have control over the disputed securities. Paragraph (2) awards priority to whichever secured party first entered into the agreement with Clearing Corporation.

355.9-329. Priority of security interests in letter-of-credit right.

The following rules govern priority among conflicting security interests in the same letter-of-credit right:

  1. A security interest held by a secured party having control of the letter-of-credit right under KRS 355.9-107 has priority to the extent of its control over a conflicting security interest held by a secured party that does not have control.
  2. Security interests perfected by control under KRS 355.9-314 rank according to priority in time of obtaining control.

History. Enact. Acts 2000, ch. 408, § 69, effective July 1, 2001.

Official Comment

  1. Source.  New; loosely modeled after former Section 9-115(5).
  2. General Rule.  Paragraph (1) awards priority to a secured party who perfects a security interest directly in letter-of-credit rights (i.e., one that takes an assignment of proceeds and obtains consent of the issuer or any nominated person under Section 5-114(c)) over another conflicting security interest (i.e., one that is perfected automatically in the letter-of-credit rights as supporting obligations under Section 9-308(d)). This is consistent with international letter-of-credit practice and provides finality to payments made to recognized assignees of letter-of-credit proceeds. If an issuer or nominated person recognizes multiple security interests in a letter-of-credit right, resulting in multiple parties having control (Section 9-107), under paragraph (2) the security interests rank according to the time of obtaining control.
  3. Drawing Rights; Transferee Beneficiaries.  Drawing under a letter of credit is personal to the beneficiary and requires the beneficiary to perform the conditions for drawing under the letter of credit. Accordingly, a beneficiary’s grant of a security interest in a letter of credit includes the beneficiary’s “letter-of-credit right” as defined in Section 9-102 and the right to “proceeds of (the) letter of credit” as defined in Section 5-114(a), but does not include the right to demand payment under the letter of credit.

    Section 5-114(e) provides that the “(r)ights of a transferee beneficiary or nominated person are independent of the beneficiary’s assignment of the proceeds of a letter of credit and are superior to the assignee’s right to the proceeds.” To the extent the rights of a transferee beneficiary or nominated person are independent and superior, this article does not apply. See Section 9-109(c).

    Under Article 5, there is in effect a novation upon the transfer with the issuer becoming bound on a new, independent obligation to the transferee. The rights of nominated persons and transferee beneficiaries under a letter of credit include the right to demand payment from the issuer. Under Section 5-114(e), their rights to payment are independent of their obligations to the beneficiary (or original beneficiary) and superior to the rights of assignees of letter-of-credit proceeds (Section 5-114(c)) and others claiming a security interest in the beneficiary’s (or original beneficiary’s) letter-of-credit rights.

    A transfer of drawing rights under a transferable letter of credit establishes independent Article 5 rights in the transferee and does not create or perfect an Article 9 security interest in the transferred drawing rights. The definition of “letter-of-credit right” in Section 9-102 excludes a beneficiary’s drawing rights. The exercise of drawing rights by a transferee beneficiary may breach a contractual obligation of the transferee to the original beneficiary concerning when and how much the transferee may draw or how it may use the funds received under the letter of credit. If, for example, drawing rights are transferred to support a sale or loan from the transferee to the original beneficiary, then the transferee would be obligated to the original beneficiary under the sale or loan agreement to account for any drawing and for the use of any funds received. The transferee’s obligation would be governed by the applicable law of contracts or restitution.

  4. Secured Party-Transferee Beneficiaries.  As described in Comment 3, drawing rights under letters of credit are transferred in many commercial contexts in which the transferee is not a secured party claiming a security interest in an underlying receivable supported by the letter of credit. Consequently, a transfer of a letter of credit is not a method of “perfection” of a security interest. The transferee’s independent right to draw under the letter of credit and to receive and retain the value thereunder (in effect, priority) is not based on Article 9 but on letter-of-credit law and the terms of the letter of credit. Assume, however, that a secured party does hold a security interest in a receivable that is owned by a beneficiary-debtor and supported by a transferable letter of credit. Assume further that the beneficiary-debtor causes the letter of credit to be transferred to the secured party, the secured party draws under the letter of credit, and, upon the issuer’s payment to the secured party-transferee, the underlying account debtor’s obligation to the original beneficiary-debtor is satisfied. In this situation, the payment to the secured party-transferee is proceeds of the receivable collected by the secured party-transferee. Consequently, the secured party-transferee would have certain duties to the debtor and third parties under Article 9. For example, it would be obliged to collect under the letter of credit in a commercially reasonable manner and to remit any surplus pursuant to Sections 9-607 and 9-608.

    This scenario is problematic under letter-of-credit law and practice, inasmuch as a transferee beneficiary collects in its own right arising from its own performance. Accordingly, under Section 5-114, the independent and superior rights of a transferee control over any inconsistent duties under article 9. A transferee beneficiary may take a transfer of drawing rights to avoid reliance on the original beneficiary’s credit and collateral, and it may consider any Article 9 rights superseded by its Article 5 rights. Moreover, it will not always be clear (i) whether a transferee beneficiary has a security interest in the underlying collateral, (ii) whether any security interest is senior to the rights of others, or (iii) whether the transferee beneficiary is aware that it holds a security interest. There will be clear cases in which the role of a transferee beneficiary as such is merely incidental to a conventional secured financing. There also will be cases in which the existence of a security interest may have little to do with the position of a transferee beneficiary as such. In dealing with these cases and less clear cases involving the possible application of Article 9 to a nominated person or a transferee beneficiary, the right to demand payment under a letter of credit should be distinguished from letter-of-credit rights. The courts also should give appropriate consideration to the policies and provisions of Article 5 and letter-of-credit practice as well as Article 9.

355.9-330. Priority of purchaser of chattel paper or instrument.

  1. A purchaser of chattel paper has priority over a security interest in the chattel paper which is claimed merely as proceeds of inventory subject to a security interest if:
    1. In good faith and in the ordinary course of the purchaser’s business, the purchaser gives new value and takes possession of the chattel paper or obtains control of the chattel paper under KRS 355.9-105 ; and
    2. The chattel paper does not indicate that it has been assigned to an identified assignee other than the purchaser.
  2. A purchaser of chattel paper has priority over a security interest in the chattel paper which is claimed other than merely as proceeds of inventory subject to a security interest if the purchaser gives new value and takes possession of the chattel paper or obtains control of the chattel paper under KRS 355.9-105 in good faith, in the ordinary course of the purchaser’s business, and without knowledge that the purchase violates the rights of the secured party.
  3. Except as otherwise provided in KRS 355.9-327 , a purchaser having priority in chattel paper under subsection (1) or (2) of this section also has priority in proceeds of the chattel paper to the extent that:
    1. KRS 355.9-322 provides for priority in the proceeds; or
    2. The proceeds consist of the specific goods covered by the chattel paper or cash proceeds of the specific goods, even if the purchaser’s security interest in the proceeds is unperfected.
  4. Except as otherwise provided in KRS 355.9-331 (1), a purchaser of an instrument has priority over a security interest in the instrument perfected by a method other than possession if the purchaser gives value and takes possession of the instrument in good faith and without knowledge that the purchase violates the rights of the secured party.
  5. For purposes of subsections (1) and (2) of this section, the holder of a purchase-money security interest in inventory gives new value for chattel paper constituting proceeds of the inventory.
  6. For purposes of subsections (2) and (4) of this section, if chattel paper or an instrument indicates that it has been assigned to an identified secured party other than the purchaser, a purchaser of the chattel paper or instrument has knowledge that the purchase violates the rights of the secured party.

History. Enact. Acts 2000, ch. 408, § 70, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-308.
  2. Nontemporal Priority.  This article permits a security interest in chattel paper or instruments to be perfected either by filing or by the secured party’s taking possession. This section enables secured parties and other purchasers of chattel paper (both electronic and tangible) and instruments to obtain priority over earlier-perfected security interests.
  3. Chattel Paper.  Subsections (a) and (b) follow former Section 9-308 in distinguishing between earlier-perfected security interests in chattel paper that is claimed merely as proceeds of inventory subject to a security interest and chattel paper that is claimed other than merely as proceeds. Like former Section 9-308, this section does not elaborate upon the phrase “merely as proceeds.” For an elaboration, see PEB Commentary No. 8.

    This section makes explicit the “good faith” requirement and retains the requirements of “the ordinary course of the purchaser’s business” and the giving of “new value” as conditions for priority. Concerning the last, this article deletes former Section 9-108 and adds to Section 9-102 a completely different definition of the term “new value.” Under subsection (e), the holder of a purchase-money security interest in inventory is deemed to give “new value” for chattel paper constituting the proceeds of the inventory. Accordingly, the purchase-money secured party may qualify for priority in the chattel paper under subsection (a) or (b), whichever is applicable, even if it does not make an additional advance against the chattel paper.

    If a possessory security interest in tangible chattel paper or a perfected-by-control security interest in electronic chattel paper does not qualify for priority under this section, it may be subordinate to a perfected-by-filing security interest under Section 9-322(a)(1).

  4. Possession.  The priority afforded by this section turns in part on whether a purchaser “takes possession” of tangible chattel paper. Similarly, the governing law provisions in Section 9-301 address both “possessory” and “nonpossessory” security interests. Two common practices have raised particular concerns. First, in some cases the parties create more than one copy or counterpart of chattel paper evidencing a single secured obligation or lease. This practice raises questions as to which counterpart is the “original” and whether it is necessary for a purchaser to take possession of all counterparts in order to “take possession” of the chattel paper. Second, parties sometimes enter into a single “master” agreement. The master agreement contemplates that the parties will enter into separate “schedules” from time to time, each evidencing chattel paper. Must a purchaser of an obligation or lease evidenced by a single schedule also take possession of the master agreement as well as the schedule in order to “take possession” of the chattel paper?

    The problem raised by the first practice is easily solved. The parties may in the terms of their agreement and by designation on the chattel paper identify only one counterpart as the original chattel paper for purposes of taking possession of the chattel paper. Concerns about the second practice also are easily solved by careful drafting. Each schedule should provide that it incorporates the terms of the master agreement, not the other way around. This will make it clear that each schedule is a “stand alone” document.

  5. Chattel Paper Claimed Merely as Proceeds.  Subsection (a) revises the rule in former Section 9-308(b) to eliminate reference to what the purchaser knows. Instead, a purchaser who meets the possession or control, ordinary course, and new value requirements takes priority over a competing security interest unless the chattel paper itself indicates that it has been assigned to an identified assignee other than the purchaser. Thus subsection (a) recognizes the common practice of placing a “legend” on chattel paper to indicate that it has been assigned. This approach, under which the chattel paper purchaser who gives new value in ordinary course can rely on possession of unlegended, tangible chattel paper without any concern for other facts that it may know, comports with the expectations of both inventory and chattel paper financers.
  6. Chattel Paper Claimed Other Than Merely as Proceeds.  Subsection (b) eliminates the requirement that the purchaser take without knowledge that the “specific paper” is subject to the security interest and substitutes for it the requirement that the purchaser take “without knowledge that the purchase violates the rights of the secured party.” This standard derives from the definition of “buyer in ordinary course of business” in Section 1-201(9). The source of the purchaser’s knowledge is irrelevant. Note, however, that “knowledge” means “actual knowledge.” Section 1-201(25).

    In contrast to a junior secured party in accounts, who may be required in some special circumstances to undertake a search under the “good faith” requirement, see Comment 5 to Section 9-331, a purchaser of chattel paper under this section is not required as a matter of good faith to make a search in order to determine the existence of prior security interests. There may be circumstances where the purchaser undertakes a search nevertheless, either on its own volition or because other considerations make it advisable to do so, e.g., where the purchaser also is purchasing accounts. Without more, a purchaser of chattel paper who has seen a financing statement covering the chattel paper or who knows that the chattel paper is encumbered with a security interest, does not have knowledge that its purchase violates the secured party’s rights. However, if a purchaser sees a statement in a financing statement to the effect that a purchase of chattel paper from the debtor would violate the rights of the filed secured party, the purchaser would have such knowledge. Likewise, under new subsection (f), if the chattel paper itself indicates that it had been assigned to an identified secured party other than the purchaser, the purchaser would have wrongful knowledge for purposes of subsection (b), thereby preventing the purchaser from qualifying for priority under that subsection, even if the purchaser did not have actual knowledge. In the case of tangible chattel paper, the indication normally would consist of a written legend on the chattel paper. In the case of electronic chattel paper, this article leaves to developing market and technological practices the manner in which the chattel paper would indicate an assignment.

  7. Instruments.  Subsection (d) contains a special priority rule for instruments. Under this subsection, a purchaser of an instrument has priority over a security interest perfected by a method other than possession (e.g., by filing, temporarily under Section 9-312(e) or (g), as proceeds under Section 9-315(d), or automatically upon attachment under Section 9-309(4) if the security interest arises out of a sale of the instrument) if the purchaser gives value and takes possession of the instrument in good faith and without knowledge that the purchase violates the rights of the secured party. Generally, to the extent subsection (d) conflicts with section 3-306, subsection (d) governs. See Section 3-102(b). For example, notice of a conflicting security interest precludes a purchaser from becoming a holder in due course under Section 3-302 and thereby taking free of all claims to the instrument under Section 3-306. However, a purchaser who takes even with knowledge of the security interest qualifies for priority under subsection (d) if it takes without knowledge that the purchase violates the rights of the holder of the security interest. Likewise, a purchaser qualifies for priority under subsection (d) if it takes for “value” as defined in Section 1-201, even if it does not take for “value” as defined in Section 3-303.

    Subsection (d) is subject to Section 9-331(a), which provides that article 9 does not limit the rights of a holder in due course under article 3. Thus, in the rare case in which the purchaser of an instrument qualifies for priority under subsection (d), but another person has the rights of a holder in due course of the instrument, the other person takes free of the purchaser’s claim. See Section 3-306.

    The rule in subsection (d) is similar to the rules in subsections (a) and (b), which govern priority in chattel paper. The observations in comment 6 concerning the requirement of good faith and the phrase “without knowledge that the purchase violates the rights of the secured party” apply equally to purchasers of instruments. However, unlike a purchaser of chattel paper, to qualify for priority under this section a purchaser of an instrument need only give “value” as defined in Section 1-201; it need not give “new value.” Also, the purchaser need not purchase the instrument in the ordinary course of its business.

    Subsection (d) applies to checks as well as notes. For example, to collect and retain checks that are proceeds (collections) of accounts free of a senior secured party’s claim to the same checks, a junior secured party must satisfy the good-faith requirement (honesty in fact and the observance of reasonable commercial standards of fair dealing) of this subsection. This is the same good-faith requirement applicable to holders in due course. See Section 9-331, Comment 5.

  8. Priority in Proceeds of Chattel Paper.  Subsection (c) sets forth the two circumstances under which the priority afforded to a purchaser of chattel paper under subsection (a) or (b) extends also to proceeds of the chattel paper. The first is if the purchaser would have priority under the normal priority rules applicable to proceeds. The second, which the following comments discuss in greater detail, is if the proceeds consist of the specific goods covered by the chattel paper. Former Article 9 generally was silent as to the priority of a security interest in proceeds when a purchaser qualifies for priority under Section 9-308 (but see former Section 9-306(5)(b), concerning returned and repossessed goods).
  9. Priority in Returned and Repossessed Goods.  Returned and repossessed goods may constitute proceeds of chattel paper. The following comments explain the treatment of returned and repossessed goods as proceeds of chattel paper. The analysis is consistent with that of PEB Commentary No. 5, which these comments replace, and is based upon the following example:
  10. Assignment of Nonlease Chattel Paper.
    1. Loan by SP-2 to Dealer Secured by Chattel Paper (or Functional Equivalent Pursuant to Recourse Arrangement).
      1. Returned Goods.  If BIOCOB returns the goods to Dealer for repairs, Dealer is merely a bailee and acquires thereby no meaningful rights in the goods to which SP-1’s security interest could attach. (Although SP-1’s security interest could attach to Dealer’s interest as a bailee, that interest is not likely to be of any particular value to SP-1.) Dealer is the owner of the chattel paper (i.e., the owner of a right to payment secured by a security interest in the goods); SP-2 has a security interest in the chattel paper, as does SP-1 (as proceeds of the goods under Section 9-315). Under Section 9-330, SP-2’s security interest in the chattel paper is senior to that of SP-1. SP-2 enjoys this priority regardless of whether, or when, SP-2 filed a financing statement covering the chattel paper. Because chattel paper and goods represent different types of collateral, Dealer does not have any meaningful interest in goods to which either SP-1’s or SP-2’s security interest could attach in order to secure Dealer’s obligations to either creditor. See Section 9-102 (defining “chattel paper” and “goods”).

        Now assume that BIOCOB returns the goods to Dealer under circumstances whereby Dealer once again becomes the owner of the goods. This would be the case, for example, if the goods were defective and BIOCOB was entitled to reject or revoke acceptance of the goods. See Sections 2-602 (rejection), and 2-608 (revocation of acceptance). Unless BIOCOB has waived its defenses as against assignees of the chattel paper, SP-1’s and SP-2’s rights against BIOCOB would be subject to BIOCOB’s claims and defenses. See Sections 9-403 and 9-404. SP-1’s security interest would attach again because the returned goods would be proceeds of the chattel paper. Dealer’s acquisition of the goods easily can be characterized as “proceeds” consisting of an “in kind” collection on or distribution on account of the chattel paper. See Section 9-102 (definition of “proceeds”). Assuming that SP-1’s security interest is perfected by filing against the goods and that the filing is made in the same office where a filing would be made against the chattel paper, SP-1’s security interest in the goods would remain perfected beyond the 20-day period of automatic perfection. See Section 9-315(d).

        Because Dealer’s newly reacquired interest in the goods is proceeds of the chattel paper, SP-2’s security interest also would attach in the goods as proceeds. If SP-2 had perfected its security interest in the chattel paper by filing (again, assuming that filing against the chattel paper was made in the same office where a filing would be made against the goods), SP-2’s security interest in the reacquired goods would be perfected beyond 20 days. See Section 9-315(d). However, if SP-2 had relied only on its possession of the chattel paper for perfection and had not filed against the chattel paper or the goods, SP-2’s security interest would be unperfected after the 20-day period. See Section 9-315(d). Nevertheless, SP-2’s unperfected security interest in the goods would be senior to SP-1’s security interest under Section 9-330(c). The result in this priority contest is not affected by SP-2’s acquiescence or non-acquiescence in the return of the goods to Dealer.

      2. Repossessed Goods.  As explained above, Dealer owns the chattel paper covering the goods, subject to security interests in favor of SP-1 and SP-2. In Article 9 parlance, Dealer has an interest in chattel paper, not goods. If Dealer, SP-1, or SP-2 repossesses the goods upon BIOCOB’s default, whether the repossession is rightful or wrongful as among Dealer, SP-1, or SP-2, Dealer’s interest will not change. The location of goods and the party who possesses them does not affect the fact that Dealer’s interest is in chattel paper, not goods. The goods continue to be owned by BIOCOB. SP-1’s security interest in the goods does not attach until such time as Dealer reacquires an interest (other than a bare possessory interest) in the goods. For example, Dealer might buy the goods at a foreclosure sale from SP-2 (whose security interest in the chattel paper is senior to that of SP-1); that disposition would cut off BIOCOB’s rights in the goods. Section 9-617.

        In many cases the matter would end upon sale of the goods to Dealer at a foreclosure sale and there would be no priority contest between SP-1 and SP-2; Dealer would be unlikely to buy the goods under circumstances whereby SP-2 would retain its security interest. There can be exceptions, however. For example, Dealer may be obliged to purchase the goods from SP-2 and SP-2 may be obliged to convey the goods to Dealer, but Dealer may fail to pay SP-2. Or, one could imagine that SP-2, like SP-1, has a general security interest in the inventory of Dealer. In the latter case, SP-2 should not receive the benefit of any special priority rule, since its interest in no way derives from priority under Section 9-330. In the former case, SP-2’s security interest in the goods reacquired by Dealer is senior to SP-1’s security interest under Section 9-330.

    2. Dealer’s Outright Sale of Chattel Paper to SP-2.  Article 9 also applies to a transaction whereby SP-2 buys the chattel paper in an outright sale transaction without recourse against Dealer. Sections 1-201(37) and 9-109(a). Although Dealer does not, in such a transaction, retain any residual ownership interest in the chattel paper, the chattel paper constitutes proceeds of the goods to which SP-1’s security interest will attach and continue following the sale of the goods. Section 9-315(a). Even though Dealer has not retained any interest in the chattel paper, as discussed above BIOCOB subsequently may return the goods to Dealer under circumstances whereby Dealer reacquires an interest in the goods. The priority contest between SP-1 and SP-2 will be resolved as discussed above; section 9-330 makes no distinction among purchasers of chattel paper on the basis of whether the purchaser is an outright buyer of chattel paper or one whose security interest secures an obligation of Dealer.
  11. Assignment of Lease Chattel Paper.  As defined in Section 9-102, “chattel paper” includes not only writings that evidence security interests in specific goods but also those that evidence true leases of goods.

    The analysis with respect to lease chattel paper is similar to that set forth above with respect to nonlease chattel paper. It is complicated, however, by the fact that, unlike the case of chattel paper arising out of a sale, Dealer retains a residual interest in the goods. See Section 2A-103(1)(q) (defining “lessor’s residual interest”); In re Leasing Consultants, Inc. , 486 F.2d 367 (2d Cir. 1973) (lessor’s residual interest under true lease is an interest in goods and is a separate type of collateral from lessor’s interest in the lease). If Dealer leases goods to a “lessee in ordinary course of business” (LIOCOB), then LIOCOB takes its interest under the lease (i.e., its “leasehold interest”) free of the security interest of SP-1. See Sections 2A-307(3), 2A-103(1)(m) (defining “leasehold interest”) and (1)(o) (defining “lessee in ordinary course of business”). SP-1 would, however, retain its security interest in the residual interest. In addition, SP-1 would acquire an interest in the lease chattel paper as proceeds. If Dealer then assigns the lease chattel paper to SP-2, Section 9-330 gives SP-2 priority over SP-1 with respect to the chattel paper, but not with respect to the residual interest in the goods. Consequently, assignees of lease chattel paper typically take a security interest in and file against the lessor’s residual interest in goods, expecting their priority in the goods to be governed by the first-to-file-or-perfect rule of Section 9-322.

    If the goods are returned to Dealer, other than upon expiration of the lease term, then the security interests of both SP-1 and SP-2 normally would attach to the goods as proceeds of the chattel paper. (If the goods are returned to Dealer at the expiration of the lease term and the lessee has made all payments due under the lease, however, then Dealer no longer has any rights under the chattel paper. Dealer’s interest in the goods consists solely of its residual interest, as to which SP-2 has no claim.) This would be the case, for example, when the lessee rescinds the lease or when the lessor recovers possession in the exercise of its remedies under Article 2A. See, e.g., Section 2A-525. If SP-2 enjoyed priority in the chattel paper under Section 9-330, then SP-2 likewise would enjoy priority in the returned goods as proceeds. This does not mean that SP-2 necessarily is entitled to the entire value of the returned goods. The value of the goods represents the sum of the present value of (i) the value of their use for the term of the lease and (ii) the value of the residual interest. SP-2 has priority in the former, but SP-1 ordinarily would have priority in the latter. Thus, an allocation of a portion of the value of the goods to each component may be necessary. Where, as here, one secured party has a security interest in the lessor’s residual interest and another has a priority security interest in the chattel paper, it may be advisable for the conflicting secured parties to establish a method for making such an allocation and otherwise to determine their relative rights in returned goods by agreement.

Example: SP-1 has a security interest in all the inventory of a dealer in goods (Dealer); SP-1’s security interest is perfected by filing. Dealer sells some of its inventory to a buyer in the ordinary course of business (BIOCOB) pursuant to a conditional sales contract (chattel paper) that does not indicate that it has been assigned to SP-1. SP-2 purchases the chattel paper from Dealer and takes possession of the paper in good faith, in the ordinary course of business, and without knowledge that the purchase violates the rights of SP-1. Subsequently, BIOCOB returns the goods to Dealer because they are defective. Alternatively, Dealer acquires possession of the goods following BIOCOB’s default.

NOTES TO DECISIONS

1.In General.

Where the assignment of a mortgage to the bank was recorded after the bankruptcy was filed, because of an indorsement in blank, the note was negotiated by transfer alone pursuant to KRS 355.3-205 (2),and the bank’s possession of the note, coupled with its status as a bona fide purchaser rendered it a bearer, pursuant to KRS 355.1-201 (2) and KRS 355.3-301 , that was able to enforce the note against the debtors under KRS 355.9-330 (4); moreover the bank did not violate the automatic stay because it simply recorded its equitable interest in the property, which did not belong to the debtors. Rogan v. Bank One, N.A. (In re Cook), 457 F.3d 561, 2006 FED App. 0284P, 2006 U.S. App. LEXIS 20377 (6th Cir. Ky. 2006 ).

2.Assignee of Conditional Sales Contract.

Where assignee of conditional sales contract had knowledge that partnership, without knowledge of the conditional sales contract, had installed dump beds on truck chassis of trucks purchased under the conditional sales contract which was not executed or recorded until after the beds were installed, he was estopped from claiming that his lien had priority over the partnership’s claim. (decided under prior law) Walter J. Hieb Sand & Gravel, Inc. v. Universal C. I. T. Credit Corp., 332 S.W.2d 619, 1959 Ky. LEXIS 20 ( Ky. 1959 ).

3.Priority of Financing Company.

Since the security agreement between the manufacturer of farm equipment and a dealer authorized the dealer to make resales for cash, pursuant to former KRS 355.9-306 (2), when the items of farm equipment were sold to bona fide purchasers and left the inventory of the dealer, the lien of the manufacturer in the said equipment at that point ceased to exist, and pursuant to this section, the financing company, to which the retail installment contracts were assigned, obtained priority in the chattel paper executed by the purchasers of the equipment to the dealer; the manufacturer retained a secondary security interest in the chattel paper as proceeds of the equipment. (decided under prior law) J.I. Case Co. v. Borg-Warner Acceptance Corp., 669 S.W.2d 543, 1984 Ky. App. LEXIS 450 (Ky. Ct. App. 1984).

4.Setoff of Preexisting Unsecured Debt.

If setoffs of preexisting, unsecured debts were treated as new value for purposes of this section, factors and discounters of accounts receivables and installment contracts would be given a position in bankruptcy superior to their fellow unsecured creditors as well as to holders of perfected security interests in inventory proceeds. Treating preexisting debts as new value would also upset the precise interrelationship of priorities under the U.C.C. Such preferential treatment of this class of financers would both greatly impair the value of inventory financers’ security interests in proceeds and significantly damage the fundamental principle of bankruptcy law that all unsecured creditors should receive equal treatment in the repayment of their debts. (decided under prior law) In re Dr. C. Huff Co., 44 B.R. 129, 1984 Bankr. LEXIS 4647 (Bankr. W.D. Ky. 1984 ).

5.New Value.

The term “new value” as used in former KRS 355.9-308 has neither been directly defined in Kentucky’s version of the U.C.C. nor by cases involving questions of priority under former U.C.C. § 9-308. However some guidance to the meaning of the term “new value” may be found in former U.C.C. § 9-108 which gives three examples of what constitutes new value: making an advance, incurring an obligation and releasing a perfected security interest. In official comment number 2 to this section, the U.C.C.’s draftsmen state that in other situations it is left to the courts to distinguish between “new” and “old” value. (decided under prior law) In re Dr. C. Huff Co., 44 B.R. 129, 1984 Bankr. LEXIS 4647 (Bankr. W.D. Ky. 1984 ).

A purchaser of chattel paper who otherwise complies with the provisions of former U.C.C. § 9-308, has priority over a security interest in the paper as inventory proceeds, only to the extent of new value actually given. (decided under prior law) In re Dr. C. Huff Co., 44 B.R. 129, 1984 Bankr. LEXIS 4647 (Bankr. W.D. Ky. 1984 ).

A setoff of funds against a preexisting debt does not constitute “new value” for purposes of this section. (decided under prior law) In re Dr. C. Huff Co., 44 B.R. 129, 1984 Bankr. LEXIS 4647 (Bankr. W.D. Ky. 1984 ).

The U.C.C. nowhere defines “new value” and there may be borderline cases in which it will be difficult to determine whether the purchases of the chattel paper give new value. (decided under prior law) In re Dr. C. Huff Co., 44 B.R. 129, 1984 Bankr. LEXIS 4647 (Bankr. W.D. Ky. 1984 ).

The value of an inventory financer’s interest in chattel paper is greatly limited by the provisions of former U.C.C. § 9-308. If an expansive definition is given to the term “new value,” then the party claiming an interest in the chattel paper as inventory proceeds will rarely, if ever, have priority over a purchaser of those notes. (decided under prior law) In re Dr. C. Huff Co., 44 B.R. 129, 1984 Bankr. LEXIS 4647 (Bankr. W.D. Ky. 1984 ).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

355.9-331. Priority of rights of purchasers of instruments, documents, and securities under other articles — Priority of interests in financial assets and security entitlements under Article 8.

  1. This article does not limit the rights of a holder in due course of a negotiable instrument, a holder to which a negotiable document of title has been duly negotiated, or a protected purchaser of a security. These holders or purchasers take priority over an earlier security interest, even if perfected, to the extent provided in Articles 3, 7, and 8 of this chapter.
  2. This article does not limit the rights of or impose liability on a person to the extent that the person is protected against the assertion of a claim under Article 8 of this chapter.
  3. Filing under this article does not constitute notice of a claim or defense to the holders, or purchasers, or persons described in subsections (1) and (2) of this section.

History. Enact. Acts 2000, ch. 408, § 71, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-309.
  2. “Priority.”  In some provisions, this article distinguishes between claimants that take collateral free of a security interest (in the sense that the security interest no longer encumbers the collateral) and those that take an interest in the collateral that is senior to a surviving security interest. See, e.g., Section 9-317. Whether a holder or purchaser referred to in this section takes free or is senior to a security interest depends on whether the purchaser is a buyer of the collateral or takes a security interest in it. The term “priority” is meant to encompass both scenarios, as it does in Section 9-330.
  3. Rights Acquired by Purchasers.  The rights to which this section refers are set forth in Sections 3-305 and 3-306 (holder in due course), 7-502 (holder to whom a negotiable document of title has been duly negotiated), and 8-303 (protected purchaser). The holders and purchasers referred to in this section do not always take priority over a security interest. See, e.g., Section 7-503 (affording paramount rights to certain owners and secured parties as against holder to whom a negotiable document of title has been duly negotiated). Accordingly, this section adds the clause, “to the extent provided in Articles 3, 7, and 8” to former Section 9-309.
  4. Financial Assets and Security Entitlements.  New subsection (b) provides explicit protection for those who deal with financial assets and security entitlements and who are immunized from liability under article 8. See, e.g., Sections 8-502, 8-503(e), 8-510, and 8-511. The new subsection makes explicit in Article 9 what is implicit in former article 9 and explicit in several provisions of article 8. It does not change the law.
  5. Collections by Junior Secured Party.  Under this section, a secured party with a junior security interest in receivables (accounts, chattel paper, promissory notes, or payment intangibles) may collect and retain the proceeds of those receivables free of the claim of a senior secured party to the same receivables, if the junior secured party is a holder in due course of the proceeds. In order to qualify as a holder in due course, the junior must satisfy the requirements of Section 3-302, which include taking in “good faith.” This means that the junior not only must act “honestly” but also must observe “reasonable commercial standards of fair dealing” under the particular circumstances. See Section 9-102(a). Although “good faith” does not impose a general duty of inquiry, e.g., a search of the records in filing offices, there may be circumstances in which “reasonable commercial standards of fair dealing” would require such a search.

    Consider, for example, a junior secured party in the business of financing or buying accounts who fails to undertake a search to determine the existence of prior security interests. Because a search, under the usages of trade of that business, would enable it to know or learn upon reasonable inquiry that collecting the accounts violated the rights of a senior secured party, the junior may fail to meet the good-faith standard. See Utility Contractors Financial Services, Inc. v. Amsouth Bank, NA, 985 F.2d 1554 (11th Cir. 1993). Likewise, a junior secured party who collects accounts when it knows or should know under the particular circumstances that doing so would violate the rights of a senior secured party, because the debtor had agreed not to grant a junior security interest in, or sell, the accounts, may not meet the good-faith test. Thus, if a junior secured party conducted or should have conducted a search and a financing statement filed on behalf of the senior secured party states such a restriction, the junior’s collection would not meet the good-faith standard. On the other hand, if there was a course of performance between the senior secured party and the debtor which placed no such restrictions on the debtor and allowed the debtor to collect and use the proceeds without any restrictions, the junior secured party may then satisfy the requirements for being a holder in due course. This would be more likely in those circumstances where the junior secured party was providing additional financing to the debtor on an on-going basis by lending against or buying the accounts and had no notice of any restrictions against doing so. Generally, the senior secured party would not be prejudiced because the practical effect of such payment to the junior secured party is little different than if the debtor itself had made the collections and subsequently paid the secured party from the debtor’s general funds. Absent collusion, the junior secured party would take the funds free of the senior security interests. See Section 9-332. In contrast, the senior secured party is likely to be prejudiced if the debtor is going out of business and the junior secured party collects the accounts by notifying the account debtors to make payments directly to the junior. Those collections may not be consistent with “reasonable commercial standards of fair dealing.”

    Whether the junior secured party qualifies as a holder in due course is fact-sensitive and should be decided on a case-by-case basis in the light of those circumstances. Decisions such as Financial Management Services Inc. v. Familian, 905 P.2d 506 (Ariz. App. Div. 1995) (finding holder in due course status) could be determined differently under this application of the good-faith requirement.

    The concepts addressed in this comment are also applicable to junior secured parties as purchasers of instruments under Section 9-330(d). See Section 9-330, Comment 7.

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

355.9-332. Transfer of money — Transfer of funds from deposit account.

  1. A transferee of money takes the money free of a security interest unless the transferee acts in collusion with the debtor in violating the rights of the secured party.
  2. A transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party.

History. Enact. Acts 2000, ch. 408, § 72, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Scope of This Section.  This section affords broad protection to transferees who take funds from a deposit account and to those who take money. The term “transferee” is not defined; however, the debtor itself is not a transferee. Thus this section does not cover the case in which a debtor withdraws money (currency) from its deposit account or the case in which a bank debits an encumbered account and credits another account it maintains for the debtor.

    A transfer of funds from a deposit account, to which subsection (b) applies, normally will be made by check, by funds transfer, or by debiting the debtor’s deposit account and crediting another depositor’s account.

  3. Policy.  Broad protection for transferees helps to ensure that security interests in deposit accounts do not impair the free flow of funds. It also minimizes the likelihood that a secured party will enjoy a claim to whatever the transferee purchases with the funds. Rules concerning recovery of payments traditionally have placed a high value on finality. The opportunity to upset a completed transaction, or even to place a completed transaction in jeopardy by bringing suit against the transferee of funds, should be severely limited. Although the giving of value usually is a prerequisite for receiving the ability to take free from third-party claims, where payments are concerned the law is even more protective. Thus, Section 3-418(c) provides that, even where the law of restitution otherwise would permit recovery of funds paid by mistake, no recovery may be had from a person “who in good faith changed position in reliance on the payment.” Rather than adopt this standard, this section eliminates all reliance requirements whatsoever. Payments made by mistake are relatively rare, but payments of funds from encumbered deposit accounts (e.g., deposit accounts containing collections from accounts receivable) occur with great regularity. In most cases, unlike payment by mistake, no one would object to these payments. In the vast proportion of cases, the transferee probably would be able to show a change of position in reliance on the payment. This section does not put the transferee to the burden of having to make this proof.
  4. “Bad Actors.”  To deal with the question of the “bad actor,” this section borrows “collusion” language from article 8. See, e.g., Sections 8-115 and 8-503(e). This is the most protective (i.e., least stringent) of the various standards now found in the UCC. Compare, e.g., Section 1-201(9) (“without knowledge that the sale … is in violation of the … security interest”); Section 1-201(19) (“honesty in fact in the conduct or transaction concerned”); Section 3-302(a)(2)(v) (“without notice of any claim”).
  5. Transferee Who Does Not Take Free.  This section sets forth the circumstances under which certain transferees of money or funds take free of security interests. It does not determine the rights of a transferee who does not take free of a security interest.

Example 1: Debtor maintains a deposit account with Bank A. The deposit account is subject to a perfected security interest in favor of Lender. Debtor draws a check on the account, payable to Payee. Inasmuch as the check is not the proceeds of the deposit account (it is an order to pay funds from the deposit account), Lender’s security interest in the deposit account does not give rise to a security interest in the check. Payee deposits the check into its own deposit account, and Bank A pays it. Unless Payee acted in collusion with Debtor in violating Lender’s rights, Payee takes the funds (the credits running in favor of Payee) free of Lender’s security interest. This is true regardless of whether Payee is a holder in due course of the check and even if Payee gave no value for the check.

Example 2: Debtor maintains a deposit account with Bank A. The deposit account is subject to a perfected security interest in favor of Lender. At Bank B’s suggestion, Debtor moves the funds from the account at Bank A to Debtor’s deposit account with Bank B. Unless Bank B acted in collusion with Debtor in violating Lender’s rights, Bank B takes the funds (the credits running in favor of Bank B) free from Lender’s security interest. See subsection (b). However, inasmuch as the deposit account maintained with Bank B constitutes the proceeds of the deposit account at Bank A, Lender’s security interest would attach to that account as proceeds. See Section 9-315.

Subsection (b) also would apply if, in the example, Bank A debited Debtor’s deposit account in exchange for the issuance of Bank A’s cashier’s check. Lender’s security interest would attach to the cashier’s check as proceeds of the deposit account, and the rules applicable to instruments would govern any competing claims to the cashier’s check. See, e.g., Sections 3-306, 9-322, 9-330, and 9-331.

If Debtor withdraws money (currency) from an encumbered deposit account and transfers the money to a third party, then subsection (a), to the extent not displaced by federal law relating to money, applies. It contains the same rule as subsection (b).

Subsection (b) applies to transfers of funds from a deposit account; it does not apply to transfers of the deposit account itself or of an interest therein. For example, this section does not apply to the creation of a security interest in a deposit account. Competing claims to the deposit account itself are dealt with by other Article 9 priority rules. See Sections 9-317(a), 9-327, 9-340, and 9-341. Similarly, a corporate merger normally would not result in a transfer of funds from a deposit account. Rather, it might result in a transfer of the deposit account itself. If so, the normal rules applicable to transferred collateral would apply; this section would not.

Example 3: The facts are as in Example 2, but, in wrongfully moving the funds from the deposit account at Bank A to Debtor’s deposit account with Bank B, Debtor acts in collusion with Bank B. Bank B does not take the funds free of Lender’s security interest under this section. If Debtor grants a security interest to Bank B, Section 9-327 governs the relative priorities of Lender and Bank B. Under Section 9-327(3), Bank B’s security interest in the Bank B deposit account is senior to Lender’s security interest in the deposit account as proceeds. However, Bank B’s senior security interest does not protect Bank B against any liability to Lender that might arise from Bank B’s wrongful conduct.

NOTES TO DECISIONS

1.Applicability.

KRS 355.9-332 was not meant to apply to a situation where a secured creditor claimed a priority interest in funds that were deposited by the debtor into a deposit account with the bank and the bank claimed a superior right of set-off. Ky. Highlands Inv. Corp. v. Bank of Corbin, Inc., 217 S.W.3d 851, 2006 Ky. App. LEXIS 286 (Ky. Ct. App. 2006).

355.9-333. Priority of certain liens arising by operation of law.

  1. In this section, “possessory lien” means an interest, other than a security interest or an agricultural lien:
    1. Which secures payment or performance of an obligation for services or materials furnished with respect to goods by a person in the ordinary course of the person’s business;
    2. Which is created by statute or rule of law in favor of the person; and
    3. Whose effectiveness depends on the person’s possession of the goods.
  2. A possessory lien on goods has priority over a security interest in the goods unless the lien is created by a statute that expressly provides otherwise.

History. Enact. Acts 2000, ch. 408, § 73, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-310.
  2. “Possessory Liens.”  This section governs the relative priority of security interests arising under this article and “possessory liens,” i.e., common-law and statutory liens whose effectiveness depends on the lienor’s possession of goods with respect to which the lienor provided services or furnished materials in the ordinary course of its business. As under former Section 9-310, the possessory lien has priority over a security interest unless the possessory lien is created by a statute that expressly provides otherwise. If the statute creating the possessory lien is silent as to its priority relative to a security interest, this section provides a rule of interpretation that the possessory lien takes priority, even if the statute has been construed judicially to make the possessory lien subordinate.

NOTES TO DECISIONS

1.In General.

Settlement of a disputed claim that a debtor had with a bank was not, as a matter of law, a preferential transfer under 11 U.S.C.S. § 547 because the creditor bank received nothing of clear value, and the bank’s claim was a secured claim that took priority pursuant to KRS 355.9-333 over any nonpossessory wage lien. Moreover, under KRS 376.190 , the wage lien was filed too late because it was filed more than 60 days after the date the debtor’s business stopped. Scherer v. Quality Communs., Inc. (In re Quality Communs., Inc.), 347 B.R. 227, 2006 Bankr. LEXIS 1678 (Bankr. W.D. Ky. 2006 ).

2.Lien for Repairs on Motor Vehicles.

A garageman’s lien is inferior to prior encumbrances which are properly prepared, executed, and recorded. (decided under prior law) Indiana Truck Corp. v. Hurry Up Broadway Co., 222 Ky. 521 , 1 S.W.2d 990, 1928 Ky. LEXIS 202 ( Ky. 1928 ). See Hauseman Motor Co. v. Napierella, 223 Ky. 433 , 3 S.W.2d 1084, 1928 Ky. LEXIS 366 ( Ky. 1928 ); C. I. T. Corp. v. Studebaker Sales of Kentucky, 251 Ky. 349 , 65 S.W.2d 84, 1933 Ky. LEXIS 884 ( Ky. 1933 ).

Purchase money chattel mortgage on truck, properly recorded, was superior to subsequent statutory lien for tires. (decided under prior law) Indiana Truck Corp. v. Hurry Up Broadway Co., 222 Ky. 521 , 1 S.W.2d 990, 1928 Ky. LEXIS 202 ( Ky. 1928 ).

The right to detain a car operates only as against the person from whom it was received. (decided under prior law) Indiana Truck Corp. v. Hurry Up Broadway Co., 222 Ky. 521 , 1 S.W.2d 990, 1928 Ky. LEXIS 202 ( Ky. 1928 ).

Statutory lien for repairs on motor vehicle created by KRS 376.270 had priority over perfected security interest created under former KRS 355.9-310 section notwithstanding the latter interest was created before the repairs were made. (decided under prior law) Corbin Deposit Bank v. King, 384 S.W.2d 302, 1964 Ky. LEXIS 83 ( Ky. 1964 ).

3.Mechanic’s Lien.

Where subcontractor who was not paid by contractor, filed mechanic’s lien on the improved property, subcontractor’s lien on sums due the contractor was superior to secured creditor’s lien arising from security interest agreement which granted a lien on contractor’s accounts receivable. (decided under prior law) Citizens Fidelity Bank & Trust Co. v. Fenton Rigging Co., 522 S.W.2d 862, 1975 Ky. LEXIS 145 ( Ky. 1975 ).

Towing of boat by marina was properly included “work done” in marina’s mechanic’s lien superior to that of lender’s prior acquired security interest in the boat. (decided under prior law) Central Trust Co., N.A. v. Dan's Marina, 858 S.W.2d 211, 1993 Ky. App. LEXIS 91 (Ky. Ct. App. 1993).

Service charges were not included in that portion of marina’s mechanic’s lien on a boat superior to that of a lender’s prior acquired security interest. (decided under prior law) Central Trust Co., N.A. v. Dan's Marina, 858 S.W.2d 211, 1993 Ky. App. LEXIS 91 (Ky. Ct. App. 1993).

4.Lien for Repairs.

Where leasing company at time of lease of drilling rig to drilling company perfected a security interest in the rig and where supply company that performed repair work on rig’s engine perfected material and service lien against the engine under the provisions of KRS 376.440 to 376.455 , since under Kentucky law a mortgage does not mean or include a security interest, KRS 376.450 did not give a perfected security interest priority over a perfected KRS 376.440 service and supply lien; therefore, former KRS 355.9-310 governs the priority of the interest, and thus the lien of the supply company was superior to the security interest of the leasing company. (decided under prior law) In re Yost, 40 B.R. 962, 1984 Bankr. LEXIS 5198 (Bankr. W.D. Ky. 1984 ).

5.Possession.

Repairman’s lien was subordinate to a purchase money security interest even though the machinery was so large that repair on the owner’s premises was necessary and thus possession was not possible; former KRS 355.9-310 is clear and unambiguous in its requirement of possession by the lienholder. (decided under prior law) ITT Commercial Finance Corp. v. Madisonville Recapping Co., 793 S.W.2d 849, 1990 Ky. App. LEXIS 93 (Ky. Ct. App. 1990).

Opinions of Attorney General.

A lien created by KRS 376.270 is superior to an already perfected security interest. OAG 63-41 .

The sale of a motor vehicle under the provisions of KRS 376.270 or 376.275 will extinguish any prior recorded liens. OAG 66-413 .

Research References and Practice Aids

Kentucky Bench & Bar.

Schneiter, Equine Statutory Liens, Vol. 67, No. 4, July 2003, Ky. Bench & Bar 23.

355.9-334. Priority of security interests in fixtures and crops.

  1. A security interest under this article may be created in goods that are fixtures or may continue in goods that become fixtures. A security interest does not exist under this article in ordinary building materials incorporated into an improvement on land.
  2. This article does not prevent creation of an encumbrance upon fixtures under real property law.
  3. In cases not governed by subsections (4) to (8) of this section, a security interest in fixtures is subordinate to a conflicting interest of an encumbrancer or owner of the related real property other than the debtor.
  4. Except as otherwise provided in subsection (8) of this section, a perfected security interest in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if the debtor has an interest of record in or is in possession of the real property and:
    1. The security interest is a purchase-money security interest;
    2. The interest of the encumbrancer or owner arises before the goods become fixtures; and
    3. The security interest is perfected by a fixture filing before the goods become fixtures or within twenty (20) days thereafter.
  5. A perfected security interest in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if:
    1. The debtor has an interest of record in the real property or is in possession of the real property and the security interest:
      1. Is perfected by a fixture filing before the interest of the encumbrancer or owner is of record; and
      2. Has priority over any conflicting interest of a predecessor in title of the encumbrancer or owner;
    2. Before the goods become fixtures, the security interest is perfected by any method permitted by this article and the fixtures are readily removable:
      1. Factory or office machines;
      2. Equipment that is not primarily used or leased for use in the operation of the real property; or
      3. Replacements of domestic appliances that are consumer goods;
    3. The conflicting interest is a lien on the real property obtained by legal or equitable proceedings after the security interest was perfected by any method permitted by this article; or
    4. The security interest is:
      1. Created in a manufactured home in a manufactured-home transaction; and
      2. Perfected pursuant to a statute described in KRS 355.9-311 (1)(b).
  6. A security interest in fixtures, whether or not perfected, has priority over a conflicting interest of an encumbrancer or owner of the real property if:
    1. The encumbrancer or owner has, in an authenticated record, consented to the security interest or disclaimed an interest in the goods as fixtures; or
    2. The debtor has a right to remove the goods as against the encumbrancer or owner.
  7. The priority of the security interest under subsection (6)(b) of this section continues for a reasonable time if the debtor’s right to remove the goods as against the encumbrancer or owner terminates.
  8. A mortgage is a construction mortgage to the extent that it secures an obligation incurred for the construction of an improvement on land, including the acquisition cost of the land, if a recorded record of the mortgage so indicates. Except as otherwise provided in subsections (5) and (6) of this section, a security interest in fixtures is subordinate to a construction mortgage if a record of the mortgage is recorded before the goods become fixtures and the goods become fixtures before the completion of the construction. A mortgage has this priority to the same extent as a construction mortgage to the extent that it is given to refinance a construction mortgage.
  9. A perfected security interest in crops growing on real property has priority over a conflicting interest of an encumbrancer or owner of the real property if the debtor has an interest of record in or is in possession of the real property.

History. Enact. Acts 2000, ch. 408, § 74, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-313.
  2. Scope of This Section.  This section contains rules governing the priority of security interests in fixtures and crops as against persons who claim an interest in real property. Priority contests with other Article 9 security interests are governed by the other priority rules of this article. The provisions with respect to fixtures follow those of former Section 9-313. However, they have been rewritten to conform to Section 2A-309 and to prevailing style conventions. Subsections (j) and (k), which apply to crops, are new.
  3. Security Interests in Fixtures.  Certain goods that are the subject of personal-property (chattel) financing become so affixed or otherwise so related to real property that they become part of the real property. These goods are called “fixtures.” See Section 9-102 (definition of “fixtures”). Some fixtures retain their personal property nature: A security interest under this article may be created in fixtures and may continue in goods that become fixtures. See subsection (a). However, if the goods are ordinary building materials incorporated into an improvement on land, no security interest in them exists. Rather, the priority of claims to the building materials are determined by the law governing claims to real property. (Of course, the fact that no security interest exists in ordinary building materials incorporated into an improvement on land does not prejudice any rights the secured party may have against the debtor or any other person who violated the secured party’s rights by wrongfully incorporating the goods into real property.)

    Thus, this section recognizes three categories of goods: (1) Those that retain their chattel character entirely and are not part of the real property; (2) ordinary building materials that have become an integral part of the real property and cannot retain their chattel character for purposes of finance; and (3) an intermediate class that has become real property for certain purposes, but as to which chattel financing may be preserved.

    To achieve priority under certain provisions of this section, a security interest must be perfected by making a “fixture filing” (defined in Section 9-102) in the real property records. Because the question whether goods have become fixtures often is a difficult one under applicable real property law, a secured party may make a fixture filing as a precaution. Courts should not infer from a fixture filing that the secured party concedes that the goods are or will become fixtures.

  4. Priority in Fixtures: General.  In considering priority problems under this section, one must first determine whether real property claimants per se have an interest in the crops or fixtures as part of real property. If not, it is immaterial, so far as concerns real property parties as such, whether a security interest arising under this article is perfected or unperfected. In no event does a real property claimant (e.g., owner or mortgagee) acquire an interest in a “pure” chattel just because a security interest therein is unperfected. If on the other hand real property law gives real property parties an interest in the goods, a conflict arises and this section states the priorities.
  5. Priority in Fixtures: Residual Rule.  Subsection (c) states the residual priority rule, which applies only if one of the other rules does not: A security interest in fixtures is subordinate to a conflicting interest of an encumbrancer or owner of the related real property other than the debtor.
  6. Priority in Fixtures: First to File or Record.  Subsection (e)(1), which follows former Section 9-313(4)(b), contains the usual priority rule of conveyancing, that is, the first to file or record prevails. In order to achieve priority under this rule, however, the security interest must be perfected by a “fixture filing” (defined in Section 9-102), i.e., a filing for record in the real property records and indexed therein, so that it will be found in a real property search. The condition in subsection (e)(1)(B), that the security interest must have had priority over any conflicting interest of a predecessor in title of the conflicting encumbrancer or owner, appears to limit to the first-in-time principle. However, this apparent limitation is nothing other than an expression of the usual rule that a person must be entitled to transfer what he or she has. Thus, if the fixture security interest is subordinate to a mortgage, it is subordinate to an interest of an assignee of the mortgage, even though the assignment is a later recorded instrument. Similarly if the fixture security interest is subordinate to the rights of an owner, it is subordinate to a subsequent grantee of the owner and likewise subordinate to a subsequent mortgagee of the owner.
  7. Priority in Fixtures: Purchase-Money Security Interests.  Subsection (d), which follows former Section 9-313(4)(a), contains the principal exception to the first-to-file-or-record rule of subsection (e)(1). It affords priority to purchase-money security interests in fixtures as against prior recorded real property interests, provided that the purchase-money security interest is filed as a fixture filing in the real property records before the goods become fixtures or within 20 days thereafter. This priority corresponds to the purchase-money priority under Section 9-324(a). (Like other 10-day periods in former Article 9, the 10-day period in this section has been changed to 20 days.)

    It should be emphasized that this purchase-money priority with the 20-day grace period for filing is limited to rights against real property interests that arise before the goods become fixtures. There is no such priority with the 20-day grace period as against real property interests that arise subsequently. The fixture security interest can defeat subsequent real property interests only if it is filed first and prevails under the usual conveyancing rule in subsection (e)(1) or one of the other rules in this section.

  8. Priority in Fixtures: Readily Removable Goods.  Subsection (e)(2), which derives from Section 2A-309 and former Section 9-313(4)(d), contains another exception to the usual first-to-file-or-perfect rule. It affords priority to the holders of security interests in certain types of readily removable goods—factory and office machines, equipment that is not primarily used or leased for use in the operation of the real property, and (as discussed below) certain replacements of domestic appliances. This rule is made necessary by the confusion in the law as to whether certain machinery, equipment, and appliances become fixtures. It protects a secured party who, perhaps in the mistaken belief that the readily removable goods will not become fixtures, makes a UCC filing (or otherwise perfects under this article) rather than making a fixture filing.

    Frequently, under applicable law, goods of the type described in subsection (e)(2) will not be considered to have become part of the real property. In those cases, the fixture security interest does not conflict with a real property interest, and resort to this section is unnecessary. However, if the goods have become part of the real property, subsection (e)(2) enables a fixture secured party to take priority over a conflicting real-property interest if the fixture security interest is perfected by a fixture filing or by any other method permitted by this article. If perfection is by fixture filing, the fixture security interest would have priority over subsequently recorded real property interests under subsection (e)(1) and, if the fixture security interest is a purchase-money security interest (a likely scenario), it would also have priority over most real property interests under the purchase-money priority of subsection (d). Note, however, that unlike the purchase-money priority rule in subsection (d), the priority rules in subsection (e) override the priority given to a construction mortgage under subsection (h).

    The rule in subsection (e)(2) is limited to readily removable replacements of domestic appliances. It does not apply to original installations. Moreover, it is limited to appliances that are “consumer goods” (defined in Section 9-102) in the hands of the debtor. The principal effect of the rule is to make clear that a secured party financing occasional replacements of domestic appliances in noncommercial, owner-occupied contexts need not concern itself with real-property descriptions or records; indeed, for a purchase-money replacement of consumer goods, perfection without any filing will be possible. See Section 9-309(1).

  9. Priority in Fixtures: Judicial Liens.  Subsection (e)(3), which follows former section 9-313(4)(d), adopts a first-in-time rule applicable to conflicts between a fixture security interest and a lien on the real property obtained by legal or equitable proceedings. Such a lien is subordinate to an earlier-perfected security interest, regardless of the method by which the security interest was perfected. Judgment creditors generally are not reliance creditors who search real property records. Accordingly, a perfected fixture security interest takes priority over a subsequent judgment lien or other lien obtained by legal or equitable proceedings, even if no evidence of the security interest appears in the relevant real property records. Subsection (e)(3) thus protects a perfected fixture security interest from avoidance by a trustee in bankruptcy under Bankruptcy Code Section 544(a), regardless of the method of perfection.
  10. Priority in Fixtures: Manufactured Homes.  A manufactured home may become a fixture. New subsection (e)(4) contains a special rule granting priority to certain security interests created in a “manufactured home” as part of a “manufactured-home transaction” (both defined in Section 9-102). Under this rule, a security interest in a manufactured home that becomes a fixture has priority over a conflicting interest of an encumbrancer or owner of the real property if the security interest is perfected under a certificate of title statute (see Section 9-311). Subsection (e)(4) is only one of the priority rules applicable to security interests in a manufactured home that becomes a fixture. Thus, a security interest in a manufactured home which does not qualify for priority under this subsection may qualify under another.
  11. Priority in Fixtures: Construction Mortgages.  The purchase-money priority presents a difficult problem in relation to construction mortgages. The latter ordinarily will have been recorded even before the commencement of delivery of materials to the job, and therefore would take priority over fixture security interests were it not for the purchase-money priority. However, having recorded first, the holder of a construction mortgage reasonably expects to have first priority in the improvement built using the mortgagee’s advances. Subsection (g) expressly gives priority to the construction mortgage recorded before the filing of the purchase-money security interest in fixtures. A refinancing of a construction mortgage has the same priority as the construction mortgage itself. The phrase “an obligation incurred for the construction of an improvement” covers both optional advances and advances pursuant to commitment. Both types of advances have the same priority under subsection (g).

    The priority under this subsection applies only to goods that become fixtures during the construction period leading to the completion of the improvement. The construction priority will not apply to additions to the building made long after completion of the improvement, even if the additions are financed by the real property mortgagee under an open-end clause of the construction mortgage. In such case, subsections (d), (e), and (f) govern.

    Although this subsection affords a construction mortgage priority over a purchase-money security interest that otherwise would have priority under subsection (d), the subsection is subject to the priority rules in subsections (e) and (f). Thus, a construction mortgage may be junior to a fixture security interest perfected by a fixture filing before the construction mortgage was recorded. See subsection (e)(1).

  12. Crops.  Growing crops are “goods” in which a security interest may be created and perfected under this article. In some jurisdictions, a mortgage of real property may cover crops, as well. In the event that crops are encumbered by both a mortgage and an Article 9 security interest, subsection (i) provides that the security interest has priority. States whose real property law provides otherwise should either amend that law directly or override it by enacting subsection (j).

NOTES TO DECISIONS

1.Chattel Mortages.

A materialman’s lien was not superior to prior recorded mortgages. (decided under prior law) Indiana Truck Corp. v. Hurry Up Broadway Co., 222 Ky. 521 , 1 S.W.2d 990, 1928 Ky. LEXIS 202 ( Ky. 1928 ).

2.— Crop.

A mortgage on a growing tobacco crop which was prior in time but recorded after a subsequent mortgage on the same tobacco was superior to the subsequent mortgage where mortgagee had knowledge of the prior mortgage. (decided under prior law) Holt v. Farmers' Loose Leaf Tobacco Warehouse Co., 201 Ky. 184 , 256 S.W. 6, 1923 Ky. LEXIS 246 ( Ky. 1923 ).

3.Interest in Crops.

Where the plaintiff secured a promissory note, security agreement and financing statement from an individual covering proceeds of crops and where the defendant subsequently advanced the same individual money to grow, harvest and sell the same crops, but failed to file a mortgage, security agreement or financing statement in the county clerk’s office, the defendant failed to perfect its interest in the crops for new value and the plaintiff was entitled to a first lien on the proceeds of the crops. (decided under prior law) United Tobacco Warehouse Co. v. Wells, 490 S.W.2d 152, 1973 Ky. LEXIS 611 ( Ky. 1973 ).

Former KRS 355.9-312 (2) should not be read so broadly as to permit creditors to file crop money liens to achieve priority status in contravention of federal bankruptcy law affording automatic stay protection to debtors upon their filing of a bankruptcy petition; rather, former KRS 355.9-312 2) presupposes creditor’s prepetition filing of the crop money lien by its absence of an expressed statutory period in which a creditor can file and gain advantage of a relation-back provision securing creditor at the time the prepetition security agreement arose. (decided under prior law) In re Rogers, 39 B.R. 295, 1984 Bankr. LEXIS 6096 (Bankr. W.D. Ky. 1984 ).

4.Possession.

Although the Uniform Commercial Code does not contain a definition of the term “possession” or “receives possession,” there is strong support for the proposition that the term “possession,” as used in former KRS 355.9-312 (4), refers to actual, physical possession as opposed to constructive possession. (decided under prior law) In re Ivy, 37 B.R. 285, 1983 Bankr. LEXIS 5101 (Bankr. E.D. Ky. 1983 ).

The evidence did not support the creditor tobacco warehouse’s claim that its crop money lien was perfected by “possession” when the debtors delivered their tobacco to the warehouse for purpose of selling the collateral at the seasonal auctions held by the warehouse, since no evidence was offered by the warehouse to show the necessary dominion and control over the property required for “possession” at common law, and the record also failed to show debtors’ relinquishment of control to accept or reject bids at the auction when the collateral was physically possessed by the creditor warehouse. (decided under prior law) In re Rogers, 39 B.R. 295, 1984 Bankr. LEXIS 6096 (Bankr. W.D. Ky. 1984 ).

5.Earlier Perfected Interest.

Where the security agreement of the parties at the outset provided for periodic accrual of interest on debtors’ obligations, and that agreement was properly filed in June 1981, the credit association’s later filing in August of 1981 to reflect current total debt secured by the debtors’ 1981 tobacco crops and proceeds merely insured the credit association’s interest in collateral to the extent of value represented by interest charges or miscellaneous expenses; since the act of filing anew did not erode the credit association’s earlier status as secured creditor of debtors’ 1981 tobacco crops and proceeds, the credit association possessed the “earlier perfected security interest” required for application of subsection (2) of this section. (decided under prior law) In re Rogers, 39 B.R. 295, 1984 Bankr. LEXIS 6096 (Bankr. W.D. Ky. 1984 ).

Where the debtor’s bank had filed and perfected its security interest in the debtor’s assets under former KRS 355.9-312 (5)(a), (7), 355.9-303 , 355.9-203 , before the debtor’s shareholders sold their stock to the debtor and took a security interest in the debtor’s assets, the bank held a perfected, first, and prior lien on the debtor’s assets; a subordination provision in the stock purchase agreement between the debtor and the former shareholders, to which the bank was not a party, was not binding on the bank. (decided under prior law) Ralph v. Stock Yards Bank & Trust Co. (In re Kentuckiana Truck & Trailer Repair, Inc.), 291 B.R. 84, 2002 Bankr. LEXIS 1678 (Bankr. W.D. Ky. 2002 ).

A person who becomes a lien creditor before a security interest is perfected will defeat the security interest even if the lien creditor has knowledge of the security interest; however, a perfected security interest is not subordinate to the rights of a subsequent judgment lien creditor. (decided under prior law) In re Lynum, 246 B.R. 537, 2000 Bankr. LEXIS 338 (Bankr. E.D. Ky. 2000 ).

6.Perfection of Security Interest in Mobile Home.

Creditor’s objection to a Chapter 13 plan on the grounds that the plan impermissibly sought to modify its claim under 11 U.S.C.S. § 1322(b)(2) was overruled because notwithstanding whether the debtors’ mobile home was permanently affixed to real property that secured the creditor’s interest, it could only be deemed an interest in real estate if it was converted to real property under KRS 186A.297 ; thus, because the mobile home had an active certificate of title and had not been converted, a security interest could only be perfected under KRS 186A.190(1) by notation on the certificate of title. The court rejected the creditor’s argument that because the priority scheme in KRS 355.9-334 (5)(d) provided a mechanism for a mortgage to have priority over a security interest in a titled mobile home, that this meant the mobile home could be perfected other than by a notation on its title. In re Starks, 2011 Bankr. LEXIS 268 (Bankr. E.D. Ky. Jan. 24, 2011).

Chapter 7 Trustee avoided a lien on the debtors’ manufactured home under 11 U.S.C.S. § 544. The creditor did not perfect its lien in the home, which was certificate of title property under KRS 186A.070 subject to perfection under KRS 186A.190 , and the debtors did not convert the home from personal property to real estate as permitted by KRS 186A.297 ; in addition, KRS 355.9-334 did not apply to permit the perfection of the lien as a lien on a fixture because the Uniform Commercial code did not address perfection of a security interest in certificate of title property. Rogan v. Greentree Fin. Servicing Corp. (In re Nutgrass), 2013 Bankr. LEXIS 636 (Bankr. E.D. Ky. Feb. 12, 2013).

Opinions of Attorney General.

If a financing statement qualifies as a real estate mortgage instrument, it may be filed and recorded as a real estate mortgage as well as being filed as a financing statement involving a chattel. OAG 77-708 .

The statement in this section, that chapter 355 does not prevent the creation of an encumbrance upon fixtures or real estate pursuant to the Kentucky law applicable to real estate, attests to a legislative intent that the real estate mortgage or lien concept and the existing statutory formalities of KRS 382.270 and KRS 382.330 remain inviolate and unchanged. OAG 81-144 .

Fixture filings are to be filed in the office where a mortgage on real estate would be filed or recorded. Fixture filings are not required to be recorded with mortgages in a mortgage book, but a duplicate filing may be made in the mortgage book at the request of the secured party if the fixture filing complies with KRS Chapter 382; however, there is no statutory direction as to the chronological order of filing. OAG 87-52 .

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

Northern Kentucky Law Review.

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Answer by Tenant That Items are Trade Fixtures, Form 302.02.

Caldwell’s Kentucky Form Book, 5th Ed., Complaint by Landlord Against Tenant for Fixtures Removed, Form 302.01.

355.9-335. Accessions.

  1. A security interest may be created in an accession and continues in collateral that becomes an accession.
  2. If a security interest is perfected when the collateral becomes an accession, the security interest remains perfected in the collateral.
  3. Except as otherwise provided in subsection (4) of this section, the other provisions of this part of this article determine the priority of a security interest in an accession.
  4. A security interest in an accession is subordinate to a security interest in the whole which is perfected by compliance with the requirements of a certificate-of-title statute under KRS 355.9-311 (2).
  5. After default, subject to Part 6 of this article, a secured party may remove an accession from other goods if the security interest in the accession has priority over the claims of every person having an interest in the whole.
  6. A secured party that removes an accession from other goods under subsection (5) of this section shall promptly reimburse any holder of a security interest or other lien on, or owner of, the whole or of the other goods, other than the debtor, for the cost of repair of any physical injury to the whole or the other goods. The secured party need not reimburse the holder or owner for any diminution in value of the whole or the other goods caused by the absence of the accession removed or by any necessity for replacing it. A person entitled to reimbursement may refuse permission to remove until the secured party gives adequate assurance for the performance of the obligation to reimburse.

History. Enact. Acts 2000, ch. 408, § 75, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-314.
  2. “Accession.”  This section applies to an “accession,” as defined in Section 9-102, regardless of the cost or difficulty of removing the accession from the other goods, and regardless of whether the original goods have come to form an integral part of the other goods. This section does not apply to goods whose identity has been lost. Goods of that kind are “commingled goods” governed by Section 9-336. Neither this section nor the following one addresses the case of collateral that changes form without the addition of other goods.
  3. “Accession” vs. “Other Goods.”  This section distinguishes among the “accession,” the “other goods,” and the “whole.” The last term refers to the combination of the “accession” and the “other goods.” If one person’s collateral becomes physically united with another person’s collateral, each is an “accession.”
  4. Scope.  This section governs only a few issues concerning accessions. Subsection (a) contains rules governing continuation of a security interest in an accession. Subsection (b) contains a rule governing continued perfection of a security interest in goods that become an accession. Subsection (d) contains a special priority rule governing accessions that become part of a whole covered by a certificate of title. Subsections (e) and (f) govern enforcement of a security interest in an accession.
  5. Matters Left to Other Provisions of This Article: Attachment and Perfection.  Other provisions of this article often govern accession-related issues. For example, this section does not address whether a secured party acquires a security interest in the whole if its collateral becomes an accession. Normally this will turn on the description of the collateral in the security agreement.
  6. Matters Left to Other Provisions of This Article: Priority.  With one exception, concerning goods covered by a certificate of title (see subsection (d)), the other provisions of this part, including the rules governing purchase-money security interests, determine the priority of most security interests in an accession, including the relative priority of a security interest in an accession and a security interest in the whole. See subsection (c).
  7. Goods Covered by Certificate of Title.  This section does govern the priority of a security interest in an accession that is or becomes part of a whole that is subject to a security interest perfected by compliance with a certificate of title statute. Subsection (d) provides that a security interest in the whole, perfected by compliance with a certificate of title statute, takes priority over a security interest in the accession. It enables a secured party to rely upon a certificate of title without having to check the UCC files to determine whether any components of the collateral may be encumbered. The subsection imposes a corresponding risk upon those who finance goods that may become part of goods covered by a certificate of title. In doing so, it reverses the priority that appeared reasonable to most pre-UCC courts.

Example 1: SP-1 holds a security interest in the debtor’s tractors (which are not subject to a certificate of title statute), and SP-2 holds a security interest in a particular tractor engine. The engine is installed in a tractor. From the perspective of SP-1, the tractor becomes an “accession” and the engine is the “other goods.” From the perspective of SP-2, the engine is the “accession” and the tractor is the “other goods.” The completed tractor—tractor cum engine—constitutes the “whole.”

Example 2: Debtor owns a computer subject to a perfected security interest in favor of SP-1. Debtor acquires memory and installs it in the computer. Whether SP-1’s security interest attaches to the memory depends on whether the security agreement covers it.

Similarly, this section does not determine whether perfection against collateral that becomes an accession is effective to perfect a security interest in the whole. Other provisions of this article, including the requirements for indicating the collateral covered by a financing statement, resolve that question.

Example 3: Debtor owns an office computer subject to a security interest in favor of SP-1. Debtor acquires memory and grants a perfected security interest in the memory to SP-2. Debtor installs the memory in the computer, at which time (one assumes) SP-1’s security interest attaches to the memory. The first-to-file-or-perfect rule of Section 9-322 governs priority in the memory. If, however, SP-2’s security interest is a purchase-money security interest, Section 9-324(a) would afford priority in the memory to SP-2, regardless of which security interest was perfected first.

Example 4: Debtor owns an automobile subject to a security interest in favor of SP-1. The security interest is perfected by notation on the certificate of title. Debtor buys tires subject to a perfected-by-filing purchase-money security interest in favor of SP-2 and mounts the tires on the automobile’s wheels. If the security interest in the automobile attaches to the tires, then SP-1 acquires priority over SP-2. The same result would obtain if SP-1’s security interest attached to the automobile and was perfected after the tires had been mounted on the wheels.

NOTES TO DECISIONS

1.Motor Vehicles.

Purchase money chattel mortgage on truck, properly recorded, was superior to subsequent statutory lien for tires. (decided under prior law) Indiana Truck Corp. v. Hurry Up Broadway Co., 222 Ky. 521 , 1 S.W.2d 990, 1928 Ky. LEXIS 202 ( Ky. 1928 ).

Neither seller of truck chassis nor its assignee had a lien on truck chassis at the time partnership, without notice of conditional sales, installed dump beds for purchaser on open account where the conditional sales contracts creating the liens were not executed or recorded until after the dump beds were installed and, when the conditional sales contracts were executed, liens on the truck chassis only were imposed by virtue of the sale because they were the only things sold and where seller assigned the conditional sales contracts to assignee with knowledge of the partnership’s claim, the partnership had priority on the proceeds of the sale of the trucks with the beds attached by the seller’s assignee. (decided under prior law) Walter J. Hieb Sand & Gravel, Inc. v. Universal C. I. T. Credit Corp., 332 S.W.2d 619, 1959 Ky. LEXIS 20 ( Ky. 1959 ).

Research References and Practice Aids

Kentucky Law Journal.

Nowka and Taylor, Kentucky Employees’ Wage Liens: A Sneak Attack on Creditors, but Beware of the Bankruptcy Trustee, 84 Ky. L.J. 317 (1995-96).

355.9-336. Commingled goods.

  1. In this section, “commingled goods” means goods that are physically united with other goods in such a manner that their identity is lost in a product or mass.
  2. A security interest does not exist in commingled goods as such. However, a security interest may attach to a product or mass that results when goods become commingled goods.
  3. If collateral becomes commingled goods, a security interest attaches to the product or mass.
  4. If a security interest in collateral is perfected before the collateral becomes commingled goods, the security interest that attaches to the product or mass under subsection (3) of this section is perfected.
  5. Except as otherwise provided in subsection (6) of this section, the other provisions of this part of this article determine the priority of a security interest that attaches to the product or mass under subsection (3) of this section.
  6. If more than one (1) security interest attaches to the product or mass under subsection (3) of this section, the following rules determine priority:
    1. A security interest that is perfected under subsection (4) of this section has priority over a security interest that is unperfected at the time the collateral becomes commingled goods.
    2. If more than one (1) security interest is perfected under subsection (4) of this section, the security interests rank equally in proportion to the value of the collateral at the time it became commingled goods.

History. Enact. Acts 2000, ch. 408, § 76, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-315.
  2. “Commingled Goods.”  Subsection (a) defines “commingled goods.” It is meant to include not only goods whose identity is lost through manufacturing or production (e.g., flour that has become part of baked goods) but also goods whose identity is lost by commingling with other goods from which they cannot be distinguished (e.g., ball bearings).
  3. Consequences of Becoming “Commingled Goods.”  By definition, the identity of the original collateral cannot be determined once the original collateral becomes commingled goods. Consequently, the security interest in the specific original collateral alone is lost once the collateral becomes commingled goods, and no security interest in the original collateral can be created thereafter except as a part of the resulting product or mass. See subsection (b).

    Once collateral becomes commingled goods, the secured party’s security interest is transferred from the original collateral to the product or mass. See subsection (c). If the security interest in the original collateral was perfected, the security interest in the product or mass is a perfected security interest. See subsection (d). This perfection continues until lapse.

  4. Priority of Perfected Security Interests That Attach Under This Section.  This section governs the priority of competing security interests in a product or mass only when both security interests arise under this section. In that case, if both security interests are perfected by operation of this section (see subsections (c) and (d)), then the security interests rank equally, in proportion to the value of the collateral at the time it became commingled goods. See subsection (f)(2).
  5. Perfection: Unperfected Security Interests.  The rule explained in the preceding comment applies only when both security interests in original collateral are perfected when the goods become commingled goods. If a security interest in original collateral is unperfected at the time the collateral becomes commingled goods, subsection (f)(1) applies.
  6. Multiple Security Interests.  On occasion, a single input may be encumbered by more than one security interest. In those cases, the multiple secured parties should be treated like a single secured party for purposes of determining their collective share under subsection (f)(2). The normal priority rules would determine how that share would be allocated between them. Consider the following example, which is a variation on Example 1 above:
  7. Priority of Security Interests That Attach Other Than by Operation of This Section.  Under subsection (e), the normal priority rules determine the priority of a security interest that attaches to the product or mass other than by operation of this section. For example, assume that SP-1 has a perfected security interest in Debtor’s existing and after-acquired baked goods, and SP-2 has a perfected security interest in Debtor’s flour. When the flour is processed into cakes, subsections (c) and (d) provide that SP-2 acquires a perfected security interest in the cakes. If SP-1 filed against the baked goods before SP-2 filed against the flour, then SP-1 will enjoy priority in the cakes. See Section 9-322 (first-to-file-or-perfect). But if SP-2 filed against the flour before SP-1 filed against the baked goods, then SP-2 will enjoy priority in the cakes to the extent of its security interest.

Example 1: SP-1 has a perfected security interest in Debtor’s eggs, which have a value of $300 and secure a debt of $400, and SP-2 has a perfected security interest in Debtor’s flour, which has a value of $500 and secures a debt of $600. Debtor uses the flour and eggs to make cakes, which have a value of $1000. The two security interests rank equally and share in the ratio of 3:5. Applying this ratio to the entire value of the product, SP-1 would be entitled to $375 (i.e., 3/8 x $1000), and SP-2 would be entitled to $625 (i.e., 5/8 x $1000).

Example 2: Assume the facts of Example 1, except that SP-1’s collateral, worth $300, secures a debt of $200. Recall that, if the cake is worth $1000, then applying the ratio of 3:5 would entitle SP-1 to $375 and SP-2 to $625. However, SP-1 is not entitled to collect from the product more than it is owed. Accordingly, SP-1’s share would be only $200, SP-2 would receive the remaining value, up to the amount it is owed ($600).

Example 3: Assume that the cakes in the previous examples have a value of only $600. Again, the parties share in the ratio of 3:5. If, as in Example 1, SP-1 is owed $400, then SP-1 is entitled to $225 (i.e., 3/8 x $600), and SP-2 is entitled to $375 (i.e., 5/8 x $600). Debtor receives nothing. If, however, as in Example 2, SP-1 is owed only $200, then SP-2 receives $400.

The results in the foregoing examples remain the same, regardless of whether SP-1 or SP-2 (or each) has a purchase-money security interest.

Example 4: SP-1 has a perfected security interest in the debtor’s eggs, and SP-2 has an unperfected security interest in the debtor’s flour. Debtor uses the flour and eggs to make cakes. Under subsection (c), both security interests attach to the cakes. But since SP-1’s security interest was perfected at the time of commingling and SP-2’s was not, only SP-1’s security interest in the cakes is perfected. See subsection (d). Under subsection (f)(1) and Section 9-322(a)(2), SP-1’s perfected security interest has priority over SP-2’s unperfected security interest.

If both security interests are unperfected, the rule of Section 9-322(a)(3) would apply.

Example 5: SP-1A has a perfected, first-priority security interest in Debtor’s eggs. SP-1B has a perfected, second-priority security interest in the same collateral. The eggs have a value of $300. Debtor owes $200 to SP-1A and $200 to SP-1B. SP-2 has a perfected security interest in Debtor’s flour, which has a value of $500 and secures a debt of $600. Debtor uses the flour and eggs to make cakes, which have a value of $1000.

For purposes of subsection (f)(2), SP-1A and SP-1B should be treated like a single secured party. The collective security interest would rank equally with that of SP-2. Thus, the secured parties would share in the ratio of 3 (for SP-1A and SP-1B combined) to 5 (for SP-2). Applying this ratio to the entire value of the product, SP-1A and SP-1B in the aggregate would be entitled to $375 (i.e., 3/8 x $1000), and SP-2 would be entitled to $625 (i.e., 5/8 x $1000).

SP-1A and SP-1B would share the $375 in accordance with their priority, as established under other rules. Inasmuch as SP-1A has first priority, it would receive $200, and SP-1B would receive $175.

NOTES TO DECISIONS

1.Continuation of Security Interest.

Lender did not lose its perfected status in grain grown in one county and stored in a second county, since under this section a perfected security interest in collateral continues when such collateral becomes a part of the mass. (decided under prior law) In re Tinsley & Groom, 49 B.R. 85, 1984 Bankr. LEXIS 4658 (Bankr. W.D. Ky. 1984 ) (decided under prior law).

355.9-337. Priority of security interests in goods covered by certificate of title.

If, while a security interest in goods is perfected by any method under the law of another jurisdiction, this Commonwealth issues a certificate of title that does not show that the goods are subject to the security interest or contain a statement that they may be subject to security interests not shown on the certificate:

  1. A buyer of the goods, other than a person in the business of selling goods of that kind, takes free of the security interest if the buyer gives value and receives delivery of the goods after issuance of the certificate and without knowledge of the security interest; and
  2. The security interest is subordinate to a conflicting security interest in the goods that attaches, and is perfected under KRS 355.9-311 (2), after issuance of the certificate and without the conflicting secured party’s knowledge of the security interest.

History. Enact. Acts 2000, ch. 408, § 77, effective July 1, 2001.

Official Comment

  1. Source.  Derived from former Section 9-103(2)(d).
  2. Protection for Buyers and Secured Parties.  This section affords protection to certain good-faith purchasers for value who are likely to have relied on a “clean” certificate of title, i.e., one that neither shows that the goods are subject to a particular security interest nor contains a statement that they may be subject to security interests not shown on the certificate. Under this section, a buyer can take free of, and the holder of a conflicting security interest can acquire priority over, a security interest that is perfected by any method under the law of another jurisdiction. The fact that the security interest has been reperfected by possession under Section 9-313 does not of itself disqualify the holder of a conflicting security interest from protection under paragraph (2).

355.9-338. Priority of security interest or agricultural lien perfected by filed financing statement providing certain incorrect information.

If a security interest or agricultural lien is perfected by a filed financing statement providing information described in KRS 355.9-516 (2)(e) which is incorrect at the time the financing statement is filed:

  1. The security interest or agricultural lien is subordinate to a conflicting perfected security interest in the collateral to the extent that the holder of the conflicting security interest gives value in reasonable reliance upon the incorrect information; and
  2. A purchaser, other than a secured party, of the collateral takes free of the security interest or agricultural lien to the extent that, in reasonable reliance upon the incorrect information, the purchaser gives value and, in the case of tangible chattel paper, documents, goods, instruments, or a security certificate, receives delivery of the collateral.

History. Enact. Acts 2000, ch. 408, § 78, effective July 1, 2001; 2012, ch. 132, § 75, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  New.
  2. Effect of Incorrect Information in Financing Statement.  Section 9-520(a) requires the filing office to reject financing statements that do not contain information concerning the debtor as specified in Section 9-516(b)(5). An error in this information does not render the financing statement ineffective. On rare occasions, a subsequent purchaser of the collateral (i.e., a buyer or secured party) may rely on the misinformation to its detriment. This section subordinates a security interest or agricultural lien perfected by an effective, but flawed, financing statement to the rights of a buyer or holder of a perfected security interest to the extent that, in reasonable reliance on the incorrect information, the purchaser gives value and, in the case of tangible collateral, receives delivery of the collateral. A purchaser who has not made itself aware of the information in the filing office with respect to the debtor cannot act in “reasonable reliance” upon incorrect information.
  3. Relationship to Section 9-507.  This section applies to financing statements that contain information that is incorrect at the time of filing and imposes a small risk of subordination on the filer. In contrast, Section 9-507 deals with financing statements containing information that is correct at the time of filing but which becomes incorrect later. Except as provided in Section 9-507 with respect to changes in the debtor’s name, an otherwise effective financing statement does not become ineffective if the information contained in it becomes inaccurate.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-339. Priority subject to subordination.

This article does not preclude subordination by agreement by a person entitled to priority.

History. Enact. Acts 2000, ch. 408, § 79, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-316.
  2. Subordination by Agreement.  The preceding sections deal elaborately with questions of priority. This section makes it entirely clear that a person entitled to priority may effectively agree to subordinate its claim. Only the person entitled to priority may make such an agreement: A person’s rights cannot be adversely affected by an agreement to which the person is not a party.

NOTES TO DECISIONS

1.Notice of Subsequent Loans.

Where the subordination agreement did not contain any provision which prohibited additional loans from the bank nor specify that any payments received would be used first to reduce the original secured portion of the renewed promissory note, the bank did not breach the subordination agreement when it renewed the note and approved an additional unsecured loan, but did breach its implied covenant of good faith and fair dealing when it failed to give notice to the private lender of its subsequent loan and when it unilaterally applied the payments it received first to the unsecured portion of the new promissory note. (decided under prior law) Ranier v. Mt. Sterling Nat'l Bank, 812 S.W.2d 154, 1991 Ky. LEXIS 78 ( Ky. 1991 ).

2.Third-Party Creditors.

Where a third-party creditor executes a subordination agreement in favor of another creditor, the latter has an implied duty under equitable principles to apply the payment it receives from the debtor in a manner which does not prejudice the third-party creditor’s subordinated security interest. (decided under prior law) Ranier v. Mt. Sterling Nat'l Bank, 812 S.W.2d 154, 1991 Ky. LEXIS 78 ( Ky. 1991 ).

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Subpart 4. Rights of Bank

355.9-340. Effectiveness of right of recoupment or set-off against deposit account.

  1. Except as otherwise provided in subsection (3) of this section, a bank with which a deposit account is maintained may exercise any right of recoupment or set-off against a secured party that holds a security interest in the deposit account.
  2. Except as otherwise provided in subsection (3) of this section, the application of this article to a security interest in a deposit account does not affect a right of recoupment or set-off of the secured party as to a deposit account maintained with the secured party.
  3. The exercise by a bank of a set-off against a deposit account is ineffective against a secured party that holds a security interest in the deposit account which is perfected by control under KRS 355.9-104 (1)(c), if the set-off is based on a claim against the debtor.

History. Enact. Acts 2000, ch. 408, § 80, effective July 1, 2001.

Official Comment

  1. Source.  New; subsection (b) is based on a nonuniform Illinois amendment.
  2. Set-off vs. Security Interest.  This section resolves the conflict between a security interest in a deposit account and the bank’s rights of recoupment and set-off.

    Subsection (a) states the general rule and provides that the bank may effectively exercise rights of recoupment and set-off against the secured party. Subsection (c) contains an exception: If the secured party has control under Section 9-104(a)(3) (i.e., if it has become the bank’s customer), then any set-off exercised by the bank against a debt owed by the debtor (as opposed to a debt owed to the bank by the secured party) is ineffective. The bank may, however, exercise its recoupment rights effectively. This result is consistent with the priority rule in Section 9-327(4), under which the security interest of a bank in a deposit account is subordinate to that of a secured party who has control under Section 9-104(a)(3).

    This section deals with rights of set-off and recoupment that a bank may have under other law. It does not create a right of set-off or recoupment, nor is it intended to override any limitations or restrictions that other law imposes on the exercise of those rights.

  3. Preservation of Set-Off Right.  Subsection (b) makes clear that a bank may hold both a right of set-off against, and an article 9 security interest in, the same deposit account. By holding a security interest in a deposit account, a bank does not impair any right of set-off it would otherwise enjoy. This subsection does not pertain to accounts evidenced by an instrument (e.g., certain certificates of deposit), which are excluded from the definition of “deposit accounts.”

NOTES TO DECISIONS

1.Applicability.

Where the creditor did not make prior arrangements, as contemplated by KRS 355.9-104 , through an agreement with the debtor and the debtor’s bank to provide the creditor with a superior secured interest in any funds deposited with the bank, the bank did not have an obligation to preserve the funds for the creditor, even if the debtor was depositing customer proceeds into the account contrary to the debtor’s agreement with the creditor. Under KRS 355.9-340 , the bank had authority to exercise its right to set-off to the funds deposited by the debtor in the bank’s account. Ky. Highlands Inv. Corp. v. Bank of Corbin, Inc., 217 S.W.3d 851, 2006 Ky. App. LEXIS 286 (Ky. Ct. App. 2006).

355.9-341. Bank’s rights and duties with respect to deposit account.

Except as otherwise provided in KRS 355.9-340 (3), and unless the bank otherwise agrees in an authenticated record, a bank’s rights and duties with respect to a deposit account maintained with the bank are not terminated, suspended, or modified by:

  1. The creation, attachment, or perfection of a security interest in the deposit account;
  2. The bank’s knowledge of the security interest; or
  3. The bank’s receipt of instructions from the secured party.

History. Enact. Acts 2000, ch. 408, § 81, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Free Flow of Funds.  This section is designed to prevent security interests in deposit accounts from impeding the free flow of funds through the payment system. Subject to two exceptions, it leaves the bank’s rights and duties with respect to the deposit account and the funds on deposit unaffected by the creation or perfection of a security interest or by the bank’s knowledge of the security interest. In addition, the section permits the bank to ignore the instructions of the secured party unless it had agreed to honor them or unless other law provides to the contrary. A secured party who wishes to deprive the debtor of access to funds on deposit or to appropriate those funds for itself needs to obtain the agreement of the bank, utilize the judicial process, or comply with procedures set forth in other law. Section 4-303(a), concerning the effect of notice on a bank’s right and duty to pay items, is not to the contrary. That section addresses only whether an otherwise effective notice comes too late; it does not determine whether a timely notice is otherwise effective.
  3. Operation of Rule.  The general rule of this section is subject to Section 9-340(c), under which a bank’s right of set-off may not be exercised against a deposit account in the secured party’s name if the right is based on a claim against the debtor. This result reflects current law in many jurisdictions and does not appear to have unduly disrupted banking practices or the payments system. The more important function of this section, which is not impaired by Section 9-340, is the bank’s right to follow the debtor’s (customer’s) instructions (e.g., by honoring checks, permitting withdrawals, etc.) until such time as the depository institution is served with judicial process or receives instructions with respect to the funds on deposit from a secured party who has control over the deposit account.
  4. Liability of Bank.  This article does not determine whether a bank that pays out funds from an encumbered deposit is liable to the holder of a security interest. Although the fact that a secured party has control over the deposit account and the manner by which control was achieved may be relevant to the imposition of liability, whatever rule applies generally when a bank pays out funds in which a third party has an interest would determine liability to a secured party. Often, this rule is found in a non-UCC adverse claim statute.
  5. Certificates of Deposit.  This section does not address the obligations of banks that issue instruments evidencing deposits (e.g., certain certificates of deposit).

NOTES TO DECISIONS

Cited:

Ky. Highlands Inv. Corp. v. Bank of Corbin, Inc., 217 S.W.3d 851, 2006 Ky. App. LEXIS 286 (Ky. Ct. App. 2006).

355.9-342. Bank’s right to refuse to enter into or disclose existence of control agreement.

This article does not require a bank to enter into an agreement of the kind described in KRS 355.9-104 (1)(b), even if its customer so requests or directs. A bank that has entered into such an agreement is not required to confirm the existence of the agreement to another person unless requested to do so by its customer.

History. Enact. Acts 2000, ch. 408, § 82, effective July 1, 2001.

Official Comment

  1. Source.  New; derived from Section 8-106(g).
  2. Protection for Bank.  This section protects banks from the need to enter into agreements against their will and from the need to respond to inquiries from persons other than their customers.

Part 4. Rights of Third Parties

355.9-401. Alienability of debtor’s rights.

  1. Except as otherwise provided in subsection (2) of this section and KRS 355.9-406 , 355.9-407 , 355.9-408 , and 355.9-409 , whether a debtor’s rights in collateral may be voluntarily or involuntarily transferred is governed by law other than this article.
  2. An agreement between the debtor and secured party which prohibits a transfer of the debtor’s rights in collateral or makes the transfer a default does not prevent the transfer from taking effect.

History. Enact. Acts 1958, ch. 77, § 9-401; 1962, ch. 83, § 9; 1978, ch. 384, § 489, effective June 17, 1978; 1986, ch. 118, § 74, effective July 1, 1987; 1986, ch. 204, § 98, effective July 15, 1986; 1988, ch. 132, § 7, effective March 31, 1988; 1990, ch. 478, § 3, effective July 13, 1990; 1998, ch. 341, § 47, effective July 15, 1998; repealed and reenact., Acts 2000, ch. 408, § 83, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-311.
  2. Scope of This Part.  This Part deals with several issues affecting third parties (i.e., parties other than the debtor and the secured party). These issues are not addressed in Part 3, Subpart 3, which deals with priorities. This Part primarily addresses the rights and duties of account debtors and other persons obligated on collateral who are not, themselves, parties to a secured transaction.
  3. Governing Law.  There was some uncertainty under former Article 9 as to which jurisdiction’s law (usually, which jurisdiction’s version of Article 9) applied to the matters that this part addresses. Part 3, Subpart 1, does not determine the law governing these matters because they do not relate to perfection, the effect of perfection or nonperfection, or priority. However, it might be inappropriate for a designation of applicable law by a debtor and secured party under Section 1-105 to control the law applicable to an independent transaction or relationship between the debtor and an account debtor.

    Consider an example under Section 9-408:

  4. Inalienability Under Other Law.  Subsection (a) addresses the question whether property necessarily is transferable by virtue of its inclusion (i.e., its eligibility as collateral) within the scope of Article 9. It gives a negative answer, subject to the identified exceptions. The substance of subsection (a) was implicit under former Article 9.
  5. Negative Pledge Covenant.  Subsection (b) is an exception to the general rule in subsection (a). It makes clear that in secured transactions under this article the debtor has rights in collateral (whether legal title or equitable) which it can transfer and which its creditors can reach. It is best explained with an example:
  6. Rights of Lien Creditors.  Difficult problems may arise with respect to attachment, levy, and other judicial procedures under which a debtor’s creditors may reach collateral subject to a security interest. For example, an obligation may be secured by collateral worth many times the amount of the obligation. If a lien creditor has caused all or a portion of the collateral to be seized under judicial process, it may be difficult to determine the amount of the debtor’s “equity” in the collateral that has been seized. The section leaves resolution of this problem to the courts. The doctrine of marshaling may be appropriate.
  7. Sale of Receivables.  If a debtor sells an account, chattel paper, payment intangible, or promissory note outright, as against the buyer the debtor has no remaining rights to transfer. If, however, the buyer fails to perfect its interest, then solely insofar as the rights of certain third parties are concerned, the debtor is deemed to retain its rights and title. See Section 9-318. The debtor has the power to convey these rights to a subsequent purchaser. If the subsequent purchaser (buyer or secured lender) perfects its interest, it will achieve priority over the earlier, unperfected purchaser. See Section 9-322(a)(1).

Example 1: State X has adopted this article; former Article 9 is the law of State Y. A general intangible (e.g., a franchise agreement) between a debtor-franchisee, D, and an account debtor-franchisor, AD, is governed by the law of State Y. D grants to SP a security interest in its rights under the franchise agreement. The franchise agreement contains a term prohibiting D’s assignment of its rights under the agreement. D and SP agree that their secured transaction is governed by the law of State X. Under State X’s Section 9-408, the restriction on D’s assignment is ineffective to prevent the creation, attachment, or perfection of SP’s security interest. State Y’s former Section 9-318(4), however, does not address restrictions on the creation of security interests in general intangibles other than general intangibles for money due or to become due. Accordingly, it does not address restrictions on the assignment to SP of D’s rights under the franchise agreement. The non-article-9 law of State Y, which does address restrictions, provides that the prohibition on assignment is effective.

This Article does not provide a specific answer to the question of which State’s law applies to the restriction on assignment in the example. However, assuming that under non-UCC choice-of-law principles the effectiveness of the restriction would be governed by the law of State Y, which governs the franchise agreement, the fact that State X’s Article 9 governs the secured transaction between SP and D would not override the otherwise applicable law governing the agreement. Of course, to the extent that jurisdictions eventually adopt identical versions of this article and courts interpret it consistently, the inability to identify the applicable law in circumstances such as those in the example may be inconsequential.

Example 2: A debtor, D, grants to SP a security interest to secure a debt in excess of the value of the collateral. D agrees with SP that it will not create a subsequent security interest in the collateral and that any security interest purportedly granted in violation of the agreement will be void. Subsequently, in violation of its agreement with SP, D purports to grant a security interest in the same collateral to another secured party.

Subsection (b) validates D’s creation of the subsequent (prohibited) security interest, which might even achieve priority over the earlier security interest. See Comment 7. However, unlike some other provisions of this part, such as Section 9-406, subsection (b) does not provide that the agreement restricting assignment itself is “ineffective.” Consequently, the debtor’s breach may create a default.

NOTES TO DECISIONS

1.Transfer Despite Third Party’s Objection.

Debtor had power to transfer its interest in a drilling rig to a purchaser even though a secured party objected. (decided under prior law) Summit Petroleum Corp. v. Ingersoll-Rand Financial Corp., 909 F.2d 862, 1990 U.S. App. LEXIS 11231 (6th Cir. Ky. 1990 ).

Opinions of Attorney General.

No crime was committed where the buyer sold a tractor on which he owed a balance and on which a security agreement had been filed, where the note had become due prior to the sale and no continuation statement was filed. OAG 70-203 .

Where the original purchaser of a mobile home purports to transfer any interest he has in the home to a third party through a “transfer of equity and assumption agreement,” with the third party’s assumption of the remaining obligation due under the original security agreement covering the vehicle, the county clerk should accept the transfer and note the lien on the new registration certificate issued to the new owner, since subsection (9) of KRS 186.230 , which restricts alienability of vehicles while a lien exists, is clearly unconstitutional, and since this section permits the alienability of a secured transaction debtor’s rights. OAG 81-160 .

Research References and Practice Aids

Kentucky Law Journal.

Hakes, A Quest for Justice in the Conversion of Security Interests, 82 Ky. L.J. 837 (1993-94).

Northern Kentucky Law Review.

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

355.9-401A. Filing of financing statement and related documents with Secretary of State. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 542, § 2, effective July 15, 1998) was repealed by Acts 2000, ch. 408, § 187, effective July 14, 2000.

355.9-402. Secured party not obligated on contract of debtor or in tort.

The existence of a security interest, agricultural lien, or authority given to a debtor to dispose of or use collateral, without more, does not subject a secured party to liability in contract or tort for the debtor’s acts or omissions.

History. Enact. Acts 1958, ch. 77, § 9-402; 1962, ch. 83, § 10; 1966, ch. 259, § 1; 1968, ch. 193; 1986, ch. 118, § 75, effective July 1, 1987; 1988, ch. 132, § 8, effective March 31, 1988; 1998, ch. 542, § 4, effective July 15, 1998; repealed and reenact., Acts 2000, ch. 408, § 84, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-317.
  2. Nonliability of Secured Party.  This section, like former Section 9-317, rejects theories on which a secured party might be held liable on a debtor’s contracts or in tort merely because a security interest exists or because the debtor is entitled to dispose of or use collateral. This section expands former Section 9-317 to cover agricultural liens.

355.9-403. Agreement not to assert defenses against assignee.

  1. In this section, “value” has the meaning provided in KRS 355. 3-303(1).
  2. Except as otherwise provided in this section, an agreement between an account debtor and an assignor not to assert against an assignee any claim or defense that the account debtor may have against the assignor is enforceable by an assignee that takes an assignment:
    1. For value;
    2. In good faith;
    3. Without notice of a claim of a property or possessory right to the property assigned; and
    4. Without notice of a defense or claim in recoupment of the type that may be asserted against a person entitled to enforce a negotiable instrument under KRS 355.3-305 (1).
  3. Subsection (2) of this section does not apply to defenses of a type that may be asserted against a holder in due course of a negotiable instrument under KRS 355.3-305 (2).
  4. In a consumer transaction, if a record evidences the account debtor’s obligation, law other than this article requires that the record include a statement to the effect that the rights of an assignee are subject to claims or defenses that the account debtor could assert against the original obligee, and the record does not include such a statement:
    1. The record has the same effect as if the record included such a statement; and
    2. The account debtor may assert against an assignee those claims and defenses that would have been available if the record included such a statement.
  5. This section is subject to law other than this article which establishes a different rule for an account debtor who is an individual and who incurred the obligation primarily for personal, family, or household purposes.
  6. Except as otherwise provided in subsection (4) of this section, this section does not displace law other than this article which gives effect to an agreement by an account debtor not to assert a claim or defense against an assignee.

History. Enact. Acts 1958, ch. 77, § 9-403; 1962, ch. 83, § 11; 1964, ch. 130, § 23, effective July 1, 1964; 1966, ch. 185, § 1; 1972, ch. 203, § 52; 1974, ch. 222, § 4; 1978, ch. 84, § 21, effective June 17, 1978; 1986, ch. 118, § 76, effective July 1, 1987; 1988, ch. 132, § 9, effective March 31, 1988; 1998, ch. 542, § 5, effective July 15, 1998; repealed and reenact., Acts 2000, ch. 408, § 85, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-206.
  2. Scope and Purpose.  Subsection (b), like former Section 9-206, generally validates an agreement between an account debtor and an assignor that the account debtor will not assert against an assignee claims and defenses that it may have against the assignor. These agreements are typical in installment sale agreements and leases. However, this section expands former Section 9-206 to apply to all account debtors; it is not limited to account debtors that have bought or leased goods. This section applies only to the obligations of an “account debtor,” as defined in Section 9-102. Thus, it does not determine the circumstances under which and the extent to which a person who is obligated on a negotiable instrument is disabled from asserting claims and defenses. Rather, article 3 must be consulted. See, e.g., Sections 3-305 and 3-306. Article 3 governs even when the negotiable instrument constitutes part of chattel paper. See section 9-102 (an obligor on a negotiable instrument constituting part of chattel paper is not an “account debtor”).
  3. Conditions of Validation; Relationship to Article 3.  Subsection (b) validates an account debtor’s agreement only if the assignee takes an assignment for value, in good faith, and without notice of conflicting claims to the property assigned or of certain claims or defenses of the account debtor. Like former Section 9-206, this section is designed to put the assignee in a position that is no better and no worse than that of a holder in due course of a negotiable instrument under article 3. However, former Section 9-206 left open certain issues, e.g., whether the section incorporated the special article 3 definition of “value” in Section 3-303 or the generally applicable definition in Section 1-201(44). Subsection (a) addresses this question; it provides that “value” has the meaning specified in section 3-303(a). Similarly, subsection (c) provides that subsection (b) does not validate an agreement with respect to defenses that could be asserted against a holder in due course under Section 3-305(b) (the so-called “real” defenses). In 1990, the definition of “holder in due course” (Section 3-302) and the articulation of the rights of a holder in due course (Sections 3-305 and 3-306) were revised substantially. This section tracks more closely the rules of Sections 3-302, 3-305, and 3-306.
  4. Relationship to Terms of Assigned Property.  Former Section 9-206(2), concerning warranties accompanying the sale of goods, has been deleted as unnecessary. This Article does not regulate the terms of the account, chattel paper, or general intangible that is assigned, except insofar as the account, chattel paper, or general intangible itself creates a security interest (as often is the case with chattel paper). Thus, Article 2, and not this article, determines whether a seller of goods makes or effectively disclaims warranties, even if the sale is secured. Similarly, other law, and not this article, determines the effectiveness of an account debtor’s undertaking to pay notwithstanding, and not to assert, any defenses or claims against an assignor—e.g., a “hell-or-high-water” provision in the underlying agreement that is assigned. If other law gives effect to this undertaking, then, under principles of nemo dat, the undertaking would be enforceable by the assignee (secured party). If other law prevents the assignor from enforcing the undertaking, this section nevertheless might permit the assignee to do so. The right of the assignee to enforce would depend upon whether, under the particular facts, the account debtor’s undertaking fairly could be construed as an agreement that falls within the scope of this section and whether the assignee meets the requirements of this section.
  5. Relationship to Federal Trade Commission Rule.  Subsection (d) is new. It applies to rights evidenced by a record that is required to contain, but does not contain, the notice set forth in Federal Trade Commission Rule 433, 16 C.F.R. Part 433 (the “Holder-in-Due-Course Regulations”). Under this subsection, an assignee of such a record takes subject to the consumer account debtor’s claims and defenses to the same extent as it would have if the writing had contained the required notice. Thus, subsection (d) effectively renders waiver-of-defense clauses ineffective in the transactions with consumers to which it applies.
  6. Relationship to Other Law.  Like former Section 9-206(1), this section takes no position on the enforceability of waivers of claims and defenses by consumer account debtors, leaving that question to other law. However, the reference to “law other than this article” in subsection (e) encompasses administrative rules and regulations; the reference in former Section 9-206(1) that it replaces (“statute or decision”) arguably did not.

    This section does not displace other law that gives effect to a nonconsumer account debtor’s agreement not to assert defenses against an assignee, even if the agreement would not qualify under subsection (b). See subsection (f). It validates, but does not invalidate, agreements made by a nonconsumer account debtor. This section also does not displace other law to the extent that the other law permits an assignee, who takes an assignment with notice of a claim of a property or possessory right, a defense, or a claim in recoupment, to enforce an account debtor’s agreement not to assert claims and defenses against the assignor (e.g., a “hell-or-high-water” agreement). See comment 4. It also does not displace an assignee’s right to assert that an account debtor is estopped from asserting a claim or defense. Nor does this section displace other law with respect to waivers of potential future claims and defenses that are the subject of an agreement between the account debtor and the assignee. Finally, it does not displace Section 1-107, concerning waiver of a breach that allegedly already has occurred.

NOTES TO DECISIONS

1.Applicability.

The policy of the Uniform Commercial Code to encourage the supplying of credit for the buying of goods by insulating the lender from lawsuits over the quality of the goods was intended primarily for financial institutions rather than the manufacturer who finances his own sales. (decided under prior law) Massey-Ferguson, Inc. v. Utley, 439 S.W.2d 57, 1969 Ky. LEXIS 353 ( Ky. 1969 ).

2.Notice of Claim or Defense.

Where assignee took conditional sales contract and related note with an agreement by buyer that he would not assert against assignee any defenses he had against seller and there was a question of whether assignee took without notice of claim of buyer that baler, subject matter of sale, was defective, summary judgment was not permissible. (decided under prior law) McCoy v. Mosley Machinery Co., 33 F.R.D. 287, 1963 U.S. Dist. LEXIS 10369 (D. Ky. 1963 ).

3.Valid Waiver of Defense.

Provision in “time sale agreement” that if agreement was assigned buyer would not use any claim for breach of warranty “as a defense against any effort by the holder to enforce this instrument” was valid. (decided under prior law) Root v. John Deere Co., 413 S.W.2d 901, 1967 Ky. LEXIS 404 ( Ky. 1967 ).

Where the assignee took the assignment for value in good faith and without notice of a claim or defense to the debt, the waiver of defense clause constituted a complete defense for the assignee to the debtor’s claim for damages resulting from the original sale. (decided under prior law) Jennings v. Universal C. I. T. Credit Corp., 442 S.W.2d 565, 1969 Ky. LEXIS 269 ( Ky. 1969 ).

4.Manufacturer as Assignee.

Where the assignee-manufacturer followed the course of dealing of supplying blank sales contracts to its dealer and receiving immediate and routine assignments, and its factory representative visited the dealer and participated in sales, there was no error in refusing to give an instruction which would have submitted to the jury the issue of whether the assignee was a holder in due course. (decided under prior law) Massey-Ferguson, Inc. v. Utley, 439 S.W.2d 57, 1969 Ky. LEXIS 353 ( Ky. 1969 ).

Where the plaintiff-manufacturer followed the course of dealing of supplying blank sales contracts to its dealer and receiving immediate and routine assignments, and its factory representative visited the dealer and participated in sales, the plaintiff’s conduct put it in the status of a “seller” and its status as a “seller” and its status as a “seller” outweighed its status as an “assignee.” (decided under prior law) Massey-Ferguson, Inc. v. Utley, 439 S.W.2d 57, 1969 Ky. LEXIS 353 ( Ky. 1969 ).

5.Holder in Due Course.

The furnishing of forms and credit checks by assignee of conditional sales contract to assignor did not establish such a close connection between them as to show that assignee acted in bad faith or was a party to the fraudulent sales transaction and assignee was not precluded from recovering on the contract as a holder in due course. (decided under prior law) Citicorp Leasing, Inc. v. Whitaker, 605 S.W.2d 24, 1980 Ky. App. LEXIS 361 (Ky. Ct. App. 1980).

Research References and Practice Aids

Kentucky Law Journal.

Smith, Uniform Commercial Code — Assignments — Conditional Sales Contracts — Waiver of Defense Clauses, 58 Ky. L.J. 850 (1970).

355.9-404. Rights acquired by assignee — Claims and defenses against assignee.

  1. Unless an account debtor has made an enforceable agreement not to assert defenses or claims, and subject to subsections (2) to (5) of this section, the rights of an assignee are subject to:
    1. All terms of the agreement between the account debtor and assignor and any defense or claim in recoupment arising from the transaction that gave rise to the contract; and
    2. Any other defense or claim of the account debtor against the assignor which accrues before the account debtor receives a notification of the assignment authenticated by the assignor or the assignee.
  2. Subject to subsection (3) of this section and except as otherwise provided in subsection (4) of this section, the claim of an account debtor against an assignor may be asserted against an assignee under subsection (1) of this section only to reduce the amount the account debtor owes.
  3. This section is subject to law other than this article which establishes a different rule for an account debtor who is an individual and who incurred the obligation primarily for personal, family, or household purposes.
  4. In a consumer transaction, if a record evidences the account debtor’s obligation, law other than this article requires that the record include a statement to the effect that the account debtor’s recovery against an assignee with respect to claims and defenses against the assignor may not exceed amounts paid by the account debtor under the record, and the record does not include such a statement, the extent to which a claim of an account debtor against the assignor may be asserted against an assignee is determined as if the record included such a statement.
  5. This section does not apply to an assignment of a health-care-insurance receivable.

History. Enact. Acts 1958, ch. 77, § 9-404; 1962, ch. 83, § 12; 1966, ch. 83, § 3; 1966, ch. 185, § 2; 1986, ch. 118, § 77, effective July 1, 1987; 1986, ch. 204, § 9, effective July 15, 1986; 1998, ch. 542, § 6, effective July 15, 1998; repealed and reenact., Acts 2000, ch. 408, § 86, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-318(1).
  2. Purpose; Rights of Assignee in General.  Subsection (a), like former Section 9-318(1), provides that an assignee generally takes an assignment subject to defenses and claims of an account debtor. Under subsection (a)(1), if the account debtor’s defenses on an assigned claim arise from the transaction that gave rise to the contract with the assignor, it makes no difference whether the defense or claim accrues before or after the account debtor is notified of the assignment. Under subsection (a)(2) the assignee takes subject to other defenses or claims only if they accrue before the account debtor has been notified of the assignment. Of course, an account debtor may waive its right to assert defenses or claims against an assignee under Section 9-403 or other applicable law. Subsection (a) tracks Section 3-305(a)(3) more closely than its predecessor.
  3. Limitation on Affirmative Claims.  Subsection (b) is new. It limits the claim that the account debtor may assert against an assignee. Borrowing from Section 3-305(a)(3) and cases construing former Section 9-318, subsection (b) generally does not afford the account debtor the right to an affirmative recovery from an assignee.
  4. Consumer Account Debtors; Relationship to Federal Trade Commission Rule.  Subsections (c) and (d) also are new. Subsection (c) makes clear that the rules of this section are subject to other law establishing special rules for consumer account debtors. An “account debtor who is an individual” as used in subsection (c) includes individuals who are jointly or jointly and severally obligated. Subsection (d) applies to rights evidenced by a record that is required to contain, but does not contain, the notice set forth in Federal Trade Commission Rule 433, 16 C.F.R. Part 433 (the “Holder-in-Due-Course Regulations”). Under subsection (d), a consumer account debtor has the same right to an affirmative recovery from an assignee of such a record as the consumer would have had against the assignee had the record contained the required notice.
  5. Scope; Application to “Account Debtor.”  This section deals only with the rights and duties of “account debtors”—and for the most part only with account debtors on accounts, chattel paper, and payment intangibles. Subsection (e) provides that the obligation of an insurer with respect to a health care insurance receivable is governed by other law. References in this section to an “account debtor” include account debtors on collateral that is proceeds. Neither this section nor any other provision of this article, including Sections 9-408 and 9-409, provides analogous regulation of the rights and duties of other obligors on collateral, such as the maker of a negotiable instrument (governed by Article 3), the issuer of or nominated person under a letter of credit (governed by Article 5), or the issuer of a security (governed by Article 8). Article 9 leaves those rights and duties untouched; however, Section 9-409 deals with the special case of letters of credit. When chattel paper is composed in part of a negotiable instrument, the obligor on the instrument is not an “account debtor,” and Article 3 governs the rights of the assignee of the chattel paper with respect to the issues that this section addresses. See, e.g., Section 3-601 (dealing with discharge of an obligation to pay a negotiable instrument).

NOTES TO DECISIONS

1.Right to Assert Defenses.

Where a secured lender, which had been assigned a tire manufacturer’s accounts receivable, brought an action to recover the debt owed to the manufacturer by a tire dealer, the lender, as the manufacturer’s assignee, was subject to all the legal and equitable defenses that the dealer could have asserted against the manufacturer. Thus, the lender’s right to collect the dealer’s debt to the manufacturer was subject to the dealer’s entire recoupment claim for all of the manufacturer’s defective tires that the dealer adjusted pursuant to an agreement between the dealer and the manufacturer. (decided under prior law) First Nat'l Bank v. Master Auto Service Corp., 693 F.2d 308, 1982 U.S. App. LEXIS 24361 (4th Cir. 1982).

2.Notice.

Where there was an agency relationship, notice of the assignment of the accounts receivable given to the agent constituted notice to the principal. (decided under prior law) CSX Transp., Inc. v. First Nat'l Bank, 14 S.W.3d 563, 1999 Ky. App. LEXIS 144 (Ky. Ct. App. 1999).

3.Right to Assert Choice of Law Provision.

Under this section, all of a creditor's rights and obligations under a Credit Card Agreement transferred to the assignee upon the assignment, including the choice of law provision in favor of Utah law. Stratton v. Portfolio Recovery Assocs., LLC, 706 Fed. Appx. 840, 2017 FED App. 0493N, 2017 U.S. App. LEXIS 16308 (6th Cir. Ky. 2017 ).

355.9-405. Modification of assigned contract.

  1. A modification of or substitution for an assigned contract is effective against an assignee if made in good faith. The assignee acquires corresponding rights under the modified or substituted contract. The assignment may provide that the modification or substitution is a breach of contract by the assignor. This subsection is subject to subsections (2) to (4) of this section.
  2. Subsection (1) of this section applies to the extent that:
    1. The right to payment or a part thereof under an assigned contract has not been fully earned by performance; or
    2. The right to payment or a part thereof has been fully earned by performance and the account debtor has not received notification of the assignment under KRS 355.9-406 (1).
  3. This section is subject to law other than this article which establishes a different rule for an account debtor who is an individual and who incurred the obligation primarily for personal, family, or household purposes.
  4. This section does not apply to an assignment of a health-care-insurance receivable.

History. Enact. Acts 1958, ch. 77, § 9-405; 1962, ch. 83, § 13; 1978, ch. 84, § 19, effective June 17, 1978; 1986, ch. 118, § 78, effective July 1, 1987; 1988, ch. 132, § 10, effective March 31, 1988; 1998, ch. 542, § 7, effective July 15, 1998; repealed and reenact., Acts 2000, ch. 408, § 87, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-318(2).
  2. Modification of Assigned Contract.  The ability of account debtors and assignors to modify assigned contracts can be important, especially in the case of government contracts and complex contractual arrangements (e.g., construction contracts) with respect to which modifications are customary. Subsections (a) and (b) provide that good-faith modifications of assigned contracts are binding against an assignee to the extent that (i) the right to payment has not been fully earned or (ii) the right to payment has been earned and notification of the assignment has not been given to the account debtor. Former Section 9-318(2) did not validate modifications of fully-performed contracts under any circumstances, whether or not notification of the assignment had been given to the account debtor. Subsection (a) protects the interests of assignees by (i) limiting the effectiveness of modifications to those made in good faith, (ii) affording the assignee with corresponding rights under the contract as modified, and (iii) recognizing that the modification may be a breach of the assignor’s agreement with the assignee.
  3. Consumer Account Debtors.  Subsection (c) is new. It makes clear that the rules of this section are subject to other law establishing special rules for consumer account debtors.
  4. Account Debtors on Health-Care-Insurance Receivables.  Subsection (d) also is new. It provides that this section does not apply to an assignment of a health-care-insurance receivable. The obligation of an insurer with respect to a health-care-insurance receivable is governed by other law.

355.9-406. Discharge of account debtor — Notification of assignment — Identification and proof of assignment — Restrictions on assignment of accounts, chattel paper, payment intangibles, and promissory notes ineffective.

  1. Subject to subsections (2) to (9) of this section, an account debtor on an account, chattel paper, or a payment intangible may discharge its obligation by paying the assignor until, but not after, the account debtor receives a notification, authenticated by the assignor or the assignee, that the amount due or to become due has been assigned and that payment is to be made to the assignee. After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor.
  2. Subject to subsection (8) of this section, notification is ineffective under subsection (1) of this section:
    1. If it does not reasonably identify the rights assigned;
    2. To the extent that an agreement between an account debtor and a seller of a payment intangible limits the account debtor’s duty to pay a person other than the seller and the limitation is effective under law other than this article; or
    3. At the option of an account debtor, if the notification notifies the account debtor to make less than the full amount of any installment or other periodic payment to the assignee, even if:
      1. Only a portion of the account, chattel paper, or payment intangible has been assigned to that assignee;
      2. A portion has been assigned to another assignee; or
      3. The account debtor knows that the assignment to that assignee is limited.
  3. Subject to subsection (8) of this section, if requested by the account debtor, an assignee shall seasonably furnish reasonable proof that the assignment has been made. Unless the assignee complies, the account debtor may discharge its obligation by paying the assignor, even if the account debtor has received a notification under subsection (1) of this section.
  4. Except as otherwise provided in subsection (5) of this section and KRS 355.2A-303 and 355.9-407 , and subject to subsection (8) of this section, a term in an agreement between an account debtor and an assignor or in a promissory note is ineffective to the extent that it:
    1. Prohibits, restricts, or requires the consent of the account debtor or person obligated on the promissory note to the assignment or transfer of, or the creation, attachment, perfection, or enforcement of a security interest in, the account, chattel paper, payment intangible, or promissory note; or
    2. Provides that the assignment or transfer or the creation, attachment, perfection, or enforcement of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination, or remedy under the account, chattel paper, payment intangible, or promissory note.
  5. Subsection (4) of this section does not apply to the sale of a payment intangible or promissory note, other than a sale pursuant to a disposition under KRS 355.9-610 or an acceptance of collateral under KRS 355.9-620 .
  6. Except as otherwise provided in KRS 355.2A-303 and 355.9-407 and subject to subsections (8) and (9) of this section, a rule of law, statute, or regulation that prohibits, restricts, or requires the consent of a government, governmental body or official, or account debtor to the assignment or transfer of, or creation of a security interest in, an account or chattel paper is ineffective to the extent that the rule of law, statute, or regulation:
    1. Prohibits, restricts, or requires the consent of the government, governmental body or official, or account debtor to the assignment or transfer of, or the creation, attachment, perfection, or enforcement of a security interest in the account or chattel paper; or
    2. Provides that the assignment or transfer or the creation, attachment, perfection, or enforcement of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination, or remedy under the account or chattel paper.
  7. Subject to subsection (8) of this section, an account debtor may not waive or vary its option under subsection (2)(c) of this section.
  8. This section is subject to law other than this article which establishes a different rule for an account debtor who is an individual and who incurred the obligation primarily for personal, family, or household purposes.
  9. This section does not apply to an assignment of a health-care-insurance receivable.

History. Enact. Acts 1958, ch. 77, § 9-406; 1962, ch. 83, § 20; 1978, ch. 84, § 20, effective June 17, 1978; 1986, ch. 118, § 79, effective July 1, 1987; 1998, ch. 542, § 8, effective July 15, 1998; repealed and reenact., Acts 2000, ch. 408, § 88, effective July 1, 2001; repealed and reenact., Acts 2001, ch. 119, § 11, effective July 1, 2001; 2012, ch. 132, § 76, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  Former Section 9-318(3), (4).
  2. Account Debtor’s Right to Pay Assignor Until Notification.  Subsection (a) provides the general rule concerning an account debtor’s right to pay the assignor until the account debtor receives appropriate notification. The revision makes clear that once the account debtor receives the notification, the account debtor cannot discharge its obligation by paying the assignor. It also makes explicit that payment to the assignor before notification, or payment to the assignee after notification, discharges the obligation. No change in meaning from former Section 9-318 is intended. Nothing in this section conditions the effectiveness of a notification on the identity of the person who gives it. An account debtor that doubts whether the right to payment has been assigned may avail itself of the procedures in subsection (c). See comment 4.

    An effective notification under subsection (a) must be authenticated. This requirement normally could be satisfied by sending notification on the notifying person’s letterhead or on a form on which the notifying person’s name appears. In each case the printed name would be a symbol adopted by the notifying person for the purpose of identifying the person and adopting the notification. See section 9-102 (defining “authenticate”).

    Subsection (a) applies only to account debtors on accounts, chattel paper, and payment intangibles. (Section 9-102 defines the term “account debtor” more broadly, to include those obligated on all general intangibles.) Although subsection (a) is more precise than its predecessor, it probably does not change the rule that applied under former article 9. Former Section 9-318(3) referred to the account debtor’s obligation to “pay,” indicating that the subsection was limited to account debtors on accounts, chattel paper, and other payment obligations.

  3. Limitations on Effectiveness of Notification.  Subsection (b) contains some special rules concerning the effectiveness of a notification under subsection (a).

    Subsection (b)(1) tracks former Section 9-318(3) by making ineffective a notification that does not reasonably identify the rights assigned. A reasonable identification need not identify the right to payment with specificity, but what is reasonable also is not left to the arbitrary decision of the account debtor. If an account debtor has doubt as to the adequacy of a notification, it may not be safe in disregarding the notification unless it notifies the assignee with reasonable promptness as to the respects in which the account debtor considers the notification defective.

    Subsection (b)(2), which is new, applies only to sales of payment intangibles. It makes a notification ineffective to the extent that other law gives effect to an agreement between an account debtor and a seller of a payment intangible that limits the account debtor’s duty to pay a person other than the seller. Payment intangibles are substantially less fungible than accounts and chattel paper. In some (e.g., commercial bank loans), account debtors customarily and legitimately expect that they will not be required to pay any person other than the financial institution that has advanced funds.

    It has become common in financing transactions to assign interests in a single obligation to more than one assignee. Requiring an account debtor that owes a single obligation to make multiple payments to multiple assignees would be unnecessarily burdensome. Thus, under subsection (b)(3), an account debtor that is notified to pay an assignee less than the full amount of any installment or other periodic payment has the option to treat the notification as ineffective, ignore the notice, and discharge the assigned obligation by paying the assignor. Some account debtors may not realize that the law affords them the right to ignore certain notices of assignment with impunity. By making the notification ineffective at the account debtor’s option, subsection (b)(3) permits an account debtor to pay the assignee in accordance with the notice and thereby to satisfy its obligation pro tanto. Under subsection (g), the rights and duties created by subsection (b)(3) cannot be waived or varied.

  4. Proof of Assignment.  Subsection (c) links payment with discharge, as in subsection (a). It follows former Section 9-318(3) in referring to the right of the account debtor to pay the assignor if the requested proof of assignment is not seasonably forthcoming. Even if the proof is not forthcoming, the notification of assignment would remain effective, so that, in the absence of reasonable proof of the assignment, the account debtor could discharge the obligation by paying either the assignee or the assignor. Of course, if the assignee did not in fact receive an assignment, the account debtor cannot discharge its obligation by paying a putative assignee who is a stranger. The observations in comment 3 concerning the reasonableness of an identification of a right to payment also apply here. An account debtor that questions the adequacy of proof submitted by an assignor would be well advised to promptly inform the assignor of the defects.

    An account debtor may face another problem if its obligation becomes due while the account debtor is awaiting reasonable proof of the assignment that it has requested from the assignee. This section does not excuse the account debtor from timely compliance with its obligations. Consequently, an account debtor that has received a notification of assignment and who has requested reasonable proof of the assignment may discharge its obligation by paying the assignor at the time (or even earlier if reasonably necessary to avoid risk of default) when a payment is due, even if the account debtor has not yet received a response to its request for proof. On the other hand, after requesting reasonable proof of the assignment, an account debtor may not discharge its obligation by paying the assignor substantially in advance of the time that the payment is due unless the assignee has failed to provide the proof seasonably.

  5. Contractual Restrictions on Assignment.  Former Section 9-318(4) rendered ineffective an agreement between an account debtor and an assignor which prohibited assignment of an account (whether outright or to secure an obligation) or prohibited a security assignment of a general intangible for the payment of money due or to become due. Subsection (d) essentially follows former Section 9-318(4), but expands the rule of free assignability to chattel paper (subject to Sections 2A-303 and 9-407) and promissory notes and explicitly overrides both restrictions and prohibitions of assignment. The policies underlying the ineffectiveness of contractual restrictions under this section build on common-law developments that essentially have eliminated legal restrictions on assignments of rights to payment as security and other assignments of rights to payment such as accounts and chattel paper. Any that might linger for accounts and chattel paper are addressed by new subsection (f). See Comment 6.

    Former Section 9-318(4) did not apply to a sale of a payment intangible (as described in the former provision, “a general intangible for money due or to become due”) but did apply to an assignment of a payment intangible for security. Subsection (e) continues this approach and also makes subsection (d) inapplicable to sales of promissory notes. Section 9-408 addresses anti-assignment clauses with respect to sales of payment intangibles and promissory notes.

    Like former Section 9-318(4), subsection (d) provides that anti-assignment clauses are “ineffective.” The quoted term means that the clause is of no effect whatsoever; the clause does not prevent the assignment from taking effect between the parties and the prohibited assignment does not constitute a default under the agreement between the account debtor and assignor. However, subsection (d) does not override terms that do not directly prohibit, restrict, or require consent to an assignment but which might, nonetheless, present a practical impairment of the assignment. Properly read, however, subsection (d) reaches only covenants that prohibit, restrict, or require consents to assignments; it does not override all terms that might “impair” an assignment in fact.

  6. Legal Restrictions on Assignment.  Former Section 9-318(4), like subsection (d) of this section, addressed only contractual restrictions on assignment. The former section was grounded on the reality that legal, as opposed to contractual, restrictions on assignments of rights to payment had largely disappeared. New subsection (f) codifies this principle of free assignability for accounts and chattel paper. For the most part the discussion of contractual restrictions in comment 5 applies as well to legal restrictions rendered ineffective under subsection (f).
  7. Multiple Assignments.  This section, like former Section 9-318, is not a complete codification of the law of assignments of rights to payment. In particular, it is silent concerning many of the ramifications for an account debtor in cases of multiple assignments of the same right. For example, an assignor might assign the same receivable to multiple assignees (which assignments could be either inadvertent or wrongful). Or, the assignor could assign the receivable to assignee-1, which then might reassign it to assignee-2, and so forth. The rights and duties of an account debtor in the face of multiple assignments and in other circumstances not resolved in the statutory text are left to the common-law rules. See, e.g., Restatement (2d), Contracts §§  338(3) and 339. The failure of former Article 9 to codify these rules does not appear to have caused problems.
  8. Consumer Account Debtors.  Subsection (h) is new. It makes clear that the rules of this section are subject to other law establishing special rules for consumer account debtors.
  9. Account Debtors on Health-Care-Insurance Receivables.  Subsection (i) also is new. The obligation of an insurer with respect to a health-care-insurance receivable is governed by other law. Section 9-408 addresses contractual and legal restrictions on the assignment of a health-care-insurance receivable.

Example: Buyer enters into an agreement with Seller to buy equipment that Seller is to manufacture according to Buyer’s specifications. Buyer agrees to make a series of prepayments during the construction process. In return, Seller agrees to set aside the prepaid funds in a special account and to use the funds solely for the manufacture of the designated equipment. Seller also agrees that it will not assign any of its rights under the sale agreement with Buyer. Nevertheless, Seller grants to Secured Party a security interest in its accounts. Seller’s anti-assignment agreement is ineffective under subsection (d); its agreement concerning the use of prepaid funds, which is not a restriction or prohibition on assignment, is not. However, if Secured Party notifies Buyer to make all future payments directly to Secured Party, Buyer will be obliged to do so under subsection (a) if it wishes the payments to discharge its obligation. Unless Secured Party releases the funds to Seller so that Seller can comply with its use-of-funds covenant, Seller will be in breach of that covenant.

In the example, there appears to be a plausible business purpose for the use-of-funds covenant. However, a court may conclude that a covenant with no business purpose other than imposing an impediment to an assignment actually is a direct restriction that is rendered ineffective by subsection (d).

NOTES TO DECISIONS

1.Right to Assert Defenses.

Where a secured lender, which had been assigned a tire manufacturer’s accounts receivable, brought an action to recover the debt owed to the manufacturer by a tire dealer, the lender, as the manufacturer’s assignee, was subject to all the legal and equitable defenses that the dealer could have asserted against the manufacturer. Thus, the lender’s right to collect the dealer’s debt to the manufacturer was subject to the dealer’s entire recoupment claim for all of the manufacturer’s defective tires that the dealer adjusted pursuant to an agreement between the dealer and the manufacturer. (decided under prior law) First Nat'l Bank v. Master Auto Service Corp., 693 F.2d 308, 1982 U.S. App. LEXIS 24361 (4th Cir. 1982).

2.Notice.

Where there was an agency relationship, notice of the assignment of the accounts receivable given to the agent constituted notice to the principal. (decided under prior law) CSX Transp., Inc. v. First Nat'l Bank, 14 S.W.3d 563, 1999 Ky. App. LEXIS 144 (Ky. Ct. App. 1999).

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Research References and Practice Aids

Kentucky Bench & Bar.

Rutledge, Recent Amendments to Kentucky Business Entity Laws, Vol. 71, No. 5, Sept. 2007, Ky. Bench & Bar 25.

355.9-407. Restrictions on creation or enforcement of security interest in leasehold interest or in lessor’s residual interest.

  1. Except as otherwise provided in subsection (2) of this section, a term in a lease agreement is ineffective to the extent that it:
    1. Prohibits, restricts, or requires the consent of a party to the lease to the assignment or transfer of, or the creation, attachment, perfection, or enforcement of a security interest in, an interest of a party under the lease contract or in the lessor’s residual interest in the goods; or
    2. Provides that the assignment or transfer or the creation, attachment, perfection, or enforcement of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination, or remedy under the lease.
  2. Except as otherwise provided in KRS 355.2A-303 (7), a term described in subsection (1)(b) of this section is effective to the extent that there is:
    1. A transfer by the lessee of the lessee’s right of possession or use of the goods in violation of the term; or
    2. A delegation of a material performance of either party to the lease contract in violation of the term.
  3. The creation, attachment, perfection, or enforcement of a security interest in the lessor’s interest under the lease contract or the lessor’s residual interest in the goods is not a transfer that materially impairs the lessee’s prospect of obtaining return performance or materially changes the duty of or materially increases the burden or risk imposed on the lessee within the purview of KRS 355.2A-303 (4) unless, and then only to the extent that, enforcement actually results in a delegation of material performance of the lessor.

History. Enact. Acts 1986, ch. 118, § 80, effective July 1, 1987; repealed and reenact., Acts 2000, ch. 408, § 89, effective July 1, 2001; repealed and reenact., Acts 2001, ch. 119, § 12, effective July 1, 2001.

Official Comment

  1. Source.  Section 2A-303.
  2. Restrictions on Assignment Generally Ineffective.  Under subsection (a), as under former Section 2A-303(3), a term in a lease agreement which prohibits or restricts the creation of a security interest generally is ineffective. This reflects the general policy of Section 9-406(d) and former Section 9-318(4). This section has been conformed in several respects to analogous provisions in Sections 9-406, 9-408, and 9-409, including the substitution of “ineffective” for “not enforceable” and the substitution of “assignment or transfer of, or the creation, attachment, perfection, or enforcement of a security interest” for “creation or enforcement of a security interest.”
  3. Exceptions for Certain Transfers and Delegations.  Subsection (b) provides exceptions to the general ineffectiveness of restrictions under subsection (a). A term that otherwise is ineffective under subsection (a)(2) is effective to the extent that a lessee transfers its right to possession and use of goods or if either party delegates material performance of the lease contract in violation of the term. However, under subsection (c), as under former Section 2A-303(3), a lessor’s creation of a security interest in its interest in a lease contract or its residual interest in the leased goods is not a material impairment under Section 2A-303(4) (former Section 2A-303(5)), absent an actual delegation of the lessor’s material performance. The terms of the lease contract determine whether the lessor, in fact, has any remaining obligations to perform. If it does, it is then necessary to determine whether there has been an actual delegation of “material performance.” See section 2A-303, Comments 3 and 4.

355.9-408. Restrictions on assignment of promissory notes, health-care-insurance receivables, and certain general intangibles ineffective.

  1. Except as otherwise provided in subsection (2) of this section, a term in a promissory note or in an agreement between an account debtor and a debtor which relates to a health-care-insurance receivable or a general intangible, including a contract, permit, license, or franchise, and which term prohibits, restricts, or requires the consent of the person obligated on the promissory note or the account debtor to, the assignment or transfer of, or creation, attachment, or perfection of a security interest in, the promissory note, health-care-insurance receivable, or general intangible, is ineffective to the extent that the term:
    1. Would impair the creation, attachment, or perfection of a security interest; or
    2. Provides that the assignment or transfer or the creation, attachment, or perfection of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination, or remedy under the promissory note, health-care-insurance receivable, or general intangible.
  2. Subsection (1) of this section applies to a security interest in a payment intangible or promissory note only if the security interest arises out of a sale of the payment intangible or promissory note, other than a sale pursuant to a disposition under KRS 355.9-610 or an acceptance of collateral under KRS 355.9-620 .
  3. A rule of law, statute, or regulation that prohibits, restricts, or requires the consent of a government, governmental body or official, person obligated on a promissory note, or account debtor to the assignment or transfer of, or creation of a security interest in, a promissory note, health-care-insurance receivable, or general intangible, including a contract, permit, license, or franchise between an account debtor and a debtor, is ineffective to the extent that the rule of law, statute, or regulation:
    1. Would impair the creation, attachment, or perfection of a security interest; or
    2. Provides that the assignment or transfer or the creation, attachment, or perfection of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination, or remedy under the promissory note, health-care-insurance receivable, or general intangible.
  4. To the extent that a term in a promissory note or in an agreement between an account debtor and a debtor which relates to a health-care-insurance receivable or general intangible or a rule of law, statute, or regulation described in subsection (3) of this section would be effective under law other than this article but is ineffective under subsection (1) or (3) of this section, the creation, attachment, or perfection of a security interest in the promissory note, health-care-insurance receivable, or general intangible:
    1. Is not enforceable against the person obligated on the promissory note or the account debtor;
    2. Does not impose a duty or obligation on the person obligated on the promissory note or the account debtor;
    3. Does not require the person obligated on the promissory note or the account debtor to recognize the security interest, pay or render performance to the secured party, or accept payment or performance from the secured party;
    4. Does not entitle the secured party to use or assign the debtor’s rights under the promissory note, health-care-insurance receivable, or general intangible, including any related information or materials furnished to the debtor in the transaction giving rise to the promissory note, health-care-insurance receivable, or general intangible;
    5. Does not entitle the secured party to use, assign, possess, or have access to any trade secrets or confidential information of the person obligated on the promissory note or the account debtor; and
    6. Does not entitle the secured party to enforce the security interest in the promissory note, health-care-insurance receivable, or general intangible.
  5. This section prevails over any inconsistent provisions of the following statutes and any administrative regulations based on those statutes: KRS 56.230(2), 138.320(3), 138.665(4), 138.720(5), 139.250 , 154A.400(3), 190.047(1), 190.070(2)(c), 217B.535(2), 228.070(2), 230.300(11), 234.330(10), 243.630(2), 260.815 , 286.4-460 (2), 292.320(2)(b), 286.8-036 (3), 304.3-410 (2)(f), 304.3-520 (5), 333.080 , 350.135(1), 365.430(27), and 286.9-070 (2).
  6. Subsection (3) of this section does not apply to the following statutes and to administrative regulations promulgated under the authority of those statutes: KRS 304.2-260 , KRS 304.24-420 , Subtitle 33 of KRS Chapter 304, and Subtitle 37 of KRS Chapter 304.

History. Enact. Acts 2000, ch. 408, § 90, effective July 1, 2001; repealed and reenact., Acts 2001, ch. 119, § 13, effective July 1, 2001; 2002, ch. 31, § 1, effective July 15, 2002; 2009, ch. 80, § 11, effective June 25, 2009; 2012, ch. 132, § 77, effective July 1, 2013.

Legislative Research Commission Notes.

(7/15/2016). Under the authority of KRS 7.136(1)(e), a reference to “KRS 286.8-036 (3)” in subsection (5) of this statute has been changed to “KRS 286.8-036 (2)” by the Reviser of Statutes following the enactment of 2016 Ky. Acts ch. 129, sec. 11, which deleted subsection (2) of KRS 286.8-036 and renumbered the subsequent subsections, but did not amend this statute to conform.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

(7/12/2006). 2006 Ky. Acts ch. 247 instructs the Reviser of Statutes to adjust KRS references throughout the statutes to conform with the 2006 renumbering of the Financial Services Code, KRS Chapter 286. Such an adjustment has been made in this statute.

Acts 1988, ch. 11, § 19, provides: “In order that city employees with a choice can make an informed decision on whether or not to join the county employees retirement system, Kentucky retirement systems shall conduct briefings for each affected pension system on the provisions of this Act. Each employee shall receive a written summary of the retirement benefits which the county employees retirement system offers, and each employee shall be given the opportunity to attend an oral presentation. All such presentations shall be completed by October 15, 1988, and each affected employee shall make his decision by November 1, 1988. Failure of an employee subject to the provisions of this Act to receive a written summary or to attend an oral briefing shall in no way invalidate any of the provisions of this Act.”

Official Comment

  1. Source.  New.
  2. Free Assignability.  This section makes ineffective any attempt to restrict the assignment of a general intangible, health-care-insurance receivable, or promissory note, whether the restriction appears in the terms of a promissory note or the agreement between an account debtor and a debtor (subsection (a)) or in a rule of law, including a statute or governmental rule or regulation (subsection (c)). This result allows the creation, attachment, and perfection of a security interest in a general intangible, such as an agreement for the nonexclusive license of software, as well as sales of certain receivables, such as a health-care-insurance receivable (which is an “account”), payment intangible, or promissory note, without giving rise to a default or breach by the assignor or from triggering a remedy of the account debtor or person obligated on a promissory note. This enhances the ability of certain debtors to obtain credit. On the other hand, subsection (d) protects the other party—the “account debtor” on a general intangible or the person obligated on a promissory note—from adverse effects arising from the security interest. It leaves the account debtor’s or obligated person’s rights and obligations unaffected in all material respects if a restriction rendered ineffective by subsection (a) or (c) would be effective under law other than Article 9.
  3. Nature of Debtor’s Interest.  Neither this section nor any other provision of this article determines whether a debtor has a property interest. The definition of the term “security interest” provides that it is an “interest in personal property.” See Section 1-201(37). Ordinarily, a debtor can create a security interest in collateral only if it has “rights in the collateral.” See Section 9-203(b). Other law determines whether a debtor has a property interest (“rights in the collateral”) and the nature of that interest. For example, the nonexclusive license addressed in Example 1 may not create any property interest whatsoever in the intellectual property (e.g., copyright) that underlies the license and that effectively enables the licensor to grant the license. The debtor’s property interest may be confined solely to its interest in the promises made by the licensor in the license agreement (e.g., a promise not to sue the debtor for its use of the software).
  4. Scope: Sales of Payment Intangibles and Other General Intangibles; Assignments Unaffected by this Section.  Subsections (a) and (c) render ineffective restrictions on assignments only “to the extent” that the assignments restrict the “creation, attachment, or perfection of a security interest,” including sales of payment intangibles and promissory notes. This section does not render ineffective a restriction on an assignment that does not create a security interest. For example, if the debtor in Comment 2, Example 1, purported to assign the license to another entity that would use the computer software itself, other law would govern the effectiveness of the anti-assignment provisions.

    Subsection (a) applies to a security interest in payment intangibles only if the security interest arises out of sale of the payment intangibles. Contractual restrictions directed to security interests in payment intangibles which secure an obligation are subject to Section 9-406(d). Subsection (a) also deals with sales of promissory notes which also create security interests. See Section 9-109(a). Subsection (c) deals with all security interests in payment intangibles or promissory notes, whether or not arising out of a sale.

    Subsection (a) does not render ineffective any term, and subsection (c) does not render ineffective any law, statute, or regulation, that restricts outright sales of general intangibles other than payment intangibles. They deal only with restrictions on security interests. The only sales of general intangibles that create security interests are sales of payment intangibles.

  5. Terminology: “Account Debtor”; “Person Obligated on a Promissory Note.”  This section uses the term “account debtor” as it is defined in Section 9-102. The term refers to the party, other than the debtor, to a general intangible, including a permit, license, franchise, or the like, and the person obligated on a health-care-insurance receivable, which is a type of account. The definition of “account debtor” does not limit the term to persons who are obligated to pay under a general intangible. Rather, the term includes all persons who are obligated on a general intangible, including those who are obligated to render performance in exchange for payment. In some cases, e.g., the creation of a security interest in a franchisee’s rights under a franchise agreement, the principal payment obligation may be owed by the debtor (franchisee) to the account debtor (franchisor). This section also refers to a “person obligated on a promissory note,” inasmuch as those persons do not fall within the definition of “account debtor.”
  6. Effects on Account Debtors and Persons Obligated on Promissory Notes.  Subsections (a) and (c) affect two classes of persons. These subsections affect account debtors on general intangibles and health-care-insurance receivables and persons obligated on promissory notes. Subsection (c) also affects governmental entities that enact or determine rules of law. However, subsection (d) ensures that these affected persons are not affected adversely. That provision removes any burdens or adverse effects on these persons for which any rational basis could exist to restrict the effectiveness of an assignment or to exercise any remedies. For this reason, the effects of subsections (a) and (c) are immaterial insofar as those persons are concerned.

    Subsection (a) does not override terms that do not directly prohibit, restrict, or require consent to an assignment but which might, nonetheless, present a practical impairment of the assignment. Properly read, however, this section, like Section 9-406(d), reaches only covenants that prohibit, restrict, or require consents to assignments; it does not override all terms that might “impair” an assignment in fact.

  7. Effect in Assignor’s Bankruptcy.  This section could have a substantial effect if the assignor enters bankruptcy. Roughly speaking, Bankruptcy Code Section 552 invalidates security interests in property acquired after a bankruptcy petition is filed, except to the extent that the postpetition property constitutes proceeds of prepetition collateral.
  8. Effect Outside of Bankruptcy.  The principal effects of this section will take place outside of bankruptcy. Compared to the relatively few debtors that enter bankruptcy, there are many more that do not. By making available previously unavailable property as collateral, this section should enable debtors to obtain additional credit. For purposes of determining whether to extend credit, under some circumstances a secured party may ascribe value to the collateral to which its security interest has attached, even if this section precludes the secured party from enforcing the security interest without the agreement of the account debtor or person obligated on the promissory note. This may be the case where the secured party sees a likelihood of obtaining that agreement in the future. This may also be the case where the secured party anticipates that the collateral will give rise to a type of proceeds as to which this section would not apply.
  9. Contrary Federal Law.  This section does not override federal law to the contrary. However, it does reflect an important policy judgment that should provide a template for future federal law reforms.

Example 1: A term of an agreement for the nonexclusive license of computer software prohibits the licensee from assigning any of its rights as licensee with respect to the software. The agreement also provides that an attempt to assign rights in violation of the restriction is a default entitling the licensor to terminate the license agreement. The licensee, as debtor, grants to a secured party a security interest in its rights under the license and in the computers in which it is installed. Under this section, the term prohibiting assignment and providing for a default upon an attempted assignment is ineffective to prevent the creation, attachment, or perfection of the security interest or entitle the licensor to terminate the license agreement. However, under subsection (d), the secured party (absent the licensor’s agreement) is not entitled to enforce the license or to use, assign, or otherwise enjoy the benefits of the licensed software, and the licensor need not recognize (or pay any attention to) the secured party. Even if the secured party takes possession of the computers on the debtor’s default, the debtor would remain free to remove the software from the computer, load it on another computer, and continue to use it, if the license so permits. If the debtor does not remove the software, other law may require the secured party to remove it before disposing of the computer. Disposition of the software with the computer could violate an effective prohibition on enforcement of the security interest. See subsection (d).

Example 2: A licensor and licensee enter into an agreement for the nonexclusive license of computer software. The licensee’s interest in the license agreement is a general intangible. If the licensee grants to a secured party a security interest in its rights under the license agreement, the licensee is the debtor and the licensor is the account debtor. On the other hand, if the licensor grants to a secured party a security interest in its right to payment (an account) under the license agreement, the licensor is the debtor and the licensee is the account debtor. (This section applies to the security interest in the general intangible but not to the security interest in the account, which is not a health-care-insurance receivable.)

Example 3: A licensor and licensee enter into an agreement for the nonexclusive license of valuable business software. The license agreement includes terms (i) prohibiting the licensee from assigning its rights under the license, (ii) prohibiting the licensee from disclosing to anyone certain information relating to the software and the licensor, and (iii) deeming prohibited assignments and prohibited disclosures to be defaults. The licensee wishes to obtain financing and, in exchange, is willing to grant a security interest in its rights under the license agreement. The secured party, reasonably, refuses to extend credit unless the licensee discloses the information that it is prohibited from disclosing under the license agreement. The secured party cannot determine the value of the proposed collateral in the absence of this information. Under this section, the terms of the license prohibiting the assignment (grant of the security interest) and making the assignment a default are ineffective. However, the nondisclosure covenant is not a term that prohibits the assignment or creation of a security interest in the license. Consequently, the nondisclosure term is enforceable even though the practical effect is to restrict the licensee’s ability to use its rights under the license agreement as collateral.

The nondisclosure term also would be effective in the factual setting of comment 2, Example 1. If the secured party’s possession of the computers loaded with software would put it in a position to discover confidential information that the debtor was prohibited from disclosing, the licensor should be entitled to enforce its rights against the secured party. Moreover, the licensor could have required the debtor to obtain the secured party’s agreement that (i) it would immediately return all copies of software loaded on the computers and that (ii) it would not examine or otherwise acquire any information contained in the software. This section does not prevent an account debtor from protecting by agreement its independent interests that are unrelated to the “creation, attachment, or perfection” of a security interest. In Example 1, moreover, the secured party is not in possession of copies of software by virtue of its security interest or in connection with enforcing its security interest in the debtor’s license of the software. Its possession is incidental to its possession of the computers, in which it has a security interest. Enforcing against the secured party a restriction relating to the software in no way interferes with its security interest in the computers.

Example 4: A debtor is the owner of a cable television franchise that, under applicable law, cannot be assigned without the consent of the municipal franchisor. A lender wishes to extend credit to the debtor, provided that the credit is secured by the debtor’s “going business” value. To secure the loan, the debtor grants a security interest in all its existing and after-acquired property. The franchise represents the principal value of the business. The municipality refuses to consent to any assignment for collateral purposes. If other law were given effect, the security interest in the franchise would not attach; and if the debtor were to enter bankruptcy and sell the business, the secured party would receive but a fraction of the business’s value. Under this section, however, the security interest would attach to the franchise. As a result, the security interest would attach to the proceeds of any sale of the franchise while a bankruptcy is pending. However, this section would protect the interests of the municipality by preventing the secured party from enforcing its security interest to the detriment of the municipality.

Example 5: Under the facts of Example 4, the debtor does not enter bankruptcy. Perhaps in exchange for a fee, the municipality agrees that the debtor may transfer the franchise to a buyer. As consideration for the transfer, the debtor receives from the buyer its check for part of the purchase price and its promissory note for the balance. The security interest attaches to the check and promissory note as proceeds. See Section 9-315(a)(2). This section does not apply to the security interest in the check, which is not a promissory note, health-care-insurance receivable, or general intangible. Nor does it apply to the security interest in the promissory note, inasmuch as it was not sold to the secured party.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Research References and Practice Aids

Kentucky Bench & Bar.

Rutledge, Recent Amendments to Kentucky Business Entity Laws, Vol. 71, No. 5, Sept. 2007, Ky. Bench & Bar 25.

355.9-409. Restrictions on assignment of letter-of-credit rights ineffective.

  1. A term in a letter of credit or a rule of law, statute, regulation, custom, or practice applicable to the letter of credit which prohibits, restricts, or requires the consent of an applicant, issuer, or nominated person to a beneficiary’s assignment of or creation of a security interest in a letter-of-credit right is ineffective to the extent that the term or rule of law, statute, regulation, custom, or practice:
    1. Would impair the creation, attachment, or perfection of a security interest in the letter-of-credit right; or
    2. Provides that the assignment or the creation, attachment, or perfection of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination, or remedy under the letter-of-credit right.
  2. To the extent that a term in a letter of credit is ineffective under subsection (1) of this section but would be effective under law other than this article or a custom or practice applicable to the letter of credit, to the transfer of a right to draw or otherwise demand performance under the letter of credit, or to the assignment of a right to proceeds of the letter of credit, the creation, attachment, or perfection of a security interest in the letter-of-credit right:
    1. Is not enforceable against the applicant, issuer, nominated person, or transferee beneficiary;
    2. Imposes no duties or obligations on the applicant, issuer, nominated person, or transferee beneficiary; and
    3. Does not require the applicant, issuer, nominated person, or transferee beneficiary to recognize the security interest, pay or render performance to the secured party, or accept payment or other performance from the secured party.
  3. Subsection (1) of this section does not apply to the following statutes and to administrative regulations promulgated under the authority of those statutes: KRS 304.2-260 , KRS 304.24-420 , Subtitle 33 of KRS Chapter 304, and Subtitle 37 of KRS Chapter 304.

History. Enact. Acts 2000, ch. 408, § 91, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Purpose and Relevance.  This section, patterned on Section 9-408, limits the effectiveness of attempts to restrict the creation, attachment, or perfection of a security interest in letter-of-credit rights, whether the restriction appears in the letter of credit or a rule of law, custom, or practice applicable to the letter of credit. It protects the creation, attachment, and perfection of a security interest while preventing these events from giving rise to a default or breach by the assignor or from triggering a remedy or defense of the issuer or other person obligated on a letter of credit. Letter-of-credit rights are a type of supporting obligation. See section 9-102. Under Sections 9-203 and 9-308, a security interest in a supporting obligation attaches and is perfected automatically if the security interest in the supported obligation attaches and is perfected. See Section 9-107, Comment 5. The automatic attachment and perfection under Article 9 would be anomalous or misleading if, under other law (e.g., Article 5), a restriction on transfer or assignment were effective to block attachment and perfection.
  3. Relationship to Letter-of-Credit Law.  Although restrictions on an assignment of a letter of credit are ineffective to prevent creation, attachment, and perfection of a security interest, subsection (b) protects the issuer and other parties from any adverse effects of the security interest by preserving letter-of-credit law and practice that limits the right of a beneficiary to transfer its right to draw or otherwise demand performance (Section 5-112) and limits the obligation of an issuer or nominated person to recognize a beneficiary’s assignment of letter-of-credit proceeds (Section 5-114). Thus, this section’s treatment of letter-of-credit rights differs from this article’s treatment of instruments and investment property. Moreover, under Section 9-109(c)(4), this article does not apply to the extent that the rights of a transferee beneficiary or nominated person are independent and superior under Section 5-114, thereby preserving the “independence principle” of letter-of-credit law.

Part 5. Filing

Subpart 1. Filing Office; Contents and Effectiveness of Financing Statement

355.9-501. Filing office.

  1. Except as otherwise provided in subsection (2) of this section, if the local law of this Commonwealth governs perfection of a security interest or agricultural lien, the office in which to file a financing statement to perfect the security interest or agricultural lien is:
    1. The office designated for the filing or recording of a record of a mortgage on the related real property, if:
      1. The collateral is as-extracted collateral or timber to be cut; or
      2. The financing statement is filed as a fixture filing and the collateral is goods that are or are to become fixtures; or
    2. The office of the Secretary of State, in all other cases, including a case in which the collateral is goods that are or are to become fixtures and the financing statement is not filed as a fixture filing.
  2. The office in which to file a financing statement to perfect a security interest in collateral, including fixtures, of a transmitting utility is the office of the Secretary of State. The financing statement also constitutes a fixture filing as to the collateral indicated in the financing statement which is or is to become fixtures.

History. Enact. Acts 1958, Acts ch. 77, § 9-501; 1962, ch. 83, § 14; 1986, ch. 118, § 82, effective July 1, 1987; repealed and reenact., Acts 2000, ch. 408, § 92, effective July 1, 2001.

Official Comment

  1. Source.  Derived from former Section 9-401.
  2. Where to File.  Subsection (a) indicates where in a given state a financing statement is to be filed. Former Article 9 afforded each state three alternative approaches, depending on the extent to which the state desires central filing (usually with the Secretary of State), local filing (usually with a county office), or both. As comment 1 to former Section 9-401 observed, “The principal advantage of state-wide filing is ease of access to the credit information which the files exist to provide. Consider for example the national distributor who wishes to have current information about the credit standing of the thousands of persons he sells to on credit. The more completely the files are centralized on a state-wide basis, the easier and cheaper it becomes to procure credit information; the more the files are scattered in local filing units, the more burdensome and costly.” Local filing increases the net costs of secured transactions also by increasing uncertainty and the number of required filings. Any benefit that local filing may have had in the 1950’s is now insubstantial. Accordingly, this article dictates central filing for most situations, while retaining local filing for real-estate-related collateral and special filing provisions for transmitting utilities.
  3. Minerals and Timber.  Under subsection (a)(1), a filing in the office where a record of a mortgage on the related real property would be filed will perfect a security interest in as-extracted collateral. Inasmuch as the security interest does not attach until extraction, the filing continues to be effective after extraction. A different result occurs with respect to timber to be cut, however. Unlike as-extracted collateral, standing timber may be goods before it is cut. See Section 9-102 (defining “goods”). Once cut, however, it is no longer timber to be cut, and the filing in the real-property-mortgage office ceases to be effective. The timber then becomes ordinary goods, and filing in the office specified in subsection (a)(2) is necessary for perfection. Note also that after the timber is cut the law of the debtor’s location, not the location of the timber, governs perfection under Section 9-301.
  4. Fixtures.  There are two ways in which a secured party may file a financing statement to perfect a security interest in goods that are or are to become fixtures. It may file in the Article 9 records, as with most other goods. See subsection (a)(2). Or it may file the financing statement as a “fixture filing,” defined in Section 9-102, in the office in which a record of a mortgage on the related real property would be filed. See subsection(a)(1)(B).
  5. Transmitting Utilities.  The usual filing rules do not apply well for a transmitting utility (defined in Section 9-102). Many pre-UCC statutes provided special filing rules for railroads and in some cases for other public utilities, to avoid the requirements for filing with legal descriptions in every county in which such debtors had property. Former Section 9-401(5) recreated and broadened these provisions, and subsection (b) follows this approach. The nature of the debtor will inform persons searching the record as to where to make a search.

NOTES TO DECISIONS

1.Filing in Wrong County.

The lien of an assignee of a conditional sales contract for an automobile was a purchase money lien and, although it was recorded in the wrong county, it was a valid recorded lien as between the parties to the contract and was a valid recorded lien within law providing for distribution by commonwealth of proceeds of automobile forfeited and sold for violation of the liquor laws, even though it was insufficient to be effectual against innocent purchasers or creditors under the recording law. (decided under prior law) Bratcher v. Ashley, 243 S.W.2d 1011, 1951 Ky. LEXIS 1197 ( Ky. 1951 ).

Lessors of coal land with lien on 50 mine cars under the terms of their lease were required to record their lease in county where lessee corporation had its principal offices and their failure to do so gave bank who had no knowledge of lessor’s lien a first lien under their chattel mortgage on the 50 mine cars. (decided under prior law) North Star Co. v. Howard, 341 S.W.2d 251, 1960 Ky. LEXIS 74 ( Ky. 1960 ).

2.Conditional Sales Contracts.

County in which purchaser of motor vehicle resided, at time of execution and delivery of conditional sales contract and note, was proper county in which to record instrument showing lien. (decided under prior law) Burbank & Burbank v. Robek, 157 Ky. 524 , 163 S.W. 457 ( Ky. 1914 ); Ashland Finance Co. v. Mollett, 252 Ky. 491 , 67 S.W.2d 717, 1934 Ky. LEXIS 814 ( Ky. 1934 ).

There was no merit in contention that a conditional sales contract for a truck was not recordable instrument because of a defect in acknowledgment where the acknowledgment was before a deputy county clerk in conformity with the law and it was actually recorded. (decided under prior law) Quillen v. Commonwealth, 275 Ky. 158 , 120 S.W.2d 1047, 1938 Ky. LEXIS 389 ( Ky. 1938 ).

3.Chattel Mortgages.

Where personal property was permanently located in a county other than the residence of the owner and mortgagor, the mortgage should be recorded in the former and not in the latter county. (decided under prior law) Beaver Creek Consol. Coal Co. v. Porter Min. Co., 60 F.2d 602, 1929 U.S. Dist. LEXIS 1160 (D. Ky. 1929 ).

A chattel mortgage covering a piano was not a recordable instrument unless the clerk had proof by subscribing witnesses that it had been executed before them, and the evidence of such proof was incorporated by the clerk in his certificate showing the recording of the instrument. (decided under prior law) Starr Piano Co. v. Petrey, 168 Ky. 530 , 182 S.W. 624, 1916 Ky. LEXIS 584 ( Ky. 1916 ).

Chattel mortgage, to be recorded, had to be delivered to proper officer in his office and all fees paid and directions given to record it. (decided under prior law) Carter Guaranty Co. v. Cumberland & M. R. Co., 219 Ky. 207 , 292 S.W. 812, 1927 Ky. LEXIS 323 ( Ky. 1927 ).

Chattel mortgage which was not acknowledged or proved to have been executed before two witnesses was not entitled to record, and mere filing of unrecordable instrument did not give constructive notice. (decided under prior law) Smith v. Jackson, 232 Ky. 76 , 22 S.W.2d 420, 1929 Ky. LEXIS 393 ( Ky. 1929 ).

4.County of Debtor’s Residence.

Under law providing that chattel mortgages, to be valid against creditors, had to be registered in county where mortgagor resided, if a resident of the state, and federal laws which vested trustees with rights of judgment creditor, a chattel mortgage given by bankrupt who was resident of state was invalid as against his trustee unless recorded in county of residence. (decided under prior law) In re Nuckols, 201 F. 437, 1912 U.S. Dist. LEXIS 1041 (D. Tenn. 1912).

The county of residence of the owner of personal property was, in legal contemplation, the situs of the property. (decided under prior law) Day & Congleton Lumber Co. v. Mack, 139 Ky. 587 , 69 S.W. 712 ( Ky. 1902 ); Burbank & Burbank v. Robek, 157 Ky. 524 , 163 S.W. 457 ( Ky. 1914 ); Riley v. Commonwealth, 275 Ky. 370 , 121 S.W.2d 921, 1938 Ky. LEXIS 436 ( Ky. 1938 ).

The recording of a mortgage of personal property, to be valid as constructive notice, had to be in the county of the owner’s residence, if he had a place of residence in this state. (decided under prior law) Day & Congleton Lumber Co. v. Mack, 139 Ky. 587 , 69 S.W. 712 ( Ky. 1902 ); Burbank & Burbank v. Robek, 157 Ky. 524 , 163 S.W. 457 ( Ky. 1914 ); Riley v. Commonwealth, 275 Ky. 370 , 121 S.W.2d 921, 1938 Ky. LEXIS 436 ( Ky. 1938 ).

Properly prepared chattel mortgage duly executed and recorded in the clerk’s office of the county of residence of the owner, which was the legal situs of the mortgaged property, operated as constructive notice of the contents of the instrument in all other counties of the commonwealth and was binding wherever the property might be taken. (decided under prior law) Hauseman Motor Co. v. Napierella, 223 Ky. 433 , 3 S.W.2d 1084, 1928 Ky. LEXIS 366 ( Ky. 1928 ).

The proper county in which to record instrument showing lien on a truck to secure a note for the purchase money was the county of residence of the purchaser at the time of the execution and delivery of the conditional sales contract and note. (decided under prior law) Ashland Finance Co. v. Mollett, 252 Ky. 491 , 67 S.W.2d 717, 1934 Ky. LEXIS 814 ( Ky. 1934 ).

5.Mortgage on Vessels.

Where home port of vessels was Evansville, Indiana, recording of mortgage in Kentucky did not give constructive notice to creditors under federal laws. (decided under prior law) Arnold v. Eastin's Trustee, 116 Ky. 686 , 76 S.W. 855, 25 Ky. L. Rptr. 895 , 1903 Ky. LEXIS 247 ( Ky. 1903 ).

6.Crops.

The United States, as mortgagee of tobacco crop grown in Indiana, could recover from Kentucky warehouse company for conversion where the mortgage was properly recorded in Indiana county where the tobacco was grown and mortgagor removed the tobacco to the Kentucky warehouse company which sold the tobacco without any accounting to the mortgagee for proceeds of sale. (decided under prior law) United States v. Covington Independent Tobacco Warehouse Co., 152 F. Supp. 612, 1957 U.S. Dist. LEXIS 3446 (D. Ky. 1957 ).

7.Lease Creating Security Interest.

The filing of a lease creating a nonpossessory security interest in personalty with the clerk and its proper recordation in the real estate deed book does not effectuate a perfected security interest in the personalty in compliance with the Uniform Commercial Code. (decided under prior law) In re Leckie Freeburn Coal Co., 405 F.2d 1043, 1969 U.S. App. LEXIS 9150 (6th Cir. Ky.), cert. denied, 395 U.S. 960, 89 S. Ct. 2101, 23 L. Ed. 2d 746, 1969 U.S. LEXIS 3173 (U.S. 1969).

8.Failure to File.

Where the plaintiff secured a promissory note, security agreement and financing statement from an individual covering proceeds of crops and where the defendant subsequently advanced the same individual money to grow, harvest and sell the same crops, but failed to file a mortgage, security agreement or financing statement in the county clerk’s office, the defendant failed to perfect its interest in the crops for new value and the plaintiff was entitled to a first lien on the proceeds of the crops. (decided under prior law) United Tobacco Warehouse Co. v. Wells, 490 S.W.2d 152, 1973 Ky. LEXIS 611 ( Ky. 1973 ).

9.Residence.

As used in former KRS 355.9-401 (1)(c) “residence” means the location of a corporation’s registered office and not the location of its place of business. (decided under prior law) National Cash Register Co. v. K. W. C., Inc., 432 F. Supp. 82, 1977 U.S. Dist. LEXIS 16013 (E.D. Ky. 1977 ).

For purposes of determining under former KRS 355.9-401 (1)(c) the proper location at which a creditor has to record a security interest in order to perfect it against a debtor foreign corporation, the debtor’s “residence” is the location of its registered office rather than the location of its place of business. (decided under prior law) In re Midwestern Food Stores, Inc., 21 B.R. 944, 1982 Bankr. LEXIS 3614 (Bankr. S.D. Ohio 1982).

Since grain grown in first county, but thereafter stored in second county, changed classification from farm products to inventory, lender’s error in failing to file in the county where the crops were grown did not impair proper perfection of the crops when they became inventory, and such collateral was subject to the financing statement filed in second county, the county of debtor’s residence and county where this collateral was located prior to commencement of bankruptcy proceeding. Therefore debtor’s rights as a hypothetical lien creditor were subrogated to lender’s perfected interests in all crops stored in second county. (decided under prior law) In re Tinsley & Groom, 49 B.R. 85, 1984 Bankr. LEXIS 4658 (Bankr. W.D. Ky. 1984 ).

A bankrupt debtor had standing under the federal bankruptcy law to object to his creditors’ secured status on the ground that recording in the wrong county of residence rendered the security interest unperfected, even though the good-faith exception would have been effective against him as an individual in a nonbankruptcy context since it was he who had supplied the information upon which the improper filing was made. (decided under prior law) In re Towery, 53 B.R. 76, 1985 Bankr. LEXIS 5330 (Bankr. W.D. Ky. 1985 ).

Bank properly filed financing statements regarding loans on tobacco and tobacco crops in the office of the clerk in the county of the debtor’s residence and the county where the land was located. (decided under prior law) Farmer's Bank v. Dykes Tobacco Warehouse, 945 S.W.2d 433, 1997 Ky. App. LEXIS 44 (Ky. Ct. App. 1997).

10.Amendment to Financing Statement.

An amendment to a financing statement must be filed in the county of the debtor’s residence if that residence is in a county other than where the original statement was filed. (decided under prior law) General Electric Credit Corp. v. Fancher, 600 S.W.2d 472, 1978 Ky. App. LEXIS 687 (Ky. Ct. App. 1978).

11.Sufficiency of Description.

Where the types of collateral subject to financing statement were identified and the names and addresses of debtors and lender as creditor provided a means for a third party to inquire and have defined, if questioned, the description of the collateral as “Members[’]” share of “growing or stored crops” and “all equipment” subject to the agreement of the parties as set forth specifically in the security agreement, and since it is the duty of a noticed third party to seek specific identification of encumbered property rather than the duty of a creditor to file a security agreement containing specific descriptions of all collateral, the financing statements were adequate notice to a third party that certain collateral might be subject to a creditor’s interest, and further provided means for a third party to identify such specific collateral. (decided under prior law) In re Tinsley & Groom, 49 B.R. 85, 1984 Bankr. LEXIS 4658 (Bankr. W.D. Ky. 1984 ).

12.Continuation of Security Interest.

Lender did not lose its perfected status in grain grown in one county and stored in a second county, since under former KRS 355.9-315 a perfected security interest in collateral continues when such collateral becomes a part of the mass. In re Tinsley & Groom, 49 B.R. 85, 1984 Bankr. LEXIS 4658 (Bankr. W.D. Ky. 1984 ).

A continuation statement filed by bank group in the same county as the properly filed original financing statement continues the effectiveness of bank group’s security interest when a debtor changes its corporate residence. (decided under prior law) In re Green River Coal Co., 165 B.R. 425, 1994 Bankr. LEXIS 453 (Bankr. W.D. Ky. 1994 ).

13.Fixtures.

Where the mobile home measured 24 feet wide and 64 feet long, and it was permanently affixed to real property owned by the debtors and was assessed as real estate by the property valuation administrator of the county, the mobile home was a fixture, and since the creditor improperly filed to perfect its interest under this section, it possessed an unperfected security interest in the debtors’ mobile home. (decided under prior law) In re Weaver, 69 B.R. 554, 1987 Bankr. LEXIS 91 (Bankr. W.D. Ky. 1987 ).

14.Retroactive Applicability.

This section gives no indication that it is to be applied retroactively, and a statute will not have retroactive effect unless such intent is clearly expressed in the statute. (decided under prior law) ITT Commercial Finance Corp. v. Madisonville Recapping Co., 793 S.W.2d 849, 1990 Ky. App. LEXIS 93 (Ky. Ct. App. 1990).

15.Filing Not Perfected.

Bank did not properly perfect its security interest in debtor’s dental practice where it filed its financing statement in the county of debtor’s residence rather than the county of debtor’s principal place of business. (decided under prior law) Estate of Conn by Bow v. First Nat'l Bank (In re Bush), 159 B.R. 209, 1993 Bankr. LEXIS 1419 (Bankr. E.D. Ky. 1993 ).

Cited in:

Bishop v. Alliance Banking Co., 412 S.W.3d 217, 2013 Ky. App. LEXIS 151 (Ky. Ct. App. 2013).

Opinions of Attorney General.

Former KRS 355.9-401 provided for the filing of a financing statement on a house trailer used as a place of residence in a permanent location. OAG 64-267 .

Where a seller requested that security agreements and financing statements on air conditioners it installed be filed in the real estate mortgage book rather than in the chattel mortgage book, the request should be complied with. OAG 68-361 .

If a person having a lien on personalty that is to become a fixture wishes to do so, he may record it as a real estate mortgage if it meets the requirements of a mortgage, but it is not necessary. OAG 68-407 .

It is immaterial whether the lien on a mobile home is recorded in a county other than the county of the original mortgagee’s place of residence as he is the one the bank will look to for satisfaction of the lien, so when transferring an equity in a mobile home, the lien should not be released in county 1 to be recorded in county 2 as such release would relieve the original owner; a Xerox copy of the security agreement would be sufficient to record the new lien; county 1 should retain the lien on the mobile home even though it has been moved to county 2 and, although there is no need to record a second lien in county 2, there is nothing in the statutes to prevent it. OAG 73-510 .

There is no requirement for notarization of the financing statement and no such requirement can be imposed on the one presenting the statement for filing to the clerk, and the financing statement should be filed in the office of the clerk of the court in accordance with the provisions of former KRS 355.9-403 (4). OAG 73-599 .

The tax imposed by KRS 142.010 is in addition to required filing fees and must be collected by the secretary of state in addition to such fees whenever in the circumstances described in former KRS 355.9-401 (1)(c) financing statements are filed under former KRS 355.9-402 and KRS 355.9-403 . OAG 75-624 .

The proper place of filing a security interest on a tractor trailer owned by a resident of Kentucky but licensed, registered, and principally operated in other states would be the office of the county clerk in the county of debtor’s residence as provided in former KRS 355.9-401 (1)(c) and an affidavit of the owner or secured party should be filed with the county clerk indicating that the vehicle is not being used on the highways of Kentucky and thus need not be registered in Kentucky. OAG 77-48 .

Carbon copies of a financing statement may be filed, but photostatic or other reproductions of a financing statement may not be filed unless the photostatic copies bear an original manual signature of the debtor. OAG 79-246 .

Since the signature on a carbon copy is made at the same time and by the same physical act as the signature on the original, the intent to authenticate the original financing statement, or security agreement, is also present as to the carbon itself, and therefore the carbon is signed within the meaning of former KRS 355.1-201 (39) and, consequently, within the meaning of former KRS 355.9-402 . OAG 79-246 .

The proper place of filing for a financing statement covering a motor boat where the debtor’s residence is in a different county or state from the place where he keeps or stores the boat is with the county court clerk in the county in which the debtor resides, if the debtor resides in this state, regardless of the fact that the boat is stored in another county; and if the security interest attaches in this state, filing in the county wherein the debtor resides would also be sufficient, even though the boat is kept in another state. OAG 79-246 .

Where one company filed a financing statement in September of 1979, listing a mobile home, with an accompanying affidavit that the mobile home would not be used on public highways, and a second company filed a financing statement in October of 1979, listing the same mobile home, with an accompanying license registration receipt issued by the county clerk’s office on which the second company was listed as the first lienholder on the mobile home, the fact that at the time of the filing of the first company’s financing statement there was no certificate of registration for the mobile home in existence in no way militates against the principle that the proper filing of the financing statement perfected the lien; the county clerk is now required to note the first lien of the company that filed the September statement on the certificate of registration that came into existence later. OAG 80-103 .

Since coal royalties are rentals or personal property, the naming of such royalties by a nonresident debtor as collateral to a secured party in a financing statement appears proper, and since the security interest was created in personal property, it is governed by the UCC, thus, in order to perfect such a security interest, the UCC requires the filing of a financial statement pursuant to former KRS 355.9-401 to 355.9-406 ; where it might be ruled by the courts that the nonresident debtor has a principal place of business in a certain county of this state, the secured party may file the financing statement in the clerk’s office of that county as well as in the office of the secretary of state. OAG 82-52 .

Where an amendment to the original financing statement involved only the change in the corporate name of the debtor, such amendment was proper and a completely new financing statement was not required to be filed. OAG 83-303 .

A financing statement that complies with former KRS 355.9-402 and covers fixtures should be filed, at the instance of the requesting party, with the real estate records, not as a mortgage, but rather to put subsequent creditors on notice. OAG 86-83 .

Fixture filings are to be filed in the office where a mortgage on real estate would be filed or recorded. Fixture filings are not required to be recorded with mortgages in a mortgage book, but a duplicate filing may be made in the mortgage book at the request of the secured party if the fixture filing complies with KRS Chapter 382; however, there is no statutory direction as to the chronological order of filing. OAG 87-52 .

Research References and Practice Aids

Cross-References.

Conveyances and encumbrances, KRS Ch. 382.

Federal tax liens, filing and indexing, KRS 382.480 .

Financing statement affecting motor vehicles, filing, KRS 186.045 .

Instruments not to be recorded unless name and address of draftsman appear thereon, KRS 382.335 .

Personal property interests, filing and recording, KRS 382.200 .

Powers of attorney to convey or release real or personal property or an interest therein, recording, KRS 382.370 .

Voluntary assignments for benefit of creditors, filing, KRS 379.020 .

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Schneiter, Equine Statutory Liens, Vol. 67, No. 4, July 2003, Ky. Bench & Bar 23.

Kentucky Law Journal.

Kripke, Kentucky Modernizes the Law of Chattel Security, 48 Ky. L.J. 369 (1960).

Spivack, Financing the Manufacturer: Article 9 of the Uniform Commercial Code, 48 Ky. L.J. 397 (1960).

Whiteside, Amending the Uniform Commercial Code, 51 Ky. L.J. 3 (1962).

Fitzgerald, The Crazy Quilt of Commercial Law: A Study in Legislative Patchwork, 54 Ky. L.J. 85 (1965).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Bland, Insolvencies in Farming and Agribusinesses, 73 Ky. L.J. 795 (1984-85).

Sales and Use Tax Planning for the Horse Industry, 78 Ky. L.J. 601 (1989-90).

Thoroughbred Certificate Law: A Proposal, 78 Ky. L.J. 659 (1989-90).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

355.9-502. Contents of financing statement — Record of mortgage as financing statement — Time of filing financing statement.

  1. Subject to subsection (2) of this section, a financing statement is sufficient only if it:
    1. Provides the name of the debtor;
    2. Provides the name of the secured party or a representative of the secured party; and
    3. Indicates the collateral covered by the financing statement.
  2. Except as otherwise provided in KRS 355.9-501 (2), to be sufficient, a financing statement that covers as-extracted collateral or timber to be cut, or which is filed as a fixture filing and covers goods that are or are to become fixtures, must satisfy subsection (1) of this section and also:
    1. Indicate that it covers this type of collateral;
    2. Indicate that it is to be filed in the real property records;
    3. Provide a description of the real property to which the collateral is related; and
    4. If the debtor does not have an interest of record in the real property, provide the name of a record owner.
  3. A record of a mortgage is effective, from the date of recording, as a financing statement filed as a fixture filing or as a financing statement covering as-extracted collateral or timber to be cut only if:
    1. The record indicates the goods or accounts that it covers;
    2. The goods are or are to become fixtures related to the real property described in the record or the collateral is related to the real property described in the record and is as-extracted collateral or timber to be cut;
    3. The record satisfies the requirements for a financing statement in this section:
      1. The record need not indicate that it is to be filed in the real property records; and
      2. The record sufficiently provides the name of a debtor who is an individual if it provides the individual name of the debtor or the surname and first personal name of the debtor, even if the debtor is an individual to whom KRS 355.9-503 (1)(d) applies; and
    4. The record is recorded.
  4. A financing statement may be filed before a security agreement is made or a security interest otherwise attaches.

History. Enact. Acts 1958, ch. 77, § 9-502, effective July 1, 1960; 1986, ch. 118, § 83, effective July 1, 1987; repealed and reenact., Acts 2000, ch. 408, § 93, effective July 1, 2001; 2012, ch. 132, § 78, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  Former Section 9-402(1), (5), (6).
  2. “Notice Filing.”  This section adopts the system of “notice filing.” What is required to be filed is not, as under pre-UCC chattel mortgage and conditional sales acts, the security agreement itself, but only a simple record providing a limited amount of information (financing statement). The financing statement may be filed before the security interest attaches or thereafter. See subsection (d). See also Section 9-308(a) (contemplating situations in which a financing statement is filed before a security interest attaches).

    The notice itself indicates merely that a person may have a security interest in the collateral indicated. Further inquiry from the parties concerned will be necessary to disclose the complete state of affairs. Section 9-210 provides a statutory procedure under which the secured party, at the debtor’s request, may be required to make disclosure. However, in many cases, information may be forthcoming without the need to resort to the formalities of that section.

    Notice filing has proved to be of great use in financing transactions involving inventory, accounts, and chattel paper, because it obviates the necessity of refiling on each of a series of transactions in a continuing arrangement under which the collateral changes from day to day. However, even in the case of filings that do not necessarily involve a series of transactions (e.g., a loan secured by a single item of equipment), a financing statement is effective to encompass transactions under a security agreement not in existence and not contemplated at the time the notice was filed, if the indication of collateral in the financing statement is sufficient to cover the collateral concerned. Similarly, a financing statement is effective to cover after-acquired property of the type indicated and to perfect with respect to future advances under security agreements, regardless of whether after-acquired property or future advances are mentioned in the financing statement and even if not in the contemplation of the parties at the time the financing statement was authorized to be filed.

  3. Debtor’s Signature; Required Authorization.  Subsection (a) sets forth the simple formal requirements for an effective financing statement. These requirements are: (1) The debtor’s name; (2) the name of a secured party or representative of the secured party; and (3) an indication of the collateral.

    Whereas former Section 9-402(1) required the debtor’s signature to appear on a financing statement, this article contains no signature requirement. The elimination of the signature requirement facilitates paperless filing. (However, as PEB Commentary No. 15 indicates, a paperless financing statement was sufficient under former Article 9.) Elimination of the signature requirement also makes the exceptions provided by former Section 9-402(2) unnecessary.

    The fact that this Article does not require that an authenticating symbol be contained in the public record does not mean that all filings are authorized. Rather, Section 9-509(a) entitles a person to file an initial financing statement, an amendment that adds collateral, or an amendment that adds a debtor only if the debtor authorizes the filing, and Section 9-509(d) entitles a person other than the debtor to file a termination statement only if the secured party of record authorizes the filing. Of course, a filing has legal effect only to the extent it is authorized. See Section 9-510.

    Law other than this article, including the law with respect to ratification of past acts, generally determines whether a person has the requisite authority to file a record under this article. See Section 1-103. However, under Section 9-509(b), the debtor’s authentication of (or becoming bound by) a security agreement ipso facto constitutes the debtor’s authorization of the filing of a financing statement covering the collateral described in the security agreement. The secured party need not obtain a separate authorization.

    Section 9-625 provides a remedy for unauthorized filings. Making an unauthorized filing also may give rise to civil or criminal liability under other law. In addition, this article contains provisions that assist in the discovery of unauthorized filings and the amelioration of their practical effect. For example, Section 9-518 provides a procedure whereby a person may add to the public record a statement to the effect that a financing statement indexed under the person’s name was wrongfully filed, and Section 9-509(d) entitles any person to file a termination statement if the secured party of record fails to comply with its obligation to file or send one to the debtor, the debtor authorizes the filing, and the termination statement so indicates. However, the filing office is neither obligated nor permitted to inquire into issues of authorization. See Section 9-520(a).

  4. Certain Other Requirements.  Subsection (a) deletes other provisions of former Section 9-402(1) because they seem unwise (real-property description for financing statements covering crops), unnecessary (adequacy of copies of financing statements), or both (copy of security agreement as financing statement). In addition, the filing office must reject a financing statement lacking certain other information formerly required as a condition of perfection (e.g., an address for the debtor or secured party). See Sections 9-516(b) and 9-520(a). However, if the filing office accepts the record, it is effective nevertheless. See Section 9-520(c).
  5. Real-Property-Related Filings.  Subsection (b) contains the requirements for financing statements filed as fixture filings and financing statements covering timber to be cut or minerals and minerals-related accounts constituting as-extracted collateral. A description of the related real property must be sufficient to reasonably identify it. See section 9-108. This formulation rejects the view that the real property description must be by metes and bounds, or otherwise conforming to traditional real-property practice in conveyancing, but, of course, the incorporation of such a description by reference to the recording data of a deed, mortgage, or other instrument containing the description should suffice under the most stringent standards. The proper test is that a description of real property must be sufficient so that the financing statement will fit into the real property search system and be found by a real property searcher. Under the optional language in subsection (b)(3), the test of adequacy of the description is whether it would be adequate in a record of a mortgage of the real property. As suggested in the legislative note, more detail may be required if there is a tract indexing system or a land registration system.

    If the debtor does not have an interest of record in the real property, a real-property-related financing statement must show the name of a record owner, and Section 9-519(d) requires the financing statement to be indexed in the name of that owner. This requirement also enables financing statements covering as-extracted collateral or timber to be cut and financing statements filed as fixture filings to fit into the real property search system.

  6. Record of Mortgage Effective as Financing Statement.  Subsection (c) explains when a record of a mortgage is effective as a financing statement filed as a fixture filing or to cover timber to be cut or as-extracted collateral. Use of the term “record of a mortgage” recognizes that in some systems the record actually filed is not the record pursuant to which a mortgage is created. Moreover, “mortgage” is defined in section 9-102 as an “interest in real property,” not as the record that creates or evidences the mortgage or the record that is filed in the public recording systems. A record creating a mortgage may also create a security interest with respect to fixtures (or other goods) in conformity with this article. A single agreement creating a mortgage on real property and a security interest in chattels is common and useful for certain purposes. Under subsection (c), the recording of the record evidencing a mortgage (if it satisfies the requirements for a financing statement) constitutes the filing of a financing statement as to the fixtures (but not, of course, as to other goods). Section 9-515(g) makes the usual five-year maximum life for financing statements inapplicable to mortgages that operate as fixture filings under Section 9-502(c). Such mortgages are effective for the duration of the real property recording.

    Of course, if a combined mortgage covers chattels that are not fixtures, a regular financing statement filing is necessary with respect to the chattels, and subsection (c) is inapplicable. Likewise, a financing statement filed as a “fixture filing” is not effective to perfect a security interest in personal property other than fixtures.

    In some cases it may be difficult to determine whether goods are or will become fixtures. Nothing in this part prohibits the filing of a “precautionary” fixture filing, which would provide protection in the event goods are determined to be fixtures. The fact of filing should not be a factor in the determining whether goods are fixtures. Cf. Section 9-505(b).

NOTES TO DECISIONS

1.Applicability.

Bankruptcy trustee had the power under 11 USCS § 544(a)(1) to avoid a loan company’s lien in joint debtors’ manufactured home in part because, as of the bankruptcy filing date, the company had not complied with KRS 186A.297 , which was necessary to convert the home to real estate. The company could not rely on KRS 355.9-502 to get around its failure to timely file the debtors’ affidavit of conversion because KRS 186A.297 provided the specific method by which a manufactured home could be converted to real estate upon its permanent affixation to land. Westenhoefer v. Countrywide Home Loans, Inc. (In re Stagnoli), 2007 Bankr. LEXIS 238 (Bankr. E.D. Ky. Jan. 19, 2007).

Because KRS 186A.297 provides a specific method by which a manufactured home can be converted to real estate, upon its permanent affixation to land, the statute must be complied with in order for a conversion to take place. KRS 355.9-502 does not provide an alternate method by which an affixed manufactured home can be converted to real estate. Westenhoefer v. Countrywide Home Loans, Inc. (In re Stagnoli), 2007 Bankr. LEXIS 238 (Bankr. E.D. Ky. Jan. 19, 2007).

2.Construction.

As a condition precedent to recording a financial statement that otherwise complies with this section, it is not necessary that it comply with KRS 382.270 requiring acknowledgment, KRS 382.330 requiring that the maturity date or dates of the security obligation be shown, or KRS 382.675 requiring that motor vehicles in dealer’s inventory be registered under KRS ch. 186, but the county clerk may require that KRS 186.195 (now repealed) requiring recording of lien information on registration receipt be complied with as a condition precedent to recording except as to dealer’s inventory or segment thereof. (decided under prior law) Lincoln Bank & Trust Co. v. Queenan, 344 S.W.2d 383, 1961 Ky. LEXIS 223 ( Ky. 1961 ).

Where chattel mortgage, signed only by the debtor, was filed for record as a financing statement, it gave notice of the encumbrance and therefore had priority over a subsequent attachment. Court indicated that this authorization of a deviation from the literal words of the law is made in recognition of the newness of the Uniform Commercial Code and that future cases will be treated according to their particular facts. (decided under prior law) Alloway v. Stuart, 385 S.W.2d 41, 1964 Ky. LEXIS 109 ( Ky. 1964 ).

3.Purpose.

The most important purpose of this section is to put subsequent creditors on notice. Riley v. Miller, 549 S.W.2d 314, 1977 Ky. App. LEXIS 661 (Ky. Ct. App. 1977).

The scope and purpose of this section is merely to put potential creditors on notice of possible security interests. (decided under prior law) In re Hazle Farm & Power Equipment, 53 B.R. 30, 1985 Bankr. LEXIS 5535 (Bankr. W.D. Ky. 1985 ).

4.Chattel Mortgages.

A chattel mortgage reciting that it was executed to secure “a certain sum of money” advanced to the mortgagor under a contract entered into on a day named, and that a note was executed therefor, was so uncertain as to amount that it did not, though recorded, operate as constructive notice to purchasers or creditors but, when read in connection with the contract and note referred to, which were not recorded but which showed the exact amount advanced, it created a lien as between the parties and was to be treated as an unrecorded mortgage. (decided under prior law) Cincinnati Leaf Tobacco Warehouse v. Combs, 109 Ky. 21 , 58 S.W. 420, 22 Ky. L. Rptr. 523 , 1900 Ky. LEXIS 161 ( Ky. 1900 ).

A chattel mortgage was not admissible to record unless proved by the attesting witnesses and, where the certificate of the clerk who admitted it to record did not show that it was proved by such witnesses, it furnished no notice and a subsequent mortgagee took priority. (decided under prior law) Starr Piano Co. v. Petrey, 168 Ky. 530 , 182 S.W. 624, 1916 Ky. LEXIS 584 ( Ky. 1916 ).

5.Farm Equipment.

Financing statement in which the description of the secured property read “all farm machinery and equipment, including but not limited to tractors, tanks, tilling and harvesting tools” was sufficient to describe tractor, breaker for the tractor, tractor cultivator and tractor warmer but was insufficient to describe speed feeders, disc hillers, planter parts, grain bed, fertilizer distributor, and rotary mower. (decided under prior law) In re Anselm, 344 F. Supp. 544, 1972 U.S. Dist. LEXIS 14915 (W.D. Ky. 1972 ).

Mammoth Cave Prod. Credit Ass’n v. York, 429 S.W.2d 26, 1968 Ky. LEXIS 729 ( Ky. 1968 ), in its categorization of “all farm equipment” as an overly broad and vague description appears to run contrary to the purpose of the Uniform Commercial Code and its provisions as enacted in this commonwealth; the continued vitality of the opinion would seem to exist only in those unique and limited circumstances wherein a debtor could prove that the creditor, in contravention of the parties’ security agreement, sought to incorporate, within its terms as collateral, property not originally contemplated by the parties to be included. (decided under prior law) Nolin Production Credit Asso. v. Canmer Deposit Bank, 726 S.W.2d 693, 2 U.C.C. Rep. Serv. 2d (CBC) 636,, 1986 Ky. App. LEXIS 1466 (Ky. Ct. App. 1986).

Where the security agreement covered “all farm machinery and equipment,” the second creditor, upon proper investigation, could have reasonably identified the farm equipment in which the secured creditor had previously taken a security interest based upon the description of collateral involved; therefore, the collateral description was neither overly broad in its scope nor unacceptably vague in its designation of the property involved. (decided under prior law) Nolin Production Credit Asso. v. Canmer Deposit Bank, 726 S.W.2d 693, 1986 Ky. App. LEXIS 1466 (Ky. Ct. App. 1986).

6.Substantial Compliance.

The lack of the creditor’s signature on the financing statement is a minor error and a financing statement with that omission, nevertheless, is in substantial compliance with this section. (decided under prior law) Riley v. Miller, 549 S.W.2d 314, 1977 Ky. App. LEXIS 661 (Ky. Ct. App. 1977).

When the omission of the addresses of the debtor and creditor does not operate to prejudice the position of a subsequent creditor by actually precluding the notice function of the financing statement it shall not render the financing statement ineffectual. (decided under prior law) Riley v. Miller, 549 S.W.2d 314, 1977 Ky. App. LEXIS 661 (Ky. Ct. App. 1977).

Where lessee of debtor took over operation of debtor’s business in casual manner with no attention to legal formalities, supplier who had entered into financing agreement with debtor that gave it a security interest in fertilizer it sold debtor but who did not enter into new security agreement with lessee did not have security interest in fertilizer it sold lessee even though lessee and debtor did not comply with certain legal requirements attendant to the transfer of a business, for the security agreement never attached as there was no agreement between the parties and even if it had attached such agreement would be unperfected for the agreement between debtor and supplier did not meet the statutory requirements of this section covering a security agreement between lessee and supplier. (decided under prior law) In re Beaver Dam Grain, Inc., 43 B.R. 283, 1984 Bankr. LEXIS 4881 (Bankr. W.D. Ky. 1984 ).

7.Sufficient Description.

Where a financial statement accurately described the type of collateral which the creditor was holding, and it was obvious from the description set out in the statement that the debtor was an on-going business whose various types of assets were being used as security, such statement was sufficient to suggest inquiries or means of identification which, if pursued, would disclose the property which was secured. (decided under prior law) American Plating & Mfg. Co. v. Liberty Nat'l Bank & Trust Co., 468 F. Supp. 103, 1979 U.S. Dist. LEXIS 14793 (W.D. Ky. 1979 ).

The description of the collateral contemplated by the statutes is not required to be by metes and bounds, and it does not have to be meticulous; it is only required to be in such words and terms that it can be readily located. (decided under prior law) Bank of Danville v. Farmers Nat'l Bank, 602 S.W.2d 160, 1980 Ky. LEXIS 235 ( Ky. 1980 ).

Where security agreement recited that the security in question was located “on the Dale Wilson farm located on Lancaster Road, four miles from Danville, Kentucky” such description was adequate and the agreement created a valid and perfected security interest. Bank of Danville v. Farmers Nat'l Bank, 602 S.W.2d 160, 1980 Ky. LEXIS 235 ( Ky. 1980 ).

The description of collateral on the financing statement is sufficient if it raises a question regarding the identity of encumbered property which causes a third party to reasonably inquire as to external sources available which specify property subject to the parties’ agreement. (decided under prior law) In re Pendleton, 40 B.R. 306, 1984 Bankr. LEXIS 6271 (Bankr. W.D. Ky. 1984 ).

Description of collateral in financial statement as “all equipment, livestock and products thereof, and proceeds” would cause a reasonable third person to inquire further to identify equipment subject to the parties’ security agreement, and thus was sufficient to perfect creditor’s interest in certain equipment owned by debtors-in-possession. (decided under prior law) In re Pendleton, 40 B.R. 306, 1984 Bankr. LEXIS 6271 (Bankr. W.D. Ky. 1984 ).

Under the “inquiry test,” a description of collateral is sufficient for either a security agreement or a financing statement if it puts subsequent creditors on notice so that, aided by inquiry, they may reasonably identify the collateral involved. (decided under prior law) Nolin Production Credit Asso. v. Canmer Deposit Bank, 726 S.W.2d 693, 1986 Ky. App. LEXIS 1466 (Ky. Ct. App. 1986).

Where creditor listed in security agreement the wrong serial number, by one digit, it was similar enough to put a bank claiming a security interest in a tractor on notice that creditor might be claiming a security interest in the same tractor or at the very least, the close similarity in serial numbers required bank to at least make further inquiry. (decided under prior law) Laurel Explosives, Inc. v. First Nat'l Bank & Trust Co., 801 S.W.2d 336, 1990 Ky. App. LEXIS 134 (Ky. Ct. App. 1990).

8.Filing of Amendment.

An amendment to a financing statement must be filed in the county of the debtor’s residence, if that residence is in a county other than where the original statement was filed. (decided under prior law) General Electric Credit Corp. v. Fancher, 600 S.W.2d 472, 1978 Ky. App. LEXIS 687 (Ky. Ct. App. 1978).

9.Security Agreement As Financing Statement.

A financing statement is a document signed by both parties and filed for public record and a security agreement may serve as a financing statement if it is signed by both parties. (decided under prior law) In re Radcliff Door Co., 17 B.R. 153, 1982 Bankr. LEXIS 5129 (Bankr. W.D. Ky. 1982 ).

10.Failure to Sign.

Where the financing statement and the photocopy thereof were unsigned, they were of no effect. (decided under prior law) Hutchison v. C.I.T. Corp., 576 F. Supp. 1, 1982 U.S. Dist. LEXIS 17609 (W.D. Ky. 1982 ), aff'd, 726 F.2d 300, 1984 U.S. App. LEXIS 25658 (6th Cir. Ky. 1984 ).

11.Corporate Signature.

An individual signature, with no indication of corporate capacity and no evidence that the signer was duly authorized to sign on behalf of the corporation, does not meet the “signature of the debtor” requirements of former KRS 355.9-402 (1). (decided under prior law) American Pulverizer Co. v. Cantrell, 694 S.W.2d 714, 1985 Ky. App. LEXIS 547 (Ky. Ct. App. 1985).

12.Duty to Check External Sources.

The duty to seek identification of encumbered property from sources external to financing statement is incumbent upon the noticed third party and not upon a creditor properly utilizing the right to file a financing statement rather than full security agreement. (decided under prior law) In re Pendleton, 40 B.R. 306, 1984 Bankr. LEXIS 6271 (Bankr. W.D. Ky. 1984 ).

13.Transfer of Collateral.

Any collateral transferred from predecessor to debtor would be subject to bank’s security interest, which was perfected by financing statement. (decided under prior law) Bluegrass Ford-Mercury, Inc. v. Farmers Nat'l Bank, 942 F.2d 381, 1991 U.S. App. LEXIS 19123 (6th Cir. Ky. 1991 ).

The language in former subsection (7) of this section does not encompass collateral not yet acquired by the transferee debtor. (decided under prior law) Bluegrass Ford-Mercury, Inc. v. Farmers Nat'l Bank, 942 F.2d 381, 1991 U.S. App. LEXIS 19123 (6th Cir. Ky. 1991 ).

14.— New Financing Statement.

Where inventory was transferred but the corporate names of dealership were similar, the dealerships were located at the same address, and the county in which the dealerships were located was the same, bank still was required to file a new financing statement. (decided under prior law) Bluegrass Ford-Mercury, Inc. v. Farmers Nat'l Bank, 942 F.2d 381, 1991 U.S. App. LEXIS 19123 (6th Cir. Ky. 1991 ).

Cited in:

Versailles Farm v. Haynes, 2021 Ky. App. LEXIS 17 (Ky. Ct. App. Feb. 12, 2021).

Opinions of Attorney General.

A clerk should refuse to accept for filing those “chattel mortgages” which do not bear the signature of the secured party. OAG 61-944 .

Where an instrument purporting to be an amendment to a chattel mortgage was received for filing and inclosed was an automobile registration certificate on which a lien was to be shown, the instrument should be recorded on the automobile registration certificate and should also be recorded as a proper financing or continuation statement. OAG 62-534 .

Where a copy of the chattel instrument is filed instead of a financing statement, it shall be considered as a financing statement if it meets all the requirements of a financing statement and need not contain the statement of authorship required by KRS 382.335 . OAG 62-787 .

If the secured creditor presents the registration receipt and the financing statement in compliance with KRS 186.195 (now repealed) and the financing statement meets the minimum requirements of this section, the clerk could not refuse to record the lien on the registration receipt and file the financing statement without the date of execution but, in the absence of proof as to when such lien was executed, there is a presumption that it was being filed more than ten days from the date of execution, and the burden of such proof is upon the creditor. OAG 63-561 .

A chattel mortgage which was executed on January 1, 1962, and recorded in January 1962, which contained only the signature of the mortgagor or debtor, was not an effective filing under the Uniform Commercial Code. OAG 63-716 .

Where a security instrument has previously been filed on a vehicle in another state, the secured party should send the certificate of title and the financing statement to the county clerk of the county in which the purchaser resides and request him to contact the purchaser about licensing the automobile in Kentucky; when the purchaser appears, the clerk will file the financing statement, issue the license and note the security interest upon the license receipt he issues. OAG 63-939 .

Without the signature of the creditor, the financing statement or a copy of the security instrument filed as a financing statement is not properly filed. OAG 64-206 .

A transcript, duplication or reproduction of the original security agreement, when such copy is actually, physically and manually signed by the debtor and the secured party, is a “copy” within the provisions of former KRS 355.9-402 (1) of this section. OAG 64-708 .

The financing statement, or copy of the security agreement in lieu thereof, must be actually, physically and manually signed by the debtor and the secured party and a copy or reproduction of such signing is not sufficient. OAG 64-708 .

A financing statement relating to property other than a motor vehicle does not need to describe each individual item covered by the financing statement. OAG 67-30 .

A corrected security agreement must be signed by both the debtor and the secured party before it is accepted for filing by the clerk. OAG 67-375 .

Under former KRS 355.9-402 , a description of household goods in the following form: “All household goods of debtor(s) located at the residence of debtor(s) whose address is shown above or at such other location to which such goods may hereafter be removed” is sufficient. OAG 68-157 .

Where a company mounted a log loader on a truck, with the truck being registered in Kentucky, the company would comply with the UCC and be protected against third parties if it filed in the county of the residence of the customer a financing statement showing both the serial number of the machine mounted on the truck and the serial number of the truck. OAG 70-471 .

There is no requirement for notarization of the financing statement and no such requirement can be imposed on the one presenting the statement for filing to the clerk, and the financing statement should be filed in the office of the clerk of the court in accordance with former KRS 355.9-403 (4). OAG 73-599 .

As the general assembly did not adopt that part of the article which states that a financing statement means the original financing statement, either a photostatic copy or a carbon copy of a financing statement may be filed and a county officer performing purely ministerial functions of recording and filing need not consider the effect of filing a financing statement. OAG 73-861 .

There is no requirement that the serial number on farm machinery be shown as part of the description on the financing statement. OAG 75-144 .

If at the time the financing statement is filed, there is an indebtedness of $200 or more, that fact must be stated in the financing statement. OAG 75-144 .

If the financing statement covers a specific crop or crops to be grown, the statement must contain a description of the real estate concerned, the adequacy of such description being a matter between the debtor and the creditor. OAG 75-144 .

A financing statement is sufficient when it is signed by both the debtor and secured party, gives the address of the secured party from which information concerning the security interest may be obtained, gives the mailing address of the debtor, and contains a statement indicating the types or describing the items of collateral. OAG 75-144 .

Photocopies of a properly signed financing statement may be filed without the additional manual signature of the parties. OAG 76-259 .

The exact amount of indebtedness does not have to be stated on the financing statement. OAG 77-391 ; 78-462.

The proper method of filing to add a debtor is to file an amendment to the original financing statement, which amendment should contain an express reference to the original financing statement on file and, when the county clerk accepts such an amendment for filing, he should file such amended financing statement under the same number and cover as the original financing statement such that all information pertaining to the security interest on the particular collateral will be together and indexed accordingly. OAG 78-213 .

It is clear that no date of execution need be shown on financing statements. OAG 78-447 .

A continuation statement is not included in the definition of a financing statement, and is not subject to the $1.00 tax imposed by KRS 142.010(1)(b) on original financing statements involving more than $200.00, nor the $1.00 for filing and noting a statement of release which has already been paid and is not to be included in calculating the fee for filing a continuation statement. OAG 79-147 .

Where one company filed a financing statement in September of 1979, listing a mobile home, with an accompanying affidavit that the mobile home would not be used on public highways, and a second company filed a financing statement in October of 1979, listing the same mobile home, with an accompanying license registration receipt issued by the county clerk’s office on which the second company was listed as the first lienholder on the mobile home, the fact that at the time of the filing of the first company’s financing statement there was no certificate of registration for the mobile home in existence in no way militates against the principle that the proper filing of the financing statement perfected the lien; the county clerk is now required to note the first lien of the company that filed the September statement on the certificate of registration that came into existence later. OAG 80-103 .

The original financing statement, rather than the index cards kept by the county clerk, is considered to be the legal instrument for the description of property involved. OAG 80-190 .

A copy of a security agreement may be filed as a financing statement, provided that it contained the essential information outlined in former KRS 355.9-402 , and provided that it was actually and physically signed by the debtor and secured party and does not bear a mere copy of the signatures. OAG 82-220 .

Where the intended collateral for a secured transaction was “equipment,” as specifically defined in former KRS 355.9-109 (2), and where motor vehicles, fixtures, crops, and farm equipment were not involved, the use of the word “equipment” to describe the collateral in the financing statement was valid and the county clerk should have filed the financing statement when it was tendered. OAG 83-196 .

Former KRS 355.9-402 (5) permited amendments of the original financing statement, but established no definite items of restriction, thus suggesting that an amendment to a financing statement may amend any aspect of the statement, and may add new collateral; further, the Kentucky statutory law does not indicate whether amendment of a financing statement may only be done by filing a completely new statement. OAG 83-303 .

Where an amendment to the original financing statement involved only the change in the corporate name of the debtor, such amendment was proper and a completely new financing statement was not required to be filed. OAG 83-303 .

If a permanent fixture is involved, then the security agreement (real estate mortgage) may be filed as a financing statement, provided that the requirements of former KRS 355.9-402 were met. OAG 83-463 .

A chattel mortgage may be filed as a financing statement, provided that both parties sign it and it meets other requirements of former KRS 355.9-402 (1). The chattel mortgage would describe in detail the contract between the mortgagor and mortgagee and the chattel mortgage filed as a financing statement would give notice, if it meets the code requirements. OAG 83-463 .

An amendment to a financing statement may amend any aspect of the statement, and may add new collateral. OAG 84-38 .

A financing statement for a mobile home may be amended for the purpose of showing new ownership of the mobile home by filing a document with the county clerk which precisely states the change in the ownership of the mobile home by giving the owner’s name and address as stated in the original financing statement and the new owner’s name and address, as well as the secured party’s address; such amendment should explicitly state information which will definitely identify the original financing statement on file in the clerk’s office, should explicitly refer to the collateral, i.e., the particular mobile home involved and should be signed by the creditor and new debtor and dated. The effective period of the original financing statement is not affected by the mere change in ownership of the mobile home. OAG 84-38 .

Under the express language of former KRS 355.9-402 (1), neither the original nor a photocopy or carbon copy of a financing statement signed only by the secured party was acceptable for filing; the financing statement must be signed by the debtor as well as the secured party under the explicit terms of the statute. OAG 84-281 .

Under the express language of KRS 355.9-402 (1), a copy of the security agreement was sufficient as a financing statement if it contained the information required in that subsection and is signed by both parties. OAG 84-281 .

Carbon copies or photocopies of the original financing statement are acceptable for filing with the clerk, where the requisites of former KRS 355.9-402 (1) were met, without the necessity for manual signature of the parties on such copies. OAG 84-281 .

When the financing statement covers goods which are or are to become fixtures, a description of the real estate by reference to deed book and page number is sufficient. OAG 86-83 .

The motor vehicle lien statement is meant to replace financing statements on those motor vehicles for which a certificate of title is required. OAG 87-39 .

For UCC filing purposes, there is no distinction between “and” and “or” titles; a UCC filing statement must contain the signatures of both owners of a vehicle when the title shows ownership to be in one party “or” the other. OAG 92-15 .

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Research References and Practice Aids

Journal of Mineral Law & Policy.

Comments, Injected Gas: Realty or Personalty, 3 J.M.L. & P. 571 (1988).

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Kentucky Law Journal.

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

355.9-503. Name of debtor and secured party.

  1. A financing statement sufficiently provides the name of the debtor:
    1. Except as otherwise provided in paragraph (c) of this subsection, if the debtor is a registered organization, or the collateral is held in a trust that is a registered organization, only if the financing statement provides the name that is stated to be the registered organization’s name on the public organic record most recently filed with or issued or enacted by the registered organization’s jurisdiction of organization which purports to state, amend, or restate the registered organization’s name;
    2. Subject to subsection (6) of this section, if the collateral is being administered by the personal representative of a decedent, only if the financing statement provides, as the name of the debtor, the name of the decedent and, in a separate part of the financing statement, indicates that the collateral is being administered by a personal representative;
    3. If the collateral is held in a trust that is not a registered organization, only if the financing statement:
      1. Provides, as the name of the debtor:
        1. If the organic record of the trust specifies a name for the trust, the name so specified; or
        2. If the organic record of the trust does not specify a name for the trust, the name of the settlor or testator; and
      2. In a separate part of the financing statement:
        1. If the name is provided in accordance with subparagraph 1.a. of this paragraph, indicates that the collateral is held in a trust; or
        2. If the name is provided in accordance with subparagraph 1.b. of this paragraph, provides additional information sufficient to distinguish the trust from other trusts having one (1) or more of the same settlors or the same testator and indicates that the collateral is held in a trust, unless the additional information so indicates;
    4. Subject to subsection (7) of this section, if the debtor is an individual to whom this state has issued an operator’s license that has not expired, only if the financing statement provides the name of the individual which is indicated on the operator’s license;
    5. If the debtor is an individual to whom paragraph (d) of this subsection does not apply, only if the financing statement provides the individual name of the debtor or the surname and first personal name of the debtor; and
    6. In other cases:
      1. If the debtor has a name, only if the financing statement provides the organizational name of the debtor; and
      2. If the debtor does not have a name, only if it provides the names of the partners, members, associates, or other persons comprising the debtor, in a manner that each name provided would be sufficient if the person named were the debtor.
  2. A financing statement that provides the name of the debtor in accordance with subsection (1) of this section is not rendered ineffective by the absence of:
    1. A trade name or other name of the debtor; or
    2. Unless required under subsection (1)(f)2. of this section, names of partners, members, associates, or other persons comprising the debtor.
  3. A financing statement that provides only the debtor’s trade name does not sufficiently provide the name of the debtor.
  4. Failure to indicate the representative capacity of a secured party or representative of a secured party does not affect the sufficiency of a financing statement.
  5. A financing statement may provide the name of more than one (1) debtor and the name of more than one (1) secured party.
  6. The name of the decedent indicated on the order appointing the personal representative of the decedent issued by the court having jurisdiction over the collateral is sufficient as the “name of the decedent” under subsection (1)(b) of this section.
  7. If this state has issued to an individual more than one (1) operator’s license of a kind described in subsection (1)(d) of this section, the one that was issued most recently is the one to which subsection (1)(d) of this section refers.
  8. The “name of the settlor or testator” means:
    1. If the settlor is a registered organization, the name of the registered organization indicated on the public organic record filed with or issued or enacted by the registered organization’s jurisdiction of organization; or
    2. In other cases, the name of the settlor or testator indicated in the trust’s organic record.

History. Enact. Acts 1958, ch. 77, § 9-503, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 94, effective July 1, 2001; 2012, ch. 132, § 79, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  Subsections (a)(4)(A), (b), and (c) derive from former Section 9-402(7); otherwise, new.
  2. Debtor’s Name.  The requirement that a financing statement provide the debtor’s name is particularly important. Financing statements are indexed under the name of the debtor, and those who wish to find financing statements search for them under the debtor’s name. Subsection (a) explains what the debtor’s name is for purposes of a financing statement.
    1. Registered Organizations.  As a general matter, if if the debtor is a “registered organization” (defined in Section 9-102 so as to ordinarily include corporations, limited partnerships, limited liability companies, and statutory trusts), then the debtor’s name is the name shown on the “public organic record” of the debtor’s “jurisdiction of organization” (both also defined in Section 9-102).
    2. Collateral Held in a Trust.  When a financing statement covers collateral that is held in a trust that is a registered organization, subsection (a)(1) governs the name of the debtor. If, however, the collateral is held in a trust that is not a registered organization, subsection (a)(3) applies. (As used in this Article, collateral “held in a trust” includes collateral as to which the trust is the debtor as well as collateral as to which the trustee is the debtor.) This subsection adopts a convention that generally results in the name of the trust or the name of the trust’s settlor being provided as the name of the debtor on the financing statement, even if, as typically is the case with common-law trusts, the “debtor” (defined in Section 9-102) is a trustee acting with respect to the collateral. This convention provides more accurate information and eases the burden for searchers, who otherwise would have difficulty with respect to debtor trustees that are large financial institutions.

      More specifically, if a trust’s organic record specifies a name for the trust, subsection (a)(3) requires the financing statement to provide, as the name of the debtor, the name for the trust specified in the organic record. In addition, the financing statement must indicate, in a separate part of the financing statement, that the collateral is held in a trust.

      If the organic record of the trust does not specify a name for the trust, the name required for the financing statement is the name of the settlor or, in the case of a testamentary trust, the testator, in each case as determined under subsection (h). In addition, the financing statement must provide sufficient additional information to distinguish the trust from other trusts having one or more of the same settlors or the same testator. In many cases an indication of the date on which the trust was settled will satisfy this requirement. If neither the name nor the additional information indicates that the collateral is held in a trust, the financing statement must indicate that fact, but not as part of the debtor’s name.

      Neither the indication that the collateral is held in a trust nor the additional information that distinguishes the trust from other trusts having one or more of the same settlors or the same testator is part of the debtor’s name. Nevertheless, a financing statement that fails to provide, in a separate part of the financing statement, any required indication or additional information does not sufficiently provide the name of the debtor under Sections 9-502(a) and 9-503(a)(3), does not “substantially satisfy[] the requirements” of Part 5 within the meaning of Section 9-506(a), and so is ineffective.

    3. Collateral Administered by a Personal Representative.  Subsection (a)(2) deals with collateral that is being administered by an executor, administrator, or other personal representative of a decedent. Even if, as often is the case, the representative is the “debtor” (defined in Section 9-102), the financing statement must provide the name of the decedent as the name of the debtor. Subsection (f) provides a safe harbor, under which the name of the decedent indicated on the order appointing the personal representative issued by the court having jurisdiction over the collateral is sufficient as the name of the decedent. If the order indicates more than one name for the decedent, the first name in the list qualifies under subsection (f); however, other names in the list also may qualify as the “name of the decedent” within the meaning of subsection (a)(2). In addition to providing the name of the decedent, the financing statement must indicate, in a separate part of the financing statement, that the collateral is being administered by a personal representative. Although the indication is not part of the debtor’s name, a financing statement that fails to provide the indication does not sufficiently provide the name of the debtor under Sections 9-502(a) and 9-503(a)(2), does not “substantially satisfy the requirements” of Part 5 within the meaning of Section 9-506(a), and so is ineffective.
    4. Individuals . This Article provides alternative approaches towards the requirement for providing the name of a debtor who is an individual.

      Alternative A. Alternative A distinguishes between two groups of individual debtors. For debtors holding an unexpired driver’s license issued by the State where the financing statement is filed (ordinarily the State where the debtor maintains the debtor’s principal residence), Alternative A requires that a financing statement provide the name indicated on the license. When a debtor does not hold an unexpired driver’s license issued by the relevant State, the requirement can be satisfied in either of two ways. A financing statement is sufficient if it provides the “individual name” of the debtor. Alternatively, a financing statement is sufficient if it provides the debtor’s surname (i.e., family name) and first personal name (i.e., first name other than the surname).

      Alternative B. Alternative B provides three ways in which a financing statement may sufficiently provide the name of an individual who is a debtor. The “individual name” of the debtor is sufficient, as is the debtor’s surname and first personal name. If the individual holds an unexpired driver’s license issued by the State where the financing statement is filed (ordinarily the State of the debtor’s principal residence), the name indicated on the driver’s license also is sufficient.

      Name indicated on the driver’s license. A financing statement does not “provide the name of the individual which is indicated” on the debtor’s driver’s license unless the name it provides is the same as the name indicated on the license. This is the case even if the name indicated on the debtor’s driver’s license contains an error.

  3. Secured Party’s Name.  New subsection (d) makes clear that when the secured party is a representative, a financing statement is sufficient if it names the secured party, whether or not it indicates any representative capacity. Similarly, a financing statement that names a representative of the secured party is sufficient, even if it does not indicate the representative capacity.
  4. Multiple Names.  Subsection (e) makes explicit what is implicit under former Article 9: a financing statement may provide the name of more than one debtor and secured party. See Section 1-106 (words in the singular include the plural). With respect to records relating to more than one debtor, see Section 9-520(d). With respect to financing statements providing the name of more than one secured party, see Sections 9-509(e) and 9-510(b).

Example 1: Debtor, an individual whose principal residence is in Illinois, grants a security interest to SP in certain business equipment. SP files a financing statement with the Illinois filing office. The financing statement provides the name appearing on Debtor’s Illinois driver’s license, “Joseph Allan Jones.” Regardless of which Alternative is in effect in Illinois, this filing would be sufficient under Illinois’ Section 9-503(a), even if Debtor’s correct middle name is Alan, not Allan.

A filing against “Joseph A. Jones” or “Joseph Jones” would not “provide the name of the individual which is indicated” on the debtor’s driver’s license. However, these filings might be sufficient if Alternative A is in effect in Illinois and Jones has no current (i.e., unexpired) Illinois driver’s license, or if Illinois has enacted Alternative B.

Determining the name that should be provided on the financing statement must not be done mechanically. The order in which the components of an individual’s name appear on a driver’s license differs among the States. Had the debtor in Example 1 obtained a driver’s license from a different State, the license might have indicated the name as “Jones Joseph Allan.” Regardless of the order on the driver’s license, the debtor’s surname must be provided in the part of the financing statement designated for the surname.

Alternatives A and B both refer to a license issued by “this State.” Perfection of a security interest by filing ordinarily is determined by the law of the jurisdiction in which the debtor is located. See Section 9-301(1). (Exceptions to the general rule are found in Section 9-301(3) and (4), concerning fixture filings, timber to be cut, and as-extracted collateral.) A debtor who is an individual ordinarily is located at the individual’s principal residence. See Section 9-307(b). (An exception appears in Section 9-307(c).) Thus, a given State’s Section 9-503 ordinarily will apply during any period when the debtor’s principal residence is located in that State, even if during that time the debtor holds or acquires a driver’s license from another State.

Individual name of the debtor. Article 9 does not determine the “individual name” of a debtor. Nor does it determine which element or elements in a debtor’s name constitute the surname. In some cases, determining the “individual name” of a debtor may be difficult, as may determining the debtor’s surname. This is because in the case of individuals, unlike registered organizations, there is no public organic record to which reference can be made and from which the name and its components can be definitively determined.

Names can take many forms in the United States. For example, whereas a surname is often colloquially referred to as a “last name,” the sequence in which the elements of a name are presented is not determinative. In some cultures, the surname appears first, while in others it may appear in a location that is neither first nor last. In addition, some surnames are composed of multiple elements that, taken together, constitute a single surname. These elements may or may not be separated by a space or connected by a hyphen, “i,” or “y.” In other instances, some or all of the same elements may not be part of the surname. In some cases, a debtor’s entire name might be composed of only a single element, which should be provided in the part of the financing statement designated for the surname.

In disputes as to whether a financing statement sufficiently provides the “individual name” of a debtor, a court should refer to any non-UCC law concerning names. However, case law about names may have developed in contexts that implicate policies different from those of Article 9. A court considering an individual’s name for purposes of determining the sufficiency of a financing statement is not necessarily bound by cases that were decided in other contexts and for other purposes.

Individuals are asked to provide their names on official documents such as tax returns and bankruptcy petitions. An individual may provide a particular name on an official document in response to instructions relating to the document rather than because the name is actually the individual’s name. Accordingly, a court should not assume that the name an individual provides on an official document necessarily constitutes the “individual name” for purposes of the sufficiency of the debtor’s name on a financing statement. Likewise, a court should not assume that the name as presented on an individual’s birth certificate is necessarily the individual’s current name.

In applying non-UCC law for purposes of determining the sufficiency of a debtor’s name on a financing statement, a court should give effect to the instruction in Section 1-103(a)(1) that the UCC “must be liberally construed and applied to promote its underlying purposes and policies,” which include simplifying and clarifying the law governing commercial transactions. Thus, determination of a debtor’s name in the context of the Article 9 filing system must take into account the needs of both filers and searchers. Filers need a simple and predictable system in which they can have a reasonable degree of confidence that, without undue burden, they can determine a name that will be sufficient so as to permit their financing statements to be effective. Likewise, searchers need a simple and predictable system in which they can have a reasonable degree of confidence that, without undue burden, they will discover all financing statements pertaining to the debtor in question. The court also should take into account the purpose of the UCC to make the law uniform among the various jurisdictions. See Section 1-103(a)(3).

Of course, once an individual debtor’s name has been determined to be sufficient for purposes of Section 9-503, a financing statement that provides a variation of that name, such as a “nickname” that does not constitute the debtor’s name, does not sufficiently provide the name of the debtor under this section. Cf. Section 9-503(c) (a financing statement providing only a debtor’s trade name is not sufficient).

If there is any doubt about an individual debtor’s name, a secured party may choose to file one or more financing statements that provide a number of possible names for the debtor and a searcher may similarly choose to search under a number of possible names.

Note that, even if the name provided in an initial financing statement is correct, the filing office nevertheless must reject the financing statement if it does not identify an individual debtor’s surname (e.g., if it is not clear whether the debtor’s surname is Perry or Mason). See Section 9-516(b)(3)(C).

Example 2: Debtor creates a security interest in favor of Bank X, Bank Y, and Bank Z, but not to their representative, the collateral agent (Bank A). The collateral agent is not itself a secured party. See Section 9-102. Under Sections 9-502(a) and 9-503(d), however, a financing statement is effective if it names as secured party Bank A and not the actual secured parties, even if it omits Bank A’s representative capacity.

Each person whose name is provided in an initial financing statement as the name of the secured party or representative of the secured party is a secured party of record. See Section 9-511.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-504. Indication of collateral.

A financing statement sufficiently indicates the collateral that it covers if the financing statement provides:

  1. A description of the collateral pursuant to KRS 355.9-108 ; or
  2. An indication that the financing statement covers all assets or all personal property.

History. Enact. Acts 1958, ch. 77, § 9-504, effective July 1, 1960; 1986, ch. 118, § 85, effective July 1, 1987; repealed and reenact., Acts 2000, ch. 408, § 95, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-402(1).
  2. Indication of Collateral.  To comply with Section 9-502(a), a financing statement must “indicate” the collateral it covers. A financing statement sufficiently indicates collateral claimed to be covered by the financing statement if it satisfies the purpose of conditioning perfection on the filing of a financing statement, i.e., if it provides notice that a person may have a security interest in the collateral claimed. See Section 9-502, Comment 2. In particular, an indication of collateral that would have satisfied the requirements of former section 9-402(1) (i.e., “a statement indicating the types, or describing the items, of collateral”) suffices under Section 9-502(a). An indication may satisfy the requirements of section 9-502(a), even if it would not have satisfied the requirements of former Section 9-402(1).

    This section provides two safe harbors. Under paragraph (1), a “description” of the collateral (as the term is explained in Section 9-108) suffices as an indication for purposes of the sufficiency of a financing statement.

    Debtors sometimes create a security interest in all, or substantially all, of their assets. To accommodate this practice, paragraph (2) expands the class of sufficient collateral references to embrace “an indication that the financing statement covers all assets or all personal property.” If the property in question belongs to the debtor and is personal property, any searcher will know that the property is covered by the financing statement. Of course, regardless of its breadth, a financing statement has no effect with respect to property indicated but to which a security interest has not attached. Note that a broad statement of this kind (e.g., “all debtor’s personal property”) would not be a sufficient “description” for purposes of a security agreement. See Sections 9-108 and 9-203(b)(3)(A). It follows that a somewhat narrower description than “all assets,” e.g., “all assets other than automobiles,” is sufficient for purposes of this section, even if it does not suffice for purposes of a security agreement.

NOTES TO DECISIONS

1.Sufficient Description.

Where a financial statement accurately described the type of collateral which the creditor was holding, and it was obvious from the description set out in the statement that the debtor was an on-going business whose various types of assets were being used as security, such statement was sufficient to suggest inquiries or means of identification which, if pursued, would disclose the property which was secured. (decided under prior law) American Plating & Mfg. Co. v. Liberty Nat'l Bank & Trust Co., 468 F. Supp. 103, 1979 U.S. Dist. LEXIS 14793 (W.D. Ky. 1979 ).

The description of the collateral contemplated by the statutes is not required to be by metes and bounds, and it does not have to be meticulous; it is only required to be in such words and terms that it can be readily located. (decided under prior law) Bank of Danville v. Farmers Nat'l Bank, 602 S.W.2d 160, 1980 Ky. LEXIS 235 ( Ky. 1980 ).

Where security agreement recited that the security in question was located “on the Dale Wilson farm located on Lancaster Road, four miles from Danville, Kentucky” such description was adequate and the agreement created a valid and perfected security interest. Bank of Danville v. Farmers Nat'l Bank, 602 S.W.2d 160, 1980 Ky. LEXIS 235 ( Ky. 1980 ).

The description of collateral on the financing statement is sufficient if it raises a question regarding the identity of encumbered property which causes a third party to reasonably inquire as to external sources available which specify property subject to the parties’ agreement. (decided under prior law) In re Pendleton, 40 B.R. 306, 1984 Bankr. LEXIS 6271 (Bankr. W.D. Ky. 1984 ).

Description of collateral in financial statement as “all equipment, livestock and products thereof, and proceeds” would cause a reasonable third person to inquire further to identify equipment subject to the parties’ security agreement, and thus was sufficient to perfect creditor’s interest in certain equipment owned by debtors-in-possession. (decided under prior law) In re Pendleton, 40 B.R. 306, 1984 Bankr. LEXIS 6271 (Bankr. W.D. Ky. 1984 ).

Under the “inquiry test,” a description of collateral is sufficient for either a security agreement or a financing statement if it puts subsequent creditors on notice so that, aided by inquiry, they may reasonably identify the collateral involved. (decided under prior law) Nolin Production Credit Asso. v. Canmer Deposit Bank, 726 S.W.2d 693, 1986 Ky. App. LEXIS 1466 (Ky. Ct. App. 1986).

Where creditor listed in security agreement the wrong serial number, by one digit, it was similar enough to put a bank claiming a security interest in a tractor on notice that creditor might be claiming a security interest in the same tractor or at the very least, the close similarity in serial numbers required bank to at least make further inquiry. (decided under prior law) Laurel Explosives, Inc. v. First Nat'l Bank & Trust Co., 801 S.W.2d 336, 1990 Ky. App. LEXIS 134 (Ky. Ct. App. 1990).

Although there was a slight error in the serial number of the borrower’s backhoe as mentioned in the creditor bank’s financial statement, the description of the collateral as a 1999 Case backhoe 580L was sufficient to put the purchaser of the backhoe on notice that the collateral mentioned in the bank’s financial statement was the same as the backhoe he had purchased from the borrower. Bishop v. Alliance Banking Co., 412 S.W.3d 217, 2013 Ky. App. LEXIS 151 (Ky. Ct. App. 2013).

Where debtor operated both hotel and restaurant on hotel site, secured creditor did not have perfected security interest in room revenue generated by credit card receipts because obligation created from credit card transaction was payment intangible and creditor did not have perfected prepetition lien in payment intangibles; reference in financing statement to security agreement was insufficient to meet safe harbor requirement that allowed a statement that the Financing Statement covered “all assets or all personal property.” In re Lexington Hosp. Grp., LLC, 2017 Bankr. LEXIS 3782 (Bankr. E.D. Ky. Nov. 1, 2017).

2.Farm Equipment.

Financing statement in which the description of the secured property read “all farm machinery and equipment, including but not limited to tractors, tanks, tilling and harvesting tools” was sufficient to describe tractor, breaker for the tractor, tractor cultivator and tractor warmer but was insufficient to describe speed feeders, disc hillers, planter parts, grain bed, fertilizer distributor, and rotary mower. (decided under prior law) In re Anselm, 344 F. Supp. 544, 1972 U.S. Dist. LEXIS 14915 (W.D. Ky. 1972 ).

Mammoth Cave Prod. Credit Ass’n v. York, 429 S.W.2d 26, 1968 Ky. LEXIS 729 ( Ky. 1968 ), in its categorization of “all farm equipment” as an overly broad and vague description appears to run contrary to the purpose of the Uniform Commercial Code and its provisions as enacted in this commonwealth; the continued vitality of the opinion would seem to exist only in those unique and limited circumstances wherein a debtor could prove that the creditor, in contravention of the parties’ security agreement, sought to incorporate, within its terms as collateral, property not originally contemplated by the parties to be included. (decided under prior law) Nolin Production Credit Asso. v. Canmer Deposit Bank, 726 S.W.2d 693, 2 U.C.C. Rep. Serv. 2d (CBC) 636,, 1986 Ky. App. LEXIS 1466 (Ky. Ct. App. 1986).

Where the security agreement covered “all farm machinery and equipment,” the second creditor, upon proper investigation, could have reasonably identified the farm equipment in which the secured creditor had previously taken a security interest based upon the description of collateral involved; therefore, the collateral description was neither overly broad in its scope nor unacceptably vague in its designation of the property involved. (decided under prior law) Nolin Production Credit Asso. v. Canmer Deposit Bank, 726 S.W.2d 693, 1986 Ky. App. LEXIS 1466 (Ky. Ct. App. 1986).

Opinions of Attorney General.

Where an instrument purporting to be an amendment to a chattel mortgage was received for filing and inclosed was an automobile registration certificate on which a lien was to be shown, the instrument should be recorded on the automobile registration certificate and should also be recorded as a proper financing or continuation statement. OAG 62-534 .

A chattel mortgage which was executed on January 1, 1962, and recorded in January 1962, which contained only the signature of the mortgagor or debtor, was not an effective filing under the Uniform Commercial Code. OAG 63-716 .

A financing statement relating to property other than a motor vehicle does not need to describe each individual item covered by the financing statement. OAG 67-30 .

Under former KRS 355.9-402 , a description of household goods in the following form: “All household goods of debtor(s) located at the residence of debtor(s) whose address is shown above or at such other location to which such goods may hereafter be removed” is sufficient. OAG 68-157 .

Where a company mounted a log loader on a truck, with the truck being registered in Kentucky, the company would comply with the UCC and be protected against third parties if it filed in the county of the residence of the customer a financing statement showing both the serial number of the machine mounted on the truck and the serial number of the truck. OAG 70-471 .

There is no requirement that the serial number on farm machinery be shown as part of the description on the financing statement. OAG 75-144 .

If the financing statement covers a specific crop or crops to be grown, the statement must contain a description of the real estate concerned, the adequacy of such description being a matter between the debtor and the creditor. OAG 75-144 .

Where the intended collateral for a secured transaction was “equipment,” as specifically defined in former KRS 355.9-109 (2), and where motor vehicles, fixtures, crops, and farm equipment were not involved, the use of the word “equipment” to describe the collateral in the financing statement was valid and the county clerk should have filed the financing statement when it was tendered. OAG 83-196 .

When the financing statement covers goods which are or are to become fixtures, a description of the real estate by reference to deed book and page number is sufficient. OAG 86-83 .

The motor vehicle lien statement is meant to replace financing statements on those motor vehicles for which a certificate of title is required. OAG 87-39 .

Research References and Practice Aids

Journal of Mineral Law & Policy.

Comments, Injected Gas: Realty or Personalty, 3 J.M.L. & P. 571 (1988).

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Kentucky Law Journal.

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

355.9-505. Filing and compliance with other statutes and treaties for consignments, leases, other bailments, and other transactions.

  1. A consignor, lessor, or other bailor of goods, a licensor, or a buyer of a payment intangible or promissory note may file a financing statement, or may comply with a statute or treaty described in KRS 355.9-311 (1), using the terms “consignor,” “consignee,” “lessor,” “lessee,” “bailor,” “bailee,” “licensor,” “licensee,” “owner,” “registered owner,” “buyer,” “seller,” or words of similar import, instead of the terms “secured party” and “debtor.”
  2. This part of this article applies to the filing of a financing statement under subsection (1) of this section and, as appropriate, to compliance that is equivalent to filing a financing statement under KRS 355.9-311 (2), but the filing or compliance is not of itself a factor in determining whether the collateral secures an obligation. If it is determined for another reason that the collateral secures an obligation, a security interest held by the consignor, lessor, bailor, licensor, owner, or buyer which attaches to the collateral is perfected by the filing or compliance.

History. Enact. Acts 1958, ch. 77, § 9-505, effective July 1, 1960; 1986, ch. 118, § 85, effective July 1, 1987; repealed and reenact., Acts 2000, ch. 408, § 96, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-408.
  2. Precautionary Filing.  Occasionally, doubts arise concerning whether a transaction creates a relationship to which this article or its filing provisions apply. For example, questions may arise over whether a “lease” of equipment in fact creates a security interest or whether the “sale” of payment intangibles in fact secures an obligation, thereby requiring action to perfect the security interest. This section, which derives from former Section 9-408, affords the option of filing of a financing statement with appropriate changes of terminology but without affecting the substantive question of classification of the transaction.
  3. Changes from Former Section 9-408.  This section expands the rule of section 9-408 to embrace more generally other bailments and transactions, as well as sales transactions, primarily sales of payment intangibles and promissory notes. It provides the same benefits for compliance with a statute or treaty described in Section 9-311(a) that former Section 9-408 provided for filing, in connection with the use of terms such as “lessor,” “consignor,” etc. The references to “owner” and “registered owner” are intended to address, for example, the situation where a putative lessor is the registered owner of an automobile covered by a certificate of title and the transaction is determined to create a security interest. Although this section provides that the security interest is perfected, the relevant certificate of title statute may expressly provide to the contrary or may be ambiguous. If so, it may be necessary or advisable to amend the certificate of title statute to ensure that perfection of the security interest will be achieved.

    As does Section 1-201, former Article 9 referred to transactions, including leases and consignments, “intended as security.” This misleading phrase created the erroneous impression that the parties to a transaction can dictate how the law will classify it (e.g., as a bailment or as a security interest) and thus affect the rights of third parties. This article deletes the phrase wherever it appears. Subsection (b) expresses the principle more precisely by referring to a security interest that “secures an obligation.”

  4. Consignments.  Although a “true” consignment is a bailment, the filing and priority provisions of former Article 9 applied to “true” consignments. See former Sections 2-326(3) and 9-114. A consignment “intended as security” created a security interest that was in all respects subject to former Article 9. This article subsumes most true consignments under the rubric of “security interest.” See Sections 9-102 (definition of “consignment”), 9-109(a)(4), 1-201(37) (definition of “security interest”). Nevertheless, it maintains the distinction between a (true) “consignment,” as to which only certain aspects of Article 9 apply, and a so-called consignment that actually “secures an obligation,” to which Article 9 applies in full. The revisions to this section reflect the change in terminology.

355.9-506. Effect of errors or omissions.

  1. A financing statement substantially satisfying the requirements of this part of this article is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.
  2. Except as otherwise provided in subsection (3) of this section, a financing statement that fails sufficiently to provide the name of the debtor in accordance with KRS 355.9-503 (1) is seriously misleading.
  3. If a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with KRS 355.9-503 (1), the name provided does not make the financing statement seriously misleading.
  4. For purposes of KRS 355.9-508 (2), the “debtor’s correct name” in subsection (3) of this section means the correct name of the new debtor.

History. Enact. Acts 1958, ch. 77, § 9-506, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 97, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-402(8).
  2. Errors.  Like former Section 9-402(8), subsection (a) is in line with the policy of this article to simplify formal requisites and filing requirements. It is designed to discourage the fanatical and impossibly refined reading of statutory requirements in which courts occasionally have indulged themselves. Subsection (a) provides the standard applicable to indications of collateral. Subsections (b) and (c), which are new, concern the effectiveness of financing statements in which the debtor’s name is incorrect. Subsection (b) contains the general rule: A financing statement that fails sufficiently to provide the debtor’s name in accordance with Section 9-503(a) is seriously misleading as a matter of law. Subsection (c) provides an exception: If the financing statement nevertheless would be discovered in a search under the debtor’s correct name, using the filing office’s standard search logic, if any, then as a matter of law the incorrect name does not make the financing statement seriously misleading. A financing statement that is seriously misleading under this section is ineffective even if it is disclosed by (i) using a search logic other than that of the filing office to search the official records, or (ii) using the filing office’s standard search logic to search a data base other than that of the filing office.

    In addition to requiring the debtor’s name and an indication of the collateral, Section 9-502(a) requires a financing statement to provide the name of the secured party or a representative of the secured party. Inasmuch as searches are not conducted under the secured party’s name, and no filing is needed to continue the perfected status of security interest after it is assigned, an error in the name of the secured party or its representative will not be seriously misleading. However, in an appropriate case, an error of this kind may give rise to an estoppel in favor of a particular holder of a conflicting claim to the collateral. See section 1-103.

  3. New Debtors.  Subsection (d) provides that, in determining the extent to which a financing statement naming an original debtor is effective against a new debtor, the sufficiency of the financing statement should be tested against the name of the new debtor.

355.9-507. Effect of certain events on effectiveness of financing statement.

  1. A filed financing statement remains effective with respect to collateral that is sold, exchanged, leased, licensed, or otherwise disposed of and in which a security interest or agricultural lien continues, even if the secured party knows of or consents to the disposition.
  2. Except as otherwise provided in subsection (3) of this section and KRS 355.9-508 , a financing statement is not rendered ineffective if, after the financing statement is filed, the information provided in the financing statement becomes seriously misleading under KRS 355.9-506 .
  3. If the name that a filed financing statement provides for a debtor becomes insufficient as the name of the debtor under KRS 355.9-503 (1) so that the financing statement becomes seriously misleading under KRS 355.9-506 :
    1. The financing statement is effective to perfect a security interest in collateral acquired by the debtor before, or within four (4) months after, the filed financing statement becomes seriously misleading; and
    2. The financing statement is not effective to perfect a security interest in collateral acquired by the debtor more than four (4) months after the filed financing statement becomes seriously misleading, unless an amendment to the financing statement which renders the financing statement not seriously misleading is filed within four (4) months after the filed financing statement becomes seriously misleading.

History. Enact. Acts 1958, ch. 77, § 9-507, effective July 1, 1960; repealed and reenact., Acts 2000, ch. 408, § 98, effective July 1, 2001; 2001, ch. 65, § 2, effective July 1, 2001; 2012, ch. 132, § 80, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  Former Section 9-402(7).
  2. Scope of Section.  This section deals with situations in which the information in a proper financing statement becomes inaccurate after the financing statement is filed. Compare Section 9-338, which deals with situations in which a financing statement contains a particular kind of information concerning the debtor (i.e., the information described in Section 9-516(b)(5)) that is incorrect at the time it is filed.
  3. Post-Filing Disposition of Collateral.  Under subsection (a), a financing statement remains effective even if the collateral is sold or otherwise disposed of. This subsection clarifies the third sentence of former Section 9-402(7) by providing that a financing statement remains effective following the disposition of collateral only when the security interest or agricultural lien continues in that collateral. This result is consistent with the conclusion of PEB Commentary No. 3. Normally, a security interest does continue after disposition of the collateral. See Section 9-315(a). Law other than this Article determines whether an agricultural lien survives disposition of the collateral.

    As a consequence of the disposition, the collateral may be owned by a person other than the debtor against whom the financing statement was filed. Under subsection (a), the secured party remains perfected even if it does not correct the public record. For this reason, any person seeking to determine whether a debtor owns collateral free of security interests must inquire as to the debtor’s source of title and, if circumstances seem to require it, search in the name of a former owner. Subsection (a) addresses only the sufficiency of the information contained in the financing statement. A disposition of collateral may result in loss of perfection for other reasons. See Section 9-316.

  4. Other Post-Filing Changes.  Subsection (b) provides that, as a general matter, post-filing changes that render a financing statement seriously misleading have no effect on a financing statement. The financing statement remains effective. It is subject to two exceptions: Section 9-508 and Section 9-507(c). Section 9-508 addresses the effectiveness of a financing statement filed against an original debtor when a new debtor becomes bound by the original debtor’s security agreement. It is discussed in the Comments to that section. Section 9-507(c) addresses cases in which a filed financing statement provides a name that, at the time of filing, satisfies the requirements of Section 9-503(a) with respect to the named debtor but, at a later time, no longer does so.

Example: Dee Corp. is an Illinois corporation. It creates a security interest in its equipment in favor of Secured Party. Secured Party files a proper financing statement in Illinois. Dee Corp. sells an item of equipment to Bee Corp., a Pennsylvania corporation, subject to the security interest. The security interest continues, see Section 9-315(a), and remains perfected, see Section 9-507(a), notwithstanding that the financing statement is filed under “D” (for Dee Corp.) and not under “B.” However, because Bee Corp. is located in Pennsylvania and not Illinois, see Section 9-307, unless Secured Party perfects under Pennsylvania law within one year after the transfer, its security interest will become unperfected and will be deemed to have been unperfected against purchasers of the collateral. See Section 9-316.

Example 1: Debtor, an individual whose principal residence is in California, grants a security interest to SP in certain business equipment. SP files a financing statement with the California filing office. Alternative A is in effect in California. The financing statement provides the name appearing on Debtor’s California driver’s license, “James McGinty.” Debtor obtains a court order changing his name to “Roger McGuinn” but does not change his driver’s license. Even after the court order issues, the name provided for the debtor in the financing statement is sufficient under Section 9-503(a). Accordingly, Section 9-507(c) does not apply.

The same result would follow if Alternative B is in effect in California.

Under Section 9-503(a)(4) (Alternative A), if the debtor holds a current (i.e., unexpired) driver’s license issued by the State where the financing statement is filed, the name required for the financing statement is the name indicated on the license that was issued most recently by that State. If the debtor does not have a current driver’s license issued by that State, then the debtor’s name is determined under subsection (a)(5). It follows that a debtor’s name may change, and a financing statement providing the name on the debtor’s then current driver’s license may become seriously misleading, if the license expires and the debtor’s name under subsection (a)(5) is different. The same consequences may follow if a debtor’s driver’s license is renewed and the names on the licenses differ.

Example 2: The facts are as in Example 1. Debtor’s driver’s license expires one year after the entry of the court order changing Debtor’s name. Debtor does not renew the license. Upon expiration of the license, the name required for sufficiency by Section 9-503(a) is the individual name of the debtor or the debtor’s surname and first personal name. The name “James McGinty” has become insufficient.

Example 3: The facts are as in Example 1. Before the license expires, Debtor renews the license. The name indicated on the new license is “Roger McGuinn.” Upon issuance of the new license, “James McGinty” becomes insufficient as the debtor’s name under Section 9-503(a).

The same results would follow if Alternative B is in effect in California (assuming that, following the issuance of the court order, “James McGinty” is neither the individual name of the debtor nor the debtor’s surname and first personal name).

Even if the name provided as the name of the debtor becomes insufficient under Section 9-503(a), the filed financing statement does not become seriously misleading, and Section 9-507(c) does not apply, if the financing statement can be found by searching under the debtor’s “correct” name, using the filing office’s standard search logic. See Section 9-506. Any name that satisfies Section 9-503(a) at the time of the search is a “correct name” for these purposes. Thus, assuming that a search of the records of the California filing office under “Roger McGuinn,” using the filing office’s standard search logic, would not disclose a financing statement naming “James McGinty,” the financing statement in Examples 2 and 3 has become seriously misleading and Section 9-507(c) applies.

If a financing statement becomes seriously misleading because the name it provides for a debtor becomes insufficient, the financing statement, unless amended to provide a sufficient name for the debtor, is effective only to perfect a security interest in collateral acquired by the debtor before, or within four months after, the change. If an amendment that provides a sufficient name is filed within four months after the change, the financing statement as amended would be effective also with respect to collateral acquired more than four months after the change. If an amendment that provides a sufficient name is filed more than four months after the change, the financing statement as amended would be effective also with respect to collateral acquired more than four months after the change, but only from the time of the filing of the amendment.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-508. Effectiveness of financing statement if new debtor becomes bound by security agreement.

  1. Except as otherwise provided in this section, a filed financing statement naming an original debtor is effective to perfect a security interest in collateral in which a new debtor has or acquires rights to the extent that the financing statement would have been effective had the original debtor acquired rights in the collateral.
  2. If the difference between the name of the original debtor and that of the new debtor causes a filed financing statement that is effective under subsection (1) of this section to be seriously misleading under KRS 355.9-506 :
    1. The financing statement is effective to perfect a security interest in collateral acquired by the new debtor before, and within four (4) months after, the new debtor becomes bound under KRS 355.9-203 (4); and
    2. The financing statement is not effective to perfect a security interest in collateral acquired by the new debtor more than four (4) months after the new debtor becomes bound under KRS 355.9-203 (4) unless an initial financing statement providing the name of the new debtor is filed before the expiration of that time.
  3. This section does not apply to collateral as to which a filed financing statement remains effective against the new debtor under KRS 355.9-507 (1).

History. Enact. Acts 2000, ch. 408, § 99, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. The Problem.  Section 9-203(d) and (e) and this section deal with situations where one party (the “new debtor”) becomes bound as debtor by a security agreement entered into by another person (the “original debtor”). These situations often arise as a consequence of changes in business structure. For example, the original debtor may be an individual debtor who operates a business as a sole proprietorship and then incorporates it. Or, the original debtor may be a corporation that is merged into another corporation. Under both former article 9 and this article, collateral that is transferred in the course of the incorporation or merger normally would remain subject to a perfected security interest. See Sections 9-315(a), 9-507(a). Former article 9 was less clear with respect to whether an after-acquired property clause in a security agreement signed by the original debtor would be effective to create a security interest in property acquired by the new corporation or the merger survivor and, if so, whether a financing statement filed against the original debtor would be effective to perfect the security interest. This section and Sections 9-203(d) and (e) are a clarification.
  3. How New Debtor Becomes Bound.  Normally, a security interest is unenforceable unless the debtor has authenticated a security agreement describing the collateral. See Section 9-203(b). New Section 9-203(e) creates an exception, under which a security agreement entered into by one person is effective with respect to the property of another. This exception comes into play if a “new debtor” becomes bound as debtor by a security agreement entered into by another person (the “original debtor”). (The quoted terms are defined in Section 9-102.) If a new debtor does become bound, then the security agreement entered into by the original debtor satisfies the security-agreement requirement of Section 9-203(b)(3) as to existing or after-acquired property of the new debtor to the extent the property is described in the security agreement. In that case, no other agreement is necessary to make a security interest enforceable in that property. See Section 9-203(e).

    Section 9-203(d) explains when a new debtor becomes bound by an original debtor’s security agreement. Under Section 9-203(d)(1), a new debtor becomes bound as debtor if, by contract or operation of other law, the security agreement becomes effective to create a security interest in the new debtor’s property. For example, if the applicable corporate law of mergers provides that when A Corp merges into B Corp, B Corp becomes a debtor under A Corp’s security agreement, then B Corp would become bound as debtor following such a merger. Similarly, B Corp would become bound as debtor if B Corp contractually assumes A’s obligations under the security agreement.

    Under certain circumstances, a new debtor becomes bound for purposes of this article even though it would not be bound under other law. Under Section 9-203(d)(2), a new debtor becomes bound when, by contract or operation of other law, it (i) becomes obligated not only for the secured obligation but also generally for the obligations of the original debtor and (ii) acquires or succeeds to substantially all the assets of the original debtor. For example, some corporate laws provide that, when two corporations merge, the surviving corporation succeeds to the assets of its merger partner and “has all liabilities” of both corporations. In the case where, for example, A Corp merges into B Corp (and A Corp ceases to exist), some people have questioned whether A Corp’s grant of a security interest in its existing and after-acquired property becomes a “liability” of B Corp, such that B Corp’s existing and after-acquired property becomes subject to a security interest in favor of A Corp’s lender. Even if corporate law were to give a negative answer, under Section 9-203(d)(2), B Corp would become bound for purposes of section 9-203(e) and this section. The “substantially all of the assets” requirement of Section 9-203(d)(2) excludes sureties and other secondary obligors as well as persons who become obligated through veil piercing and other nonsuccessorship doctrines. In most cases, it will exclude successors to the assets and liabilities of a division of a debtor.

  4. When Financing Statement Effective Against New Debtor.  Subsection (a) provides that a filing against the original debtor generally is effective to perfect a security interest in collateral that a new debtor has at the time it becomes bound by the original debtor’s security agreement and collateral that it acquires after the new debtor becomes bound. Under subsection (b), however, if the filing against the original debtor is seriously misleading as to the new debtor’s name, the filing is effective as to collateral acquired by the new debtor more than four months after the new debtor becomes bound only if a person files during the four-month period an initial financing statement providing the name of the new debtor. Compare Section 9-507(c) (four-month period of effectiveness with respect to collateral acquired by a debtor after the debtor changes its name). Moreover, if the original debtor and the new debtor are located in different jurisdictions, a filing against the original debtor would not be effective to perfect a security interest in collateral that the new debtor acquires or has acquired from a person other than the original debtor. See Example 5, Section 9-316, Comment 2.
  5. Transferred Collateral.  This section does not apply to collateral transferred by the original debtor to a new debtor. See subsection (c). Under those circumstances, the filing against the original debtor continues to be effective until it lapses or perfection is lost for another reason. See Sections 9-316, 9-507(a).
  6. Priority.  Section 9-326 governs the priority contest between a secured creditor of the original debtor and a secured creditor of the new debtor.

355.9-509. Persons entitled to file a record.

  1. A person may file an initial financing statement, amendment that adds collateral covered by a financing statement, or amendment that adds a debtor to a financing statement only if:
    1. The debtor authorizes the filing in an authenticated record or pursuant to subsection (1) or (2) of this section; or
    2. The person holds an agricultural lien that has become effective at the time of filing and the financing statement covers only collateral in which the person holds an agricultural lien.
  2. By authenticating or becoming bound as debtor by a security agreement, a debtor or new debtor authorizes the filing of an initial financing statement, and an amendment, covering:
    1. The collateral described in the security agreement; and
    2. Property that becomes collateral under KRS 355.9-315 (1)(b), whether or not the security agreement expressly covers proceeds.
  3. By acquiring collateral in which a security interest or agricultural lien continues under KRS 355.9-315 (1)(a), a debtor authorizes the filing of an initial financing statement, and an amendment, covering the collateral and property that becomes collateral under KRS 355.9-315 (1)(b).
  4. A person may file an amendment other than an amendment that adds collateral covered by a financing statement or an amendment that adds a debtor to a financing statement only if:
    1. The secured party of record authorizes the filing; or
    2. The amendment is a termination statement for a financing statement as to which the secured party of record has failed to file or send a termination statement as required by KRS 355.9-513 (1) or (3), the debtor authorizes the filing, and the termination statement indicates that the debtor authorized it to be filed.
  5. If there is more than one (1) secured party of record for a financing statement, each secured party of record may authorize the filing of an amendment under subsection (4) of this section.

History. Enact. Acts 2000, ch. 408, § 100, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Scope and Approach of This Section.  This section collects in one place most of the rules determining whether a record may be filed. Section 9-510 explains the extent to which a filed record is effective. Under these sections, the identity of the person who effects a filing is immaterial. The filing scheme contemplated by this part does not contemplate that the identity of a “filer” will be a part of the searchable records. This is consistent with, and a necessary aspect of, eliminating signatures or other evidence of authorization from the system. (Note that the 1972 amendments to this article eliminated the requirement that a financing statement contain the signature of the secured party.) As long as the appropriate person authorizes the filing, or, in the case of a termination statement, the debtor is entitled to the termination, it is insignificant whether the secured party or another person files any given record. The question of authorization is one for the court, not the filing office. However, a filing office may choose to employ authentication procedures in connection with electronic communications, e.g., to verify the identity of a filer who seeks to charge the filing fee.
  3. Unauthorized Filings.  Records filed in the filing office do not require signatures for their effectiveness. Subsection (a)(1) substitutes for the debtor’s signature on a financing statement the requirement that the debtor authorize in an authenticated record the filing of an initial financing statement or an amendment that adds collateral. Also, under subsection (a)(1), if an amendment adds a debtor, the debtor who is added must authorize the amendment. A person who files an unauthorized record in violation of subsection (a)(1) is liable under section 9-625 for actual and statutory damages. Of course, a filed financing statement is ineffective to perfect a security interest if the filing is not authorized. See Section 9-510(a). Law other than this article, including the law with respect to ratification of past acts, generally determines whether a person has the requisite authority to file a record under this section. See Sections 1-103 and 9-502 comment 3.
  4. Ipso Facto Authorization.  Under subsection (b), the authentication of a security agreement ipso facto constitutes the debtor’s authorization of the filing of a financing statement covering the collateral described in the security agreement. The secured party need not obtain a separate authorization. Similarly, a new debtor’s becoming bound by a security agreement ipso facto constitutes the new debtor’s authorization of the filing of a financing statement covering the collateral described in the security agreement by which the new debtor has become bound. And, under subsection (c), the acquisition of collateral in which a security interest continues after disposition under Section 9-315(a)(1) ipso facto constitutes an authorization to file an initial financing statement against the person who acquired the collateral. The authorization to file an initial financing statement also constitutes an authorization to file a record covering actual proceeds of the original collateral, even if the security agreement is silent as to proceeds.
  5. Agricultural Liens.  Under subsection (a)(2), the holder of an agricultural lien may file a financing statement covering collateral subject to the lien without obtaining the debtor’s authorization. Because the lien arises as matter of law, the debtor’s consent is not required. A person who files an unauthorized record in violation of this subsection is liable under Section 9-625(e) for a statutory penalty and damages.
  6. Amendments; Termination Statements Authorized by Debtor.  Most amendments may not be filed unless the secured party of record, as determined under Section 9-511, authorizes the filing. See subsection (d)(1). However, under subsection (d)(2), the authorization of the secured party of record is not required for the filing of a termination statement if the secured party of record failed to send or file a termination statement as required by Section 9-513, the debtor authorizes it to be filed, and the termination statement so indicates.
  7. Multiple Secured Parties of Record.  Subsection (e) deals with multiple secured parties of record. It permits each secured party of record to authorize the filing of amendments. However, Section 9-510(b) protects the rights and powers of one secured party of record from the effects of filings made by another secured party of record. See Section 9-510, Comment 3.
  8. Successor to Secured Party of Record.  A person may succeed to the powers of the secured party of record by operation of other law, e.g., the law of corporate mergers. In that case, the successor has the power to authorize filings within the meaning of this section.

Example 1: Debtor authenticates a security agreement creating a security interest in Debtor’s inventory in favor of Secured Party. Secured Party files a financing statement covering inventory and accounts. The financing statement is authorized insofar as it covers inventory and unauthorized insofar as it covers accounts. (Note, however, that the financing statement will be effective to perfect a security interest in accounts constituting proceeds of the inventory to the same extent as a financing statement covering only inventory.)

Example 2: Debtor authenticates a security agreement creating a security interest in Debtor’s inventory in favor of Secured Party. Secured Party files a financing statement covering inventory. Debtor sells some inventory, deposits the buyer’s payment into a deposit account, and withdraws the funds to purchase equipment. As long as the equipment can be traced to the inventory, the security interest continues in the equipment. See Section 9-315(a)(2). However, because the equipment was acquired with cash proceeds, the financing statement becomes ineffective to perfect the security interest in the equipment on the 21st day after the security interest attaches to the equipment unless Secured Party continues perfection beyond the 20-day period by filing a financing statement against the equipment or amending the filed financing statement to cover equipment. See Section 9-315(d). Debtor’s authentication of the security agreement authorizes the filing of an initial financing statement or amendment covering the equipment, which is “property that becomes collateral under Section 9-315(a)(2).” See Section 9-509(b)(2).

Research References and Practice Aids

Kentucky Bench & Bar.

Schneiter, Equine Statutory Liens, Vol. 67, No. 4, July 2003, Ky. Bench & Bar 23.

355.9-510. Effectiveness of filed record.

  1. A filed record is effective only to the extent that it was filed by a person that may file it under KRS 355.9-509 or 355.9-513 A.
  2. A record authorized by one secured party of record does not affect the financing statement with respect to another secured party of record.
  3. A continuation statement that is not filed within the six (6) month period prescribed by KRS 355.9-515 (4) is ineffective.

History. Enact. Acts 2000, ch. 408, § 101, effective July 1, 2001; 2010, ch. 155, § 9, effective July 15, 2010; 2012, ch. 132, § 81, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  New.
  2. Ineffectiveness of Unauthorized or Overbroad Filings.  Subsection (a) provides that a filed financing statement is effective only to the extent it was filed by a person entitled to file it.
  3. Multiple Secured Parties of Record.  Section 9-509(e) permits any secured party of record to authorize the filing of most amendments. Subsection (b) of this section prevents a filing authorized by one secured party of record from affecting the rights and powers of another secured party of record without the latter’s consent.
  4. Continuation Statements.  A continuation statement may be filed only within the six months immediately before lapse. See Section 9-515(d). The filing office is obligated to reject a continuation statement that is filed outside the six-month period. See Sections 9-520(a), 9-516(b)(7) . Subsection (c) provides that if the filing office fails to reject a continuation statement that is not filed in a timely manner, the continuation statement is ineffective nevertheless.

Example 1: Debtor authorizes the filing of a financing statement covering inventory. Under Section 9-509, the secured party may file a financing statement covering only inventory; it may not file a financing statement covering other collateral. The secured party files a financing statement covering inventory and equipment. This section provides that the financing statement is effective only to the extent the secured party may file it. Thus, the financing statement is effective to perfect a security interest in inventory but ineffective to perfect a security interest in equipment.

Example 2: Debtor creates a security interest in favor of A and B. The filed financing statement names A and B as the secured parties. An amendment deleting some collateral covered by the financing statement is filed pursuant to B’s authorization. Although B’s security interest in the deleted collateral becomes unperfected, A’s security interest remains perfected in all the collateral.

Example 3: Debtor creates a security interest in favor of A and B. The financing statement names A and B as the secured parties. A termination statement is filed pursuant to B’s authorization. Although the effectiveness of the financing statement terminates with respect to B’s security interest, A’s rights are unaffected. That is, the financing statement continues to be effective to perfect A’s security interest.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-511. Secured party of record.

  1. A secured party of record with respect to a financing statement is a person whose name is provided as the name of the secured party or a representative of the secured party in an initial financing statement that has been filed. If an initial financing statement is filed under KRS 355.9-514 (1), the assignee named in the initial financing statement is the secured party of record with respect to the financing statement.
  2. If an amendment of a financing statement which provides the name of a person as a secured party or a representative of a secured party is filed, the person named in the amendment is a secured party of record. If an amendment is filed under KRS 355.9-514 (2), the assignee named in the amendment is a secured party of record.
  3. A person remains a secured party of record until the filing of an amendment of the financing statement which deletes the person.

History. Enact. Acts 2000, ch. 408, § 102, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Secured Party of Record.  This new section explains how the secured party of record is to be determined. If SP-1 is named as the secured party in an initial financing statement, it is the secured party of record. Similarly, if an initial financing statement reflects a total assignment from SP-0 to SP-1, then SP-1 is the secured party of record. See subsection (a). If, subsequently, an amendment is filed assigning SP-1’s status to SP-2, then SP-2 becomes the secured party of record in place of SP-1. The same result obtains if a subsequent amendment deletes the reference to SP-1 and substitutes therefor a reference to SP-2. If, however, a subsequent amendment adds SP-2 as a secured party but does not purport to remove SP-1 as a secured party, then SP-2 and SP-1 each is a secured party of record. See subsection (b). An amendment purporting to remove the only secured party of record without providing a successor is ineffective. See Section 9-512(e). At any point in time, all effective records that comprise a financing statement must be examined to determine the person or persons that have the status of secured party of record.
  3. Successor to Secured Party of Record.  Application of other law may result in a person succeeding to the powers of a secured party of record. For example, if the secured party of record (A) merges into another corporation (B) and the other corporation (B) survives, other law may provide that B has all of A’s powers. In that case, B is authorized to take all actions under this part that A would have been authorized to take. Similarly, acts taken by a person who is authorized under generally applicable principles of agency to act on behalf of the secured party of record are effective under this Part.

355.9-512. Amendment of financing statement.

  1. Subject to KRS 355.9-509 , a person may add or delete collateral covered by, continue or terminate the effectiveness of, or, subject to subsection (5) of this section, otherwise amend the information provided in, a financing statement by filing an amendment that:
    1. Identifies, by its file number, the initial financing statement to which the amendment relates; and
    2. If the amendment relates to an initial financing statement filed in a filing office described in KRS 355.9-501 (1)(a), provides the information specified in KRS 355.9-502 (2).
  2. Except as otherwise provided in KRS 355.9-515 , the filing of an amendment does not extend the period of effectiveness of the financing statement.
  3. A financing statement that is amended by an amendment that adds collateral is effective as to the added collateral only from the date of the filing of the amendment.
  4. A financing statement that is amended by an amendment that adds a debtor is effective as to the added debtor only from the date of the filing of the amendment.
  5. An amendment is ineffective to the extent it:
    1. Purports to delete all debtors and fails to provide the name of a debtor to be covered by the financing statement; or
    2. Purports to delete all secured parties of record and fails to provide the name of a new secured party of record.

History. Enact. Acts 2000, ch. 408, § 103, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-402(4).
  2. Changes to Financing Statements.  This section addresses changes to financing statements, including addition and deletion of collateral. Although termination statements, assignments, and continuation statements are types of amendments, this Article follows former Article 9 and contains separate sections containing additional provisions applicable to particular types of amendments. See Sections 9-513 (termination statements); 9-514 (assignments); 9-515 (continuation statements). One should not infer from this separate treatment that this Article requires a separate amendment to accomplish each change. Rather, a single amendment would be legally sufficient to, e.g., add collateral and continue the effectiveness of the financing statement.
  3. Amendments.  An amendment under this article may identify only the information contained in a financing statement that is to be changed; alternatively, it may take the form of an amended and restated financing statement. The latter would state, for example, that the financing statement “is amended and restated to read as follows: …” References in this part to an “amended financing statement” are to a financing statement as amended by an amendment using either technique.

    This section revises former Section 9-402(4) to permit secured parties of record to make changes in the public record without the need to obtain the debtor’s signature. However, the filing of an amendment that adds collateral or adds a debtor must be authorized by the debtor or it will not be effective. See Sections 9-509(a) and 9-510(a).

  4. Amendment Adding Debtor.  An amendment that adds a debtor is effective, provided that the added debtor authorizes the filing. See Section 9-509(a). However, filing an amendment adding a debtor to a previously filed financing statement affords no advantage over filing an initial financing statement against that debtor and may be disadvantageous. With respect to the added debtor, for purposes of determining the priority of the security interest, the time of filing is the time of the filing of the amendment, not the time of the filing of the initial financing statement. See subsection (d). However, the effectiveness of the financing statement lapses with respect to added debtor at the time it lapses with respect to the original debtor. See Subsection (b).
  5. Deletion of All Debtors or Secured Parties of Record.  Subsection (e) assures that there will be a debtor and secured party of record for every financing statement.

Example: A filed financing statement names A and B as secured parties of record and covers inventory and equipment. An amendment deletes equipment and purports to delete A and B as secured parties of record without adding a substitute secured party. The amendment is ineffective to the extent it purports to delete the secured parties of record but effective with respect to the deletion of collateral. As a consequence, the financing statement, as amended, covers only inventory, but A and B remain as secured parties of record.

Opinions of Attorney General.

A termination statement is filed by the procedure in former KRS 355.9-404 but a partial release of a termination statement was filed pursuant to former KRS 355.9-406 . OAG 64-416 .

The fee which may be collected by the secretary of state for the filing of a statement of release under former KRS 355.9-406 and former KRS 355.9-401 (1)(c) was 75¢ and not $3.00. OAG 75-624 .

Releases and signed releases do not need to be signed by a preparer, and they do not have to be prepared by an attorney. OAG 78-690 .

355.9-513. Termination statement.

  1. A secured party shall cause the secured party of record for a financing statement to file a termination statement for the financing statement if the financing statement covers consumer goods and:
    1. There is no obligation secured by the collateral covered by the financing statement and no commitment to make an advance, incur an obligation, or otherwise give value; or
    2. The debtor did not authorize the filing of the initial financing statement.
  2. To comply with subsection (1) of this section, a secured party shall cause the secured party of record to file the termination statement:
    1. Within one (1) month after there is no obligation secured by the collateral covered by the financing statement and no commitment to make an advance, incur an obligation, or otherwise give value; or
    2. If earlier, within twenty (20) days after the secured party receives an authenticated demand from a debtor.
  3. In cases not governed by subsection (1) of this section, within twenty (20) days after a secured party receives an authenticated demand from a debtor, the secured party shall cause the secured party of record for a financing statement to send to the debtor a termination statement for the financing statement or file the termination statement in the filing office if:
    1. Except in the case of a financing statement covering accounts or chattel paper that has been sold or goods that are the subject of a consignment, there is no obligation secured by the collateral covered by the financing statement and no commitment to make an advance, incur an obligation, or otherwise give value;
    2. The financing statement covers accounts or chattel paper that has been sold but as to which the account debtor or other person obligated has discharged its obligation;
    3. The financing statement covers goods that were the subject of a consignment to the debtor but are not in the debtor’s possession; or
    4. The debtor did not authorize the filing of the initial financing statement.
  4. Except as otherwise provided in KRS 355.9-510 , upon the filing of a termination statement with the filing office, the financing statement to which the termination statement relates ceases to be effective. Except as otherwise provided in KRS 355.9-510 , for purposes of KRS 355.9-519 (7), 355.9-522 (1), and 355.9-523 (3), the filing with the filing office of a termination statement relating to a financing statement that indicates that the debtor is a transmitting utility also causes the effectiveness of the financing statement to lapse.

History. Enact. Acts 2000, ch. 408, § 104, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-404.
  2. Duty to File or Send.  This section specifies when a secured party must cause the secured party of record to file or send to the debtor a termination statement for a financing statement. Because most financing statements expire in five years unless a continuation statement is filed (Section 9-515), no compulsion is placed on the secured party to file a termination statement unless demanded by the debtor, except in the case of consumer goods. Because many consumers will not realize the importance to them of clearing the public record, an affirmative duty is put on the secured party in that case. But many purchase-money security interests in consumer goods will not be filed, except for motor vehicles. See Section 9-309(1). Under Section 9-311(b), compliance with a certificate of title statute is “equivalent to the filing of a financing statement under this article.” Thus, this section applies to a certificate of title unless the section is superseded by a certificate of title statute that contains a specific rule addressing a secured party’s duty to cause a notation of a security interest to be removed from a certificate of title. In the context of a certificate of title, however, the secured party could comply with this section by causing the removal itself or providing the debtor with documentation sufficient to enable the debtor to effect the removal.

    Subsections (a) and (b) apply to a financing statement covering consumer goods. Subsection (c) applies to other financing statements. Subsections (a) and (c) each makes explicit what was implicit under former Article 9: If the debtor did not authorize the filing of a financing statement in the first place, the secured party of record should file or send a termination statement. The liability imposed upon a secured party that fails to comply with subsection (a) or (c) is identical to that imposed for the filing of an unauthorized financing statement or amendment. See Section 9-625(e).

  3. “Bogus” Filings.  A secured party’s duty to send a termination statement arises when the secured party “receives” an authenticated demand from the debtor. In the case of an unauthorized financing statement, the person named as debtor in the financing statement may have no relationship with the named secured party and no reason to know the secured party’s address. Inasmuch as the address in the financing statement is “held out by (the person named as secured party in the financing statement) as the place for receipt of such communications (i.e., communications relating to security interests),” the putative secured party is deemed to have “received” a notification delivered to that address. See Section 1-201(26). If a termination statement is not forthcoming, the person named as debtor itself may authorize the filing of a termination statement, which will be effective if it indicates that the person authorized it to be filed. See Sections 9-509(d)(2); 9-510(c).
  4. Buyers of Receivables.  Applied literally, former Section 9-404(1) would have required many buyers of receivables to file a termination statement immediately upon filing a financing statement because “there is no outstanding secured obligation and no commitment to make advances, incur obligations, or otherwise give value.” Subsections (c)(1) and (2) remedy this problem. While the security interest of a buyer of accounts or chattel paper (B-1) is perfected, the debtor is not deemed to retain an interest in the sold receivables and thus could transfer no interest in them to another buyer (B-2) or to a lien creditor (LC). However, for purposes of determining the rights of the debtor’s creditors and certain purchasers of accounts or chattel paper from the debtor, while B-1’s security interest is unperfected, the debtor-seller is deemed to have rights in the sold receivables, and a competing security interest or judicial lien may attach to those rights. See sections 9-109 and 9-318 and comment 5. Suppose that B-1’s security interest in certain accounts and chattel paper is perfected by filing, but the effectiveness of the financing statement lapses. Both before and after lapse, B-1 collects some of the receivables. After lapse, LC acquires a lien on the accounts and chattel paper. B-1’s unperfected security interest in the accounts and chattel paper is subordinate to LC’s rights. See Section 9-317(a)(2). But collections on accounts and chattel paper are not “accounts” or “chattel paper.” Even if B-1’s security interest in the accounts and chattel paper is or becomes unperfected, neither the debtor nor LC acquires rights to the collections that B-1 collects (and owns) before LC acquires a lien.
  5. Effect of Filing.  Subsection (b) states the effect of filing a termination statement: The related financing statement ceases to be effective. If one of several secured parties of record files a termination statement, subsection (b) applies only with respect to the rights of the person who authorized the filing of the termination statement. See Section 9-510(b). The financing statement remains effective with respect to the rights of the others. However, even if a financing statement is terminated (and thus no longer is effective) with respect to all secured parties of record, the financing statement, including the termination statement, will remain of record until at least one year after it lapses with respect to all secured parties of record. See Section 9-519(g).

NOTES TO DECISIONS

1.Notification to Debtor.
2.— When.

Former KRS 355.9-404 did not provide for personal notification to the debtor, unless a written demand had been made on creditor. (decided under prior law) Ford Motor Credit Co. v. Gibson, 566 S.W.2d 154, 1977 Ky. App. LEXIS 911 (Ky. Ct. App. 1977).

3.Gap in Security Interest.

Where first creditor held perfected security interest in trencher purchased in 1973 as evidenced by recorded security agreement and financing statement which made no provision for future advances, debtor purchased additional trencher in 1975 from bank creditor using 1973 trencher as additional collateral and security agreement was recorded, debtor paid off initial loan in September 1977 and first creditor never filed termination agreement under this section, then debtor bought trucks and trailers from first creditor which took lien on 1973 trencher as new collateral in new agreement recorded in October 1977, bank creditor had priority over first creditor since security interest exists only when debtor owes obligation and original indebtedness had been paid off, thus a gap existed which gave priority to second creditor under former KRS 355.9-204 and former KRS 355.9-312 . (decided under prior law) ITT Industrial Credit Co. v. Union Bank & Trust Co., 615 S.W.2d 2, 1981 Ky. App. LEXIS 240 (Ky. Ct. App. 1981).

4.Erroneous Termination.

Where defendant creditor bank that was paid off mistakenly filed a termination statement releasing the lien of plaintiff, another creditor bank with a similar name, pursuant to KRS 355.9-513 , it was liable for the effect of that wrongful termination. Peoples Bank of Kentucky, Inc. v. U.S. Bank, N.A. (In re S.J. Cox Enters.), 2009 Bankr. LEXIS 4573 (Bankr. E.D. Ky. Mar. 3, 2009).

Opinions of Attorney General.

A termination statement is the equivalent of a release, and a financing statement is the equivalent of a chattel mortgage or other lien instrument. OAG 61-635 .

If an instrument of release is sent by the clerk to any of the parties to the transaction, it should go to the mortgagor or lienor. OAG 61-635 .

The clerk should retain an instrument of release as a part of the records. OAG 61-635 .

Where the original loan is paid in full but at the time thereof the parties agree to renew the loan or any part thereof or increase the loan on the same security, it would not be necessary to file a termination of the original financing statement and file a new one unless the old statement had expired and no continuation had been filed. OAG 61-1096 .

A termination statement does not have to be acknowledged before a notary public or other officer authorized to administer an oath. OAG 64-289 .

A termination statement meeting the requirements of former KRS 355.9-404 and signed by the secured party may properly be filed. OAG 64-289 .

A termination statement was filed by the procedure in former KRS 355.9-404 , but a partial release of a termination statement was filed pursuant to former KRS 355.9-406 . OAG 64-416 .

The fee which may be collected by the secretary of state for the filing under the circumstances described in former KRS 355.9-401 (1)(c) of a termination statement is 75¢ and not $3.00. OAG 75-624 .

Former KRS 355.9-404 would have no effect on a criminal warrant obtained under KRS 186.045(5). OAG 77-49 .

There was no conflict between KRS 186.045(5) and former KRS 355.9-404 for one involved a criminal offense for violation and the other involved a civil debt for violation. OAG 77-49 .

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

355.9-513A. Termination of wrongfully filed record — Reinstatement.

  1. No person shall communicate a financing statement to a filing office for filing which is:
    1. Not authorized or permitted under KRS 355.9-509 or 355.9-708 ;
    2. Not related to a valid existing or potential commercial or financial transaction; and
    3. Filed with the intent to harass, hinder, or defraud a qualified person identified as an individual debtor in the financing statement.
  2. A qualified person may file in the office of the Secretary of State’s Office of Business Services a notarized affidavit, signed under penalty of perjury, stating that:
    1. The affiant is a qualified person;
    2. None of the secured parties of record are financial institutions as defined in subsection (15) of this section;
    3. All secured parties of record are individuals; and
    4. The financing statement was filed by an individual not authorized or permitted to do so under KRS 355.9-509 or 355.9-708 .
    1. The Secretary of State shall adopt and make available a form of affidavit for use under this section. (3) (a) The Secretary of State shall adopt and make available a form of affidavit for use under this section.
    2. The filing office shall not charge a fee for the filing of an affidavit or a termination statement under this section. The filing office shall not return any fee paid for filing the financing statement identified in the affidavit, whether or not the financing statement is subsequently reinstated.
    3. In a case in which KRS 355.9-501 provides that the proper office to file a financing statement is the office designated for the filing or recording of a record of a mortgage on real property, the Secretary of State shall promptly transmit to that office copies of all communications regarding an affidavit filed under this section, including the affidavit itself, any termination statement filed under subsection (4) of this section, and any amendment filed or preliminary or final court order received pursuant to subsection (7) or (8) of this section, and upon receipt the receiving office shall execute the actions described herein.
  3. If an affidavit is filed under subsection (2) of this section, the filing office shall promptly file a termination statement with respect to the financing statement identified in the affidavit. The termination statement shall indicate that it was filed pursuant to this section. Except as provided in subsections (7) and (8) of this section, a termination statement filed under this subsection shall take effect thirty (30) days after it is filed.
  4. On the same day that a filing office files a termination statement under subsection (4) of this section, it shall send to each secured party of record for the financing statement a notice advising the secured party of record that the termination statement has been filed. The notice shall be sent by certified mail, return receipt requested, to the address provided for the secured party in the financing statement.
  5. An individual indicated as a secured party of record on a financing statement for which a termination statement has been filed under subsection (4) of this section may, before or after the termination statement takes effect:
    1. Request from the Secretary of State an expedited administrative review of the decision to terminate the filing; or
    2. Bring an action against the individual who filed the affidavit under subsection (2) of this section seeking a determination that the financing statement was filed by a person entitled to do so under KRS 355.9-509 (1). An action under this subsection shall have priority on the court’s calendar and shall proceed by expedited hearing. If the individual who filed the affidavit resides in this state, the exclusive venue in this state for the action shall be in the Circuit Court for the county where the individual principally resides in this state. If the individual who filed the affidavit does not reside in this state, the exclusive venue in this state shall be in the Circuit Court for the county where the filing office in which the financing statement was filed is located.
  6. In an action brought pursuant to subsection (6) of this section, a court may, in appropriate circumstances, order preliminary relief, including but not limited to an order precluding the termination statement from taking effect or directing a party to take action to prevent the termination statement from taking effect. If the court issues such an order and the filing office receives a certified copy of the order before the termination statement takes effect as provided in subsection (4) of this section, the termination statement shall not take effect and the filing office shall promptly file an amendment to the financing statement that indicates that an order has prevented the termination statement from taking effect. If such an order ceases to be effective by reason of a subsequent order or a final judgment of that court or by an order issued by another court, and the filing office receives a certified copy of the subsequent judgment or order, the termination statement shall become immediately effective upon receipt of the certified copy and the filing office shall promptly file an amendment to the financing statement indicating that the termination statement is effective.
  7. If the Secretary of State determines in an expedited administrative review initiated under subsection (6)(a) of this section, or if a court determines in an action brought pursuant to subsection (6)(b) of this section, that the financing statement was filed by a person entitled to do so under KRS 355.9-509 (1) and the filing office receives a certified copy of the administrative determination or court’s final judgment or order before the termination statement takes effect, the termination statement shall not take effect and the filing office shall remove the termination statement and any amendments filed under subsection (7) of this section from the files. If the filing office receives the certified copy after the termination statement takes effect and within thirty (30) days after the final judgment or order was entered, the filing office shall promptly file an amendment to the financing statement that indicates that the financing statement has been reinstated.
  8. Except as provided in subsection (10) of this section, upon the filing of an amendment reinstating a financing statement under subsection (8) of this section, the effectiveness of the financing statement is retroactively reinstated and the financing statement shall be considered never to have been ineffective against all persons and for all purposes.
  9. A financing statement whose effectiveness was terminated under subsection (4) of this section and has been reinstated under subsection (8) of this section shall not be effective as against a person that purchased the collateral in good faith between the time the termination statement was filed and the time of the filing of the amendment reinstating the financing statement, to the extent that the person gave new value in reliance on the termination statement.
    1. A person who violates subsection (1) of this section shall be civilly liable to an injured qualified person for: (11) (a) A person who violates subsection (1) of this section shall be civilly liable to an injured qualified person for:
      1. Actual damages caused by the violation;
      2. Reasonable attorney fees; and
      3. Exemplary damages in an amount determined by the court.
    2. Civil damages under paragraph (a) of this subsection are in addition to any recovery to which the qualified person is entitled under KRS 355.9-625 , or under law other than this article.
  10. Neither the filing office nor any of its employees shall be subject to liability for the termination or amendment of a financing statement in the lawful performance of the duties of the office under this section.
  11. A person may not file an affidavit under this section with respect to a financing statement filed by a financial institution, as defined in subsection (15) of this section or a representative of a financial institution.
  12. In this section, the term “qualified person” means an individual who, at the time the financing statement referred to in subsection (2) of this section was filed or within five (5) years prior to the time of filing, was:
    1. An elected or appointed official of this state or a governmental unit of this state as defined in KRS 355.9-102 (1);
    2. An officer or employee of a federal, state, or local judicial or prosecutorial office;
    3. An officer or employee of a federal, state, or local law enforcement office, including a correctional officer or employee; or
    4. An officer or employee of an office designated in KRS 355.9-501 as a place to file a financing statement.
  13. In this section, the term “financial institution” means a person that:
    1. Is in the business of extending credit and servicing loans, including acquiring, purchasing, selling, and brokering, or other extensions of credit; and
    2. Where applicable, holds whatever license, charter, or registration that is required to engage in such business.

The term includes banks, savings banks, savings associations, building and loan associations, credit unions, consumer and commercial finance companies, industrial banks, industrial loan companies, insurance companies, investment companies, installment sellers, mortgage servicers, sales finance companies, and leasing companies.

History. Enact. Acts 2012, ch. 132, § 82, effective July 1, 2013; 2021 ch. 185, § 2, effective June 29, 2021.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

355.9-514. Assignment of powers of secured party of record.

  1. Except as otherwise provided in subsection (3) of this section, an initial financing statement may reflect an assignment of all of the secured party’s power to authorize an amendment to the financing statement by providing the name and mailing address of the assignee as the name and address of the secured party.
  2. Except as otherwise provided in subsection (3) of this section, a secured party of record may assign of record all or part of its power to authorize an amendment to a financing statement by filing in the filing office an amendment of the financing statement which:
    1. Identifies, by its file number, the initial financing statement to which it relates;
    2. Provides the name of the assignor; and
    3. Provides the name and mailing address of the assignee.
  3. An assignment of record of a security interest in a fixture covered by a record of a mortgage which is effective as a financing statement filed as a fixture filing under KRS 355.9-502 (3) may be made only by an assignment of record of the mortgage in the manner provided by law of this Commonwealth other than this chapter.

History. Enact. Acts 2000, ch. 408, § 105, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-405.
  2. Assignments.  This section provides a permissive device whereby a secured party of record may effectuate an assignment of its power to affect a financing statement. It may also be useful for a secured party who has assigned all or part of its security interest or agricultural lien and wishes to have the fact noted of record, so that inquiries concerning the transaction would be addressed to the assignee. See Section 9-502, Comment 2. Upon the filing of an assignment, the assignee becomes the “secured party of record” and may authorize the filing of a continuation statement, termination statement, or other amendment. Note that under Section 9-310(c) no filing of an assignment is required as a condition of continuing the perfected status of the security interest against creditors and transferees of the original debtor. However, if an assignment is not filed, the assignor remains the secured party of record, with the power (even if not the right) to authorize the filing of effective amendments. See Sections 9-509(d) and 9-511(c).

    Where a record of a mortgage is effective as a financing statement filed as a fixture filing (Section 9-502(c)), then an assignment of record of the security interest may be made only in the manner in which an assignment of record of the mortgage may be made under local real property law.

  3. Comparison to Prior Law.  Most of the changes reflected in this section are for clarification or to embrace medium-neutral drafting. As a general matter, this section preserves the opportunity given by former section 9-405 to assign a security interest of record in one of two different ways. Under subsection (a), a secured party may assign all of its power to affect a financing statement by naming an assignee in the initial financing statement. The secured party of record may accomplish the same result under subsection (b) by making a subsequent filing. Subsection (b) also may be used for an assignment of only some of the secured party of record’s power to affect a financing statement, e.g., the power to affect the financing statement as it relates to particular items of collateral or as it relates to an undivided interest in a security interest in all the collateral. An initial financing statement may not be used to change the secured party of record under these circumstances. However, an amendment adding the assignee as a secured party of record may be used.

355.9-515. Duration and effectiveness of financing statement — Effect of lapsed financing statement.

  1. Except as otherwise provided in subsections (2), (5), (6), and (7) of this section, a filed financing statement is effective for a period of five (5) years after the date of filing.
  2. Except as otherwise provided in subsections (5), (6), and (7) of this section, an initial financing statement filed in connection with a public-finance transaction or manufactured-home transaction is effective for a period of thirty (30) years after the date of filing if it indicates that it is filed in connection with a public-finance transaction or manufactured-home transaction.
  3. The effectiveness of a filed financing statement lapses on the expiration of the period of its effectiveness unless before the lapse a continuation statement is filed pursuant to subsection (4) of this section. Upon lapse, a financing statement ceases to be effective and any security interest or agricultural lien that was perfected by the financing statement becomes unperfected, unless the security interest is perfected otherwise. If the security interest or agricultural lien becomes unperfected upon lapse, it is deemed never to have been perfected as against a purchaser of the collateral for value.
  4. A continuation statement may be filed only within six (6) months before the expiration of the five (5) year period specified in subsection (1) of this section or the thirty (30) year period specified in subsection (2) of this section, whichever is applicable.
  5. Except as otherwise provided in KRS 355.9-510 , upon timely filing of a continuation statement, the effectiveness of the initial financing statement continues for a period of five (5) years commencing on the day on which the financing statement would have become ineffective in the absence of the filing. Upon the expiration of the five (5) year period, the financing statement lapses in the same manner as provided in subsection (3) of this section, unless, before the lapse, another continuation statement is filed pursuant to subsection (4) of this section. Succeeding continuation statements may be filed in the same manner to continue the effectiveness of the initial financing statement.
  6. If a debtor is a transmitting utility and a filed initial financing statement so indicates, the financing statement is effective until a termination statement is filed.
  7. A record of a mortgage that is effective as a financing statement filed as a fixture filing under KRS 355.9-502 (3) remains effective as a financing statement filed as a fixture filing until the mortgage is released or satisfied of record or its effectiveness otherwise terminates as to the real property.

History. Enact. Acts 2000, ch. 408, § 106, effective July 1, 2001; 2012, ch. 132, § 83, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  Former Section 9-403(2), (3), and (6).
  2. Period of Financing Statement’s Effectiveness.  Subsection (a) states the general rule: A financing statement is effective for a five-year period unless its effectiveness is continued under this section or terminated under Section 9-513. Subsection (b) provides that if the financing statement relates to a public-finance transaction or a manufactured-home transaction and so indicates, the financing statement is effective for 30 years. These financings typically extend well beyond the standard, five-year period. Under subsection (f), a financing statement filed against a transmitting utility remains effective indefinitely, until a termination statement is filed. Likewise, under subsection (g), a mortgage effective as a fixture filing remains effective until its effectiveness terminates under real property law.
  3. Lapse.  When the period of effectiveness under subsection (a) or (b) expires, the effectiveness of the financing statement lapses. The last sentence of subsection (c) addresses the effect of lapse. The deemed retroactive unperfection applies only with respect to purchasers for value; unlike former Section 9-403(2), it does not apply with respect to lien creditors.
  4. Effect of Debtor’s Bankruptcy.  Under former Section 9-403(2), lapse was tolled if the debtor entered bankruptcy or another insolvency proceeding. Nevertheless, being unaware that insolvency proceedings had been commenced, filing offices routinely removed records from the files as if lapse had not been tolled. Subsection (c) deletes the former tolling provision and thereby imposes a new burden on the secured party: To be sure that a financing statement does not lapse during the debtor’s bankruptcy. The secured party can prevent lapse by filing a continuation statement, even without first obtaining relief from the automatic stay. See Bankruptcy Code Section 362(b)(3). Of course, if the debtor enters bankruptcy before lapse, the provisions of this article with respect to lapse would be of no effect to the extent that federal bankruptcy law dictates a contrary result (e.g., to the extent that the Bankruptcy Code determines rights as of the date of the filing of the bankruptcy petition).
  5. Continuation Statements.  Subsection (d) explains when a continuation statement may be filed. A continuation statement filed at a time other than that prescribed by subsection (d) is ineffective, see Section 9-510(c), and the filing office may not accept it. See Sections 9-520(a), 9-516(b). Subsection (e) specifies the effect of a continuation statement and provides for successive continuation statements.

Example 1: SP-1 and SP-2 both hold security interests in the same collateral. Both security interests are perfected by filing. SP-1 filed first and has priority under section 9-322(a)(1). The effectiveness of SP-1’s filing lapses. As long as SP-2’s security interest remains perfected thereafter, SP-2 is entitled to priority over SP-1’s security interest, which is deemed never to have been perfected as against a purchaser for value (SP-2). See Section 9-322(a)(2).

Example 2: SP holds a security interest perfected by filing. On July 1, LC acquires a judicial lien on the collateral. Two weeks later, the effectiveness of the financing statement lapses. Although the security interest becomes unperfected upon lapse, it was perfected when LC acquired its lien. Accordingly, notwithstanding the lapse, the perfected security interest has priority over the rights of LC, who is not a purchaser. See Section 9-317(a)(2).

NOTES TO DECISIONS

1.Lodging of Record.

Where seller mailed conditional sales contract to the office of the county clerk with the proper recording fee and requested that it be recorded, his lien was lodged of record before creditor filed an action against buyer and levied an attachment on the automobile, even though the conditional sales contract was not actually recorded until after the action for attachment was brought. (decided under prior law) Fields Motor Co. v. Sturgill, 279 Ky. 47 , 129 S.W.2d 1003, 1939 Ky. LEXIS 231 ( Ky. 1939 ).

2.Indexing.

Where the clerk recorded an instrument which was recordable in his office, it was notice to all parties as provided by law, and this notice existed regardless of whether the clerk had properly indexed the instrument. (decided under prior law) Seat v. Louisville & Jefferson County Land Co., 219 Ky. 418 , 293 S.W. 986, 1927 Ky. LEXIS 374 ( Ky. 1927 ).

3.Filing Multiple Documents.

If a party intends a single document to serve multiple purposes and each purpose requires recording to effectuate its validity, duplicate instruments must be supplied and the clerk must be informed as to the purpose for which each is to be recorded. (decided under prior law) In re Leckie Freeburn Coal Co., 405 F.2d 1043, 1969 U.S. App. LEXIS 9150 (6th Cir. Ky.), cert. denied, 395 U.S. 960, 89 S. Ct. 2101, 23 L. Ed. 2d 746, 1969 U.S. LEXIS 3173 (U.S. 1969).

4.Undated Financing Statement.

An undated financing statement is effective for five years. (decided under prior law) In re Cantrill Constr. Co., 418 F.2d 705, 1969 U.S. App. LEXIS 9946 (6th Cir. Ky. 1969 ), cert. denied, 397 U.S. 990, 90 S. Ct. 1124, 25 L. Ed. 2d 398, 1970 U.S. LEXIS 3561 (U.S. 1970).

Where there were no stated maturity dates in a bank’s security agreement and financing statement, the stated maturity dates in the debtor’s underlying notes were not controlling for perfection purposes, and the security instruments were effective for a period of five years from the date of filing. (decided under prior law) In re Hazle Farm & Power Equipment, 53 B.R. 30, 1985 Bankr. LEXIS 5535 (Bankr. W.D. Ky. 1985 ).

5.Failure to File Continuation Statement.

A perfected security interest which states a maturity date lapses 60 days after that maturity date unless a continuation statement is filed prior to the lapse; therefore, where more than 60 days had passed since either of the maturity dates contended for in this action, and since no continuation statement was ever filed by the creditor bank in order to continue perfection of its security interests, those interests became unperfected and the bank was deemed a general unsecured creditor of the estate. (decided under prior law) In re Radcliff Door Co., 17 B.R. 153, 1982 Bankr. LEXIS 5129 (Bankr. W.D. Ky. 1982 ).

6.Time of Filing Continuation Statement.

There is no Kentucky authority which supports the position that a continuation statement which is filed prematurely nevertheless extends the effectiveness of a financing statement for an additional five-year period. (decided under prior law) Banque Worms v. Davis Constr. Co., 831 S.W.2d 921, 1992 Ky. App. LEXIS 133 (Ky. Ct. App. 1992).

This section provides, in effect, that if a security agreement which retains a security interest in collateral has been perfected by the filing of a financial statement, the statement lapses at the expiration of a five-year period unless a continuation statement is filed prior to the lapse. Further, if the security interest becomes unperfected by lapse, it is deemed to have become unperfected as against a person who became a purchaser before the lapse. (decided under prior law) Banque Worms v. Davis Constr. Co., 831 S.W.2d 921, 1992 Ky. App. LEXIS 133 (Ky. Ct. App. 1992).

To be timely, a continuation statement must be filed within six months prior to the expiration of the five-year period during which the original financing statement is effective. Only if the continuation statement is timely filed is the effectiveness of the original financing statement continued. (decided under prior law) Banque Worms v. Davis Constr. Co., 831 S.W.2d 921, 1992 Ky. App. LEXIS 133 (Ky. Ct. App. 1992).

7.Place of Filing.

A continuation statement filed by bank group in the same county as the properly filed original financing statement continues the effectiveness of bank group’s security interest when a debtor changes its corporate residence. (decided under prior law) In re Green River Coal Co., 165 B.R. 425, 1994 Bankr. LEXIS 453 (Bankr. W.D. Ky. 1994 ).

8.Miscellaneous.

While Ky. Rev. Stat. Ann. § 355.9-515 addresses the effect of a financing statement expiring, court believes that termination would have same consequence. Crop Prod. Servs. v. Wheeler (In re Wheeler), 580 B.R. 719, 2017 Bankr. LEXIS 4373 (Bankr. W.D. Ky. 2017 ).

Opinions of Attorney General.

Where the original loan is paid in full but at the time thereof the parties agree to renew the loan or any part thereof or increase the loan on the same security, it would not be necessary to file a termination of the original financing statement and file a new one unless the old statement had expired and no continuation had been filed. OAG 61-1096 .

Where an instrument purporting to be an amendment to a chattel mortgage was received for filing and inclosed was an automobile registration certificate on which a lien was to be shown, the instrument should be recorded on the automobile registration certificate and should also be recorded as a proper financing or continuation statement. OAG 62-534 .

A continuation statement is merely a device to continue the effectiveness of the original financing statement beyond the five (5) year period set out in former KRS 355.9-403 (2) and cannot be used as a device to add additional property to that already recorded with the clerk covered by the original financing statement. OAG 66-173 .

No crime was committed where the buyer sold a tractor on which he owed a balance and on which a security agreement had been filed, where the note had become due prior to the sale and no continuation statement was filed. OAG 70-203 .

The filing officer may remove a lapsed statement from the files and destroy it. OAG 70-655 .

The motor vehicle certificate is an exception to the general filing provisions under this section, since a financing statement must be noted on the motor vehicle registration certificate. OAG 70-655 .

A continuation statement could be effectively filed any time before the clerk’s office closes for business on the day the financing statement would lapse. OAG 72-789 .

There is no requirement for notarization of the financing statement and no such requirement can be imposed on the one presenting the statement for filing to the clerk, and such statement should be filed in the office of the clerk of the court. OAG 73-599 .

The continuation statement is inextricably tied to the original financing statement to which it applies; thus the index card of the original financing statement is the proper card to record the data about the continuation statement, and the continuation statement should properly be attached to the original financing statement which it continues. OAG 77-67 .

A continuation statement merely continues the legal effectiveness of the original financing statement, or of the original financing statement as amended and cannot be used as a device to add collateral or an additional debtor. OAG 78-213 .

The index cards kept by a county clerk do not have to specifically list household goods and other personal property when the collateral is not specifically described in the financing statement, and a general reference to “all household goods and other personal property,” is a sufficient description under the statutes. OAG 80-190 .

A group of continuation financing statements cannot be clustered, i.e., referred to by number in only one continuation form, in order to avoid paying the county clerk a filing fee for each continuation statement, because each financing statement and its companion continuation statement stands as a separate transaction and they may not be clustered so as to avoid the proper statutory filing fee. OAG 80-250 .

A county clerk’s office should refuse to accept or file continuation statements tendered for filing before the six (6) month period immediately prior to the maturity date named in the original statement, for such continuation statements are premature and, under former KRS 355.9-403 (3) had no legal effect; in those cases where premature continuation statements have already been filed, the secured party should be given written notice that the statement has no legal effect and that the security interest which was perfected by way of the original statement will lapse upon the expiration date established by the original statement if a timely continuation statement is not filed. OAG 80-290 .

Under former KRS 355.9-403 (3), a timely filed continuation statement became effective “upon” the last date to which the filing of the original financing statement was effective, because if the continuation statement would become effective only “after” the last date to which the filing of the original financing statement was effective, there would be a fatal lapse. OAG 82-13 .

A second continuation statement, in order to be timely, must be filed at least by the last date to which the filing of the first continuation statement was effective; this simply means that the second continuation statement must be filed prior to the lapse of the first one. OAG 82-13 .

A financing statement for a mobile home may be amended for the purpose of showing new ownership of the mobile home by filing a document with the county clerk which precisely states the change in the ownership of the mobile home by giving the owner’s name and address as stated in the original financing statement and the new owner’s name and address, as well as the secured party’s address; such amendment should explicitly state information which will definitely identify the original financing statement on file in the clerk’s office, should explicitly refer to the collateral, i.e., the particular mobile home involved and should be signed by the creditor and new debtor and dated. The effective period of the original financing statement is not affected by the mere change in ownership of the mobile home. OAG 84-38 .

The literal language of former KRS 355.9-405 indicated clearly that either the original secured party or the assignee must actually, physically, and manually sign the financing statement in connection with the assignment portion of the instrument. OAG 82-220 .

A secured party can assign various security agreements, by incorporating them by reference, and by using the cluster technique, provided the terms of former KRS 355.9-405 (2) are met. OAG 82-432 .

The filing of a UCC continuation statement extends the security interest from the date of expiration of the original perfected security interest. OAG 92-105 .

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Schneiter, Equine Statutory Liens, Vol. 67, No. 4, July 2003, Ky. Bench & Bar 23.

Kentucky Law Journal.

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Northern Kentucky Law Review.

Ellerman & Linneman, A Survey of Kentucky Commercial Law., 31 N. Ky. L. Rev. 201 (2004).

355.9-516. What constitutes filing — Effectiveness of filing.

  1. Except as otherwise provided in subsection (2) of this section, communication of a record to a filing office and tender of the filing fee or acceptance of the record by the filing office constitutes filing.
  2. Filing does not occur with respect to a record that a filing office refuses to accept because:
    1. The record is not communicated by a method or medium of communication authorized by the filing office;
    2. An amount equal to or greater than the applicable filing fee is not tendered;
    3. The filing office is unable to index the record because:
      1. In the case of an initial financing statement, the record does not provide a name for the debtor;
      2. In the case of an amendment or information statement, the record:
        1. Does not identify the initial financing statement as required by KRS 355.9-512 or 355.9-518 , as applicable; or
        2. Identifies an initial financing statement whose effectiveness has lapsed under KRS 355.9-515 ;
      3. In the case of an initial financing statement that provides the name of a debtor identified as an individual or an amendment that provides a name of a debtor identified as an individual which was not previously provided in the financing statement to which the record relates, the record does not identify the debtor’s surname; or
      4. In the case of a record filed in the filing office described in KRS 355.9-501 (1)(a), the record does not provide a sufficient description of the real property to which it relates;
    4. In the case of an initial financing statement or an amendment that adds a secured party of record, the record does not provide a name and mailing address for the secured party of record;
    5. In the case of an initial financing statement or an amendment that provides a name of a debtor which was not previously provided in the financing statement to which the amendment relates, the record does not:
      1. Provide a mailing address for the debtor; or
      2. Indicate whether the debtor is an individual or an organization;
    6. In the case of an assignment reflected in an initial financing statement under KRS 355.9-514 (1) or an amendment filed under KRS 355.9-514 (2), the record does not provide a name and mailing address for the assignee; or
    7. In the case of a continuation statement, the record is not filed within the six (6) month period prescribed by KRS 355.9-515 (4).
  3. For purposes of subsection (2) of this section:
    1. A record does not provide information if the filing office is unable to read or decipher the information; and
    2. A record that does not indicate that it is an amendment or identify an initial financing statement to which it relates, as required by KRS 355.9-512 , 355.9-514 , or 355.9-518 , is an initial financing statement.
  4. A record that is communicated to the filing office with tender of the filing fee, but which the filing office refuses to accept for a reason other than one set forth in subsection (2) of this section, is effective as a filed record except as against a purchaser of the collateral which gives value in reasonable reliance upon the absence of the record from the files.

History. Enact. Acts 2000, ch. 408, § 107, effective July 1, 2001; 2012, ch. 132, § 84, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  Subsection (a): former Section 9-403(1); the remainder is new.
  2. What Constitutes Filing.  Subsection (a) deals generically with what constitutes filing of a record, including an initial financing statement and amendments of all kinds (e.g., assignments, termination statements, and continuation statements). It follows former Section 9-403(1), under which either acceptance of a record by the filing office or presentation of the record and tender of the filing fee constitutes filing.
  3. Effectiveness of Rejected Record.  Subsection (b) provides an exclusive list of grounds upon which the filing office may reject a record. See Section 9-520(a). Although some of these grounds would also be grounds for rendering a filed record ineffective (e.g., an initial financing statement does not provide a name for the debtor), many others would not be (e.g., an initial financing statement does not provide a mailing address for the debtor or secured party of record). Neither this section nor Section 9-520 requires or authorizes the filing office to determine, or even consider, the accuracy of information provided in a record.

    A financing statement or other record that is communicated to the filing office but which the filing office refuses to accept provides no public notice, regardless of the reason for the rejection. However, this section distinguishes between records that the filing office rightfully rejects and those that it wrongfully rejects. A filer is able to prevent a rightful rejection by complying with the requirements of subsection (b). No purpose is served by giving effect to records that justifiably never find their way into the system, and subsection (b) so provides.

    Subsection (d) deals with the filing office’s unjustified refusal to accept a record. Here, the filer is in no position to prevent the rejection and as a general matter should not be prejudiced by it. Although wrongfully rejected records generally are effective, subsection (d) contains a special rule to protect a third-party purchaser of the collateral (e.g., a buyer or competing secured party) who gives value in reliance upon the apparent absence of the record from the files. As against a person who searches the public record and reasonably relies on what the public record shows, subsection (d) imposes upon the filer the risk that a record failed to make its way into the filing system because of the filing office’s wrongful rejection of it. (Compare Section 9-517, under which a mis-indexed financing statement is fully effective.) This risk is likely to be small, particularly when a record is presented electronically, and the filer can guard against this risk by conducting a post-filing search of the records. Moreover, Section 9-520(b) requires the filing office to give prompt notice of its refusal to accept a record for filing.

  4. Method or Medium of Communication.  Rejection pursuant to subsection (b)(1) for failure to communicate a record properly should be understood to mean noncompliance with procedures relating to security, authentication, or other communication-related requirements that the filing office may impose. Subsection (b)(1) does not authorize a filing office to impose additional substantive requirements. See Section 9-520, Comment 2.
  5. Address for Secured Party of Record.  Under subsection (b)(4) and Section 9-520(a), the lack of a mailing address for the secured party of record requires the filing office to reject an initial financing statement. The failure to include an address for the secured party of record no longer renders a financing statement ineffective. See Section 9-502(a). The function of the address is not to identify the secured party of record but rather to provide an address to which others can send required notifications, e.g., of a purchase-money security interest in inventory or of the disposition of collateral. Inasmuch as the address shown on a filed financing statement is an “address that is reasonable under the circumstances,” a person required to send a notification to the secured party may satisfy the requirement by sending a notification to that address, even if the address is or becomes incorrect. See Section 9-102 (definition of “send”). Similarly, because the address is “held out by [the secured party] as the place for receipt of such communications [i.e., communications relating to security interests],” the secured party is deemed to have received a notification delivered to that address. See Section 1-202(e).
  6. Uncertainty Concerning Individual Debtor’s Last Name.  Subsection (b)(3)(C) requires the filing office to reject an initial financing statement or amendment adding an individual debtor if the office cannot index the record because it does not identify the debtor’s surname (e.g., it is unclear whether the debtor’s surname is Elton or John).
  7. Inability of Filing Office to Read or Decipher Information.  Under subsection (c)(1), if the filing office cannot read or decipher information, the information is not provided by a record for purposes of subsection (b).
  8. Classification of Records.  For purposes of subsection (b), a record that does not indicate it is an amendment or identify an initial financing statement to which it relates is deemed to be an initial financing statement. See subsection (c)(2).
  9. Effectiveness of Rejectable But Unrejected Record.  Section 9-520(a) requires the filing office to refuse to accept an initial financing statement for a reason set forth in subsection (b). However, if the filing office accepts such a financing statement nevertheless, the financing statement generally is effective if it complies with the requirements of Section 9-502(a) and (b). See Section 9-520(c). Similarly, an otherwise effective financing statement generally remains so even though the information in the financing statement becomes incorrect. See Section 9-507(b). (Note that if the information required by subsection (b)(5) is incorrect when the financing statement is filed, Section 9-338 applies.)

NOTES TO DECISIONS

1.Lodging of Record.

Where seller mailed conditional sales contract to the office of the county clerk with the proper recording fee and requested that it be recorded, his lien was lodged of record before creditor filed an action against buyer and levied an attachment on the automobile, even though the conditional sales contract was not actually recorded until after the action for attachment was brought. (decided under prior law) Fields Motor Co. v. Sturgill, 279 Ky. 47 , 129 S.W.2d 1003, 1939 Ky. LEXIS 231 ( Ky. 1939 ).

2.Indexing.

Where the clerk recorded an instrument which was recordable in his office, it was notice to all parties as provided by law, and this notice existed regardless of whether the clerk had properly indexed the instrument. (decided under prior law) Seat v. Louisville & Jefferson County Land Co., 219 Ky. 418 , 293 S.W. 986, 1927 Ky. LEXIS 374 ( Ky. 1927 ).

3.Filing Multiple Documents.

If a party intends a single document to serve multiple purposes and each purpose requires recording to effectuate its validity, duplicate instruments must be supplied and the clerk must be informed as to the purpose for which each is to be recorded. (decided under prior law) In re Leckie Freeburn Coal Co., 405 F.2d 1043, 1969 U.S. App. LEXIS 9150 (6th Cir. Ky.), cert. denied, 395 U.S. 960, 89 S. Ct. 2101, 23 L. Ed. 2d 746, 1969 U.S. LEXIS 3173 (U.S. 1969).

4.Undated Financing Statement.

An undated financing statement is effective for five years. (decided under prior law) In re Cantrill Constr. Co., 418 F.2d 705, 1969 U.S. App. LEXIS 9946 (6th Cir. Ky. 1969 ), cert. denied, 397 U.S. 990, 90 S. Ct. 1124, 25 L. Ed. 2d 398, 1970 U.S. LEXIS 3561 (U.S. 1970).

Where there were no stated maturity dates in a bank’s security agreement and financing statement, the stated maturity dates in the debtor’s underlying notes were not controlling for perfection purposes, and the security instruments were effective for a period of five years from the date of filing. (decided under prior law) In re Hazle Farm & Power Equipment, 53 B.R. 30, 1985 Bankr. LEXIS 5535 (Bankr. W.D. Ky. 1985 ).

5.Failure to File Continuation Statement.

A perfected security interest which states a maturity date lapses 60 days after that maturity date unless a continuation statement is filed prior to the lapse; therefore, where more than 60 days had passed since either of the maturity dates contended for in this action, and since no continuation statement was ever filed by the creditor bank in order to continue perfection of its security interests, those interests became unperfected and the bank was deemed a general unsecured creditor of the estate. (decided under prior law) In re Radcliff Door Co., 17 B.R. 153, 1982 Bankr. LEXIS 5129 (Bankr. W.D. Ky. 1982 ).

6.Time of Filing Continuation Statement.

There is no Kentucky authority which supports the position that a continuation statement which is filed prematurely nevertheless extends the effectiveness of a financing statement for an additional five-year period. (decided under prior law) Banque Worms v. Davis Constr. Co., 831 S.W.2d 921, 1992 Ky. App. LEXIS 133 (Ky. Ct. App. 1992).

This section provides, in effect, that if a security agreement which retains a security interest in collateral has been perfected by the filing of a financial statement, the statement lapses at the expiration of a five-year period unless a continuation statement is filed prior to the lapse. Further, if the security interest becomes unperfected by lapse, it is deemed to have become unperfected as against a person who became a purchaser before the lapse. (decided under prior law) Banque Worms v. Davis Constr. Co., 831 S.W.2d 921, 1992 Ky. App. LEXIS 133 (Ky. Ct. App. 1992).

To be timely, a continuation statement must be filed within six months prior to the expiration of the five-year period during which the original financing statement is effective. Only if the continuation statement is timely filed is the effectiveness of the original financing statement continued. (decided under prior law) Banque Worms v. Davis Constr. Co., 831 S.W.2d 921, 1992 Ky. App. LEXIS 133 (Ky. Ct. App. 1992).

7.Place of Filing.

A continuation statement filed by bank group in the same county as the properly filed original financing statement continues the effectiveness of bank group’s security interest when a debtor changes its corporate residence. (decided under prior law) In re Green River Coal Co., 165 B.R. 425, 1994 Bankr. LEXIS 453 (Bankr. W.D. Ky. 1994 ).

Opinions of Attorney General.

The filing officer may remove a lapsed statement from the files and destroy it. OAG 70-655 .

The motor vehicle certificate is an exception to the general filing provisions under this section, since a financing statement must be noted on the motor vehicle registration certificate. OAG 70-655 .

A continuation statement could be effectively filed any time before the clerk’s office closes for business on the day the financing statement would lapse. OAG 72-789 .

There is no requirement for notarization of the financing statement and no such requirement can be imposed on the one presenting the statement for filing to the clerk, and such statement should be filed in the office of the clerk of the court. OAG 73-599 .

The continuation statement is inextricably tied to the original financing statement to which it applies; thus the index card of the original financing statement is the proper card to record the data about the continuation statement, and the continuation statement should properly be attached to the original financing statement which it continues. OAG 77-67 .

A continuation statement merely continues the legal effectiveness of the original financing statement, or of the original financing statement as amended and cannot be used as a device to add collateral or an additional debtor. OAG 78-213 .

The index cards kept by a county clerk do not have to specifically list household goods and other personal property when the collateral is not specifically described in the financing statement, and a general reference to “all household goods and other personal property,” is a sufficient description under the statutes. OAG 80-190 .

A group of continuation financing statements cannot be clustered, i.e., referred to by number in only one continuation form, in order to avoid paying the county clerk a filing fee for each continuation statement, because each financing statement and its companion continuation statement stands as a separate transaction and they may not be clustered so as to avoid the proper statutory filing fee. OAG 80-250 .

A county clerk’s office should refuse to accept or file continuation statements tendered for filing before the six (6) month period immediately prior to the maturity date named in the original statement, for such continuation statements are premature and, under former KRS 355.9-403 (3) had no legal effect; in those cases where premature continuation statements have already been filed, the secured party should be given written notice that the statement has no legal effect and that the security interest which was perfected by way of the original statement will lapse upon the expiration date established by the original statement if a timely continuation statement is not filed. OAG 80-290 .

Under former KRS 355.9-403 (3), a timely filed continuation statement became effective “upon” the last date to which the filing of the original financing statement was effective, because if the continuation statement would become effective only “after” the last date to which the filing of the original financing statement was effective, there would be a fatal lapse. OAG 82-13 .

A second continuation statement, in order to be timely, must be filed at least by the last date to which the filing of the first continuation statement was effective; this simply means that the second continuation statement must be filed prior to the lapse of the first one. OAG 82-13 .

A financing statement for a mobile home may be amended for the purpose of showing new ownership of the mobile home by filing a document with the county clerk which precisely states the change in the ownership of the mobile home by giving the owner’s name and address as stated in the original financing statement and the new owner’s name and address, as well as the secured party’s address; such amendment should explicitly state information which will definitely identify the original financing statement on file in the clerk’s office, should explicitly refer to the collateral, i.e., the particular mobile home involved and should be signed by the creditor and new debtor and dated. The effective period of the original financing statement is not affected by the mere change in ownership of the mobile home. OAG 84-38 .

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Kentucky Law Journal.

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

355.9-516A. Administrative rejection of unauthorized records.

  1. Upon approval of the Secretary of State, a filing office may refuse to accept a record communicated for filing under this article if it is evident from the contents of the record, including the described collateral, or from information in a record accompanying the record communicated for filing, that the person filing the record is not authorized to do so under KRS 355.9-509 or 355.9-708 . This section only applies if all debtors and secured parties indicated on the record are individuals.
  2. If a filing office refuses to accept a record pursuant to subsection (1) of this section, it shall immediately inform the person attempting to file the record and all persons identified on the record as secured parties that the record has not been accepted, and may request additional documentation supporting the filing. The Secretary of State shall review all documentation received pursuant to a request under this subsection, and if the Secretary of State concludes that the record is authorized under KRS 355.9-509 or 355.9-708 , the Secretary of State shall direct the filing office to promptly accept the record.
  3. A person indicated as a secured party of record on a financing statement that is refused pursuant to subsection (1) of this section may request from the Secretary of State an expedited administrative review of the decision to refuse filing.
  4. A person indicated as a secured party of record on a financing statement that is refused filing pursuant to subsection (1) of this section may bring an action against the Secretary of State seeking a determination that the financing statement was filed by a person entitled to do so under KRS 355.9-509 (1) and was authorized. An action under this subsection shall have priority on the court’s calendar and shall proceed by expedited hearing. If the individual who filed the affidavit resides in this state, the exclusive venue in this state for the action shall be in the Circuit Court for the county where the individual principally resides in this state. If the individual who filed the affidavit does not reside in this state, the exclusive venue in this state shall be in the Circuit Court for the county where the filing office in which the financing statement was filed is located.
  5. If the Secretary of State determines in an expedited administrative review initiated under subsection (3) of this section, or if a court determines in an action brought pursuant to subsection (4) of this section, that a rejected record was filed by a person entitled to do so under KRS 355.9-509 (1) and should have been accepted for filing, upon receipt of a certified copy of that determination the filing office shall promptly file the record. Upon the filing of a record improperly refused under subsection (1) of this section, the record shall be treated as if it had been filed and effective as of the date originally submitted, except against a person that purchased the collateral in good faith between the date the record was rejected for filing and the subsequent actual date of the filing, to the extent that the person gave new value in reliance on the absence of the record from the files.

History. Enact. Acts 2012, ch. 132, § 85, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

355.9-517. Effect of indexing errors.

The failure of the filing office to index a record correctly does not affect the effectiveness of the filed record.

History. Enact. Acts 2000, ch. 408, § 108, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Effectiveness of Mis-Indexed Records.  This section provides that the filing office’s error in mis-indexing a record does not render ineffective an otherwise effective record. As did former Section 9-401, this section imposes the risk of filing-office error on those who search the files rather than on those who file.

355.9-518. Claim concerning inaccurate or wrongfully filed record.

  1. A person may file in the filing office an information statement with respect to a record indexed there under the person’s name if the person believes that the record is inaccurate or was wrongfully filed.
  2. An information statement filed under subsection (1) of this section shall:
    1. Identify the record to which it relates by the file number assigned to the initial financing statement to which the record relates;
    2. Indicate that it is an information statement; and
    3. Provide the basis for the person’s belief that the record is inaccurate and indicate the manner in which the person believes the record should be amended to cure any inaccuracy or provide the basis for the person’s belief that the record was wrongfully filed.
  3. A person may file in the filing office an information statement with respect to a record filed there if the person is a secured party of record with respect to the financing statement to which the record relates and believes that the person that filed the record was not entitled to do so under KRS 355.9-509 (4).
  4. An information statement filed under subsection (3) of this section shall:
    1. Identify the record to which it relates by the file number assigned to the initial financing statement to which the record relates;
    2. Indicate that it is an information statement; and
    3. Provide the basis for the person’s belief that the person that filed the record was not entitled to do so under KRS 355.9-509 (4).
  5. Except as provided in subsection (6) of this section, the filing of an information statement does not affect the effectiveness of an initial financing statement or other filed record.
  6. An information statement that is filed by a bank, or subsidiary or affiliate thereof, shall affect the effectiveness of the record to which it relates if:
    1. The information statement includes a written statement of an officer of the entity filing the information statement, which provides the information specified in subsection (2) of this section;
    2. The officer’s written statement provides the officer’s title and information identifying how the filer qualifies as a bank, or subsidiary or affiliate thereof;
    3. The officer’s written statement has been duly acknowledged before a notary public; and
    4. The record to which the information statement relates was originally filed by or refers to a record filed by the entity filing the information statement.

History. Enact. Acts 2000, ch. 408, § 109, effective July 1, 2001; 2010, ch. 155, § 8, effective July 15, 2010; 2012, ch. 132, § 86, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  New.
  2. Information Statements.  Former Article 9 did not afford a nonjudicial means for a debtor to indicate that a financing statement or other record that was inaccurate or wrongfully filed. Subsection (a) affords the debtor the right to file an information statement. Among other requirements, the correction statement must provide the basis for the debtor’s belief that the public record should be corrected. See subsection (b). These provisions, which resemble the analogous remedy in the Fair Credit Reporting Act, 15 U.S.C. § 1681i, afford an aggrieved person the opportunity to state its position on the public record. They do not permit an aggrieved person to change the legal effect of the public record. Thus, although a filed information statement becomes part of the “financing statement,” as defined in Section 9-102, the filing does not affect the effectiveness of the initial financing statement or any other filed record. See subsection (e).

    Sometimes a person files a termination statement or other record relating to a filed financing statement without being entitled to do so. A secured party of record with respect to the financing statement who believes that such a record has been filed may, but need not, file an information statement indicating that the person that filed the record was not entitled to do so. See subsection (c). An information statement has no legal effect. Its sole purpose is to provide some limited public notice that the efficacy of a filed record is disputed. If the person that filed the record was not entitled to do so, the filed record is ineffective, regardless of whether the secured party of record files an information statement. Likewise, if the person that filed the record was entitled to do so, the filed record is effective, even if the secured party of record files an information statement. See Section 9-510(a), 9-518(e). Because an information statement filed under subsection (c) has no legal effect, a secured party of record—even one who is aware of the unauthorized filing of a record has no duty to file one. Just as searchers bear the burden of determining whether the filing of initial financing statement was authorized, searchers bear the burden of determining whether the filing of every subsequent record was authorized.

    Inasmuch as the filing of an information statement has no legal effect, this section does not provide a mechanism by which a secured party can correct an error that it discovers in its own financing statement.

    This section does not displace other provisions of this Article that impose liability for making unauthorized filings or failing to file or send a termination statement (see Section 9-625(e)), nor does it displace any available judicial remedies.

  3. Resort to Other Law.  This Article cannot provide a satisfactory or complete solution to problems caused by misuse of the public records. The problem of “bogus” filings is not limited to the UCC filing system but extends to the real-property records, as well. A summary judicial procedure for correcting the public record and criminal penalties for those who misuse the filing and recording systems are likely to be more effective and put less strain on the filing system than provisions authorizing or requiring action by filing and recording offices.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Subpart 2. Duties and Operation of Filing Office

355.9-519. Numbering, maintaining, and indexing records — Communicating information provided in records.

  1. For each record filed in a filing office, the filing office shall:
    1. Assign a unique number to the filed record;
    2. Create a record that bears the number assigned to the filed record and the date and time of filing;
    3. Maintain the filed record for public inspection; and
    4. Index the filed record in accordance with subsections (3), (4), and (5) of this section.
  2. A file number must include a digit that:
    1. Is mathematically derived from or related to the other digits of the file number; and
    2. Aids the filing office in determining whether a number communicated as the file number includes a single-digit or transpositional error.
  3. Except as otherwise provided in subsections (4) and (5) of this section, the filing office shall:
    1. Index an initial financing statement according to the name of the debtor and index all filed records relating to the initial financing statement in a manner that associates with one another an initial financing statement and all filed records relating to the initial financing statement; and
    2. Index a record that provides a name of a debtor which was not previously provided in the financing statement to which the record relates also according to the name that was not previously provided.
  4. If a financing statement is filed as a fixture filing or covers as-extracted collateral or timber to be cut, the filing office shall index it:
    1. Under the names of the debtor and of each owner of record shown on the financing statement as if they were the mortgagors under a mortgage of the real property described; and
    2. To the extent that the law of this Commonwealth provides for indexing of records of mortgages under the name of the mortgagee, under the name of the secured party as if the secured party were the mortgagee thereunder, or, if indexing is by description, as if the financing statement were a record of a mortgage of the real property described.
  5. If a financing statement is filed as a fixture filing or covers as-extracted collateral or timber to be cut, the filing office shall index an assignment filed under KRS 355.9-514 (1) or an amendment filed under KRS 355.9-514 (2):
    1. Under the name of the assignor as grantor; and
    2. To the extent that the law of this Commonwealth provides for indexing a record of the assignment of a mortgage under the name of the assignee, under the name of the assignee.
  6. The filing office shall maintain a capability:
    1. To retrieve a record by the name of the debtor and by the file number assigned to the initial financing statement to which the record relates; and
    2. To associate and retrieve with one another an initial financing statement and each filed record relating to the initial financing statement.
  7. The filing office may not remove a debtor’s name from the index until one (1) year after the effectiveness of a financing statement naming the debtor lapses under KRS 355.9-515 with respect to all secured parties of record.
  8. The filing office shall perform the acts required by subsections (1) to (5) of this section at the time and in the manner prescribed by filing-office rule, but not later than two (2) business days after the filing office receives the record in question.
  9. Subsection (2) of this section does not apply to a filing office described in KRS 355.9-501 (1)(a).

History. Enact. Acts 2000, ch. 408, § 110, effective July 1, 2001.

Official Comment

  1. Source.  Former Sections 9-403(4), (7), 9-405(2).
  2. Filing Office’s Duties.  Subsections (a) through (e) set forth the duties of the filing office with respect to filed records. Subsection (h), which is new, imposes a minimum standard of performance for those duties. Prompt indexing is crucial to the effectiveness of any filing system. An accepted but unindexed record affords no public notice. Subsection (f) requires the filing office to maintain appropriate storage and retrieval facilities, and subsection (g) contains minimum requirements for the retention of records.
  3. File Number.  Subsection (a)(1) requires the filing office to assign a unique number to each filed record. That number is the “file number” only if the record is an initial financing statement. See Section 9-102.
  4. Time of Filing.  Subsection (a)(2) and Section 9-523 refer to the “date and time” of filing. The statutory text does not contain any instructions to a filing office as to how the time of filing is to be determined. The method of determining or assigning a time of filing is an appropriate matter for filing-office rules to address.
  5. Related Records.  Subsections (c) and (f) are designed to ensure that an initial financing statement and all filed records relating to it are associated with one another, indexed under the name of the debtor, and retrieved together. To comply with subsection (f), a filing office (other than a real property recording office in a state that enacts subsection (f), Alternative B) must be capable of retrieving records in each of two ways: By the name of the debtor and by the file number of the initial financing statement to which the record relates.
  6. Prohibition on Deleting Names from Index.  This article contemplates that the filing office will not delete the name of a debtor from the index until at least one year passes after the effectiveness of the financing statement lapses as to all secured parties of record. See subsection (g). This rule applies even if the filing office accepts an amendment purporting to delete or modify the name of a debtor or terminate the effectiveness of the financing statement. If an amendment provides a modified name for a debtor, the amended name should be added to the index, see subsection (c)(2), but the preamendment name should remain in the index.

    Compared to former Article 9, the rule in subsection (g) increases the amount of information available to those who search the public records. The rule also contemplates that searchers—not the filing office—will determine the significance and effectiveness of filed records.

Opinions of Attorney General.

The provisions of former KRS 355.9-403 (4) must be literally followed. OAG 64-822 .

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Kentucky Law Journal.

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

355.9-520. Acceptance and refusal to accept record.

  1. A filing office shall refuse to accept a record for filing for a reason set forth in KRS 355.9-516 (2) and may refuse to accept a record for filing only for a reason set forth in KRS 355.9-516 (2) or 355.9-518 .
  2. If a filing office refuses to accept a record for filing, it shall communicate to the person that presented the record the fact of and reason for the refusal and the date and time the record would have been filed had the filing office accepted it. The communication must be made at the time and in the manner prescribed by filing-office rule but in no event more than two (2) business days after the filing office receives the record.
  3. A filed financing statement satisfying KRS 355.9-502 (1) and (2) is effective, even if the filing office is required to refuse to accept it for filing under subsection (1) of this section or refuses to accept for filing for a reason set forth in this section or KRS 355.9-518 . However, KRS 355.9-338 applies to a filed financing statement providing information described in KRS 355.9-516 (2)(e) which is incorrect at the time the financing statement is filed.
  4. If a record communicated to a filing office provides information that relates to more than one (1) debtor, this part of this article applies as to each debtor separately.

History. Enact. Acts 2000, ch. 408, § 111, effective July 1, 2001; 2012, ch. 132, § 87, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  New.
  2. Refusal to Accept Record for Filing.  In some states, filing offices considered themselves obligated by former Article 9 to review the form and content of a financing statement and to refuse to accept those that they determine are legally insufficient. Some filing offices imposed requirements for or conditions to filing that do not appear in the statute. Under this section, the filing office is not expected to make legal judgments and is not permitted to impose additional conditions or requirements.

    Subsection (a) both prescribes and limits the bases upon which the filing office must and may reject records by reference to the reasons set forth in Section 9-516(b). For the most part, the bases for rejection are limited to those that prevent the filing office from dealing with a record that it receives—because some of the requisite information (e.g., the debtor’s name) is missing or cannot be deciphered, because the record is not communicated by a method (e.g., it is MIME-rather than UU-encoded) or medium (e.g., it is written rather than electronic) that the filing office accepts, or because the filer fails to tender an amount equal to or greater than the filing fee.

  3. Consequences of Accepting Rejectable Record.  Section 9-516(b) includes among the reasons for rejecting an initial financing statement the failure to give certain information that is not required as a condition of effectiveness. In conjunction with Section 9-516(b)(5), this section requires the filing office to refuse to accept a financing statement that is legally sufficient to perfect a security interest under Section 9-502 but does not contain a mailing address for the debtor, does not disclose whether the debtor is an individual or an organization (e.g., a partnership or corporation) or, if the debtor is an organization, does not give certain specified information concerning the organization. The information required by Section 9-516(b)(5) assists searchers in weeding out “false positives,” i.e., records that a search reveals but which do not pertain to the debtor in question. It assists filers by helping to ensure that the debtor’s name is correct and that the financing statement is filed in the proper jurisdiction.

    If the filing office accepts a financing statement that does not give this information at all, the filing is fully effective. Section 9-520(c). The financing statement also generally is effective if the information is given but is incorrect; however, section 9-338 affords protection to buyers and holders of perfected security interests who give value in reasonable reliance upon the incorrect information.

  4. Filing Office’s Duties with Respect to Rejected Record.  Subsection (b) requires the filing office to communicate the fact of rejection and the reason therefor within a fixed period of time. Inasmuch as a rightfully rejected record is ineffective and a wrongfully rejected record is not fully effective, prompt communication concerning any rejection is important.
  5. Partial Effectiveness of Record.  Under subsection (d), the provisions of this part apply to each debtor separately. Thus, a filing office may reject an initial financing statement or other record as to one named debtor but accept it as to the other.

Example: An initial financing statement is communicated to the filing office. The financing statement names two debtors, John Smith and Jane Smith. It contains all of the information described in Section 9-516(b)(5) with respect to John but lacks some of the information with respect to Jane. The filing office must accept the financing statement with respect to John, reject it with respect to Jane, and notify the filer of the rejection.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-521. Uniform form of written financing statement and amendment.

  1. A filing office that accepts written records may not refuse to accept a written initial financing statement in the form and format set forth in the official text of the 2010 amendments to Article 9 of the Uniform Commercial Code promulgated by The American Law Institute and the National Conference of Commissioners on Uniform State Laws, except for a reason set forth in KRS 355.9-516 (2).
  2. A filing office that accepts written records may not refuse to accept a written record in the form and format set forth as Form UCC3 and Form UCC3Ad in the final official text of the 2010 amendments to Article 9 of the Uniform Commercial Code promulgated by The American Law Institute and the National Conference of Commissioners on Uniform State Laws, except for a reason set forth in KRS 355.9-516 (2).

History. Enact. Acts 2000, ch. 408, § 112, effective July 1, 2001; 2012, ch. 132, § 88, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  New.
  2. “Safe Harbor” Written Forms.  Although Section 9-520 limits the bases upon which the filing office can refuse to accept records, this section provides sample written forms that must be accepted in every filing office in the country, as long as the filing office’s rules permit it to accept written communications. By completing one of the forms in this section, a secured party can be certain that the filing office is obligated to accept it.

    The forms in this section are based upon national financing statement forms that were in use under former article 9. Those forms were developed over an extended period and reflect the comments and suggestions of filing officers, secured parties and their counsel, and service companies. The formatting of those forms and of the ones in this section has been designed to reduce error by both filers and filing offices.

    A filing office that accepts written communications may not reject, on grounds of form or format, a filing using these forms. Although filers are not required to use the forms, they are encouraged and can be expected to do so, inasmuch as the forms are well designed and avoid the risk of rejection on the basis of form or format. As their use expands, the forms will rapidly become familiar to both filers and filing office personnel. Filing offices may and should encourage the use of these forms by declaring them to be the “standard” (but not exclusive) forms for each jurisdiction, albeit without in any way suggesting that alternative forms are unacceptable.

    The multi-purpose form in subsection (b) covers changes with respect to the debtor, the secured party, the collateral, and the status of the financing statement (termination and continuation). A single form may be used for several different types of amendments at once (e.g., both to change a debtor’s name and continue the effectiveness of the financing statement).

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-522. Maintenance and destruction of records.

  1. The filing office shall maintain a record of the information provided in a filed financing statement for at least one (1) year after the effectiveness of the financing statement has lapsed under KRS 355.9-515 with respect to all secured parties of record. The record must be retrievable by using the name of the debtor and by using the file number assigned to the initial financing statement to which the record relates.
  2. Except to the extent that a statute governing disposition of public records provides otherwise, the filing office immediately may destroy any written record evidencing a financing statement. However, if the filing office destroys a written record, it shall maintain another record of the financing statement which complies with subsection (1) of this section.

History. Enact. Acts 2000, ch. 408, § 113, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-403(3), revised substantially.
  2. Maintenance of Records.  Section 9-523 requires the filing office to provide information concerning certain lapsed financing statements. Accordingly, subsection (a) requires the filing office to maintain a record of the information in a financing statement for at least one year after lapse. During that time, the filing office may not delete any information with respect to a filed financing statement; it may only add information. This approach relieves the filing office from any duty to determine whether to substitute or delete information upon receipt of an amendment. It also assures searchers that they will receive all information with respect to financing statements filed against a debtor and thereby be able themselves to determine the state of the public record.

    The filing office may maintain this information in any medium. Subsection (b) permits the filing office immediately to destroy written records evidencing a financing statement, provided that the filing office maintains another record of the information contained in the financing statement as required by subsection (a).

355.9-523. Information from filing office — Sale or license of records.

  1. If a person that files a written record requests an acknowledgment of the filing, the filing office shall send to the person an image of the record showing the number assigned to the record pursuant to KRS 355.9-519 (1)(a) and the date and time of the filing of the record. However, if the person furnishes a copy of the record to the filing office, the filing office may instead:
    1. Note upon the copy the number assigned to the record pursuant to KRS 355.9-519 (1)(a) and the date and time of the filing of the record; and
    2. Send the copy to the person.
  2. If a person files a record other than a written record, the filing office shall communicate to the person an acknowledgment that provides:
    1. The information in the record;
    2. The number assigned to the record pursuant to KRS 355.9-519 (1)(a); and
    3. The date and time of the filing of the record.
  3. The filing office shall communicate or otherwise make available in a record the following information to any person that requests it:
    1. Whether there is on file on a date and time specified by the filing office, but not a date earlier than three (3) business days before the filing office receives the request, any financing statement that:
      1. Designates a particular debtor;
      2. Has not lapsed under KRS 355.9-515 with respect to all secured parties of record; and
      3. If the request so states, has lapsed under KRS 355.9-515 and a record of which is maintained by the filing office under KRS 355.9-522 (1);
    2. The date and time of filing of each financing statement; and
    3. The information provided in each financing statement.
  4. In complying with its duty under subsection (3) of this section, the filing office may communicate information in any medium. However, if requested, the filing office shall communicate information by issuing its written certificate.
  5. The filing office shall perform the acts required by subsections (1) to (4) of this section at the time and in the manner prescribed by filing-office rule, but not later than two (2) business days after the filing office receives the request.
  6. At least weekly, the Secretary of State shall offer to sell or license to the public on a nonexclusive basis, in bulk, copies of all records filed in it under this part of this article, in every medium from time to time available to the filing office.

History. Enact. Acts 2000, ch. 408, § 114, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-407; subsections (d) and (e) are new.
  2. Filing Office’s Duty to Provide Information.  Former Section 9-407, dealing with obtaining information from the filing office, was bracketed to suggest to legislatures that its enactment was optional. Experience has shown that the method by which interested persons can obtain information concerning the public records should be uniform. Accordingly, the analogous provisions of this article are not in brackets.

    Most of the other changes from former Section 9-407 are for clarification, to embrace medium-neutral drafting, or to impose standards of performance on the filing office.

  3. Acknowledgments of Filing. Subsections (a) and (b) require the filing office to acknowledge the filing of a record. Under subsection (a), the filing office is required to acknowledge the filing of a written record only upon request of the filer. Subsection (b) requires the filing office to acknowledge the filing of a non-written record even in the absence of a request from the filer.
  4. Response to Search Request.  Subsection (c)(3) requires the filing office to provide “the information contained in each financing statement” to a person who requests it. This requirement can be satisfied by providing copies, images, or reports. The requirement does not in any manner inhibit the filing office from also offering to provide less than all of the information (presumably for a lower fee) to a person who asks for less. Thus, subsection (c) accommodates the practice of providing only the type of record (e.g., initial financing statement, continuation statement), number assigned to the record, date and time of filing, and names and addresses of the debtor and secured party when a requesting person asks for no more (i.e., when the person does not ask for copies of financing statements). In contrast, the filing office’s obligation under subsection (b) to provide an acknowledgment containing “the information contained in the record” is not defined by a customer’s request. Thus unless the filer stipulates otherwise, to comply with subsection (b) the filing office’s acknowledgment must contain all of the information in a record.

    Subsection (c) assures that a minimum amount of information about filed records will be available to the public. It does not preclude a filing office from offering additional services.

  5. Lapsed and Terminated Financing Statements.  This section reflects the policy that terminated financing statements will remain part of the filing office’s data base. The filing office may remove from the data base only lapsed financing statements, and then only when at least a year has passed after lapse. See Section 9-519(g). Subsection (c)(1)(C) requires a filing office to conduct a search and report as to lapsed financing statements that have not been removed from the data base, when requested.
  6. Search by Debtor’s Address.  Subsection (c)(1)(A) contemplates that, by making a single request, a searcher will receive the results of a search of the entire public record maintained by any given filing office. Addition of the bracketed language in subsection (c)(1)(A) would permit a search report limited to financing statements showing a particular address for the debtor, but only if the search request is so limited. With or without the bracketed language, this subsection does not permit the filing office to compel a searcher to limit a request by address.
  7. Medium of Communication; Certificates.  Former Article 9 provided that the filing office respond to a request for information by providing a certificate. The principle of medium-neutrality would suggest that the statute not require a written certificate. Subsection (d) follows this principle by permitting the filing office to respond by communicating “in any medium.” By permitting communication “in any medium,” subsection (d) is not inconsistent with a system in which persons other than filing office staff conduct searches of the filing office’s (computer) records.

    Some searchers find it necessary to introduce the results of their search into evidence. Because official written certificates might be introduced into evidence more easily than official communications in another medium, subsection (d) affords states the option of requiring the filing office to issue written certificates upon request. The alternative bracketed language in subsection (d) recognizes that some states may prefer to permit the filing office to respond in another medium, as long as the response can be admitted into evidence in the courts of that state without extrinsic evidence of its authenticity.

  8. Performance Standard.  The utility of the filing system depends on the ability of searchers to get current information quickly. Accordingly, subsection (e) requires that the filing office respond to a request for information no later than two business days after it receives the request. The information contained in the response must be current as of a date no earlier than three business days before the filing office receives the request. See subsection (c)(1). The failure of the filing office to comply with performance standards, such as subsection (e), has no effect on the private rights of persons affected by the filing of records.
  9. Sales of Records in Bulk.  Subsection (f), which is new, mandates that the appropriate official or the filing office sell or license the filing records to the public in bulk, on a nonexclusive basis, in every medium available to the filing office. The details of implementation are left to filing-office rules.

355.9-524. Delay by filing office.

Delay by the filing office beyond a time limit prescribed by this part of this article is excused if:

  1. The delay is caused by interruption of communication or computer facilities, war, emergency conditions, failure of equipment, or other circumstances beyond control of the filing office; and
  2. The filing office exercises reasonable diligence under the circumstances.

History. Enact. Acts 2000, ch. 408, § 115, effective July 1, 2001.

Official Comment

Source. New; derived from Section 4-109.

355.9-525. Fees.

  1. Except as otherwise provided in subsection (4) of this section, the fee for filing and indexing a record under this part of this article is:
    1. Ten dollars ($10) if the record is communicated in writing and consists of one (1) or two (2) pages;
    2. Twenty dollars ($20) if the record is communicated in writing and consists of more than two (2) pages; and
    3. Five dollars ($5) if the record is communicated by another medium authorized by filing-office rule.
  2. The number of names required to be indexed does not affect the amount of the fee in subsection (1) of this section.
  3. The fee for issuing a certificate showing whether there is on file any financing statement naming a particular debtor is five dollars ($5).
  4. This section does not require a fee with respect to a record of a mortgage which is effective as a financing statement filed as a fixture filing or as a financing statement covering as-extracted collateral or timber to be cut under KRS 355.9-502 (3). However, the recording and satisfaction fees that otherwise would be applicable to the record of the mortgage apply.

History. Enact. Acts 2000, ch. 408, § 116, effective July 1, 2001.

Official Comment

  1. Source.  Various sections of former Part 4.
  2. Fees.  This section contains all fee requirements for filing, indexing, and responding to requests for information. Uniformity in the fee structure (but not necessarily in the amount of fees) makes this article easier for secured parties to use and reduces the likelihood that a filed record will be rejected for failure to pay at least the correct amount of the fee. See Section 9-516(b)(2).

    The costs of processing electronic records are less than those with respect to written records. Accordingly, this section mandates a lower fee as an incentive to file electronically and imposes the additional charge (if any) for multiple debtors only with respect to written records. When written records are used, this article encourages the use of the uniform forms in Section 9-521. The fee for filing these forms should be no greater than the fee for other written records.

    To make the relevant information included in a filed record more accessible once the record is found, this section mandates a higher fee for longer written records than for shorter ones. Finally, recognizing that financing statements naming more than one debtor are most often filed against a husband and wife, any additional charge for multiple debtors applies to records filed with respect to more than two debtors, rather than with respect to more than one.

Opinions of Attorney General.

The clerk’s fee for filing an instrument transferring the debtor’s interest in a motor vehicle to the purchaser who assumed the debt with the consent and agreement of the creditor was $2.50. OAG 62-822 .

Furnishing filing data is not part of the package deal covered by the $3.25 fee but refers to the furnishing of a certified copy of an original financing statement or a continuation statement. OAG 66-706 .

The clerk is entitled to $3.25 as the filing fee for a corrected security agreement. OAG 67-375 .

As specific fees have been provided for the filing of security agreements and financing statements with no provision being made for a fee for filing amendments to such statements, it seems there is no fee that may be charged for filing such instruments. OAG 72-298 .

Since a review of the legislative history indicates that a uniform fee was intended for the filing of a financing statement, regardless of whether it involves a motor vehicle or some other item of personal property, and in 1974 the fee under KRS 186.045 was inadvertently stated to be $4.00 instead of $4.75, the clerk’s fee for filing an original financing statement is uniformly $4.75. OAG 75-179 .

The tax imposed by KRS 142.010 is in addition to required fees and must be collected in addition to such fees by the secretary of state whenever in the circumstances described in former KRS 355.9-401 (1)(c) financing statements are filed under former KRS 355.9-402 and former KRS 355.9-403 . OAG 75-624 .

The $4.75 fee referred to in form KRS 355.9-403 applied only to fees for filings with county court clerks and not to fees for filings with the secretary of state. OAG 75-624 .

The fee which may be collected by the secretary of state for the filing of financing statements and amendments to financing statements in the circumstances described in former KRS 355.9-401 (1)(c) under former KRS 355.9-402 and former KRS 355.9-403 was $3.00 and not the $4.75 referred to in former KRS 355.9-403 . OAG 75-624 .

The fee which may be collected by the secretary of state for the filing of a continuation statement under the circumstances described in former KRS 355.9-401 (1)(c) is $3.00 and not the $4.75 mentioned in former KRS 355.9-403 . OAG 75-624 .

The fee which may be collected by the secretary of state for the filing of a statement of assignment under former KRS 355.9-405 and former KRS 355.9-401 (1)(c) was 75¢ and not $3.00. OAG 75-624 .

Since the legislature intended to provide the county clerk a fee of 75 cents for each effective assignment of a security agreement, the clerk would be entitled to a fee of $91.50 where 122 security agreements were listed on one statement of assignment. OAG 76-312 .

Since no specific fee is set for filing an amendment to a financing statement, it falls into a general category under KRS 64.012 , which provides that the fee for miscellaneous recordings for which no specific fee is set, provided the entire record does not exceed three pages, is five dollars, and where the document exceeds three pages, one dollar and fifty cents for each additional page. OAG 83-421 .

The county clerk’s proper fee for filing and indexing a continuation financing statement is six dollars according to KRS 64.012 . OAG 83-421 .

A properly filed assignment (a single assignment), whether involving one (1), two (2) or more security agreements, calls for a six dollar ($6) fee for the clerk. OAG 82-432 .

The fee in KRS 64.012 , for filing and indexing an assignment of a financing statement is $6.00 for each financing statement mentioned and assigned in the one instrument of assignment; the cluster technique cannot be used to circumvent the clear policy expressed in former KRS 355.9-403 (4) and former KRS 355.9-405 . OAG 84-260 .

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Kentucky Law Journal.

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

355.9-526. Filing-office rules.

  1. The Secretary of State shall promulgate administrative regulations to implement this article as it relates to the Secretary of State. The filing-office administrative regulations must be:
    1. Consistent with this article; and
    2. Promulgated in accordance with KRS Chapter 13A.
  2. To keep the filing-office administrative regulations and practices of the filing office in harmony with the rules and practices of filing offices in other jurisdictions that enact substantially this part of this article, and to keep the technology used by the filing office compatible with the technology used by filing offices in other jurisdictions that enact substantially this part of this article, the Secretary of State, so far as is consistent with the purposes, policies, and provisions of this article, in promulgating, amending, and repealing filing-office administrative regulations, shall:
    1. Consult with filing offices in other jurisdictions that enact substantially this part of this article; and
    2. Consult the most recent version of the model rules promulgated by the International Association of Corporate Administrators or any successor organization; and
    3. Take into consideration the rules and practices of, and the technology used by, filing offices in other jurisdictions that enact substantially this part of this article.

History. Enact. Acts 2000, ch. 408, § 117, effective July 1, 2001.

Official Comment

  1. Source.  New; subsection (b) derived in part from the Uniform Consumer Credit Code (1974).
  2. Rules Required.  Operating a filing office is a complicated business, requiring many more rules and procedures than this article can usefully provide. Subsection (a) requires the adoption of rules to carry out the provisions of Article 9. The filing-office rules must be consistent with the provisions of the statute and adopted in accordance with local procedures. The publication requirement informs secured parties about filing office practices, aids secured parties in evaluating filing-related risks and costs, and promotes regularity of application within the filing office.
  3. Importance of Uniformity.  In today’s national economy, uniformity of the policies and practices of the filing offices will reduce the costs of secured transactions substantially. The International Association of Corporate Administrators (IACA), referred to in subsection (b), is an organization whose membership includes filing officers from every state. These individuals are responsible for the proper functioning of the Article 9 filing system and have worked diligently to develop model filing-office rules, with a view toward efficiency and uniformity.

    Although uniformity is an important desideratum, subsection (a) affords considerable flexibility in the adoption of filing-office rules. Each state may adopt a version of subsection (a) that reflects the desired relationship between the statewide filing office described in Section 9-501(a)(2) and the local filing offices described in Section 9-501(a)(1) and that takes into account the practices of its filing offices. Subsection (a) need not designate a single official or agency to adopt rules applicable to all filing offices, and the rules applicable to the statewide filing office need not be identical to those applicable to the local filing office. For example, subsection (a) might provide for the statewide filing office to adopt filing-office rules, and, if not prohibited by other law, the filing office might adopt one set of rules for itself and another for local offices. Or, subsection (a) might designate one official or agency to adopt rules for the statewide filing office and another to adopt rules for local filing offices.

355.9-527. Duty to report.

The Secretary of State shall report annually on or before June 30 to the Governor and to the Legislative Research Commission on the operation of the filing office. The report must contain a statement of the extent to which:

  1. The filing-office administrative regulations are not in harmony with the rules of filing offices in other jurisdictions that enact substantially this part of this article and the reasons for these variations; and
  2. The filing-office administrative regulations are not in harmony with the most recent version of the Model Rules promulgated by the International Association of Corporate Administrators, or any successor organization, and the reasons for these variations.

History. Enact. Acts 2000, ch. 408, § 118, effective July 1, 2001.

Official Comment

  1. Source.  New; derived in part from the Uniform Consumer Credit Code (1974).
  2. Duty to Report.  This section is designed to promote compliance with the standards of performance imposed upon the filing office and with the requirement that the filing office’s policies, practices, and technology be consistent and compatible with the policies, practices, and technology of other filing offices.

Part 6. Default

Subpart 1. Default and Enforcement of Security Interest

355.9-601. Rights after default — Judicial enforcement — Consignor or buyer of accounts, chattel paper, payment intangibles, or promissory notes.

  1. After default, a secured party has the rights provided in this part of this article and, except as otherwise provided in KRS 355.9-602 , those provided by agreement of the parties. A secured party:
    1. May reduce a claim to judgment, foreclose, or otherwise enforce the claim, security interest, or agricultural lien by any available judicial procedure; and
    2. If the collateral is documents, may proceed either as to the documents or as to the goods they cover.
  2. A secured party in possession of collateral or control of collateral under KRS 355.7-106 , 355.9-104 , 355.9-105 , 355.9-106 , or 355.9-107 has the rights and duties provided in KRS 355.9-207 .
  3. The rights under subsections (1) and (2) of this section are cumulative and may be exercised simultaneously.
  4. Except as otherwise provided in subsection (7) of this section and KRS 355.9-605 , after default, a debtor and an obligor have the rights provided in this part of this article and by agreement of the parties.
  5. If a secured party has reduced its claim to judgment, the lien of any levy that may be made upon the collateral by virtue of an execution based upon the judgment relates back to the earliest of:
    1. The date of perfection of the security interest or agricultural lien in the collateral;
    2. The date of filing a financing statement covering the collateral; or
    3. Any date specified in a statute under which the agricultural lien was created.
  6. A sale pursuant to an execution is a foreclosure of the security interest or agricultural lien by judicial procedure within the meaning of this section. A secured party may purchase at the sale and thereafter hold the collateral free of any other requirements of this article.
  7. Except as otherwise provided in KRS 355.9-607 (3), this part of this article imposes no duties upon a secured party that is a consignor or is a buyer of accounts, chattel paper, payment intangibles, or promissory notes.

History. Enact. Acts 2000, ch. 408, § 119, effective July 1, 2001; 2012, ch. 132, § 89, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  Former Section 9-501(1), (2), (5).
  2. Enforcement: In General.  The rights of a secured party to enforce its security interest in collateral after the debtor’s default are an important feature of a secured transaction. (Note that the term “rights,” as defined in Section 1-201, includes “remedies.”) This part provides those rights as well as certain limitations on their exercise for the protection of the defaulting debtor, other creditors, and other affected persons. However, subsections (a) and (d) make clear that the rights provided in this part do not exclude other rights provided by agreement.
  3. When Remedies Arise.  Under subsection (a) the secured party’s rights arise “(a)fter default.” As did former Section 9-501, this Article leaves to the agreement of the parties the circumstances giving rise to a default. This Article does not determine whether a secured party’s post-default conduct can constitute a waiver of default in the face of an agreement stating that such conduct shall not constitute a waiver. Rather, it continues to leave to the parties’ agreement, as supplemented by law other than this article, the determination whether a default has occurred or has been waived. See Section 1-103.
  4. Possession of Collateral; Section 9-207.  After a secured party takes possession of collateral following a default, there is no longer any distinction between a security interest that before default was nonpossessory and a security interest that was possessory before default, as under a common-law pledge. This part generally does not distinguish between the rights of a secured party with a nonpossessory security interest and those of a secured party with a possessory security interest. However, Section 9-207 addresses rights and duties with respect to collateral in a secured party’s possession. Under subsection (b) of this section, Section 9-207 applies not only to possession before default but also to possession after default. Subsection (b) also has been conformed to Section 9-207, which, unlike former Section 9-207, applies to secured parties having control of collateral.
  5. Cumulative Remedies.  Former Section 9-501(1) provided that the secured party’s remedies were cumulative, but it did not explicitly provide whether the remedies could be exercised simultaneously. Subsection (c) permits the simultaneous exercise of remedies if the secured party acts in good faith. The liability scheme of subpart 2 affords redress to an aggrieved debtor or obligor. Moreover, permitting the simultaneous exercise of remedies under subsection (c) does not override any non-UCC law, including the law of tort and statutes regulating collection of debts, under which the simultaneous exercise of remedies in a particular case constitutes abusive behavior or harassment giving rise to liability.
  6. Judicial Enforcement.  Under subsection (a) a secured party may reduce its claim to judgment or foreclose its interest by any available procedure outside this article under applicable law. Subsection (e) generally follows former Section 9-501(5). It makes clear that any judicial lien that the secured party may acquire against the collateral effectively is a continuation of the original security interest (if perfected) and not the acquisition of a new interest or a transfer of property on account of a preexisting obligation. Under former Section 9-501(5), the judicial lien was stated to relate back to the date of perfection of the security interest. Subsection (e), however, provides that the lien relates back to the earlier of the date of filing or the date of perfection. This provides a secured party who enforces a security interest by judicial process with the benefit of the “first-to-file-or-perfect” priority rule of Section 9-322(a)(1).
  7. Agricultural Liens.  Part 6 provides parallel treatment for the enforcement of agricultural liens and security interests. Because agricultural liens are statutory rather than consensual, this article does draw a few distinctions between these liens and security interests. Under subsection (e), the statute creating an agricultural lien would govern whether and the date to which an execution lien relates back. Section 9-606 explains when a “default” occurs in the agricultural lien context.
  8. Execution Sales.  Subsection (f) also follows former Section 9-501(5). It makes clear that an execution sale is an appropriate method of foreclosure contemplated by this part. However, the sale is governed by other law and not by this article, and the limitations under Section 9-610 on the right of a secured party to purchase collateral do not apply.
  9. Sales of Receivables; Consignments.  Subsection (g) provides that, except as provided in Section 9-607(c), the duties imposed on secured parties do not apply to buyers of accounts, chattel paper, payment intangibles, or promissory notes. Although denominated “secured parties,” these buyers own the entire interest in the property sold and so may enforce their rights without regard to the seller (“debtor”) or the seller’s creditors. Likewise, a true consignor may enforce its ownership interest under other law without regard to the duties that this part imposes on secured parties. Note, however, that Section 9-615 governs cases in which a consignee’s secured party (other than a consignor) is enforcing a security interest that is senior to the security interest (i.e., ownership interest) of a true consignor.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Research References and Practice Aids

Kentucky Bench & Bar.

Schneiter, Equine Statutory Liens, Vol. 67, No. 4, July 2003, Ky. Bench & Bar 23.

355.9-602. Waiver and variance of rights and duties.

Except as otherwise provided in KRS 355.9-624 , to the extent that they give rights to a debtor or obligor and impose duties on a secured party, the debtor or obligor may not waive or vary the rules stated in the following listed sections:

  1. KRS 355.9-207 (2)(d)3., which deals with use and operation of the collateral by the secured party;
  2. KRS 355.9-210 , which deals with requests for an accounting and requests concerning a list of collateral and statement of account;
  3. KRS 355.9-607 (3), which deals with collection and enforcement of collateral;
  4. KRS 355.9-608 (1) and 355.9-615 (3) to the extent that they deal with application or payment of noncash proceeds of collection, enforcement, or disposition;
  5. KRS 355.9-608 (1) and 355.9-615 (4) to the extent that they require accounting for or payment of surplus proceeds of collateral;
  6. KRS 355.9-609 to the extent that it imposes upon a secured party that takes possession of collateral without judicial process the duty to do so without breach of the peace;
  7. KRS 355.9-610 (2), 355.9-611 , 355.9-613 , and 355.9-614 , which deal with disposition of collateral;
  8. KRS 355.9-615 (6), which deals with calculation of a deficiency or surplus when a disposition is made to the secured party, a person related to the secured party, or a secondary obligor;
  9. KRS 355.9-616 , which deals with explanation of the calculation of a surplus or deficiency;
  10. KRS 355.9-620 , 355.9-621 , and 355.9-622 , which deal with acceptance of collateral in satisfaction of obligation;
  11. KRS 355.9-623 , which deals with redemption of collateral;
  12. KRS 355.9-624 , which deals with permissible waivers; and
  13. KRS 355.9-625 and 355.9-626 , which deal with the secured party’s liability for failure to comply with this article.

History. Enact. Acts 2000, ch. 408, § 120, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-501(3).
  2. Waiver: In General.  Section 1-102(3) addresses which provisions of the UCC are mandatory and which may be varied by agreement. With exceptions relating to good faith, diligence, reasonableness, and care, immediate parties, as between themselves, may vary its provisions by agreement. However, in the context of rights and duties after default, our legal system traditionally has looked with suspicion on agreements that limit the debtor’s rights and free the secured party of its duties. As stated in former Section 9-501, Comment 4, “no mortgage clause has ever been allowed to clog the equity of redemption.” The context of default offers great opportunity for overreaching. The suspicious attitudes of the courts have been grounded in common sense. This section, like former Section 9-501(3), codifies this long-standing and deeply rooted attitude. The specified rights of the debtor and duties of the secured party may not be waived or varied except as stated. Provisions that are not specified in this section are subject to the general rules in Section 1-102(3).
  3. Nonwaivable Rights and Duties.  This section revises former Section 9-501(3) by restricting the ability to waive or modify additional specified rights and duties: (i) Duties under Section 9-207(b)(4)(C), which deals with the use and operation of consumer goods; (ii) the right to a response to a request for an accounting, concerning a list of collateral, or concerning a statement of account (Section 9-210); (iii) the duty to collect collateral in a commercially reasonable manner (Section 9-607); (iv) the implicit duty to refrain from a breach of the peace in taking possession of collateral under Section 9-609; (v) the duty to apply noncash proceeds of collection or disposition in a commercially reasonable manner (Sections 9-608 and 9-615); (vi) the right to a special method of calculating a surplus or deficiency in certain dispositions to a secured party, a person related to secured party, or a secondary obligor (Section 9-615); (vii) the duty to give an explanation of the calculation of a surplus or deficiency (Section 9-616); (viii) the right to limitations on the effectiveness of certain waivers (Section 9-624); and (ix) the right to hold a secured party liable for failure to comply with this article (Sections 9-625 and 9-626). For clarity and consistency, this article uses the term “waive or vary” instead of “renounc[e] or modify[ ]” which appeared in former Section 9-504(3).

    This section provides generally that the specified rights and duties “may not be waived or varied.” However, it does not restrict the ability of parties to agree to settle, compromise, or renounce claims for past conduct that may have constituted a violation or breach of those rights and duties, even if the settlement involves an express “waiver.”

  4. Waiver by Debtors and Obligors.  The restrictions on waiver contained in this section apply to obligors as well as debtors. This resolves a question under former Article 9 as to whether secondary obligors, assuming that they were “debtors” for purposes of former Part 5, were permitted to waive, under the law of suretyship, rights and duties under that part.
  5. Certain Post-Default Waivers.  Section 9-624 permits post-default waivers in limited circumstances. These waivers must be made in agreements that are authenticated. Under Section 1-201, an “‘agreement’ means the bargain of the parties in fact.” In considering waivers under Section 9-624 and analogous agreements in other contexts, courts should carefully scrutinize putative agreements that appear in records that also address many additional or unrelated matters.

NOTES TO DECISIONS

1.Waiver and Estoppel.

Former KRS 355.9-501 prohibited an anticipatory express waiver but did not deny a party the right to invoke the principles of waiver and estoppel which may apply to the subsequent transactions of the parties. (decided under prior law) Nelson v. Monarch Inv. Plan, Inc., 452 S.W.2d 375, 1970 Ky. LEXIS 350 ( Ky. 1970 ).

2.Remedies.

Plaintiff’s remedies upon default of loan secured by equipment include repossession and suit, and pursuit of one remedy does not preclude the concurrent pursuit of the other. (decided under prior law) Ingersoll-Rand Financial Corp. v. Electro Coal, Inc., 496 F. Supp. 1289, 1980 U.S. Dist. LEXIS 15369 (E.D. Ky. 1980 ).

The proper disposal of repossessed collateral is not a precondition to a suit for any remaining debt and once a partial recovery is made by repossession, the amount recoverable on judgment is limited to any deficiency. (decided under prior law) Ingersoll-Rand Financial Corp. v. Electro Coal, Inc., 496 F. Supp. 1289, 1980 U.S. Dist. LEXIS 15369 (E.D. Ky. 1980 ).

Research References and Practice Aids

Kentucky Law Journal.

Viles, The Uniform Commercial Code v. The Bankruptcy Act, 55 Ky. L.J. 636 (1967).

Harris, Defending Deficiency Judgment Suits in Kentucky: Article Nine, Part 5 of the Uniform Commercial Code, 61 Ky. L.J. 578 (1973).

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Kentucky Survey of Law, Nowka, Commercial Law, 72 Ky. L.J. 337 (1983-84).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

Hakes, A Quest for Justice in the Conversion of Security Interests, 82 Ky. L.J. 837 (1993-94).

355.9-603. Agreement on standards concerning rights and duties.

  1. The parties may determine by agreement the standards measuring the fulfillment of the rights of a debtor or obligor and the duties of a secured party under a rule stated in KRS 355.9-602 if the standards are not manifestly unreasonable.
  2. Subsection (1) of this section does not apply to the duty under KRS 355.9-609 to refrain from breaching the peace.

History. Enact. Acts 2000, ch. 408, § 121, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-501(3).
  2. Limitation on Ability to Set Standards.  Subsection (a), like former Section 9-501(3), permits the parties to set standards for compliance with the rights and duties under this part if the standards are not “manifestly unreasonable.” Under subsection (b), the parties are not permitted to set standards measuring fulfillment of the secured party’s duty to take collateral without breaching the peace.

355.9-604. Procedure if security agreement covers real property or fixtures.

  1. If a security agreement covers both personal and real property, a secured party may proceed:
    1. Under this part of this article as to the personal property without prejudicing any rights with respect to the real property; or
    2. As to both the personal property and the real property in accordance with the rights with respect to the real property, in which case the other provisions of this part of this article do not apply.
  2. Subject to subsection (3) of this section, if a security agreement covers goods that are or become fixtures, a secured party may proceed:
    1. Under this part of this article; or
    2. In accordance with the rights with respect to real property, in which case the other provisions of this part of this article do not apply.
  3. Subject to the other provisions of this part of this article, if a secured party holding a security interest in fixtures has priority over all owners and encumbrances of the real property, the secured party, after default, may remove the collateral from the real property.
  4. A secured party that removes collateral shall promptly reimburse any encumbrancer or owner of the real property, other than the debtor, for the cost of repair of any physical injury caused by the removal. The secured party need not reimburse the encumbrancer or owner for any diminution in value of the real property caused by the absence of the goods removed or by any necessity of replacing them. A person entitled to reimbursement may refuse permission to remove until the secured party gives adequate assurance for the performance of the obligation to reimburse.

History. Enact. Acts 2000, ch. 408, § 122, effective July 1, 2001.

Official Comment

  1. Source.  Former Sections 9-501(4), 9-313(8).
  2. Real-Property-Related Collateral.  The collateral in many transactions consists of both real and personal property. In the interest of simplicity, speed, and economy, subsection (a), like former Section 9-501(4), permits (but does not require) the secured party to proceed as to both real and personal property in accordance with its rights and remedies with respect to the real property. Subsection (a) also makes clear that a secured party who exercises rights under part 6 with respect to personal property does not prejudice any rights under real-property law.

    This article does not address certain other real-property-related problems. In a number of states, the exercise of remedies by a creditor who is secured by both real property and non-real property collateral is governed by special legal rules. For example, under some antideficiency laws, creditors risk loss of rights against personal property collateral if they err in enforcing their rights against the real property. Under a “one-form-of-action” rule (or rule against splitting a cause of action), a creditor who judicially enforces a real property mortgage and does not proceed in the same action to enforce a security interest in personalty may (among other consequences) lose the right to proceed against the personalty. Although statutes of this kind create impediments to enforcement of security interests, this article does not override these limitations under other law.

  3. Fixtures.  Subsection (b) is new. It makes clear that a security interest in fixtures may be enforced either under real property law or under any of the applicable provisions of Part 6, including sale or other disposition either before or after removal of the fixtures (see subsection (c)). Subsection (b) also serves to overrule cases holding that a secured party’s only remedy after default is the removal of the fixtures from the real property. See, e.g., Maplewood Bank & Trust v. Sears, Roebuck & Co., 625 A.2d 537 (N.J. Super. Ct. App. Div. 1993).

    Subsection (c) generally follows former Section 9-313(8). It gives the secured party the right to remove fixtures under certain circumstances. A secured party whose security interest in fixtures has priority over owners and encumbrancers of the real property may remove the collateral from the real property. However, subsection (d) requires the secured party to reimburse any owner (other than the debtor) or encumbrancer for the cost of repairing any physical injury caused by the removal. This right to reimbursement is implemented by the last sentence of subsection (d), which gives the owner or encumbrancer a right to security or indemnity as a condition for giving permission to remove.

355.9-605. Unknown debtor or secondary obligor.

A secured party does not owe a duty based on its status as secured party:

  1. To a person that is a debtor or obligor, unless the secured party knows:
    1. That the person is a debtor or obligor;
    2. The identity of the person; and
    3. How to communicate with the person; or
  2. To a secured party or lienholder that has filed a financing statement against a person, unless the secured party knows:
    1. That the person is a debtor; and
    2. The identity of the person.

History. Enact. Acts 2000, ch. 408, § 123, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Duties to Unknown Persons.  This section relieves a secured party from duties owed to a debtor or obligor, if the secured party does not know about the debtor or obligor. Similarly, it relieves a secured party from duties owed to a secured party or lienholder who has filed a financing statement against the debtor, if the secured party does not know about the debtor. For example, a secured party may be unaware that the original debtor has sold the collateral subject to the security interest and that the new owner has become the debtor. If so, the secured party owes no duty to the new owner (debtor) or to a secured party who has filed a financing statement against the new owner. This section should be read in conjunction with the exculpatory provisions in Section 9-628. Note that it relieves a secured party not only from duties arising under this article but also from duties arising under other law by virtue of the secured party’s status as such under this article, unless the other law otherwise provides.

355.9-606. Time of default for agricultural lien.

For purposes of this part of this article, a default occurs in connection with an agricultural lien at the time the secured party becomes entitled to enforce the lien in accordance with the statute under which it was created.

History. Enact. Acts 2000, ch. 408, § 124, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Time of Default.  Remedies under this part become available upon the debtor’s “default.” See Section 9-601. This section explains when “default” occurs in the agricultural-lien context. It requires one to consult the enabling statute to determine when the lienholder is entitled to enforce the lien.

355.9-607. Collection and enforcement by secured party.

  1. If so agreed, and in any event after default, a secured party:
    1. May notify an account debtor or other person obligated on collateral to make payment or otherwise render performance to or for the benefit of the secured party;
    2. May take any proceeds to which the secured party is entitled under KRS 355.9-315 ;
    3. May enforce the obligations of an account debtor or other person obligated on collateral and exercise the rights of the debtor with respect to the obligation of the account debtor or other person obligated on collateral to make payment or otherwise render performance to the debtor, and with respect to any property that secures the obligations of the account debtor or other person obligated on the collateral;
    4. If it holds a security interest in a deposit account perfected by control under KRS 355.9-104 (1)(a), may apply the balance of the deposit account to the obligation secured by the deposit account; and
    5. If it holds a security interest in a deposit account perfected by control under KRS 355.9-104 (1)(b) or (c), may instruct the bank to pay the balance of the deposit account to or for the benefit of the secured party.
  2. If necessary to enable a secured party to exercise under subsection (1)(c) of this section the right of a debtor to enforce a mortgage nonjudicially, the secured party may record in the office in which a record of the mortgage is recorded:
    1. A copy of the security agreement that creates or provides for a security interest in the obligation secured by the mortgage; and
    2. The secured party’s sworn affidavit in recordable form stating that:
      1. A default has occurred with respect to the obligation secured by the mortgage; and
      2. The secured party is entitled to enforce the mortgage nonjudicially.
  3. A secured party shall proceed in a commercially reasonable manner if the secured party:
    1. Undertakes to collect from or enforce an obligation of an account debtor or other person obligated on collateral; and
    2. Is entitled to charge back uncollected collateral or otherwise to full or limited recourse against the debtor or a secondary obligor.
  4. A secured party may deduct from the collections made pursuant to subsection (3) of this section reasonable expenses of collection and enforcement, including reasonable attorney’s fees and legal expenses incurred by the secured party.
  5. This section does not determine whether an account debtor, bank, or other person obligated on collateral owes a duty to a secured party.

History. Enact. Acts 2000, ch. 408, § 125, effective July 1, 2001; 2012, ch. 132, § 90, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (codified as KRS 355.9-801 ) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (codified as KRS 355.9-801 ) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102. This statute was one of the substantive provisions of Article 9 contained in 2012 Ky. Acts Chapter 132, Sections 60 to 90.

Official Comment

  1. Source.  Former Section 9-502; subsections (b), (d), and (e) are new.
  2. Collections: In General.  Collateral consisting of rights to payment is not only the most liquid asset of a typical debtor’s business but also is property that may be collected without any interruption of the debtor’s business. This situation is far different from that in which collateral is inventory or equipment, whose removal may bring the business to a halt. Furthermore, problems of valuation and identification, present with collateral that is tangible personal property, frequently are not as serious in the case of rights to payment and other intangible collateral. Consequently, this section, like former section 9-502, recognizes that financing through assignments of intangibles lacks many of the complexities that arise after default in other types of financing. This section allows the assignee to liquidate collateral by collecting whatever may become due on the collateral, whether or not the method of collection contemplated by the security arrangement before default was direct (i.e., payment by the account debtor to the assignee, “notification” financing) or indirect (i.e., payment by the account debtor to the assignor, “nonnotification” financing).
  3. Scope.  The scope of this section is broader than that of former Section 9-502. It applies not only to collections from account debtors and obligors on instruments but also to enforcement more generally against all persons obligated on collateral. It explicitly provides for the secured party’s enforcement of the debtor’s rights in respect of the account debtor’s (and other third parties’) obligations and for the secured party’s enforcement of supporting obligations with respect to those obligations. (Supporting obligations are components of the collateral under Section 9-203(f).) The rights of a secured party under subsection (a) include the right to enforce claims that the debtor may enjoy against others. For example, the claims might include a breach-of-warranty claim arising out of a defect in equipment that is collateral or a secured party’s action for an injunction against infringement of a patent that is collateral. Those claims typically would be proceeds of original collateral under Section 9-315.
  4. Collection and Enforcement Before Default.  Like Part 6 generally, this section deals with the rights and duties of secured parties following default. However, as did former Section 9-502 with respect to collection rights, this section also applies to the collection and enforcement rights of secured parties even if a default has not occurred, as long as the debtor has so agreed. It is not unusual for debtors to agree that secured parties are entitled to collect and enforce rights against account debtors prior to default.
  5. Collections by Junior Secured Party.  A secured party who holds a security interest in a right to payment may exercise the right to collect and enforce under this section, even if the security interest is subordinate to a conflicting security interest in the same right to payment. Whether the junior secured party has priority in the collected proceeds depends on whether the junior secured party qualifies for priority as a purchaser of an instrument (e.g., the account debtor’s check) under Section 9-330(d), as a holder in due course of an instrument under Sections 3-305 and 9-331(a), or as a transferee of money under Section 9-332(a). See Sections 9-330, Comment 7; 9-331, Comment 5; and 9-332.
  6. Relationship to Rights and Duties of Persons Obligated on Collateral.  This section permits a secured party to collect and enforce obligations included in collateral in its capacity as a secured party. It is not necessary for a secured party first to become the owner of the collateral pursuant to a disposition or acceptance. However, the secured party’s rights, as between it and the debtor, to collect from and enforce collateral against account debtors and others obligated on collateral under subsection (a) are subject to Section 9-341, Part 4, and other applicable law. Neither this section nor former Section 9-502 should be understood to regulate the duties of an account debtor or other person obligated on collateral. Subsection (e) makes this explicit. For example, the secured party may be unable to exercise the debtor’s rights under an instrument if the debtor is in possession of the instrument, or under a nontransferable letter of credit if the debtor is the beneficiary. Unless a secured party has control over a letter-of-credit right and is entitled to receive payment or performance from the issuer or a nominated person under Article 5, its remedies with respect to the letter-of-credit right may be limited to the recovery of any identifiable proceeds from the debtor. This section establishes only the baseline rights of the secured party vis-a-vis the debtor—the secured party is entitled to enforce and collect after default or earlier if so agreed.
  7. Deposit Account Collateral.  Subsections (a)(4) and (5) set forth the self-help remedy for a secured party whose collateral is a deposit account. Subsection (a)(4) addresses the rights of a secured party that is the bank with which the deposit account is maintained. That secured party automatically has control of the deposit account under Section 9-104(a)(1). After default, and otherwise if so agreed, the bank/secured party may apply the funds on deposit to the secured obligation.

    If a security interest of a third party is perfected by control (Section 9-104(a)(2) or (a)(3)), then after default, and otherwise if so agreed, the secured party may instruct the bank to pay out the funds in the account. If the third party has control under Section 9-104(a)(3), the depositary institution is obliged to obey the instruction because the secured party is its customer. See Section 4-401. If the third party has control under Section 9-104(a)(2), the control agreement determines the depositary institution’s obligation to obey.

    If a security interest in a deposit account is unperfected, or is perfected by filing by virtue of the proceeds rules of Section 9-315, the depositary institution ordinarily owes no obligation to obey the secured party’s instructions. See Section 9-341. To reach the funds without the debtor’s cooperation, the secured party must use an available judicial procedure.

  8. Rights Against Mortgagor of Real Property.  Subsection (b) addresses the situation in which the collateral consists of a mortgage note (or other obligation secured by a mortgage on real property). After the debtor’s (mortgagee’s) default, the secured party (assignee) may wish to proceed with a nonjudicial foreclosure of the mortgage securing the note but may be unable to do so because it has not become the assignee of record. The assignee/secured party may not have taken a recordable assignment at the commencement of the transaction (perhaps the mortgage note in question was one of hundreds assigned to the secured party as collateral). Having defaulted, the mortgagee may be unwilling to sign a recordable assignment. This section enables the secured party (assignee) to become the assignee of record by recording in the applicable real property records the security agreement and an affidavit certifying default. Of course, the secured party’s rights derive from those of its debtor. Subsection (b) would not entitle the secured party to proceed with a foreclosure unless the mortgagor also were in default or the debtor (mortgagee) otherwise enjoyed the right to foreclose.
  9. Commercial Reasonableness.  Subsection (c) provides that the secured party’s collection and enforcement rights under subsection (a) must be exercised in a commercially reasonable manner. These rights include the right to settle and compromise claims against the account debtor. The secured party’s failure to observe the standard of commercial reasonableness could render it liable to an aggrieved person under Section 9-625, and the secured party’s recovery of a deficiency would be subject to Section 9-626. Subsection (c) does not apply if, as is characteristic of most sales of accounts, chattel paper, payment intangibles, and promissory notes, the secured party (buyer) has no right of recourse against the debtor (seller) or a secondary obligor. However, if the secured party does have a right of recourse, the commercial reasonableness standard applies to collection and enforcement even though the assignment to the secured party was a “true” sale. The obligation to proceed in a commercially reasonable manner arises because the collection process affects the extent of the seller’s recourse liability, not because the seller retains an interest in the sold collateral (the seller does not). Concerning classification of a transaction, see Section 9-109, comment 4.
  10. Attorney’s Fees and Legal Expenses.  The phrase “reasonable attorney’s fees and legal expenses,” which appears in subsection (d), includes only those fees and expenses incurred in proceeding against account debtors or other third parties. The secured party’s right to recover these expenses from the collections arises automatically under this section. The secured party also may incur other attorney’s fees and legal expenses in proceeding against the debtor or obligor. Whether the secured party has a right to recover those fees and expenses depends on whether the debtor or obligor has agreed to pay them, as is the case with respect to attorney’s fees and legal expenses under Sections 9-608(a)(1)(A) and 9-615(a)(1). The parties also may agree to allocate a portion of the secured party’s overhead to collection and enforcement under subsection (d) or Section 9-608(a).

NOTES TO DECISIONS

1.In General.

Fact that bank had previously accepted a promisor’s late payments on a loan did not constitute a waiver of its right to accelerate the loan when the promisor again defaulted on a payment, and in any event, under former KRS 355.1-205 (4) (now KRS 355.1-303 ), if the course of dealing between the parties and the express terms of their agreement could not reasonably be construed as consistent with each other, the express terms of the agreement controlled. Catron v. Citizens Union Bank, 229 S.W.3d 54, 2006 Ky. App. LEXIS 273 (Ky. Ct. App. 2006).

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Research References and Practice Aids

Kentucky Law Journal.

Spivack, Financing the Manufacturer: Article 9 of the Uniform Commercial Code, 48 Ky. L.J. 397 (1960).

Kentucky Law Survey, Weinberg, Commercial Law and Consumer Credit, 65 Ky. L.J. 370 (1976-77).

Northern Kentucky Law Review.

2010 GENERAL LAW ISSUE: Note: We Don’t Live Here Anymore: A Critical Analysis of Government Responses to the Foreclosure Crisis, 37 N. Ky. L. Rev. 121 (2010).

355.9-608. Application of proceeds of collection or enforcement — Liability for deficiency and right to surplus.

  1. If a security interest or agricultural lien secures payment or performance of an obligation, the following rules apply:
    1. A secured party shall apply or pay over for application the cash proceeds of collection or enforcement under KRS 355.9-607 in the following order to:
      1. The reasonable expenses of collection and enforcement and, to the extent provided for by agreement and not prohibited by law, reasonable attorney’s fees and legal expenses incurred by the secured party;
      2. The satisfaction of obligations secured by the security interest or agricultural lien under which the collection or enforcement is made; and
      3. The satisfaction of obligations secured by any subordinate security interest in or other lien on the collateral subject to the security interest or agricultural lien under which the collection or enforcement is made if the secured party receives an authenticated demand for proceeds before distribution of the proceeds is completed.
    2. If requested by a secured party, a holder of a subordinate security interest or other lien shall furnish reasonable proof of the interest or lien within a reasonable time. Unless the holder complies, the secured party need not comply with the holder’s demand under paragraph (a)3. of this subsection.
    3. A secured party need not apply or pay over for application noncash proceeds of collection and enforcement under KRS 355.9-607 unless the failure to do so would be commercially unreasonable. A secured party that applies or pays over for application noncash proceeds shall do so in a commercially reasonable manner.
    4. A secured party shall account to and pay a debtor for any surplus, and the obligor is liable for any deficiency.
  2. If the underlying transaction is a sale of accounts, chattel paper, payment intangibles, or promissory notes, the debtor is not entitled to any surplus, and the obligor is not liable for any deficiency.

History. Enact. Acts 2000, ch. 408, § 126, effective July 1, 2001.

Official Comment

  1. Source.  Subsection (a) is new; subsection (b) derives from former Section 9-502(2).
  2. Modifications of Prior Law.  Subsections (a) and (b) modify former Section 9-502(2) by explicitly providing for the application of proceeds recovered by the secured party in substantially the same manner as provided in Section 9-615(a) and (e) for dispositions of collateral.
  3. Surplus and Deficiency.  Subsections (a)(4) and (b) omit, as unnecessary, the references contained in former Section 9-502(2) to agreements varying the baseline rules on surplus and deficiency. The parties are always free to agree that an obligor will not be liable for a deficiency, even if the collateral secures an obligation, and that an obligor is liable for a deficiency, even if the transaction is a sale of receivables. For parallel provisions, see Section 9-615(d) and (e).
  4. Noncash Proceeds.  Subsection (a)(3) addresses the situation in which an enforcing secured party receives noncash proceeds.
  5. No Effect on Priority of Senior Security Interest.  The application of proceeds required by subsection (a) does not affect the priority of a security interest in collateral which is senior to the interest of the secured party who is collecting or enforcing collateral under Section 9-607. Although subsection (a) imposes a duty to apply proceeds to the enforcing secured party’s expenses and to the satisfaction of the secured obligations owed to it and to subordinate secured parties, that duty applies only among the enforcing secured party and those persons. Concerning the priority of a junior secured party who collects and enforces collateral, see Section 9-607, Comment 5.

Example: An enforcing secured party receives a promissory note from an account debtor who is unable to pay an account when it is due. The secured party accepts the note in exchange for extending the date on which the account debtor’s obligation is due. The secured party may wish to credit its debtor (the assignor) with the principal amount of the note upon receipt of the note, but probably will prefer to credit the debtor only as and when the note is paid.

Under subsection (a)(3), the secured party is under no duty to apply the note or its value to the outstanding obligation unless its failure to do so would be commercially unreasonable. If the secured party does apply the note to the outstanding obligation, however, it must do so in a commercially reasonable manner. The parties may provide for the method of application of noncash proceeds by agreement, if the method is not manifestly unreasonable. See Section 9-603. This section does not explain when the failure to apply noncash proceeds would be commercially unreasonable; it leaves that determination to case-by-case adjudication. In the example, the secured party appears to have accepted the account debtor’s note in order to increase the likelihood of payment and decrease the likelihood that the account debtor would dispute its obligation. Under these circumstances, it may well be commercially reasonable for the secured party to credit its debtor’s obligations only as and when cash proceeds are collected from the account debtor, especially given the uncertainty that attends the account debtor’s eventual payment. For an example of a secured party’s receipt of noncash proceeds in which it may well be commercially unreasonable for the secured party to delay crediting its debtor’s obligations with the value of noncash proceeds, see Section 9-615, Comment 3.

When the secured party is not required to “apply or pay over for application noncash proceeds,” the proceeds nonetheless remain collateral subject to this article. If the secured party were to dispose of them, for example, appropriate notification would be required (see Section 9-611), and the disposition would be subject to the standards provided in this part (see Section 9-610). Moreover, a secured party in possession of the noncash proceeds would have the duties specified in Section 9-207.

355.9-609. Secured party’s right to take possession after default.

  1. After default, a secured party:
    1. May take possession of the collateral; and
    2. Without removal, may render equipment unusable and dispose of collateral on a debtor’s premises under KRS 355.9-610 .
  2. A secured party may proceed under subsection (1) of this section:
    1. Pursuant to judicial process; or
    2. Without judicial process, if it proceeds without breach of the peace.
  3. If so agreed, and in any event after default, a secured party may require the debtor to assemble the collateral and make it available to the secured party at a place to be designated by the secured party which is reasonably convenient to both parties.

History. Enact. Acts 2000, ch. 408, § 127, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-503.
  2. Secured Party’s Right to Possession.  This section follows former Section 9-503 and earlier uniform legislation. It provides that the secured party is entitled to take possession of collateral after default.
  3. Judicial Process; Breach of Peace.  Subsection (b) permits a secured party to proceed under this section without judicial process if it does so “without breach of the peace.” Although former Section 9-503 placed the same condition on a secured party’s right to take possession of collateral, subsection (b) extends the condition to the right provided in subsection (a)(2) as well. Like former Section 9-503, this section does not define or explain the conduct that will constitute a breach of the peace, leaving that matter for continuing development by the courts. In considering whether a secured party has engaged in a breach of the peace, however, courts should hold the secured party responsible for the actions of others taken on the secured party’s behalf, including independent contractors engaged by the secured party to take possession of collateral.

    This section does not authorize a secured party who repossesses without judicial process to utilize the assistance of a law enforcement officer. A number of cases have held that a repossessing secured party’s use of a law enforcement officer without benefit of judicial process constituted a failure to comply with former Section 9-503.

  4. Damages for Breach of Peace.  Concerning damages that may be recovered based on a secured party’s breach of the peace in connection with taking possession of collateral, see Section 9-625, Comment 3.
  5. Multiple Secured Parties.  More than one secured party may be entitled to take possession of collateral under this section. Conflicting rights to possession among secured parties are resolved by the priority rules of this article. Thus, a senior secured party is entitled to possession as against a junior claimant. Non-UCC law governs whether a junior secured party in possession of collateral is liable to the senior in conversion. Normally, a junior who refuses to relinquish possession of collateral upon the demand of a secured party having a superior possessory right to the collateral would be liable in conversion.
  6. Secured Party’s Right to Disable and Dispose of Equipment on Debtor’s Premises.  In the case of some collateral, such as heavy equipment, the physical removal from the debtor’s plant and the storage of the collateral pending disposition may be impractical or unduly expensive. This section follows former Section 9-503 by providing that, in lieu of removal, the secured party may render equipment unusable or may dispose of collateral on the debtor’s premises. Unlike former Section 9-503, however, this section explicitly conditions these rights on the debtor’s default. Of course, this section does not validate unreasonable action by a secured party. Under Section 9-610, all aspects of a disposition must be commercially reasonable.
  7. Debtor’s Agreement to Assemble Collateral.  This section follows former Section 9-503 also by validating a debtor’s agreement to assemble collateral and make it available to a secured party at a place that the secured party designates. Similar to the treatment of agreements to permit collection prior to default under Section 9-607 and former Section 9-502, however, this section validates these agreements whether or not they are conditioned on the debtor’s default. For example, a debtor might agree to make available to a secured party, from time to time, any instruments or negotiable documents that the debtor receives on account of collateral. A court should not infer from this section’s validation that a debtor’s agreement to assemble and make available collateral would not be enforceable under other applicable law.
  8. Agreed Standards.  Subject to the limitation imposed by Section 9-603(b), this section’s provisions concerning agreements to assemble and make available collateral and a secured party’s right to disable equipment and dispose of collateral on a debtor’s premises are likely topics for agreement on standards as contemplated by Section 9-603.

NOTES TO DECISIONS

1.Right to Repossession.

Under Uniform Sales Law, no title passed to conditional purchaser until he had completed and performed the contractual stipulations and the conditional seller’s demand and receipt of possession of vehicles before the buyer was in default, where the contract entitled him to demand and return before default, was not a voidable preference in purchaser’s subsequent bankruptcy, since there was no transfer from the bankrupt to the conditional seller for the title was already in the conditional seller. (decided under prior law) White v. General Motors Acceptance Corp., 2 F. Supp. 406, 1932 U.S. Dist. LEXIS 1640 (D. Ky. 1932 ).

Seller, under a conditional sales contract, had the right to repossess on default of buyer. (decided under prior law) Brown v. Woods Motor Co., 239 Ky. 312 , 39 S.W.2d 507, 1931 Ky. LEXIS 779 ( Ky. 1931 ), limited, Commonwealth v. Larson, 242 Ky. 317 , 46 S.W.2d 82, 1932 Ky. LEXIS 251 ( Ky. 1932 ); C. I. T. Corp. v. Thompson, 293 Ky. 637 , 169 S.W.2d 820, 1943 Ky. LEXIS 674 ( Ky. 1943 ).

Seller could retain title in himself under a conditional sales contract until the property was paid for according to the terms of the contract and could take peaceable possession of the property upon default of the buyer and, if he was unable to do so without committing a breach of the peace, he could obtain possession by claim and delivery. (decided under prior law) C. I. T. Corp. v. Thompson, 293 Ky. 637 , 169 S.W.2d 820, 1943 Ky. LEXIS 674 ( Ky. 1943 ).

2.Wrongful Repossession.

Where a conditional seller of an automobile wrongfully repossessed it, the uniform sales law did not put the enforcement of the law into the hands of the owner of the title in such conditions, so that he could repossess himself of the property without judicial investigation or so as to render him immune from the criminal consequences of wrongful repossession. (decided under prior law) Commonwealth v. Larson, 242 Ky. 317 , 46 S.W.2d 82, 1932 Ky. LEXIS 251 ( Ky. 1932 ).

3.Acceleration Clause.

Mortgagee bank could take possession of personal property on default of note containing an acceleration clause authorizing holder to precipitate the maturity date in the event makers defaulted in any monthly payment and providing that holder could declare it due before maturity if holder felt insecure. (decided under prior law) Ft. Knox Nat'l Bank v. Gustafson, 385 S.W.2d 196, 1964 Ky. LEXIS 148 ( Ky. 1964 ).

4.Damages for Wrongful Conversion.

Pledgor whose security was wrongfully converted by the pledgee when the pledgee surrendered the security to a third party was entitled to recover such actual damages as he sustained as a result of the dismissal of the claim and delivery action which he filed seeking immediate possession of the property from the third party and such damages were to be assessed against the pledgee. (decided under prior law) Signer v. First Nat'l Bank & Trust Co., 455 F.2d 382, 1971 U.S. App. LEXIS 6557 (6th Cir. Ky. 1971 ).

5.Repossession as Deprivation of Rights.

Where plaintiff entered into a consumer credit transaction with defendant for the purchase of an automobile, defaulted on the payments, and the automobile was repossessed without notice or prior hearing, repossession of the car under this section was not made under color of state law and would not support an action under 42 USCS § 1983 since enactment of this section did not reverse the law as it had been prior to the enactment of the Uniform Commercial Code but merely codified existing law. (decided under prior law) Gary v. Darnell, 505 F.2d 741, 1974 U.S. App. LEXIS 6372 (6th Cir. Ky. 1974 ).

6.Breach of the Peace.

A breach of the peace has been defined to include both actual violent acts and acts likely to induce violence; repossession in the face of the debtor’s objection constitutes a breach of the peace, and a disagreement over repossession ought not rise to the level of an assault before a breach is deemed to occur. (decided under prior law) First & Farmers Bank v. Henderson, 763 S.W.2d 137, 1988 Ky. App. LEXIS 192 (Ky. Ct. App. 1988).

If a creditor is allowed to unofficially use the powers of the state to squelch potential breaches of the peace, he can effectively evade or avoid this section, and the statute makes it clear that a creditor runs the risk of serious liability if he proceeds with a self-help repossession when there is a serious objection by the debtor; if the strong arm of the law is needed, then the creditor must secure judicial intervention when a police officer is carrying out or sanctioning the repossession. (decided under prior law) First & Farmers Bank v. Henderson, 763 S.W.2d 137, 1988 Ky. App. LEXIS 192 (Ky. Ct. App. 1988).

Although seeming to serve the salutory purpose of preserving the peace, bank’s decision to informally obtain the presence of a peace officer when it repossessed debtor’s boat was violative of this section. (decided under prior law) First & Farmers Bank v. Henderson, 763 S.W.2d 137, 1988 Ky. App. LEXIS 192 (Ky. Ct. App. 1988).

7.Perfection of Security Interest.

Since KRS 186A.190(2) and former 355.9-302 (3) clearly and unambiguously provide that, as to any property for which a certificate of title is required by KRS Chapter 186A, a security interest in that property may be perfected or discharged only by a notation in that vein on the certificate of title, fact that mobile home was affixed to real estate was of no merit and notation on the certificate of title served as the exclusive method for perfecting bank’s security interest therein and bank was entitled to possess the mobile home upon default of promissory note. (decided under prior law) Hiers v. Bank One, 946 S.W.2d 196, 1996 Ky. App. LEXIS 167 (Ky. Ct. App. 1996).

Opinions of Attorney General.

Where a transferor transferred two (2) tractors to the transferees who took title subject to the original obligations of the transferor under a security agreement, the county clerk was authorized to transfer the registration from the transferor to the original secured party upon repossession of the tractors, though disposition of the collateral by the secured party was of no concern to the county clerk. OAG 76-66 .

Research References and Practice Aids

Kentucky Law Journal.

Stengel, Should States Adopt the Uniform Consumer Credit Code?, 60 Ky. L.J. 8 (1971).

Weinberg, Commercial Law, 63 Ky. L.J. 727 (1974-75).

Kentucky Law Survey, Weinberg, Commercial Law and Consumer Credit, 65 Ky. L.J. 370 (1976-77).

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Hakes, A Quest for Justice in the Conversion of Security Interests, 82 Ky. L.J. 837 (1993-94).

Northern Kentucky Law Review.

McClure, The Loch Ness Monster, Big Foot, Repossession Titles and Other Myths: Defenses and Counterclaims in a Repossession as an Alternative to Bankruptcy, 27 N. Ky. L. Rev. 360 (2000).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Writ of Possession, Form 152.01.

355.9-610. Disposition of collateral after default.

  1. After default, a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing.
  2. Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable. If commercially reasonable, a secured party may dispose of collateral by public or private proceedings, by one (1) or more contracts, as a unit or in parcels, and at any time and place and on any terms.
  3. A secured party may purchase collateral:
    1. At a public disposition; or
    2. At a private disposition only if the collateral is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations.
  4. A contract for sale, lease, license, or other disposition includes the warranties relating to title, possession, quiet enjoyment, and the like which by operation of law accompany a voluntary disposition of property of the kind subject to the contract.
  5. A secured party may disclaim or modify warranties under subsection (4) of this section:
    1. In a manner that would be effective to disclaim or modify the warranties in a voluntary disposition of property of the kind subject to the contract of disposition; or
    2. By communicating to the purchaser a record evidencing the contract for disposition and including an express disclaimer or modification of the warranties.
  6. A record is sufficient to disclaim warranties under subsection (5) of this section if it indicates “There is no warranty relating to title, possession, quiet enjoyment, or the like in this disposition” or uses words of similar import.
  7. The acquisition of a repossession title by a secured party shall not be deemed a disposition of collateral under this section.

History. Enact. Acts 2000, ch. 408, § 128, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-504(1), (3).
  2. Commercially Reasonable Dispositions.  Subsection (a) follows former Section 9-504 by permitting a secured party to dispose of collateral in a commercially reasonable manner following a default. Although subsection (b) permits both public and private dispositions, “every aspect of a disposition … must be commercially reasonable.” This section encourages private dispositions on the assumption that they frequently will result in higher realization on collateral for the benefit of all concerned. Subsection (a) does not restrict dispositions to sales; collateral may be sold, leased, licensed, or otherwise disposed. Section 9-627 provides guidance for determining the circumstances under which a disposition is “commercially reasonable.”
  3. Time of Disposition.  This article does not specify a period within which a secured party must dispose of collateral. This is consistent with this article’s policy to encourage private dispositions through regular commercial channels. It may, for example, be prudent not to dispose of goods when the market has collapsed. Or, it might be more appropriate to sell a large inventory in parcels over a period of time instead of in bulk. Of course, under subsection (b) every aspect of a disposition of collateral must be commercially reasonable. This requirement explicitly includes the “method, manner, time, place, and other terms.” For example, if a secured party does not proceed under Section 9-620 and holds collateral for a long period of time without disposing of it, and if there is no good reason for not making a prompt disposition, the secured party may be determined not to have acted in a “commercially reasonable” manner. See also Section 1-203 (general obligation of good faith).
  4. Pre-Disposition Preparation and Processing.  Former Section 9-504(1) appeared to give the secured party the choice of disposing of collateral either “in its then condition or following any commercially reasonable preparation or processing.” Some courts held that the “commercially reasonable” standard of former Section 9-504(3) nevertheless could impose an affirmative duty on the secured party to process or prepare the collateral prior to disposition. Subsection (a) retains the substance of the quoted language. Although courts should not be quick to impose a duty of preparation or processing on the secured party, subsection (a) does not grant the secured party the right to dispose of the collateral “in its then condition” under all circumstances. A secured party may not dispose of collateral “in its then condition” when, taking into account the costs and probable benefits of preparation or processing and the fact that the secured party would be advancing the costs at its risk, it would be commercially unreasonable to dispose of the collateral in that condition.
  5. Disposition by Junior Secured Party.  Disposition rights under subsection (a) are not limited to first-priority security interests. Rather, any secured party as to whom there has been a default enjoys the right to dispose of collateral under this subsection. The exercise of this right by a secured party whose security interest is subordinate to that of another secured party does not of itself constitute a conversion or otherwise give rise to liability in favor of the holder of the senior security interest. Section 9-615 addresses application of the proceeds of a disposition by a junior secured party. Under Section 9-615(a), a junior secured party owes no obligation to apply the proceeds of disposition to the satisfaction of obligations secured by a senior security interest. Section 9-615(g) builds on this general rule by protecting certain juniors from claims of a senior concerning cash proceeds of the disposition. Even if a senior were to have a non-Article 9 claim to proceeds of a junior’s disposition, Section 9-615(g) would protect a junior that acts in good faith and without knowledge that its actions violate the rights of a senior party. Because the disposition by a junior would not cut off a senior’s security interest or other lien (see Section 9-617), in many (probably most) cases the junior’s receipt of the cash proceeds would not violate the rights of the senior.

    The holder of a senior security interest is entitled, by virtue of its priority, to take possession of collateral from the junior secured party and conduct its own disposition, provided that the senior enjoys the right to take possession of the collateral from the debtor. See Section 9-609. The holder of a junior security interest normally must notify the senior secured party of an impending disposition. See Section 9-611. Regardless of whether the senior receives a notification from the junior, the junior’s disposition does not of itself discharge the senior’s security interest. See Section 9-617. Unless the senior secured party has authorized the disposition free and clear of its security interest, the senior’s security interest ordinarily will survive the disposition by the junior and continue under Section 9-315(a). If the senior enjoys the right to repossess the collateral from the debtor, the senior likewise may recover the collateral from the transferee.

    When a secured party’s collateral is encumbered by another security interest or other lien, one of the claimants may seek to invoke the equitable doctrine of marshaling. As explained by the Supreme Court, that doctrine “rests upon the principle that a creditor having two funds to satisfy his debt, may not by his application of them to his demand, defeat another creditor, who may resort to only one of the funds.” Meyer v. United States , 375 U.S. 233, 236 (1963), quoting Sowell v. Federal Reserve Bank , 268 U.S. 449, 456-57 (1925). The purpose of the doctrine is “to prevent the arbitrary action of a senior lienor from destroying the rights of a junior lienor or a creditor having less security.” Id. at 237. Because it is an equitable doctrine, marshaling “is applied only when it can be equitably fashioned as to all of the parties” having an interest in the property. Id. This article leaves courts free to determine whether marshaling is appropriate in any given case. See Section 1-103.

  6. Security Interests of Equal Rank.  Sometimes two security interests enjoy the same priority. This situation may arise by contract, e.g., pursuant to “equal and ratable” provisions in indentures, or by operation of law. See Section 9-328(6). This Article treats a security interest having equal priority like a senior security interest in many respects. Assume, for example, that SP-X and SP-Y enjoy equal priority, SP-W is senior to them, and SP-Z is junior. If SP-X disposes of the collateral under this section, then (i) SP-W’s and SP-Y’s security interests survive the disposition but SP-Z’s does not, see Section 9-617, and (ii) neither SP-W nor SP-Y is entitled to receive a distribution of proceeds, but SP-Z is. See Section 9-615(a)(3).

    When one considers the ability to obtain possession of the collateral, a secured party with equal priority is unlike a senior secured party. As the senior secured party, SP-W should enjoy the right to possession as against SP-X. See Section 9-609, Comment 5. If SP-W takes possession and disposes of the collateral under this section, it is entitled to apply the proceeds to satisfy its secured claim. SP-Y, however, should not have such a right to take possession from SP-X; otherwise, once SP-Y took possession from SP-X, SP-X would have the right to get possession from SP-Y, which would be obligated to redeliver possession to SP-X, and so on. Resolution of this problem is left to the parties and, if necessary, the courts.

  7. Public vs. Private Dispositions.  This part maintains two distinctions between “public” and other dispositions: (i) The secured party may buy at the former, but normally not at the latter (Section 9-610(c)), and (ii) the debtor is entitled to notification of “the time and place of a public disposition” and notification of “the time after which” a private disposition or other intended disposition is to be made (Section 9-613(1)(E)). It does not retain the distinction under former Section 9-504(4), under which transferees in a noncomplying public disposition could lose protection more easily than transferees in other noncomplying dispositions. Instead, Section 9-617(b) adopts a unitary standard. Although the term is not defined, as used in this article, a “public disposition” is one at which the price is determined after the public has had a meaningful opportunity for competitive bidding. “Meaningful opportunity” is meant to imply that some form of advertisement or public notice must precede the sale (or other disposition) and that the public must have access to the sale (disposition).
  8. Investment Property.  Dispositions of investment property may be regulated by the federal securities laws. Although a “public” disposition of securities under this article may implicate the registration requirements of the Securities Act of 1933, it need not do so. A disposition that qualifies for a “private placement” exemption under the Securities Act of 1933 nevertheless may constitute a “public” disposition within the meaning of this section. Moreover, the “commercially reasonable” requirements of subsection (b) need not prevent a secured party from conducting a foreclosure sale without the issuer’s compliance with federal registration requirements.
  9. “Recognized Market.”  A “recognized market,” as used in subsection (c) and Section 9-611(d), is one in which the items sold are fungible and prices are not subject to individual negotiation. For example, the New York Stock Exchange is a recognized market. A market in which prices are individually negotiated or the items are not fungible is not a recognized market, even if the items are the subject of widely disseminated price guides or are disposed of through dealer auctions.
  10. Relevance of Price.  While not itself sufficient to establish a violation of this part, a low price suggests that a court should scrutinize carefully all aspects of a disposition to ensure that each aspect was commercially reasonable. Note also that even if the disposition is commercially reasonable, Section 9-615(f) provides a special method for calculating a deficiency or surplus if (i) the transferee in the disposition is the secured party, a person related to the secured party, or a secondary obligor, and (ii) the amount of proceeds of the disposition is significantly below the range of proceeds that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought.
  11. Warranties.  Subsection (d) affords the transferee in a disposition under this section the benefit of any title, possession, quiet enjoyment, and similar warranties that would have accompanied the disposition by operation of non-Article 9 law had the disposition been conducted under other circumstances. For example, the Article 2 warranty of title would apply to a sale of goods, the analogous warranties of Article 2A would apply to a lease of goods, and any common law warranties of title would apply to dispositions of other types of collateral. See, e.g., Restatement (2d), Contracts §  333 (warranties of assignor).

    Subsection (e) explicitly provides that these warranties can be disclaimed either under other applicable law or by communicating a record containing an express disclaimer. The record need not be written, but an oral communication would not be sufficient. See Section 9-102 (definition of “record”). Subsection (f) provides a sample of wording that will effectively exclude the warranties in a disposition under this section, whether or not the exclusion would be effective under non-Article 9 law.

    The warranties incorporated by subsection (d) are those relating to “title, possession, quiet enjoyment, and the like.” Depending on the circumstances, a disposition under this section also may give rise to other statutory or implied warranties, e.g., warranties of quality or fitness for purpose. Law other than this article determines whether such other warranties apply to a disposition under this section. Other law also determines issues relating to disclaimer of such warranties. For example, a foreclosure sale of a car by a car dealer could give rise to an implied warranty of merchantability (Section 2-314) unless effectively disclaimed or modified (Section 2-316).

    This section’s approach to these warranties conflicts with the former comment to Section 2-312. This article rejects the baseline assumption that commercially reasonable dispositions under this section are out of the ordinary commercial course or peculiar. The comment to Section 2-312 has been revised accordingly.

NOTES TO DECISIONS

1.Applicability.

This section applies only to personalty used as collateral and not to real property and thus could not impliedly approve of a provision in a promissory note and mortgage for the payment of attorney’s fees arising as a result of the debtor’s default. (decided under prior law) Mammoth Cave Production Credit Asso. v. Geralds, 551 S.W.2d 5, 1977 Ky. App. LEXIS 687 (Ky. Ct. App. 1977).

Section 355.9-102 (2) specifically applies Article 9 to a lease intended as security; thus, the provisions of former subsection (3) of this section apply only if a lease between parties was intended as security, and this intent is to be determined by the facts of each case. (decided under prior law) Ford Motor Credit Co. v. Webb-Elkhorn Coal Corp., 775 S.W.2d 945, 1989 Ky. App. LEXIS 111 (Ky. Ct. App. 1989).

2.Security Interest.

Where a lease did not constitute a security agreement, subsection (3) of this section was inapplicable. (decided under prior law) Diaz v. Goodwin Bros. Leasing, Inc., 511 S.W.2d 680, 1974 Ky. LEXIS 510 ( Ky. 1974 ).

3.Commercially Reasonable.

A sale was not commercially unreasonable because a better price could have been obtained at another time and place and in another matter. (decided under prior law) Ft. Knox Nat'l Bank v. Gustafson, 385 S.W.2d 196, 1964 Ky. LEXIS 148 ( Ky. 1964 ).

Where subcontractor complained that contractor bought his repossessed travel batcher without notice to him of the time and place of proposed sale, the court held the acquisition by the contractor was commercially reasonable, since contractor bought the lien paper on the batcher from subcontractor’s vendor and bought the machine by giving subcontractor credit for the entire purchase price of the machine or the exact amount he had paid for it new and subcontractor made no offer of proof that the batcher had a greater value than paid by the contractor. (decided under prior law) BSY Co. v. Fuel Economy Engineering Co., 399 S.W.2d 308, 1965 Ky. LEXIS 23 ( Ky. 1965 ).

Where the plaintiff solicited and received bids from three (3) used car dealers and then sold the repossessed car at a private sale to the highest bidder, the method, manner, time, place and terms of the sale were commercially reasonable. (decided under prior law) Nelson v. Monarch Inv. Plan, Inc., 452 S.W.2d 375, 1970 Ky. LEXIS 350 ( Ky. 1970 ).

Where the maker of a note defaulted on instalment payments, where the bank sent notice by registered mail to the debtor stating that the collateral on a security agreement executed by the debtor would be sold, and where the bank proceeded with a commercially reasonable public sale applying the proceeds to the unpaid balance, the bank dealt with the collateral in a commercially reasonable manner. (decided under prior law) Bank of Josephine v. Hopson, 516 S.W.2d 339, 1974 Ky. LEXIS 98 ( Ky. 1974 ).

Where finance company had repossessed an automobile after buyer defaulted, it was commercially reasonable to sell it at public auction at a time and place customary for such sales. (decided under prior law) Greg Coats Cars, Inc. v. Kasey, 576 S.W.2d 251, 1978 Ky. App. LEXIS 659 (Ky. Ct. App. 1978).

The secured party, rather than the debtor, should have the burden of proving that it has acted with commercial reasonableness, for in any transaction involving the holding and subsequent sale of collateral, the secured party is in the best position to introduce evidence that it acted in accordance with reasonable commercial standards, and the secured party, rather than the debtor, knows when it sent notice to the debtor of a public or private sale, and how that sale was advertised, if at all. (decided under prior law) Bank Josephine v. Conn, 599 S.W.2d 773, 1980 Ky. App. LEXIS 324 (Ky. Ct. App. 1980).

In order to recover a deficiency judgment resulting from sale of collateral, all of the provisions of this section must be complied with. The burden is on the secured party to prove it acted with commercial reasonableness in accomplishing the sale, and this includes notification to the debtor of the sale. (decided under prior law) Central Bank & Trust Co. v. Metcalfe, 663 S.W.2d 957, 1984 Ky. App. LEXIS 449 (Ky. Ct. App. 1984).

In Kentucky, a secured party may recover a deficiency judgment from a defaulting debtor after selling the collateral. However, the secured party must first establish that it acted with commercial reasonableness in the holding and disposition of the collateral in question. The secured party which fails to establish the commercial reasonableness of its actions is estopped from securing a deficiency judgment against the debtor. (decided under prior law) Rexing v. Doug Evans Auto Sales, Inc., 703 S.W.2d 491, 1986 Ky. App. LEXIS 1027 (Ky. Ct. App. 1986).

Where secured party sought to recover a deficiency judgment from debtors following its sale of Ford truck, but the pleadings and affidavit did not contain any evidence or allegation as to how the sale was noticed or advertised or who conducted the sale and there was no evidence as to how many parties appeared at the sale, the secured party did not even begin to carry its burden of proving that it conducted the sale of the truck in a commercially reasonable manner, and the trial court clearly erred in granting its summary judgment based on the pleadings and the affidavit in the record. (decided under prior law) Rexing v. Doug Evans Auto Sales, Inc., 703 S.W.2d 491, 1986 Ky. App. LEXIS 1027 (Ky. Ct. App. 1986).

As a general rule the question of whether the notice of sale of the collateral is “commercially reasonable” is a question of fact, not a question of law. McCoy v. American Fidelity Bank & Trust Co., 715 S.W.2d 228, 1986 Ky. LEXIS 311 ( Ky. 1986 ).

An automobile that was repossessed by bank, which assigned all its rights, title and interest in the security agreement executed with debtors to its insurance carrier, was never sold in a “commercially reasonable” manner and therefore, insurance carrier’s deficiency claim against debtor was summarily dismissed. (decided under prior law) Lee & Mason Int'l Agency, Inc. v. Daugherty, 828 S.W.2d 677, 1992 Ky. App. LEXIS 94 (Ky. Ct. App. 1992).

When a bank sold securities, which had been pledged as collateral for a loan on which the debtor defaulted, on a national securities market, specifically the NASDAQ, the sale was, as a matter of law, commercially reasonable. Layne v. Bank One, 395 F.3d 271, 2005 FED App. 0010P, 2005 U.S. App. LEXIS 332 (6th Cir. Ky. 2005 ).

KRS 355.9-610 does not impose an obligation on a lender to liquidate and sell collateral stock at a specific time during the life of a loan. and does not address whether a lender should dispose of its collateral, but rather once that decision has been made, how the disposition should occur. Layne v. Bank One, 395 F.3d 271, 2005 FED App. 0010P, 2005 U.S. App. LEXIS 332 (6th Cir. Ky. 2005 ).

Although a bank was entitled to summary judgment with respect to a debtor’s liability on a note, the bank failed to meet its obligation of affirmatively showing that it acted in a commercially reasonable manner in selling the debtor’s horses, as required by KRS 355.9-610 . Although the bank was not obligated to sell the equine collateral at the highest possible price, the bank provided the court with little to no specific information on the method, manner, time and other terms of the sales, the bank provided no specific evidence regarding the reasonable commercial practices among dealers in horses, much less whether its actions conformed to these practices, the bank failed to show that its efforts to prepare the horses for sale were commercially reasonable, and a drastic decline in value warranted further explanation from the bank. Fifth Third Bank v. Miller, 767 F. Supp. 2d 735, 2011 U.S. Dist. LEXIS 3618 (E.D. Ky. 2011 ).

4.— Questions of Fact and of Law.

The phrase “commercially reasonable” as relates to the disposal of collateral after default is the ultimate or conclusory fact which becomes the conclusion of law for the court to determine; however, if there is a dispute concerning the evidentiary facts, i.e., one party contending notices of the sale were mailed and the other party denying it, then an evidentiary fact issue is created which must be resolved by the factfinder. (decided under prior law) School Supply Co. v. First Nat'l Bank, 685 S.W.2d 200, 1984 Ky. App. LEXIS 645 (Ky. Ct. App. 1984).

In a legal malpractice case arising from a state court suit in which a client alleged that a seller did not provide commercially reasonable notice under former KRS 355.9-504 (3) prior to resale of a horse the client had purchased, the issue of commercial reasonableness was an issue of fact that was properly submitted to the jury, which could rationally have found that notice was reasonable. Alternatively, the notice did not cause the client any harm because the client did not have funds to pay for the horse until after the resale took place. Pivnick v. White, 552 F.3d 479, 2009 FED App. 0012P, 2009 U.S. App. LEXIS 368 (6th Cir. Ohio 2009).

5.— Burden of Proof.

The secured party rather than the debtor has the burden to prove commercial reasonableness. (decided under prior law) School Supply Co. v. First Nat'l Bank, 685 S.W.2d 200, 1984 Ky. App. LEXIS 645 (Ky. Ct. App. 1984).

This section provides that a creditor may sell the collateral, either publicly or privately, and apply the proceeds of the sale in satisfaction of the debt which is owed to him; the disposition must be commercially reasonable and the burden of so showing is upon the creditor. (decided under prior law) Owens v. First Commonwealth Bank, 706 S.W.2d 414, 1985 Ky. App. LEXIS 707 (Ky. Ct. App. 1985).

Where a finding of commercial unreasonableness against a secured party is based on some defect other than a failure to give pre-sale notice of the sale of the collateral, a presumption exists that the collateral is worth at least the amount of debt it secures and the burden is cast upon the secured party to prove that its commercial unreasonableness did not result in diminished proceeds, or if it did, by what amount, and if the secured party fails to prove that its conduct did not diminish the proceeds, the presumption that the collateral is of sufficient value to satisfy the debt would control and the claim for deficiency would be forfeited. (decided under prior law) Holt v. Peoples Bank of Mt. Washington, 814 S.W.2d 568, 1991 Ky. LEXIS 111 ( Ky. 1991 ).

6.— Disproportionate Price.

The fact that a better price could have been obtained by a sale at a different time or in a different method is not of itself sufficient to establish that the sale was not made in a commercially reasonable manner; however, a great disproportionate difference between the value of the property and what was realized by sale creates a presumption of “commercial unreasonableness.” (decided under prior law) School Supply Co. v. First Nat'l Bank, 685 S.W.2d 200, 1984 Ky. App. LEXIS 645 (Ky. Ct. App. 1984).

7.Rights to the Proceeds.

Where automobile was sold pursuant to this section, the first rights to the proceeds inured to statutory repairman’s lien acquired for services and materials furnished to repair the automobile, although it was acquired after bank’s perfected security interest. (decided under prior law) Corbin Deposit Bank v. King, 384 S.W.2d 302, 1964 Ky. LEXIS 83 ( Ky. 1964 ).

8.Notice.

“Reasonable notification” to the owner of a repossessed automobile before sale would be required by the Commercial Code under ordinary circumstances. (decided under prior law) Nelson v. Monarch Inv. Plan, Inc., 452 S.W.2d 375, 1970 Ky. LEXIS 350 ( Ky. 1970 ).

The defendant’s knowledge that the automobile eventually would be sold to satisfy his indebtedness did not constitute reasonable notification of a time after which a private sale properly could be made. (decided under prior law) Nelson v. Monarch Inv. Plan, Inc., 452 S.W.2d 375, 1970 Ky. LEXIS 350 ( Ky. 1970 ).

The requirement of “reasonable notification” to the owner of a repossessed automobile is construed to mean that the debtor is entitled to notification of a specific date after which the creditor may proceed to dispose of the collateral. (decided under prior law) Nelson v. Monarch Inv. Plan, Inc., 452 S.W.2d 375, 1970 Ky. LEXIS 350 ( Ky. 1970 ).

Where lease of restaurant equipment did not constitute a security agreement, guarantors of lessee’s performance were not entitled to notice under subsection (3) of this section prior to lessor’s sale of the equipment upon lessee’s default. (decided under prior law) Diaz v. Goodwin Bros. Leasing, Inc., 511 S.W.2d 680, 1974 Ky. LEXIS 510 ( Ky. 1974 ).

The crucial point to the issue of a notice being “reasonably sent” under this section is the reasonable expectation that, if the notice is deposited in the mail, it could reasonably be anticipated it would be transmitted to the addressee even if the addressee had moved to a different address. (decided under prior law) Central Bank & Trust Co. v. Metcalfe, 663 S.W.2d 957, 1984 Ky. App. LEXIS 449 (Ky. Ct. App. 1984).

Notice is not imputed from one spouse to another. (decided under prior law) Central Bank & Trust Co. v. Metcalfe, 663 S.W.2d 957, 1984 Ky. App. LEXIS 449 (Ky. Ct. App. 1984).

Where the defaulting purchasers had signed the sales contract individually and there was no indication in the document that the man and woman were married, the creditor bank’s notice of the impending sale of the repossessed collateral was not commercially reasonable as to the woman, where the bank mailed the notice in one envelope addressed to “Mr. & Mrs.” at the address indicated on the contract, particularly in view of the woman’s uncontradicted affidavit that she did not reside at that address at the time of the notice and that she did not receive it nor was it forwarded to her. (decided under prior law) Central Bank & Trust Co. v. Metcalfe, 663 S.W.2d 957, 1984 Ky. App. LEXIS 449 (Ky. Ct. App. 1984).

A secured party must establish that it sent the debtor commercially reasonable notice of the public sale. (decided under prior law) Bailey v. Navistar Financial Corp., 709 S.W.2d 841, 1986 Ky. App. LEXIS 1149 (Ky. Ct. App. 1986).

The purpose of pre-sale notice is to give the debtor sufficient time to protect his interest in the collateral by participating in the sale, or by taking appropriate steps to oppose the sale. (decided under prior law) Bailey v. Navistar Financial Corp., 709 S.W.2d 841, 1986 Ky. App. LEXIS 1149 (Ky. Ct. App. 1986).

Where the secured party presented testimony that the notice of the public sale was sent by ordinary mail, but no one testified from any personal knowledge that the notice was positively mailed by any particular person, the debtor countered the secured party’s proof by swearing that the “mailed” notice was never received by him, and the secured party was not a disinterested governmental unit, summary judgment in an action for deficiency judgment was improper. (decided under prior law) Bailey v. Navistar Financial Corp., 709 S.W.2d 841, 1986 Ky. App. LEXIS 1149 (Ky. Ct. App. 1986).

In action against the creditor for alleged wrongful possession of collateral, the debtor’s complaint was dismissed because he could not, as a matter of law, demonstrate that he suffered any damages as a result of the creditor’s failure to give him written notice of its intent to proceed under KRS 355.9-505 (2), where the amount owed was greater than the value of the collateral. (decided under prior law) Herring Mining Co. v. Roberts Bros. Coal Co., 747 S.W.2d 616, 1988 Ky. App. LEXIS 15 (Ky. Ct. App. 1988).

A purchaser of debtor’s interest in a drilling rig was entitled to reasonable notice of proposed sale of rig by a secured party and had a right to redeem. (decided under prior law) Summit Petroleum Corp. v. Ingersoll-Rand Financial Corp., 909 F.2d 862, 1990 U.S. App. LEXIS 11231 (6th Cir. Ky. 1990 ).

Assets of a new car dealership were not of the type customarily sold on a recognized market and therefore, dealer was entitled to reasonable notice of sale of collateral in order to recover deficiency judgment. (decided under prior law) Chrysler Credit Corp. v. H & H Chrysler-Plymouth-Dodge, Inc., 927 F.2d 270, 1991 U.S. App. LEXIS 3540 (6th Cir. Ky. 1991 ).

In an action by secured creditor of automobile dealership against the dealer to recover a deficiency judgment, dealer’s refusal to participate in the foreclosure creditor’s negotiations for the sale of collateral did not constitute a waiver of dealer’s right to a notice of sale. (decided under prior law) Chrysler Credit Corp. v. H & H Chrysler-Plymouth-Dodge, Inc., 927 F.2d 270, 1991 U.S. App. LEXIS 3540 (6th Cir. Ky. 1991 ).

The secured party’s failure to give pre-sale notice to the debtor that the collateral is about to be disposed of is so fundamental that no remedy less severe than forfeiture of the deficiency amount would be adequate. (decided under prior law) Holt v. Peoples Bank of Mt. Washington, 814 S.W.2d 568, 1991 Ky. LEXIS 111 ( Ky. 1991 ).

Whether sufficient notice was given by credit company to borrower that repossessed automobile was to be sold at auction necessitated a determination of whether auction was public or private. (decided under prior law) Ford Motor Credit Co. v. Hall, 879 S.W.2d 487, 1994 Ky. App. LEXIS 91 (Ky. Ct. App. 1994).

9.Estoppel.

Where the defendant returned the automobile to the plaintiff and stated he didn’t want the car back under any circumstances, the defendant’s actions relied on by the plaintiff estopped him to claim a violation of the statute regarding notification of the sale date. (decided under prior law) Nelson v. Monarch Inv. Plan, Inc., 452 S.W.2d 375, 1970 Ky. LEXIS 350 ( Ky. 1970 ).

10.Attorney Fees.

There is nothing in this section which expressly changes the earlier holdings of the court that provisions of notes purporting to agree that attorneys’ fees may be recovered against the debtor are invalid as against public policy; while it is a prerogative of the general assembly to establish public policy, a change from one public policy to another should be expressed clearly, but here the legislature has simply authorized recovery of fees “not prohibited by law” and in most cases such fees were prohibited by law before the enactment. (decided under prior law) Riley v. West Kentucky Production Credit Asso., 603 S.W.2d 916, 1980 Ky. App. LEXIS 347 (Ky. Ct. App. 1980).

Creditor on promissory note secured by mortgage and security agreement which contained provision for payment of attorneys’ fees by debtor, was not entitled under this section to recover such fees as a reasonable expense of enforcing the security agreement since the provisions were invalid as against public policy. (decided under prior law) Riley v. West Kentucky Production Credit Asso., 603 S.W.2d 916, 1980 Ky. App. LEXIS 347 (Ky. Ct. App. 1980).

Attorney’s fees incurred by a secured creditor in a conversion action for collateral against the transferee of the original creditor are not recoverable. (decided under prior law) Ranier v. Gilford, 688 S.W.2d 753, 1985 Ky. App. LEXIS 503 (Ky. Ct. App. 1985).

11.Deficiency Judgment.

A secured party may recover a deficiency judgment from a defaulting debtor after selling the collateral; however, the secured party must first establish it acted with commercial reasonableness in the holding and disposition of the collateral in question. A secured party which fails to establish the commercial reasonableness of its actions is estopped from obtaining a deficiency judgment against the debtor. (decided under prior law) Bailey v. Navistar Financial Corp., 709 S.W.2d 841, 1986 Ky. App. LEXIS 1149 (Ky. Ct. App. 1986).

12.Jury to Decide Facts.

There is no special rule that ultimate or conclusory facts are for the courts to decide in commercial transactions; unless reasonable minds cannot differ on the conclusions, the ultimate facts are for the jury to decide. (decided under prior law) McCoy v. American Fidelity Bank & Trust Co., 715 S.W.2d 228, 1986 Ky. LEXIS 311 ( Ky. 1986 ).

13.IRS Levy.

After the secured creditor distributed all of the proceeds of its sale of the collateral under this section, it no longer had any property belonging to the taxpayer in its possession, and the secured creditor properly refused to, and in fact could not have complied with the Internal Revenue Service levy against property belonging to the taxpayer in the secured creditor’s possession. (decided under prior law) United States v. Cope, 680 F. Supp. 912, 1987 U.S. Dist. LEXIS 13048 (W.D. Ky. 1987 ), disapproved, Estate of Wood v. Commissioner, 909 F.2d 1155, 1990 U.S. App. LEXIS 12494 (8th Cir. 1990).

14.Measure of Damages.

Where, in an action against the creditor for alleged wrongful possession of collateral, the creditor did not dispose of the collateral but retained it in full satisfaction of the debt, the measure of damages was not the fair rental value of the collateral for the period of time the creditor utilized the collateral. (decided under prior law) Herring Mining Co. v. Roberts Bros. Coal Co., 747 S.W.2d 616, 1988 Ky. App. LEXIS 15 (Ky. Ct. App. 1988).

15.Accounting for Surplus.

The mortgagor who took possession of property after default of mortgagee under a chattel mortgage and, on failure of mortgagor to redeem, sold it after a reasonable time had to account to the mortgagee for any surplus under the security agreement. (decided under prior law) White v. General Motors Acceptance Corp., 2 F. Supp. 406, 1932 U.S. Dist. LEXIS 1640 (D. Ky. 1932 ).

Cited:

Thompson v. Keesee, 375 F. Supp. 195, 1974 U.S. Dist. LEXIS 8633 (E.D. Ky. 1974 ); Dalton v. First Nat’l Bank, 712 S.W.2d 954, 1986 Ky. App. LEXIS 1165 (Ky. Ct. App. 1986).

Opinions of Attorney General.

A county clerk has no authority to arbitrarily drop subordinate liens without authorization from the lienholders upon transfer of registration when the first lienholder has repossessed the vehicle and resold it. OAG 60-1220 .

A clerk should issue a license receipt without recording on it a subordinate lien which was recorded on the prior receipt where the vehicle was disposed of under this section. OAG 61-1098 .

Where a car is repossessed by a secured party, the clerk, once the statutory requirements are met by the secured party who has suffered a default, has no alternative but to transfer the vehicle, upon a sale, without recording the subject lien or subordinate lien on the transfer certificate. OAG 71-490 .

Where an automobile is repossessed and sold by a first lienholder, the clerk has no duty to contact a second lienholder and request a release from him. OAG 71-490 .

In order for interest on expenses incurred in retaking and selling security to be collectible, it would have to be specifically provided for in the security agreement, keeping in mind the provisions of former KRS 355.9-201 in drafting such agreement. OAG 73-732 .

Where a transferor transferred two (2) tractors to the transferees who took title subject to the original obligations of the transferor under a security agreement, the county clerk was authorized to transfer the registration from the transferor to the original secured party upon repossession of the tractors, though disposition of the collateral by the secured party was of no concern to the county clerk. OAG 76-66 .

Sales of repossessed property must be conducted by a licensed auctioneer as provided for in KRS 330.030 . OAG 79-63 .

Since under KRS 330.020(5) “persons” are defined to include individuals, associations, partnerships and corporations and also includes officers, directors and employes of a corporation and since the owners are selling their own property (repossessed collateral) pursuant to the provisions of former KRS 355.9-504 and since the property was not acquired for resale but as security for a loan it would appear that an auction of repossessed collateral is within the exemption provided in KRS 330.040 as amended and such a sale does not require a licensed auctioneer to be present for the conduct of the sale. OAG 79-362 .

Research References and Practice Aids

Kentucky Bench & Bar.

Mapother, Attorneys’ Fees Recoverable in Kentucky Litigation, Vol. 44, No. 4, October 1980, Ky. Bench & Bar 28.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Kentucky Law Journal.

Fitzgerald, The Crazy Quilt of Commercial Law: A Study in Legislative Patchwork, 54 Ky. L.J. 85 (1965).

Harris, Defending Deficiency Judgment Suits in Kentucky: Article Nine, Part 5 of the Uniform Commercial Code, 61 Ky. L.J. 578 (1973).

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

Hakes, A Quest for Justice in the Conversion of Security Interests, 82 Ky. L.J. 837 (1993-94).

Nowka and Taylor, Kentucky Employees’ Wage Liens: A Sneak Attack on Creditors, but Beware of the Bankruptcy Trustee, 84 Ky. L.J. 317 (1995-96).

Northern Kentucky Law Review.

McClure, The Loch Ness Monster, Big Foot, Repossession Titles and Other Myths: Defenses and Counterclaims in a Repossession as an Alternative to Bankruptcy, 27 N. Ky. L. Rev. 360 (2000).

Treatises

Kentucky Instructions To Juries (Civil), 5th Ed., Conversion, § 29.03.

355.9-611. Notification before disposition of collateral.

  1. In this section, “notification date” means the earlier of the date on which:
    1. A secured party sends to the debtor and any secondary obligor an authenticated notification of disposition; or
    2. The debtor and any secondary obligor waive the right to notification.
  2. Except as otherwise provided in subsection (4) of this section, a secured party that disposes of collateral under KRS 355.9-610 shall send to the persons specified in subsection (3) of this section a reasonable authenticated notification of disposition.
  3. To comply with subsection (2) of this section, the secured party shall send an authenticated notification of disposition to:
    1. The debtor;
    2. Any secondary obligor; and
    3. If the collateral is other than consumer goods:
      1. Any other person from which the secured party has received, before the notification date, an authenticated notification of a claim of an interest in the collateral;
      2. Any other secured party or lienholder that, ten (10) days before the notification date, held a security interest in or other lien on the collateral perfected by the filing of a financing statement that:
        1. Identified the collateral;
        2. Was indexed under the debtor’s name as of that date; and
        3. Was filed in the office in which to file a financing statement against the debtor covering the collateral as of that date; and
      3. Any other secured party that, ten (10) days before the notification date, held a security interest in the collateral perfected by compliance with a statute, regulation, or treaty described in KRS 355.9-311 (1).
  4. Subsection (2) of this section does not apply if the collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market.
  5. A secured party complies with the requirement for notification prescribed by subsection (3)(c)2. of this section if:
    1. Not later than twenty (20) days or earlier than thirty (30) days before the notification date, the secured party requests, in a commercially reasonable manner, information concerning financing statements indexed under the debtor’s name in the office indicated in subsection (3)(c)2. of this section; and
    2. Before the notification date, the secured party:
      1. Did not receive a response to the request for information; or
      2. Received a response to the request for information and sent an authenticated notification of disposition to each secured party or other lienholder named in that response whose financing statement covered the collateral.

History. Enact. Acts 2000, ch. 408, § 129, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-504(3).
  2. Reasonable Notification.  This section requires a secured party who wishes to dispose of collateral under Section 9-610 to send “a reasonable authenticated notification of disposition” to specified interested persons, subject to certain exceptions. The notification must be reasonable as to the manner in which it is sent, its timeliness (i.e., a reasonable time before the disposition is to take place), and its content. See Sections 9-612 (timeliness of notification), 9-613 (contents of notification generally), 9-614 (contents of notification in consumer-goods transactions).
  3. Notification to Debtors and Secondary Obligors.  This section imposes a duty to send notification of a disposition not only to the debtor but also to any secondary obligor. Subsections (b) and (c) resolve an uncertainty under former Article 9 by providing that secondary obligors (sureties) are entitled to receive notification of an intended disposition of collateral, regardless of who created the security interest in the collateral. If the surety created the security interest, it would be the debtor. If it did not, it would be a secondary obligor. (This article also resolves the question of the secondary obligor’s ability to waive, pre-default, the right to notification—waiver generally is not permitted. See Section 9-602.) Section 9-605 relieves a secured party from any duty to send notification to a debtor or secondary obligor unknown to the secured party.

    Under subsection (b), the principal obligor (borrower) is not always entitled to notification of disposition.

  4. Notification to Other Secured Parties.  Prior to the 1972 amendments to Article 9, former Section 9-504(3) required the enforcing secured party to send reasonable notification of the disposition:

    except in the case of consumer goods to any other person who has a security interest in the collateral and who has duly filed a financing statement indexed in the name of the debtor in this State or who is known by the secured party to have a security interest in the collateral.

    The 1972 amendments eliminated the duty to give notice to secured parties other than those from whom the foreclosing secured party had received written notice of a claim of an interest in the collateral.

    Many of the problems arising from dispositions of collateral encumbered by multiple security interests can be ameliorated or solved by informing all secured parties of an intended disposition and affording them the opportunity to work with one another. To this end, subsection (c)(3)(B) expands the duties of the foreclosing secured party to include the duty to notify (and the corresponding burden of searching the files to discover) certain competing secured parties. The subsection imposes a search burden that in some cases may be greater than the pre-1972 burden on foreclosing secured parties but certainly is more modest than that faced by a new secured lender.

    To determine who is entitled to notification, the foreclosing secured party must determine the proper office for filing a financing statement as of a particular date, measured by reference to the “notification date,” as defined in subsection (a). This determination requires reference to the choice of law provisions of Part 3. The secured party must ascertain whether any financing statements covering the collateral and indexed under the debtor’s name, as the name existed as of that date, in fact were filed in that office. The foreclosing secured party generally need not notify secured parties whose effective financing statements have become more difficult to locate because of changes in the location of the debtor, proceeds rules, or changes in the debtor’s name.

    Under subsection (c)(3)(C), the secured party also must notify a secured party who has perfected a security interest by complying with a statute or treaty described in Section 9-311(a), such as a certificate of title statute.

    Subsection (e) provides a “safe harbor” that takes into account the delays that may be attendant to receiving information from the public filing offices. It provides, generally, that the secured party will be deemed to have satisfied its notification duty under subsection (c)(3)(B) if it requests a search from the proper office at least 20 but not more than 30 days before sending notification to the debtor and if it also sends a notification to all secured parties (and other lienholders) reflected on the search report. The secured party’s duty under subsection (c)(3)(B) also will be satisfied if the secured party requests but does not receive a search report before the notification is sent to the debtor. Thus, if subsection (e) applies, a secured party who is entitled to notification under subsection (c)(3)(B) has no remedy against a foreclosing secured party who does not send the notification. The foreclosing secured party has complied with the notification requirement. Subsection (e) has no effect on the requirements of the other paragraphs of subsection (c). For example, if the foreclosing secured party received a notification from the holder of a conflicting security interest in accordance with subsection (c)(3)(A) but failed to send to the holder a notification of the disposition, the holder of the conflicting security interest would have the right to recover any loss under Section 9-625(b).

  5. Authentication Requirement.  Subsections (b) and (c) explicitly provide that a notification of disposition must be “authenticated.” Some cases read former Section 9-504(3) as validating oral notification.
  6. Second Try.  This Article leaves to judicial resolution, based upon the facts of each case, the question whether the requirement of “reasonable notification” requires a “second try,” i.e., whether a secured party who sends notification and learns that the debtor did not receive it must attempt to locate the debtor and send another notification.
  7. Recognized Market; Perishable Collateral.  New subsection (d) makes it clear that there is no obligation to give notification of a disposition in the case of perishable collateral or collateral customarily sold on a recognized market (e.g., marketable securities). Former Section 9-504(3) might be read (incorrectly) to relieve the secured party from its duty to notify a debtor but not from its duty to notify other secured parties in connection with dispositions of such collateral.
  8. Failure to Conduct Notified Disposition.  Nothing in this article prevents a secured party from electing not to conduct a disposition after sending a notification. Nor does this article prevent a secured party from electing to send a revised notification if its plans for disposition change. This assumes, however, that the secured party acts in good faith, the revised notification is reasonable, and the revised plan for disposition and any attendant delay are commercially reasonable.
  9. Waiver.  A debtor or secondary obligor may waive the right to notification under this section only by a post-default authenticated agreement. See Section 9-624(a).

Example: Behnfeldt borrows on an unsecured basis, and Bruno grants a security interest in her car to secure the debt. Behnfeldt is a primary obligor, not a secondary obligor. As such, she is not entitled to notification of disposition under this section.

355.9-612. Timeliness of notification before disposition of collateral.

  1. Except as otherwise provided in subsection (2) of this section, whether a notification is sent within a reasonable time is a question of fact.
  2. In a transaction other than a consumer transaction, a notification of disposition sent after default and ten (10) days or more before the earliest time of disposition set forth in the notification is sent within a reasonable time before the disposition.

History. Enact. Acts 2000, ch. 408, § 130, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Reasonable Notification.  Section 9-611(b) requires the secured party to send a “reasonable authenticated notification.” Under that section, as under former Section 9-504(3), one aspect of a reasonable notification is its timeliness. This generally means that the notification must be sent at a reasonable time in advance of the date of a public disposition or the date after which a private disposition is to be made. A notification that is sent so near to the disposition date that a notified person could not be expected to act on or take account of the notification would be unreasonable.
  3. Timeliness of Notification: Safe Harbor.  The 10-day notice period in subsection (b) is intended to be a “safe harbor” and not a minimum requirement. To qualify for the “safe harbor” the notification must be sent after default. A notification also must be sent in a commercially reasonable manner. See Section 9-611(b) (“reasonable authenticated notification”). These requirements prevent a secured party from taking advantage of the “safe harbor” by, for example, giving the debtor a notification at the time of the original extension of credit or sending the notice by surface mail to a debtor overseas.

355.9-613. Contents and form of notification before disposition of collateral: General.

Except in a consumer-goods transaction, the following rules apply:

  1. The contents of a notification of disposition are sufficient if the notification:
    1. Describes the debtor and the secured party;
    2. Describes the collateral that is the subject of the intended disposition;
    3. States the method of intended disposition;
    4. States that the debtor is entitled to an accounting of the unpaid indebtedness and states the charge, if any, for an accounting; and
    5. States the time and place of a public disposition or the time after which any other disposition is to be made.
  2. Whether the contents of a notification that lacks any of the information specified in subsection (1) of this section are nevertheless sufficient is a question of fact.
  3. The contents of a notification providing substantially the information specified in subsection (1) of this section are sufficient, even if the notification includes:
    1. Information not specified by that subsection; or
    2. Minor errors that are not seriously misleading.
  4. A particular phrasing of the notification is not required.
  5. The following form of notification and the form appearing in KRS 355.9-614 (3), when completed, each provides sufficient information:

“NOTIFICATION OF DISPOSITION OF COLLATERAL To: From: Name of Debtor(s): We will sell the in public as follows: Day and Date: Time: Place: We will sell the privately sometime after . You are entitled to an accounting of the unpaid indebtedness secured by the property that we intend to sell . You may request an accounting by calling us at .” $ >

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History. Enact. Acts 2000, ch. 408, § 131, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Contents of Notification.  To comply with the “reasonable authenticated notification” requirement of Section 9-611(b), the contents of a notification must be reasonable. Except in a consumer-goods transaction, the contents of a notification that includes the information set forth in paragraph (1) are sufficient as a matter of law, unless the parties agree otherwise. (The reference to “time” of disposition means here, as it did in former Section 9-504(3), not only the hour of the day but also the date.) Although a secured party may choose to include additional information concerning the transaction or the debtor’s rights and obligations, no additional information is required unless the parties agree otherwise. A notification that lacks some of the information set forth in paragraph (1) nevertheless may be sufficient if found to be reasonable by the trier of fact, under paragraph (2). A properly completed sample form of notification in paragraph (5) or in Section 9-614(a)(3) is an example of a notification that would contain the information set forth in paragraph (1). Under paragraph (4), however, no particular phrasing of the notification is required.

355.9-614. Contents and form of notification before disposition of collateral: Consumer-goods transaction.

In a consumer-goods transaction, the following rules apply:

  1. A notification of disposition must provide the following information:
    1. The information specified in KRS 355.9-613 (1);
    2. A description of any liability for a deficiency of the person to which the notification is sent;
    3. A telephone number from which the amount that must be paid to the secured party to redeem the collateral under KRS 355.9-623 is available; and
    4. A telephone number or mailing address from which additional information concerning the disposition and the obligation secured is available.
  2. A particular phrasing of the notification is not required.
  3. The following form of notification, when completed, provides sufficient information:
  4. A notification in the form of subsection (3) of this section is sufficient, even if additional information appears at the end of the form.
  5. A notification in the form of subsection (3) of this section is sufficient, even if it includes errors in information not required by subsection (1) of this section, unless the error is misleading with respect to rights arising under this article.
  6. If a notification under this section is not in the form of subsection (3) of this section, law other than this article determines the effect of including information not required by subsection (1) of this section.

NOTICE OF OUR PLAN TO SELL PROPERTY Subject: We have your , because you broke promises in our agreement. . [For a public disposition:] We will sell at public sale. A sale could include a lease or license. The sale will be held as follows: Date: Time: Place: You may attend the sale and bring bidders if you want. [For a private disposition:] We will sell at private sale sometime after . A sale could include a lease or license. The money that we get from the sale (after paying our costs) will reduce the amount you owe. If we get less money than you owe, you still owe us the difference. If we get more money than you owe, you will get the extra money, unless we must pay it to someone else. You can get the property back at any time before we sell it by paying us the full amount you owe (not just the past due payments), including our expenses. To learn the exact amount you must pay, call us at . If you want us to explain to you in writing how we have figured the amount that you owe us, you may call us at and request a written explanation. [or write us at ] [We will charge you $ for the explanation if we sent you another written explanation of the amount you owe us within the last six months.] If you need more information about the sale call us at . [or write us at ] We are sending this notice to the following other people who have an interest in or who owe money under your agreement:

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History. Enact. Acts 2000, ch. 408, § 132, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Notification in Consumer-Goods Transactions. Paragraph (1) sets forth the information required for a reasonable notification in a consumer-goods transaction. A notification that lacks any of the information set forth in paragraph (1) is insufficient as a matter of law. Compare Section 9-613(2), under which the trier of fact may find a notification to be sufficient even if it lacks some information listed in paragraph (1) of that section.
  3. Safe-Harbor Form of Notification; Errors in Information.  Although paragraph (2) provides that a particular phrasing of a notification is not required, paragraph (3) specifies a safe-harbor form that, when properly completed, satisfies paragraph (1). Paragraphs (4), (5), and (6) contain special rules applicable to erroneous and additional information. Under paragraph (4), a notification in the safe-harbor form specified in paragraph (3) is not rendered insufficient if it contains additional information at the end of the form. Paragraph (5) provides that nonmisleading errors in information contained in a notification are permitted if the safe-harbor form is used and if the errors are in information not required by paragraph (1). Finally, if a notification is in a form other than the paragraph (3) safe-harbor form, other law determines the effect of including in the notification information other than that required by paragraph (1).

355.9-615. Application of proceeds of disposition — Liability for deficiency and right to surplus.

  1. A secured party shall apply or pay over for application the cash proceeds of disposition under KRS 355.9-610 in the following order to:
    1. The reasonable expenses of retaking, holding, preparing for disposition, processing, and disposing, and, to the extent provided for by agreement and not prohibited by law, reasonable attorney’s fees and legal expenses incurred by the secured party;
    2. The satisfaction of obligations secured by the security interest or agricultural lien under which the disposition is made;
    3. The satisfaction of obligations secured by any subordinate security interest in or other subordinate lien on the collateral if:
      1. The secured party receives from the holder of the subordinate security interest or other lien an authenticated demand for proceeds before distribution of the proceeds is completed; and
      2. In a case in which a consignor has an interest in the collateral, the subordinate security interest or other lien is senior to the interest of the consignor; and
    4. A secured party that is a consignor of the collateral if the secured party receives from the consignor an authenticated demand for proceeds before distribution of the proceeds is completed.
  2. If requested by a secured party, a holder of a subordinate security interest or other lien shall furnish reasonable proof of the interest or lien within a reasonable time. Unless the holder does so, the secured party need not comply with the holder’s demand under subsection (1)(c) of this section.
  3. A secured party need not apply or pay over for application noncash proceeds of disposition under KRS 355.9-610 unless the failure to do so would be commercially unreasonable. A secured party that applies or pays over for application noncash proceeds shall do so in a commercially reasonable manner.
  4. If the security interest under which a disposition is made secures payment or performance of an obligation, after making the payments and applications required by subsection (1) of this section and permitted by subsection (3) of this section:
    1. Unless subsection (1)(d) of this section requires the secured party to apply or pay over cash proceeds to a consignor, the secured party shall account to and pay a debtor for any surplus; and
    2. The obligor is liable for any deficiency.
  5. If the underlying transaction is a sale of accounts, chattel paper, payment intangibles, or promissory notes:
    1. The debtor is not entitled to any surplus; and
    2. The obligor is not liable for any deficiency.
  6. The surplus or deficiency following a disposition is calculated based on the amount of proceeds that would have been realized in a disposition complying with this part of this article to a transferee other than the secured party, a person related to the secured party, or a secondary obligor if:
    1. The transferee in the disposition is the secured party, a person related to the secured party, or a secondary obligor; and
    2. The amount of proceeds of the disposition is significantly below the range of proceeds that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought.
  7. A secured party that receives cash proceeds of a disposition in good faith and without knowledge that the receipt violates the rights of the holder of a security interest or other lien that is not subordinate to the security interest or agricultural lien under which the disposition is made:
    1. Takes the cash proceeds free of the security interest or other lien;
    2. Is not obligated to apply the proceeds of the disposition to the satisfaction of obligations secured by the security interest or other lien; and
    3. Is not obligated to account to or pay the holder of the security interest or other lien for any surplus.

History. Enact. Acts 2000, ch. 408, § 133, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-504(1) and (2).
  2. Application of Proceeds.  This section contains the rules governing application of proceeds and the debtor’s liability for a deficiency following a disposition of collateral. Subsection (a) sets forth the basic order of application. The proceeds are applied first to the expenses of disposition, second to the obligation secured by the security interest that is being enforced, and third, in the specified circumstances, to interests that are subordinate to that security interest.

    Subsections (a) and (d) also address the right of a consignor to receive proceeds of a disposition by a secured party whose interest is senior to that of the consignor. Subsection (a) requires the enforcing secured party to pay excess proceeds first to subordinate secured parties or lienholders whose interests are senior to that of a consignor and, finally, to a consignor. Inasmuch as a consignor is the owner of the collateral, secured parties and lienholders whose interests are junior to the consignor’s interest will not be entitled to any proceeds. In like fashion, under subsection (d)(1) the debtor is not entitled to a surplus when the enforcing secured party is required to pay over proceeds to a consignor.

  3. Noncash Proceeds.  Subsection (c) addresses the application of noncash proceeds of a disposition, such as a note or lease. The explanation in section 9-608, comment 4, generally applies to this subsection.
  4. Surplus and Deficiency.  Subsection (d) deals with surplus and deficiency. It revises former Section 9-504(2) by imposing an explicit requirement that the secured party “pay” the debtor for any surplus, while retaining the secured party’s duty to “account.” Inasmuch as the debtor may not be an obligor, subsection (d) provides that the obligor (not the debtor) is liable for the deficiency. The special rule governing surplus and deficiency when receivables have been sold likewise takes into account the distinction between a debtor and an obligor. Subsection (d) also addresses the situation in which a consignor has an interest that is subordinate to the security interest being enforced.
  5. Collateral Under New Ownership.  When the debtor sells collateral subject to a security interest, the original debtor (creator of the security interest) is no longer a debtor inasmuch as it no longer has a property interest in the collateral; the buyer is the debtor. See Section 9-102. As between the debtor (buyer of the collateral) and the original debtor (seller of the collateral), the debtor (buyer) normally would be entitled to the surplus following a disposition. Subsection (d) therefore requires the secured party to pay the surplus to the debtor (buyer), not to the original debtor (seller) with which it has dealt. But, because this situation typically arises as a result of the debtor’s wrongful act, this article does not expose the secured party to the risk of determining ownership of the collateral. If the secured party does not know about the buyer and accordingly pays the surplus to the original debtor, the exculpatory provisions of this article exonerate the secured party from liability to the buyer. See Sections 9-605, 9-628(a) and (b). If a debtor sells collateral free of a security interest, as in a sale to a buyer in ordinary course of business (see Section 9-320(a)), the property is no longer collateral and the buyer is not a debtor.
  6. Certain “Low-Price” Dispositions.  Subsection (f) provides a special method for calculating a deficiency or surplus when the secured party, a person related to the secured party (defined in Section 9-102), or a secondary obligor acquires the collateral at a foreclosure disposition. It recognizes that when the foreclosing secured party or a related party is the transferee of the collateral, the secured party sometimes lacks the incentive to maximize the proceeds of disposition. As a consequence, the disposition may comply with the procedural requirements of this article (e.g., it is conducted in a commercially reasonable manner following reasonable notice) but nevertheless fetch a low price.

    Subsection (f) adjusts for this lack of incentive. If the proceeds of a disposition of collateral to a secured party, a person related to the secured party, or a secondary obligor are “significantly below the range of proceeds that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought,” then instead of calculating a deficiency (or surplus) based on the actual net proceeds, the calculation is based upon the amount that would have been received in a commercially reasonable disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor. Subsection (f) thus rejects the view that the secured party’s receipt of such a price necessarily constitutes noncompliance with Part 6. However, such a price may suggest the need for greater judicial scrutiny. See Section 9-610, Comment 10.

  7. “Person Related To.”  Section 9-102 defines “person related to.” That term is a key element of the system provided in subsection (f) for low-price dispositions. One part of the definition applies when the secured party is an individual, and the other applies when the secured party is an organization. The definition is patterned closely on the corresponding definition in Section 1.301(32) of the Uniform Consumer Credit Code.

Example: A secured party in the business of selling or financing automobiles takes possession of collateral (an automobile) following its debtor’s default. The secured party decides to sell the automobile in a private disposition under Section 9-610 and sends appropriate notification under Section 9-611. After undertaking its normal credit investigation and in accordance with its normal credit policies, the secured party sells the automobile on credit, on terms typical of the credit terms normally extended by the secured party in the ordinary course of its business. The automobile stands as collateral for the remaining balance of the price. The noncash proceeds received by the secured party are chattel paper. The secured party may wish to credit its debtor (the assignor) with the principal amount of the chattel paper or may wish to credit the debtor only as and when the payments are made on the chattel paper by the buyer.

Under subsection (c), the secured party is under no duty to apply the noncash proceeds (here, the chattel paper) or their value to the secured obligation unless its failure to do so would be commercially unreasonable. If a secured party elects to apply the chattel paper to the outstanding obligation, however, it must do so in a commercially reasonable manner. The facts in the example indicate that it would be commercially unreasonable for the secured party to fail to apply the value of the chattel paper to the original debtor’s secured obligation. Unlike the example in Comment 4 to Section 9-608, the noncash proceeds received in this example are of the type that the secured party regularly generates in the ordinary course of its financing business in nonforeclosure transactions. The original debtor should not be exposed to delay or uncertainty in this situation. Of course, there will be many situations that fall between the examples presented in the comment to Section 9-608 and in this comment. This Article leaves their resolution to the court based on the facts of each case.

One would expect that where noncash proceeds are or may be material, the secured party and debtor would agree to more specific standards in an agreement entered into before or after default. The parties may agree to the method of application of noncash proceeds if the method is not manifestly unreasonable. See Section 9-603.

When the secured party is not required to “apply or pay over for application noncash proceeds,” the proceeds nonetheless remain collateral subject to this Article. See Section 9-608, Comment 4.

NOTES TO DECISIONS

1.Debtor’s Liability for Deficiency.

Where there was no evidence that a sale of a repossessed motor vehicle was had, there was no right to a recovery of a deficiency or any amount as a result of a default in a security agreement. (decided under prior law) Cox Motor Car Co. v. Castle, 402 S.W.2d 429, 1966 Ky. LEXIS 364 ( Ky. 1966 ).

2.Deficiency Judgment.

A secured party may recover a deficiency judgment from a defaulting debtor after selling the collateral; however, the secured party must first establish it acted with commercial reasonableness in the holding and disposition of the collateral in question. A secured party which fails to establish the commercial reasonableness of its actions is estopped from obtaining a deficiency judgment against the debtor. (decided under prior law) Bailey v. Navistar Financial Corp., 709 S.W.2d 841, 1986 Ky. App. LEXIS 1149 (Ky. Ct. App. 1986).

Cited:

Thompson v. Keesee, 375 F. Supp. 195, 1974 U.S. Dist. LEXIS 8633 (E.D. Ky. 1974 ); Dalton v. First Nat’l Bank, 712 S.W.2d 954, 1986 Ky. App. LEXIS 1165 (Ky. Ct. App. 1986).

Research References and Practice Aids

Kentucky Bench & Bar.

Mapother, Attorneys’ Fees Recoverable in Kentucky Litigation, Vol. 44, No. 4, October 1980, Ky. Bench & Bar 28.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Kentucky Law Journal.

Fitzgerald, The Crazy Quilt of Commercial Law: A Study in Legislative Patchwork, 54 Ky. L.J. 85 (1965).

Harris, Defending Deficiency Judgment Suits in Kentucky: Article Nine, Part 5 of the Uniform Commercial Code, 61 Ky. L.J. 578 (1973).

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

Hakes, A Quest for Justice in the Conversion of Security Interests, 82 Ky. L.J. 837 (1993-94).

Nowka and Taylor, Kentucky Employees’ Wage Liens: A Sneak Attack on Creditors, but Beware of the Bankruptcy Trustee, 84 Ky. L.J. 317 (1995-96).

Northern Kentucky Law Review.

McClure, The Loch Ness Monster, Big Foot, Repossession Titles and Other Myths: Defenses and Counterclaims in a Repossession as an Alternative to Bankruptcy, 27 N. Ky. L. Rev. 360 (2000).

Treatises

Kentucky Instructions To Juries (Civil), 5th Ed., Conversion, § 29.03.

355.9-616. Explanation of calculation of surplus or deficiency.

  1. In this section:
    1. “Explanation” means a writing that:
      1. States the amount of the surplus or deficiency;
      2. Provides an explanation in accordance with subsection (3) of this section of how the secured party calculated the surplus or deficiency;
      3. States, if applicable, that future debits, credits, charges, including additional credit service charges or interest, rebates, and expenses may affect the amount of the surplus or deficiency; and
      4. Provides a telephone number or mailing address from which additional information concerning the transaction is available.
    2. “Request” means a record:
      1. Authenticated by a debtor or consumer obligor;
      2. Requesting that the recipient provide an explanation; and
      3. Sent after disposition of the collateral under KRS 355.9-610 .
  2. In a consumer-goods transaction in which the debtor is entitled to a surplus or a consumer obligor is liable for a deficiency under KRS 355.9-615 , the secured party shall:
    1. Send an explanation to the debtor or consumer obligor, as applicable, after the disposition and:
      1. Before or when the secured party accounts to the debtor and pays any surplus or first makes written demand on the consumer obligor after the disposition for payment of the deficiency; and
      2. Within fourteen (14) days after receipt of a request; or
    2. In the case of a consumer obligor who is liable for a deficiency, within fourteen (14) days after receipt of a request, send to the consumer obligor a record waiving the secured party’s right to a deficiency.
  3. To comply with subsection (1)(a)2. of this section, a writing must provide the following information in the following order:
    1. The aggregate amount of obligations secured by the security interest under which the disposition was made, and, if the amount reflects a rebate of unearned interest or credit service charge, an indication of that fact, calculated as of a specified date:
      1. If the secured party takes or receives possession of the collateral after default, not more than thirty-five (35) days before the secured party takes or receives possession; or
      2. If the secured party takes or receives possession of the collateral before default or does not take possession of the collateral, not more than thirty-five (35) days before the disposition;
    2. The amount of proceeds of the disposition;
    3. The aggregate amount of the obligations after deducting the amount of proceeds;
    4. The amount, in the aggregate or by type, and types of expenses, including expenses of retaking, holding, preparing for disposition, processing, and disposing of the collateral, and attorney’s fees secured by the collateral which are known to the secured party and relate to the current disposition;
    5. The amount, in the aggregate or by type, and types of credits, including rebates of interest or credit service charges, to which the obligor is known to be entitled and which are not reflected in the amount in paragraph (a) of this subsection; and
    6. The amount of the surplus or deficiency.
  4. A particular phrasing of the explanation is not required. An explanation complying substantially with the requirements of subsection (1) of this section is sufficient, even if it includes minor errors that are not seriously misleading.
  5. A debtor or consumer obligor is entitled without charge to one (1) response to a request under this section during any six (6) month period in which the secured party did not send to the debtor or consumer obligor an explanation pursuant to subsection (2)(a) of this section. The secured party may require payment of a charge not exceeding twenty-five dollars ($25) for each additional response.

History. Enact. Acts 2000, ch. 408, § 134, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Duty to Send Information Concerning Surplus or Deficiency.  This section reflects the view that, in every consumer-goods transaction, the debtor or obligor is entitled to know the amount of a surplus or deficiency and the basis upon which the surplus or deficiency was calculated. Under subsection (b)(1), a secured party is obligated to provide this information (an “explanation,” defined in subsection (a)(1)) no later than the time that it accounts for and pays a surplus or the time of its first written attempt to collect the deficiency. The obligor need not make a request for an accounting in order to receive an explanation. A secured party who does not attempt to collect a deficiency in writing or account for and pay a surplus has no obligation to send an explanation under subsection (b)(1) and, consequently, cannot be liable for noncompliance.

    A debtor or secondary obligor need not wait until the secured party commences written collection efforts in order to receive an explanation of how a deficiency or surplus was calculated. Subsection (b)(2) obliges the secured party to send an explanation within 14 days after it receives a “request” (defined in subsection (a)(2)).

  3. Explanation of Calculation of Surplus or Deficiency.  Subsection (c) contains the requirements for how a calculation of a surplus or deficiency must be explained in order to satisfy subsection (a)(1)(B). It gives a secured party some discretion concerning rebates of interest or credit service charges. The secured party may include these rebates in the aggregate amount of obligations secured, under subsection (c)(1), or may include them with other types of rebates and credits under subsection (c)(5). Rebates of interest or credit service charges are the only types of rebates for which this discretion is provided. If the secured party provides an explanation that includes rebates of precomputed interest, its explanation must so indicate. The expenses and attorney’s fees to be described pursuant to subsection (c)(4) are those relating to the most recent disposition, not those that may have been incurred in connection with earlier enforcement efforts and which have been resolved by the parties.
  4. Liability for Noncompliance.  A secured party who fails to comply with subsection (b)(2) is liable for any loss caused plus $500. See Section 9-625(b), (c), (e)(6). A secured party who fails to send an explanation under subsection (b)(1) is liable for any loss caused plus, if the noncompliance was “part of a pattern, or consistent with a practice of noncompliance,” $500. See Section 9-625(b), (c), (e)(5). However, a secured party who fails to comply with this section is not liable for statutory minimum damages under Section 9-625(c)(2). See Section 9-628(d).

355.9-617. Rights of transferee of collateral.

  1. A secured party’s disposition of collateral after default:
    1. Transfers to a transferee for value all of the debtor’s rights in the collateral;
    2. Discharges the security interest under which the disposition is made; and
    3. Discharges any subordinate security interest or other subordinate lien.
  2. A transferee that acts in good faith takes free of the rights and interests described in subsection (1) of this section, even if the secured party fails to comply with this article or the requirements of any judicial proceeding.
  3. If a transferee does not take free of the rights and interests described in subsection (1) of this section, the transferee takes the collateral subject to:
    1. The debtor’s rights in the collateral;
    2. The security interest or agricultural lien under which the disposition is made; and
    3. Any other security interest or other lien.

History. Enact. Acts 2000, ch. 408, § 135, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-504(4).
  2. Title Taken by Good Faith Transferee.  Subsection (a) sets forth the rights acquired by persons who qualify under subsection (b)—transferees who act in good faith. Such a person is a “transferee,” inasmuch as a buyer at a foreclosure sale does not meet the definition of “purchaser” in Section 1-201 (the transfer is not, vis-a-vis the debtor, “voluntary”). By virtue of the expanded definition of the term “debtor” in Section 9-102, subsection (a) makes clear that the ownership interest of a person who bought the collateral subject to the security interest is terminated by a subsequent disposition under this part. Such a person is a debtor under this Article. Under former Article 9, the result arguably was the same, but the statute was less clear. Under subsection (a), a disposition normally discharges the security interest being foreclosed and any subordinate security interests and other liens.

    A disposition has the effect specified in subsection (a), even if the secured party fails to comply with this article. An aggrieved person (e.g., the holder of a subordinate security interest to whom a notification required by Section 9-611 was not sent) has a right to recover any loss under Section 9-625(b).

  3. Unitary Standard in Public and Private Dispositions.  Subsection (b) now contains a unitary standard that applies to transferees in both private and public dispositions—acting in good faith. However, this change from former Section 9-504(4) should not be interpreted to mean that a transferee acts in good faith even though it has knowledge of defects or buys in collusion, standards applicable to public dispositions under the former section. Properly understood, those standards were specific examples of the absence of good faith.
  4. Title Taken by Nonqualifying Transferee.  Subsection (c) specifies the consequences for a transferee who does not qualify for protection under subsections (a) and (b) (i.e., a transferee who does not act in good faith). The transferee takes subject to the rights of the debtor, the enforcing secured party, and other security interests or other liens.

355.9-618. Rights and duties of certain secondary obligors.

  1. A secondary obligor acquires the rights and becomes obligated to perform the duties of the secured party after the secondary obligor:
    1. Receives an assignment of a secured obligation from the secured party;
    2. Receives a transfer of collateral from the secured party and agrees to accept the rights and assume the duties of the secured party; or
    3. Is subrogated to the rights of a secured party with respect to collateral.
  2. An assignment, transfer, or subrogation described in subsection (1) of this section:
    1. Is not a disposition of collateral under KRS 355.9-610 ; and
    2. Relieves the secured party of further duties under this article.

History. Enact. Acts 2000, ch. 408, § 136, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-504(5).
  2. Scope of This Section.  Under this section, assignments of secured obligations and other transactions (regardless of form) that function like assignments of secured obligations are not dispositions to which part 6 applies. Rather, they constitute assignments of rights and (occasionally) delegations of duties. Application of this section may require an investigation into the agreement of the parties, which may not be reflected in the words of the repurchase agreement (e.g., when the agreement requires a recourse party to “purchase the collateral” but contemplates that the purchaser will then conduct an article 9 foreclosure disposition).

    This section, like former Section 9-504(5), does not constitute a general and comprehensive rule for allocating rights and duties upon assignment of a secured obligation. Rather, it applies only in situations involving a secondary obligor described in subsection (a). In other contexts, the agreement of the parties and applicable law other than Article 9 determine whether the assignment imposes upon the assignee any duty to the debtor and whether the assignor retains its duties to the debtor after the assignment.

    Subsection (a)(1) applies when there has been an assignment of an obligation that is secured at the time it is assigned. Thus, if a secondary obligor acquires the collateral at a disposition under Section 9-610 and simultaneously or subsequently discharges the unsecured deficiency claim, subsection (a)(1) is not implicated. Similarly, subsection (a)(3) applies only when the secondary obligor is subrogated to the secured party’s rights with respect to collateral. Thus, this subsection will not be implicated if a secondary obligor discharges the debtor’s unsecured obligation for a post-disposition deficiency. Similarly, if the secured party disposes of some of the collateral and the secondary obligor thereafter discharges the remaining obligation, subsection (a) applies only with respect to rights and duties concerning the remaining collateral, and, under subsection (b), the subrogation is not a disposition of the remaining collateral .

    As discussed more fully in Comment 3, a secondary obligor may receive a transfer of collateral in a disposition under Section 9-610 in exchange for a payment that is applied against the secured obligation. However, a secondary obligor who pays and receives a transfer of collateral does not necessarily become subrogated to the rights of the secured party as contemplated by subsection (a)(3). Only to the extent the secondary obligor makes a payment in satisfaction of its secondary obligation would it become subrogated. To the extent its payment constitutes the price of the collateral in a Section 9-610 disposition by the secured party, the secondary obligor would not be subrogated. Thus, if the amount paid by the secondary obligor for the collateral in a Section 9-610 disposition is itself insufficient to discharge the secured obligation, but the secondary obligor makes an additional payment that satisfies the remaining balance, the secondary obligor would be subrogated to the secured party’s deficiency claim. However, the duties of the secured party as such would have come to an end with respect to that collateral. In some situations the capacity in which the payment is made may be unclear. Accordingly, the parties should in their relationship provide clear evidence of the nature and circumstances of the payment by the secondary obligor.

  3. Transfer of Collateral to Secondary Obligor.  It is possible for a secured party to transfer collateral to a secondary obligor in a transaction that is a disposition under section 9-610 and that establishes a surplus or deficiency under Section 9-615. Indeed, this Article includes a special rule, in Section 9-615(f), for establishing a deficiency in the case of some dispositions to, inter alia, secondary obligors. This article rejects the view, which some may have ascribed to former Section 9-504(5), that a transfer of collateral to a recourse party can never constitute a disposition of collateral which discharges a security interest. Inasmuch as a secured party could itself buy collateral at its own public sale, it makes no sense to prohibit a recourse party ever from buying at the sale.
  4. Timing and Scope of Obligations.  Under subsection (a), a recourse party acquires rights and incurs obligations only “after” one of the specified circumstances occurs. This makes clear that when a successor assignee, transferee, or subrogee becomes obligated it does not assume any liability for earlier actions or inactions of the secured party whom it has succeeded unless it agrees to do so. Once the successor becomes obligated, however, it is responsible for complying with the secured party’s duties thereafter. For example, if the successor is in possession of collateral, then it has the duties specified in Section 9-207.

    Under subsection (b), the same event (assignment, transfer, or subrogation) that gives rise to rights to, and imposes obligations on, a successor relieves its predecessor of any further duties under this article. For example, if the security interest is enforced after the secured obligation is assigned, the assignee—but not the assignor—has the duty to comply with this part. Similarly, the assignment does not excuse the assignor from liability for failure to comply with duties that arose before the event or impose liability on the assignee for the assignor’s failure to comply.

355.9-619. Transfer of record or legal title.

  1. In this section, “transfer statement” means a record authenticated by a secured party stating:
    1. That the debtor has defaulted in connection with an obligation secured by specified collateral;
    2. That the secured party has exercised its post-default remedies with respect to the collateral;
    3. That, by reason of the exercise, a transferee has acquired the rights of the debtor in the collateral; and
    4. The name and mailing address of the secured party, debtor, and transferee.
  2. A transfer statement entitles the transferee to the transfer of record of all rights of the debtor in the collateral specified in the statement in any official filing, recording, registration, or certificate-of-title system covering the collateral. If a transfer statement is presented with the applicable fee and request form to the official or office responsible for maintaining the system, the official or office shall:
    1. Accept the transfer statement;
    2. Promptly amend its records to reflect the transfer; and
    3. If applicable, issue a new appropriate certificate of title in the name of the transferee.
  3. A transfer of the record or legal title to collateral to a secured party under subsection (2) of this section or otherwise is not of itself a disposition of collateral under this article and does not of itself relieve the secured party of its duties under this article.
  4. A secured party who complies with KRS 186.045(6) is considered to have provided a transfer statement for purposes of this section.

History. Enact. Acts 2000, ch. 408, § 137, effective July 1, 2001; 2006, ch. 242, § 60, effective July 12, 2006.

Official Comment

  1. Source.  New.
  2. Transfer of Record or Legal Title.  Potential buyers of collateral that is covered by a certificate of title (e.g., an automobile) or is subject to a registration system (e.g., a copyright) typically require as a condition of their purchase that the certificate or registry reflect their ownership. In many cases, this condition can be met only with the consent of the record owner. If the record owner is the debtor and, as may be the case after the default, the debtor refuses to cooperate, the secured party may have great difficulty disposing of the collateral.

    Subsection (b) provides a simple mechanism for obtaining record or legal title, for use primarily when other law does not provide one. Of course, use of this mechanism will not be effective to clear title to the extent that subsection (b) is preempted by federal law. Subsection (b) contemplates a transfer of record or legal title to a third party, following a secured party’s exercise of its disposition or acceptance remedies under this part, as well as a transfer by a debtor to a secured party prior to the secured party’s exercise of those remedies. Under subsection (c), a transfer of record or legal title (under subsection (b) or under other law) to a secured party prior to the exercise of those remedies merely puts the secured party in a position to pass legal or record title to a transferee at foreclosure. A secured party who has obtained record or legal title retains its duties with respect to enforcement of its security interest, and the debtor retains its rights as well.

  3. Title-Clearing Systems Under Other Law.  Applicable non-UCC law (e.g., a certificate of title statute, federal registry rules, or the like) may provide a means by which the secured party may obtain or transfer record or legal title for the purpose of a disposition of the property under this Article. The mechanism provided by this section is in addition to any title clearing provision under law other than this Article.

355.9-620. Acceptance of collateral in full or partial satisfaction of obligation — Compulsory disposition of collateral.

  1. Except as otherwise provided in subsection (7) of this section, a secured party may accept collateral in full or partial satisfaction of the obligation it secures only if:
    1. The debtor consents to the acceptance under subsection (3) of this section;
    2. The secured party does not receive, within the time set forth in subsection (4) of this section, a notification of objection to the proposal authenticated by:
      1. A person to which the secured party was required to send a proposal under KRS 355.9-621 ; or
      2. Any other person, other than the debtor, holding an interest in the collateral subordinate to the security interest that is the subject of the proposal;
    3. If the collateral is consumer goods, the collateral is not in the possession of the debtor when the debtor consents to the acceptance; and
    4. Subsection (5) of this section does not require the secured party to dispose of the collateral or the debtor waives the requirement pursuant to KRS 355.9-624 .
  2. A purported or apparent acceptance of collateral under this section is ineffective unless:
    1. The secured party consents to the acceptance in an authenticated record or sends a proposal to the debtor; and
    2. The conditions of subsection (1) of this section are met.
  3. For purposes of this section:
    1. A debtor consents to an acceptance of collateral in partial satisfaction of the obligation it secures only if the debtor agrees to the terms of the acceptance in a record authenticated after default; and
    2. A debtor consents to an acceptance of collateral in full satisfaction of the obligation it secures only if the debtor agrees to the terms of the acceptance in a record authenticated after default or the secured party:
      1. Sends to the debtor after default a proposal that is unconditional or subject only to a condition that collateral not in the possession of the secured party be preserved or maintained;
      2. In the proposal, proposes to accept collateral in full satisfaction of the obligation it secures; and
      3. Does not receive a notification of objection authenticated by the debtor within twenty (20) days after the proposal is sent.
  4. To be effective under subsection (1)(b) of this section, a notification of objection must be received by the secured party:
    1. In the case of a person to which the proposal was sent pursuant to KRS 355.9-621 , within twenty (20) days after notification was sent to that person; and
    2. In other cases:
      1. Within twenty (20) days after the last notification was sent pursuant to KRS 355.9-621 ; or
      2. If a notification was not sent, before the debtor consents to the acceptance under subsection (3) of this section.
  5. A secured party that has taken possession of collateral shall dispose of the collateral pursuant to KRS 355.9-610 within the time specified in subsection (6) of this section if:
    1. Sixty percent (60%) of the cash price has been paid in the case of a purchase-money security interest in consumer goods; or
    2. Sixty percent (60%) of the principal amount of the obligation secured has been paid in the case of a non-purchase-money security interest in consumer goods.
  6. To comply with subsection (5) of this section, the secured party shall dispose of the collateral:
    1. Within ninety (90) days after taking possession; or
    2. Within any longer period to which the debtor and all secondary obligors have agreed in an agreement to that effect entered into and authenticated after default.
  7. In a consumer transaction, a secured party may not accept collateral in partial satisfaction of the obligation it secures.

History. Enact. Acts 2000, ch. 408, § 138, effective July 1, 2001.

Official Comment

  1. Source.  Former Ssection 9-505.
  2. Overview.  This section and the two sections following deal with strict foreclosure, a procedure by which the secured party acquires the debtor’s interest in the collateral without the need for a sale or other disposition under Section 9-610. Although these provisions derive from former Section 9-505, they have been entirely reorganized and substantially rewritten. The more straightforward approach taken in this article eliminates the fiction that the secured party always will present a “proposal” for the retention of collateral and the debtor will have a fixed period to respond. By eliminating the need (but preserving the possibility) for proceeding in that fashion, this section eliminates much of the awkwardness of former Section 9-505. It reflects the belief that strict foreclosures should be encouraged and often will produce better results than a disposition for all concerned.

    Subsection (a) sets forth the conditions necessary to an effective acceptance (formerly, retention) of collateral in full or partial satisfaction of the secured obligation. Section 9-621 requires in addition that a secured party who wishes to proceed under this section notify certain other persons who have or claim to have an interest in the collateral. Unlike the failure to meet the conditions in subsection (a), under Section 9-622(b) the failure to comply with the notification requirement of Section 9-621 does not render the acceptance of collateral ineffective. Rather, the acceptance can take effect notwithstanding the secured party’s noncompliance. A person to whom the required notice was not sent has the right to recover damages under Section 9-625(b). Section 9-622(a) sets forth the effect of an acceptance of collateral.

  3. Conditions to Effective Acceptance.  Subsection (a) contains the conditions necessary to the effectiveness of an acceptance of collateral. Subsection (a)(1) requires the debtor’s consent. Under subsections (c)(1) and (c)(2), the debtor may consent by agreeing to the acceptance in writing after default. Subsection (c)(2) contains an alternative method by which to satisfy the debtor’s-consent condition in subsection (a)(1). It follows the proposal-and-objection model found in former Section 9-505: The debtor consents if the secured party sends a proposal to the debtor and does not receive an objection within 20 days. Under subsection (c)(1), however, that silence is not deemed to be consent with respect to acceptances in partial satisfaction. Thus, a secured party who wishes to conduct a “partial strict foreclosure” must obtain the debtor’s agreement in a record authenticated after default. In all other respects, the conditions necessary to an effective partial strict foreclosure are the same as those governing acceptance of collateral in full satisfaction. (But see subsection (g), prohibiting partial strict foreclosure of a security interest in consumer transactions.)

    The time when a debtor consents to a strict foreclosure is significant in several circumstances under this section and the following one. See Sections 9-620(a)(1), (d)(2), 9-621(a)(1), (a)(2), (a)(3). For purposes of determining the time of consent, a debtor’s conditional consent constitutes consent.

    Subsection (a)(2) contains the second condition to the effectiveness of an acceptance under this section—the absence of a timely objection from a person holding a junior interest in the collateral or from a secondary obligor. Any junior party—secured party or lienholder—is entitled to lodge an objection to a proposal, even if that person was not entitled to notification under Section 9-621. Subsection (d), discussed below, indicates when an objection is timely.

    Subsections (a)(3) and (a)(4) contain special rules for transactions in which consumers are involved. See Comment 12.

  4. Proposals.  Section 9-102 defines the term “proposal.” It is necessary to send a “proposal” to the debtor only if the debtor does not agree to an acceptance in an authenticated record as described in subsection (c)(1) or (c)(2). Section 9-621(a) determines whether it is necessary to send a proposal to third parties. A proposal need not take any particular form as long as it sets forth the terms under which the secured party is willing to accept collateral in satisfaction. A proposal to accept collateral should specify the amount (or a means of calculating the amount, such as by including a per diem accrual figure) of the secured obligations to be satisfied, state the conditions (if any) under which the proposal may be revoked, and describe any other applicable conditions. Note, however, that a conditional proposal generally requires the debtor’s agreement in order to take effect. See subsection (c).
  5. Secured Party’s Agreement; No “Constructive” Strict Foreclosure.  The conditions of subsection (a) relate to actual or implied consent by the debtor and any secondary obligor or holder of a junior security interest or lien. To ensure that the debtor cannot unilaterally cause an acceptance of collateral, subsection (b) provides that compliance with these conditions is necessary but not sufficient to cause an acceptance of collateral. Rather, under subsection (b), acceptance does not occur unless, in addition, the secured party consents to the acceptance in an authenticated record or sends to the debtor a proposal. For this reason, a mere delay in collection or disposition of collateral does not constitute a “constructive” strict foreclosure. Instead, delay is a factor relating to whether the secured party acted in a commercially reasonable manner for purposes of Section 9-607 or 9-610. A debtor’s voluntary surrender of collateral to a secured party and the secured party’s acceptance of possession of the collateral does not, of itself, necessarily raise an implication that the secured party intends or is proposing to accept the collateral in satisfaction of the secured obligation under this section.
  6. When Acceptance Occurs.  This section does not impose any formalities or identify any steps that a secured party must take in order to accept collateral once the conditions of subsections (a) and (b) have been met. Absent facts or circumstances indicating a contrary intention, the fact that the conditions have been met provides a sufficient indication that the secured party has accepted the collateral on the terms to which the secured party has consented or proposed and the debtor has consented or failed to object. Following a proposal, acceptance of the collateral normally is automatic upon the secured party’s becoming bound and the time for objection passing. As a matter of good business practice, an enforcing secured party may wish to memorialize its acceptance following a proposal, such as by notifying the debtor that the strict foreclosure is effective or by placing a written record to that effect in its files. The secured party’s agreement to accept collateral is self-executing and cannot be breached. The secured party is bound by its agreement to accept collateral and by any proposal to which the debtor consents.
  7. No Possession Requirement.  This section eliminates the requirement in former Section 9-505 that the secured party be “in possession” of collateral. It clarifies that intangible collateral, which cannot be possessed, may be subject to a strict foreclosure under this section. However, under subsection (a)(3), if the collateral is consumer goods, acceptance does not occur unless the debtor is not in possession.
  8. When Objection Timely.  Subsection (d) explains when an objection is timely and thus prevents an acceptance of collateral from taking effect. An objection by a person to which notification was sent under Section 9-621 is effective if it is received by the secured party within 20 days from the date the notification was sent to that person. Other objecting parties (i.e., third parties who are not entitled to notification) may object at any time within 20 days after the last notification is sent under Section 9-621. If no such notification is sent, third parties must object before the debtor agrees to the acceptance in writing or is deemed to have consented by silence. The former may occur any time after default, and the latter requires a 20-day waiting period. See subsection (c).
  9. Applicability of Other Law.  This section does not purport to regulate all aspects of the transaction by which a secured party may become the owner of collateral previously owned by the debtor. For example, a secured party’s acceptance of a motor vehicle in satisfaction of secured obligations may require compliance with the applicable motor vehicle certificate of title law. State legislatures should conform those laws so that they mesh well with this section and Section 9-610, and courts should construe those laws and this section harmoniously. A secured party’s acceptance of collateral in the possession of the debtor also may implicate statutes dealing with a seller’s retention of possession of goods sold.
  10. Accounts, Chattel Paper, Payment Intangibles, and Promissory Notes.  If the collateral is accounts, chattel paper, payment intangibles, or promissory notes, then a secured party’s acceptance of the collateral in satisfaction of secured obligations would constitute a sale to the secured party. That sale normally would give rise to a new security interest (the ownership interest) under Sections 1-201(37) and 9-109. In the case of accounts and chattel paper, the new security interest would remain perfected by a filing that was effective to perfect the secured party’s original security interest. In the case of payment intangibles or promissory notes, the security interest would be perfected when it attaches. See Section 9-309. However, the procedures for acceptance of collateral under this section satisfy all necessary formalities and a new security agreement authenticated by the debtor would not be necessary.
  11. Role of Good Faith.  Section 1-203 imposes an obligation of good faith on a secured party’s enforcement under this article. This obligation may not be disclaimed by agreement. See Section 1-102. Thus, a proposal and acceptance made under this section in bad faith would not be effective. For example, a secured party’s proposal to accept marketable securities worth $1,000 in full satisfaction of indebtedness in the amount of $100, made in the hopes that the debtor might inadvertently fail to object, would be made in bad faith. On the other hand, in the normal case proposals and acceptances should be not second guessed on the basis of the “value” of the collateral involved. Disputes about valuation or even a clear excess of collateral value over the amount of obligations satisfied do not necessarily demonstrate the absence of good faith.
  12. Special Rules in Consumer Cases.  Subsection (e) imposes an obligation on the secured party to dispose of consumer goods under certain circumstances. Subsection (f) explains when a disposition that is required under subsection (e) is timely. An effective acceptance of collateral cannot occur if subsection (e) requires a disposition unless the debtor waives this requirement pursuant to Section 9-624(b). Moreover, a secured party who takes possession of collateral and unreasonably delays disposition violates subsection (e), if applicable, and may also violate Section 9-610 or other provisions of this part. Subsection (e) eliminates as superfluous the express statutory reference to “conversion” found in former Section 9-505. Remedies available under other law, including conversion, remain available under this article in appropriate cases. See Sections 1-103, 1-106.

    Subsection (g) prohibits the secured party in consumer transactions from accepting collateral in partial satisfaction of the obligation it secures. If a secured party attempts an acceptance in partial satisfaction in a consumer transaction, the attempted acceptance is void.

NOTES TO DECISIONS

1.Failure to Sell.

Failure of the mortgagee to sell property taken upon default of mortgagor under a chattel mortgage agreement subjected mortgage to conversion. (decided under prior law) Commercial Credit Co. v. Cooper, 246 Ky. 513 , 55 S.W.2d 381, 1932 Ky. LEXIS 799 ( Ky. 1932 ).

2.Retention of Collateral.

A creditor who takes possession of collateral upon the default of the debtor must either sell the property in a “commercially reasonable” manner with notice provided to the debtor of the sale, or he or she may elect to retain the collateral in satisfaction of the debt. (decided under prior law) Herring Mining Co. v. Roberts Bros. Coal Co., 747 S.W.2d 616, 1988 Ky. App. LEXIS 15 (Ky. Ct. App. 1988).

Opinions of Attorney General.

Where a transferor transferred two tractors to the transferees who took title subject to the original obligations of the transferor under a security agreement, the county clerk was authorized to transfer the registration from the transferor to the original secured party upon repossession of the tractors, though disposition of the collateral by the secured party was of no concern to the county clerk. OAG 76-66 .

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Proposed Amendments to the Kentucky Uniform Commercial Code, Vol. 50, No. 1, Winter 1985-86 Ky. Bench & B. 17.

Kentucky Law Journal.

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Kentucky Law Survey, Weinberg, Graham and Stipanowich, Modernizing Kentucky’s Uniform Commercial Code, 73 Ky. L.J. 515 (1984-85).

Weinberg and Woodward, Easing Transfer and Security Interest Transactions in Intellectual Property: An Agenda for Reform, 79 Ky. L.J. 61 (1992).

Northern Kentucky Law Review.

McClure, The Loch Ness Monster, Big Foot, Repossession Titles and Other Myths: Defenses and Counterclaims in a Repossession as an Alternative to Bankruptcy, 27 N. Ky. L. Rev. 360 (2000).

355.9-621. Notification of proposal to accept collateral.

  1. A secured party that desires to accept collateral in full or partial satisfaction of the obligation it secures shall send its proposal to:
    1. Any person from which the secured party has received, before the debtor consented to the acceptance, an authenticated notification of a claim of an interest in the collateral;
    2. Any other secured party or lienholder that, ten (10) days before the debtor consented to the acceptance, held a security interest in or other lien on the collateral perfected by the filing of a financing statement that:
      1. Identified the collateral;
      2. Was indexed under the debtor’s name as of that date; and
      3. Was filed in the office or offices in which to file a financing statement against the debtor covering the collateral as of that date; and
    3. Any other secured party that, ten (10) days before the debtor consented to the acceptance, held a security interest in the collateral perfected by compliance with a statute, regulation, or treaty described in KRS 355.9-311 (1).
  2. A secured party that desires to accept collateral in partial satisfaction of the obligation it secures shall send its proposal to any secondary obligor in addition to the persons described in subsection (1) of this section.

History. Enact. Acts 2000, ch. 408, § 139, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-505.
  2. Notification Requirement.  Subsection (a) specifies three classes of competing claimants to whom the secured party must send notification of its proposal: (i) Those who notify the secured party that they claim an interest in the collateral; (ii) holders of certain security interests and liens who have filed against the debtor; and (iii) holders of certain security interests who have perfected by compliance with a statute (including a certificate of title statute), regulation, or treaty described in Section 9-311(a). With regard to (ii), see Section 9-611, Comment 4. Subsection (b) also requires notification to any secondary obligor if the proposal is for acceptance in partial satisfaction.

    Unlike Section 9-611, this section contains no “safe harbor,” which excuses an enforcing secured party from notifying certain secured parties and other lienholders. This is because, unlike Section 9-610, which requires that a disposition of collateral be commercially reasonable, Section 9-620 permits the debtor and secured party to set the amount of credit the debtor will receive for the collateral subject only to the requirement of good faith. An effective acceptance discharges subordinate security interests and other subordinate liens. See Section 9-622. If collateral is subject to several liens securing debts much larger than the value of the collateral, the debtor may be disinclined to refrain from consenting to an acceptance by the holder of the senior security interest, even though, had the debtor objected and the senior disposed of the collateral under Section 9-610, the collateral may have yielded more than enough to satisfy the senior security interest (but not enough to satisfy all the liens). Accordingly, this section imposes upon the enforcing secured party the risk of the filing office’s errors and delay. The holder of a security interest who is entitled to notification under this section but does not receive it has the right to recover under Section 9-625(b) any loss resulting from the enforcing secured party’s noncompliance with this section.

NOTES TO DECISIONS

1.Notice.

The purpose for the notice provision in former KRS 355.9-505 (2) was to allow a debtor to protect any interest in the collateral in excess of the amount owed the creditor, to let the debtor know when his or her rights of redemption will expire, and to protect a creditor from claims that he or she should have sold the collateral. (decided under prior law) Herring Mining Co. v. Roberts Bros. Coal Co., 747 S.W.2d 616, 1988 Ky. App. LEXIS 15 (Ky. Ct. App. 1988).

2.— Damages.

In action against the creditor for alleged wrongful possession of collateral, the debtor’s complaint was dismissed because he could not, as a matter of law, demonstrate that he suffered any damages as a result of the creditor’s failure to give him written notice of its intent to proceed under former KRS 355.9-505 , where the amount owed was greater than the value of the collateral. (decided under prior law) Herring Mining Co. v. Roberts Bros. Coal Co., 747 S.W.2d 616, 1988 Ky. App. LEXIS 15 (Ky. Ct. App. 1988).

355.9-622. Effect of acceptance of collateral.

  1. A secured party’s acceptance of collateral in full or partial satisfaction of the obligation it secures:
    1. Discharges the obligation to the extent consented to by the debtor;
    2. Transfers to the secured party all of a debtor’s rights in the collateral;
    3. Discharges the security interest or agricultural lien that is the subject of the debtor’s consent and any subordinate security interest or other subordinate lien; and
    4. Terminates any other subordinate interest.
  2. A subordinate interest is discharged or terminated under subsection (1) of this section, even if the secured party fails to comply with this article.

History. Enact. Acts 2000, ch. 408, § 140, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Effect of Acceptance.  Subsection (a) specifies the effect of an acceptance of collateral in full or partial satisfaction of the secured obligation. The acceptance to which it refers is an effective acceptance. If a purported acceptance is ineffective under Section 9-620, e.g., because the secured party receives a timely objection from a person entitled to notification, then neither this subsection nor subsection (b) applies. Paragraph (1) expresses the fundamental consequence of accepting collateral in full or partial satisfaction of the secured obligation—the obligation is discharged to the extent consented to by the debtor. Unless otherwise agreed, the obligor remains liable for any deficiency. Paragraphs (2) through (4) indicate the effects of an acceptance on various property rights and interests. Paragraph (2) follows Section 9-617(a) in providing that the secured party acquires “all of a debtor’s rights in the collateral.” Under paragraph (3), the effect of strict foreclosure on holders of junior security interests and other liens is the same regardless of whether the collateral is accepted in full or partial satisfaction of the secured obligation: All junior encumbrances are discharged. Paragraph (4) provides for the termination of other subordinate interests.

    Subsection (b) makes clear that subordinate interests are discharged under subsection (a) regardless of whether the secured party complies with this article. Thus, subordinate interests are discharged regardless of whether a proposal was required to be sent or, if required, was sent. However, a secured party’s failure to send a proposal or otherwise to comply with this article may subject the secured party to liability under Section 9-625.

355.9-623. Right to redeem collateral.

  1. A debtor, any secondary obligor, or any other secured party or lienholder may redeem collateral.
  2. To redeem collateral, a person shall tender:
    1. Fulfillment of all obligations secured by the collateral; and
    2. The reasonable expenses and attorney’s fees described in KRS 355.9-615 (1)(a).
  3. A redemption may occur at any time before a secured party:
    1. Has collected collateral under KRS 355.9-607 ;
    2. Has disposed of collateral or entered into a contract for its disposition under KRS 355.9-610 ; or
    3. Has accepted collateral in full or partial satisfaction of the obligation it secures under KRS 355.9-622 .

History. Enact. Acts 2000, ch. 408, § 141, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-506.
  2. Redemption Right.  Under this section, as under former Section 9-506, the debtor or another secured party may redeem collateral as long as the secured party has not collected (Section 9-607), disposed of or contracted for the disposition of (Section 9-610), or accepted (Section 9-620) the collateral. Although this section generally follows former Section 9-506, it extends the right of redemption to holders of nonconsensual liens. To redeem the collateral a person must tender fulfillment of all obligations secured, plus certain expenses. If the entire balance of a secured obligation has been accelerated, it would be necessary to tender the entire balance. A tender of fulfillment obviously means more than a new promise to perform an existing promise. It requires payment in full of all monetary obligations then due and performance in full of all other obligations then matured. If unmatured secured obligations remain, the security interest continues to secure them (i.e., as if there had been no default).
  3. Redemption of Remaining Collateral Following Partial Enforcement.  Under Section 9-610 a secured party may make successive dispositions of portions of its collateral. These dispositions would not affect the debtor’s, another secured party’s, or a lienholder’s right to redeem the remaining collateral.
  4. Effect of “Repledging.”  Section 9-207 generally permits a secured party having possession or control of collateral to create a security interest in the collateral. As explained in the comments to that section, the debtor’s right (as opposed to its practical ability) to redeem collateral is not affected by, and does not affect, the priority of a security interest created by the debtor’s secured party.

NOTES TO DECISIONS

1.Right of Redemption.

A purchaser of debtor’s interest in a drilling rig was entitled to reasonable notice of proposed sale of rig by a secured party, and had a right to redeem. (decided under prior law) Summit Petroleum Corp. v. Ingersoll-Rand Financial Corp., 909 F.2d 862, 1990 U.S. App. LEXIS 11231 (6th Cir. Ky. 1990 ).

2.— When.

Where the creditor had not disposed of the collateral, nor entered into a contract for its disposition, nor effectively accepted the collateral in discharge of the obligation and there was no judicial sale pursuant to execution, the debtor’s right of redemption under this section was open and unextinguished. (decided under prior law) Credit Alliance Corp. v. Adams Constr. Corp., 570 S.W.2d 283, 1978 Ky. LEXIS 389 ( Ky. 1978 ).

Research References and Practice Aids

Kentucky Bench & Bar.

Mapother, Attorneys’ Fees Recoverable in Kentucky Litigation, Vol. 44, No. 4, October 1980, Ky. Bench & Bar 28.

Kentucky Law Journal.

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Hakes, A Quest for Justice in the Conversion of Security Interests, 82 Ky. L.J. 837 (1993-94).

Northern Kentucky Law Review.

McClure, The Loch Ness Monster, Big Foot, Repossession Titles and Other Myths: Defenses and Counterclaims in a Repossession as an Alternative to Bankruptcy, 27 N. Ky. L. Rev. 360 (2000).

355.9-624. Waiver.

  1. A debtor or secondary obligor may waive the right to notification of disposition of collateral under KRS 355.9-611 only by an agreement to that effect entered into and authenticated after default.
  2. A debtor may waive the right to require disposition of collateral under KRS 355.9-620 (5) only by an agreement to that effect entered into and authenticated after default.
  3. Except in a consumer-goods transaction, a debtor or secondary obligor may waive the right to redeem collateral under KRS 355.9-623 only by an agreement to that effect entered into and authenticated after default.

History. Enact. Acts 2000, ch. 408, § 142, effective July 1, 2001.

Official Comment

  1. Source.  Former Sections 9-504(3), 9-505, 9-506.
  2. Waiver.  This section is a limited exception to Section 9-602, which generally prohibits waiver by debtors and obligors. It makes no provision for waiver of the rule prohibiting a secured party from buying at its own private disposition. Transactions of this kind are equivalent to “strict foreclosures” and are governed by Sections 9-620, 9-621, and 9-622.

Subpart 2. Noncompliance With Article

355.9-625. Remedies for secured party’s failure to comply with article.

  1. If it is established that a secured party is not proceeding in accordance with this article, a court may order or restrain collection, enforcement, or disposition of collateral on appropriate terms and conditions.
  2. Subject to subsections (3), (4), and (6) of this section, a person is liable for damages in the amount of any loss caused by a failure to comply with this article. Loss caused by a failure to comply may include loss resulting from the debtor’s inability to obtain, or increased costs of, alternative financing.
  3. Except as otherwise provided in KRS 355.9-628 :
    1. A person that, at the time of the failure, was a debtor, was an obligor, or held a security interest in or other lien on the collateral may recover damages under subsection (2) of this section for its loss; and
    2. If the collateral is consumer goods, a person that was a debtor or a secondary obligor at the time a secured party failed to comply with this part of this article may recover for that failure in any event an amount not less than the credit service charge plus ten percent (10%) of the principal amount of the obligation or the time-price differential plus ten percent (10%) of the cash price.
  4. A debtor whose deficiency is eliminated under KRS 355.9-626 may recover damages for the loss of any surplus. However, a debtor or secondary obligor whose deficiency is eliminated or reduced under KRS 355.9-626 may not otherwise recover under subsection (2) of this section for noncompliance with the provisions of this part of this article relating to collection, enforcement, disposition, or acceptance.
  5. In addition to any damages recoverable under subsection (2) of this section, the debtor, consumer obligor, or person named as a debtor in a filed record, as applicable, may recover five hundred dollars ($500) in each case from a person that:
    1. Fails to comply with KRS 355.9-208 ;
    2. Fails to comply with KRS 355.9-209 ;
    3. Files a record that the person is not entitled to file under KRS 355.9-509 (1);
    4. Fails to cause the secured party of record to file or send a termination statement as required by KRS 355.9-513 (1) or (3);
    5. Fails to comply with KRS 355.9-616 (2)(a) and whose failure is part of a pattern, or consistent with a practice, of noncompliance; or
    6. Fails to comply with KRS 355.9-616 (2)(b).
  6. A debtor or consumer obligor may recover damages under subsection (2) of this section and, in addition, five hundred dollars ($500) in each case from a person that, without reasonable cause, fails to comply with a request under KRS 355.9-210 . A recipient of a request under KRS 355.9-210 which never claimed an interest in the collateral or obligations that are the subject of a request under that section has a reasonable excuse for failure to comply with the request within the meaning of this subsection.
  7. If a secured party fails to comply with a request regarding a list of collateral or a statement of account under KRS 355.9-210 , the secured party may claim a security interest only as shown in the list or statement included in the request as against a person that is reasonably misled by the failure.

History. Enact. Acts 2000, ch. 408, § 143, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-507.
  2. Remedies for Noncompliance; Scope.  Subsections (a) and (b) provide the basic remedies afforded to those aggrieved by a secured party’s failure to comply with this article. Like all provisions that create liability, they are subject to Section 9-628, which should be read in conjunction with Section 9-605. The principal limitations under this part on a secured party’s right to enforce its security interest against collateral are the requirements that it proceed in good faith (Section 1-203), in a commercially reasonable manner (Sections 9-607 and 9-610), and, in most cases, with reasonable notification (Sections 9-611 through 9-614). Following former Section 9-507, under subsection (a) an aggrieved person may seek injunctive relief, and under subsection (b) the person may recover damages for losses caused by noncompliance. Unlike former Section 9-507, however, subsections (a) and (b) are not limited to noncompliance with provisions of this Part of Article 9. Rather, they apply to noncompliance with any provision of this Article. The change makes this section applicable to noncompliance with Sections 9-207 (duties of secured party in possession of collateral), 9-208 (duties of secured party having control over deposit account), 9-209 (duties of secured party if account debtor has been notified of an assignment), 9-210 (duty to comply with request for accounting, etc.), 9-509(a) (duty to refrain from filing unauthorized financing statement), and 9-513(a) (duty to provide termination statement). Subsection (a) also modifies the first sentence of former Section 9-507(1) by adding the references to “collection” and “enforcement.” Subsection (c)(2), which gives a minimum damage recovery in consumer goods transactions, applies only to noncompliance with the provisions of this Part.
  3. Damages for Noncompliance with This Article.  Subsection (b) sets forth the basic remedy for failure to comply with the requirements of this Article: A damage recovery in the amount of loss caused by the noncompliance. Subsection (c) identifies who may recover under subsection (b). It affords a remedy to any aggrieved person who is a debtor or obligor. However, a principal obligor who is not a debtor may recover damages only for noncompliance with Section 9-616, inasmuch as none of the other rights and duties in this article run in favor of such a principal obligor. Such a principal obligor could not suffer any loss or damage on account of noncompliance with rights or duties of which it is not a beneficiary. Subsection (c) also affords a remedy to an aggrieved person who holds a competing security interest or other lien, regardless of whether the aggrieved person is entitled to notification under Part 6. The remedy is available even to holders of senior security interests and other liens. The exercise of this remedy is subject to the normal rules of pleading and proof. A person who has delegated the duties of a secured party but who remains obligated to perform them is liable under this subsection. The last sentence of subsection (d) eliminates the possibility of double recovery or other over-compensation arising out of a reduction or elimination of a deficiency under Section 9-626, based on noncompliance with the provisions of this part relating to collection, enforcement, disposition, or acceptance. Assuming no double recovery, a debtor whose deficiency is eliminated under Section 9-626 may pursue a claim for a surplus. Because Section 9-626 does not apply to consumer transactions, the statute is silent as to whether a double recovery or other over-compensation is possible in a consumer transaction.

    Damages for violation of the requirements of this article, including Section 9-609, are those reasonably calculated to put an eligible claimant in the position that it would have occupied had no violation occurred. See Section 1-106. Subsection (b) supports the recovery of actual damages for committing a breach of the peace in violation of Section 9-609, and principles of tort law supplement this subsection. See Section 1-103. However, to the extent that damages in tort compensate the debtor for the same loss dealt with by this article, the debtor should be entitled to only one recovery.

  4. Minimum Damages in Consumer-Goods Transactions.  Subsection (c)(2) provides a minimum, statutory, damage recovery for a debtor and secondary obligor in a consumer-goods transaction. It is patterned on former Section 9-507(1) and is designed to ensure that every noncompliance with the requirements of Part 6 in a consumer goods transaction results in liability, regardless of any injury that may have resulted. Subsection (c)(2) leaves the treatment of statutory damages as it was under former Article 9. A secured party is not liable for statutory damages under this subsection more than once with respect to any one secured obligation (see Section 9-628(e)), nor is a secured party liable under this subsection for failure to comply with Section 9-616 (see Section 9-628(d)).

    Following former Section 9-507(1), this article does not include a definition or explanation of the terms “credit service charge,” “principal amount,” “time-price differential,” or “cash price,” as used in subsection (c)(2). It leaves their construction and application to the court, taking into account the subsection’s purpose of providing a minimum recovery in consumer-goods transactions.

  5. Supplemental Damages.  Subsections (e) and (f) provide damages that supplement the recovery, if any, under subsection (b). Subsection (e) imposes an additional $500 liability upon a person who fails to comply with the provisions specified in that subsection, and subsection (f) imposes like damages on a person who, without reasonable excuse, fails to comply with a request for an accounting or a request regarding a list of collateral or statement of account under Section 9-210. However, under subsection (f), a person has a reasonable excuse for the failure if the person never claimed an interest in the collateral or obligations that were the subject of the request.
  6. Estoppel.  Subsection (g) limits the extent to which a secured party who fails to comply with a request regarding a list of collateral or statement of account may claim a security interest.

NOTES TO DECISIONS

1.Counterclaim for “Loss.”

In a claim and delivery action filed by a bank as mortgagee to obtain repossession of a mobile diner under a mortgage note containing an acceleration clause, the buyer was entitled to maintain a counterclaim for any loss properly attributable to failure, if any, of the bank to conduct a commercially reasonable sale but mortgagee acting in good faith could not be held liable for compensatory or punitive damages for bringing the action. (decided under prior law) Ft. Knox Nat'l Bank v. Gustafson, 385 S.W.2d 196, 1964 Ky. LEXIS 148 ( Ky. 1964 ).

2.Auctions Commercially Reasonable.

Where finance company had repossessed an automobile after buyer defaulted, it was commercially reasonable to sell it at public auction at a time and place customary for such sales. (decided under prior law) Greg Coats Cars, Inc. v. Kasey, 576 S.W.2d 251, 1978 Ky. App. LEXIS 659 (Ky. Ct. App. 1978).

Where the secured party’s motion for summary judgment included supporting documents showing that a disinterested third party appraised the collateral at $12,000 retail and $10,000 wholesale, the auction was heavily advertised, and the collateral sold for $13,000, the sale was commercially reasonable as a matter of law. (decided under prior law) Bailey v. Navistar Financial Corp., 709 S.W.2d 841, 1986 Ky. App. LEXIS 1149 (Ky. Ct. App. 1986).

3.Judicial Sales Commercially Reasonable.

Where there was nothing in the record which indicated the commissioner’s sale was irregular and no plea was made that the sale was fraudulent or that the bank’s bid was disproportionately low, the judicial sale of the airplane was appropriate and the debtor had to look to the proceeds of the judicial sale for any credit on the indebtedness. (decided under prior law) Owens v. First Commonwealth Bank, 706 S.W.2d 414, 1985 Ky. App. LEXIS 707 (Ky. Ct. App. 1985).

4.Secured Party’s Burden of Proof.

The secured party, rather than the debtor, should have the burden of proving that it has acted with commercial reasonableness, for in any transaction involving the holding and subsequent sale of collateral, the secured party is in the best position to introduce evidence that it acted in accordance with reasonable commercial standards, and the secured party, rather than the debtor, knows when it sent notice to the debtor of a public or private sale, and how that sale was advertised, if at all. (decided under prior law) Bank Josephine v. Conn, 599 S.W.2d 773, 1980 Ky. App. LEXIS 324 (Ky. Ct. App. 1980).

Where a finding of commercial unreasonableness against a secured party is based on some defect other than a failure to give pre-sale notice of the sale of the collateral, a presumption exists that the collateral is worth at least the amount of debt it secures and the burden is cast upon the secured party to prove that its commercial unreasonableness did not result in diminished proceeds, or if it did, by what amount, and if the secured party fails to prove that its conduct did not diminish the proceeds, the presumption that the collateral is of sufficient value to satisfy the debt would control and the claim for deficiency would be forfeited. (decided under prior law) Holt v. Peoples Bank of Mt. Washington, 814 S.W.2d 568, 1991 Ky. LEXIS 111 ( Ky. 1991 ).

5.Disproportionate Price.

The fact that a better price could have been obtained by a sale at a different time or in a different method is not of itself sufficient to establish that the sale was not made in a commercially reasonable manner; however, a great disproportionate difference between the value of the property and what was realized by sale creates a presumption of “commercial unreasonableness.” (decided under prior law) School Supply Co. v. First Nat'l Bank, 685 S.W.2d 200, 1984 Ky. App. LEXIS 645 (Ky. Ct. App. 1984).

6.Notice.

A secured party must establish that it sent the debtor commercially reasonable notice of the public sale. (decided under prior law) Bailey v. Navistar Financial Corp., 709 S.W.2d 841, 1986 Ky. App. LEXIS 1149 (Ky. Ct. App. 1986).

Where the secured party presented testimony that the notice of the public sale was sent by ordinary mail, but no one testified from any personal knowledge that the notice was positively mailed by any particular person, the debtor countered the secured party’s proof by swearing that the “mailed” notice was never received by him, and the secured party was not a disinterested governmental unit, summary judgment in an action for deficiency judgment was improper. (decided under prior law) Bailey v. Navistar Financial Corp., 709 S.W.2d 841, 1986 Ky. App. LEXIS 1149 (Ky. Ct. App. 1986).

The secured party’s failure to give pre-sale notice to the debtor that the collateral is about to be disposed of is so fundamental that no remedy less severe than forfeiture of the deficiency amount would be adequate and in a proper case, criminal and tort liability may be imposed and a debtor is entitled to the benefits of this section. (decided under prior law) Holt v. Peoples Bank of Mt. Washington, 814 S.W.2d 568, 1991 Ky. LEXIS 111 ( Ky. 1991 ).

7.Questions of Fact.

A sale which complied with former KRS 355.9-507 (2) was commercially reasonable as a matter of law; however, if the parties dispute the facts necessary to bring the sale within the statute, then those issues present questions of fact for the jury. (decided under prior law) Bailey v. Navistar Financial Corp., 709 S.W.2d 841, 1986 Ky. App. LEXIS 1149 (Ky. Ct. App. 1986).

Research References and Practice Aids

Kentucky Bench & Bar.

Schneiter, Equine Statutory Liens, Vol. 67, No. 4, July 2003, Ky. Bench & Bar 23.

Kentucky Law Journal.

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Kentucky Law Survey, Nowka, Commercial Law, 73 Ky. L.J. 315 (1984-85).

Hakes, A Quest for Justice in the Conversion of Security Interests, 82 Ky. L.J. 837 (1993-94).

Northern Kentucky Law Review.

McClure, The Loch Ness Monster, Big Foot, Repossession Titles and Other Myths: Defenses and Counterclaims in a Repossession as an Alternative to Bankruptcy, 27 N. Ky. L. Rev. 360 (2000).

Treatises

Kentucky Instructions To Juries (Civil), 5th Ed., Conversion, § 29.03.

355.9-626. Action in which deficiency or surplus is in issue.

  1. In an action arising from a transaction, other than a consumer transaction, in which the amount of a deficiency or surplus is in issue, the following rules apply:
    1. A secured party need not prove compliance with the provisions of this part of this article relating to collection, enforcement, disposition, or acceptance unless the debtor or a secondary obligor places the secured party’s compliance in issue.
    2. If the secured party’s compliance is placed in issue, the secured party has the burden of establishing that the collection, enforcement, disposition, or acceptance was conducted in accordance with this part of this article.
    3. Except as otherwise provided in KRS 355.9-628 , if a secured party fails to prove that the collection, enforcement, disposition, or acceptance was conducted in accordance with the provisions of this part of this article relating to collection, enforcement, disposition, or acceptance, the liability of a debtor or a secondary obligor for a deficiency is limited to an amount by which the sum of the secured obligation, expenses, and attorney’s fees exceeds the greater of:
      1. The proceeds of the collection, enforcement, disposition, or acceptance; or
      2. The amount of proceeds that would have been realized had the noncomplying secured party proceeded in accordance with the provisions of this part of this article relating to collection, enforcement, disposition, or acceptance.
    4. For purposes of paragraph (c)2. of this subsection, the amount of proceeds that would have been realized is equal to the sum of the secured obligation, expenses, and attorney’s fees unless the secured party proves that the amount is less than that sum.
    5. If a deficiency or surplus is calculated under KRS 355.9-615 (6), the debtor or obligor has the burden of establishing that the amount of proceeds of the disposition is significantly below the range of prices that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought.
  2. The limitation of the rules in subsection (1) of this section to transactions other than consumer transactions is intended to leave to the court the determination of the proper rules in consumer transactions. The court may not infer from that limitation the nature of the proper rule in consumer transactions and may continue to apply established approaches.

History. Enact. Acts 2000, ch. 408, § 144, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Scope.  The basic damage remedy under Section 9-625(b) is subject to the special rules in this section for transactions other than consumer transactions. This section addresses situations in which the amount of a deficiency or surplus is in issue, i.e., situations in which the secured party has collected, enforced, disposed of, or accepted the collateral. It contains special rules applicable to a determination of the amount of a deficiency or surplus. Because this section affects a person’s liability for a deficiency, it is subject to Section 9-628, which should be read in conjunction with Section 9-605. The rules in this section apply only to noncompliance in connection with the “collection, enforcement, disposition, or acceptance” under part 6. For other types of noncompliance with part 6, the general liability rule of sSction 9-625(b)—recovery of actual damages—applies. Consider, for example, a repossession that does not comply with Section 9-609 for want of a default. The debtor’s remedy is under Section 9-625(b). In a proper case, the secured party also may be liable for conversion under non-UCC law. If the secured party thereafter disposed of the collateral, however, it would violate Section 9-610 at that time, and this section would apply.
  3. Rebuttable Presumption Rule.  Section 9-626 establishes the rebuttable presumption rule for transactions other than consumer transactions. Under paragraph (1), the secured party need not prove compliance with the relevant provisions of this part as part of its prima facie case. If, however, the debtor or a secondary obligor raises the issue (in accordance with the forum’s rules of pleading and practice), then the secured party bears the burden of proving that the collection, enforcement, disposition, or acceptance complied. In the event the secured party is unable to meet this burden, then paragraph (3) explains how to calculate the deficiency. Under this rebuttable presumption rule, the debtor or obligor is to be credited with the greater of the actual proceeds of the disposition or the proceeds that would have been realized had the secured party complied with the relevant provisions. If a deficiency remains, then the secured party is entitled to recover it. The references to “the secured obligation, expenses, and attorney’s fees” in paragraphs (3) and (4) embrace the application rules in Sections 9-608(a) and 9-615(a).

    Unless the secured party proves that compliance with the relevant provisions would have yielded a smaller amount, under paragraph (4) the amount that a complying collection, enforcement, or disposition would have yielded is deemed to be equal to the amount of the secured obligation, together with expenses and attorney’s fees. Thus, the secured party may not recover any deficiency unless it meets this burden.

  4. Consumer Transactions.  Although Section 9-626 adopts a version of the rebuttable presumption rule for transactions other than consumer transactions, with certain exceptions Part 6 does not specify the effect of a secured party’s noncompliance in consumer transactions. (The exceptions are the provisions for the recovery of damages in Section 9-625.) Subsection (b) provides that the limitation of subsection (a) (Section 9-626) to transactions other than consumer transactions is intended to leave to the court the determination of the proper rules in consumer transactions. It also instructs the court not to draw any inference from the limitation as to the proper rules for consumer transactions and leaves the court free to continue to apply established approaches to those transactions.

    Courts construing former Section 9-507 disagreed about the consequences of a secured party’s failure to comply with the requirements of former Part 5. Three general approaches emerged. Some courts have held that a noncomplying secured party may not recover a deficiency (the “absolute bar” rule). A few courts held that the debtor can offset against a claim to a deficiency all damages recoverable under former Section 9-507 resulting from the secured party’s noncompliance (the “offset” rule). A plurality of courts considering the issue held that the noncomplying secured party is barred from recovering a deficiency unless it overcomes a rebuttable presumption that compliance with former Part 5 would have yielded an amount sufficient to satisfy the secured debt. In addition to the nonuniformity resulting from court decisions, some states enacted special rules governing the availability of deficiencies.

  5. Burden of Proof When Section 9-615(f) Applies.  In a non-consumer transaction, subsection (a)(5) imposes upon a debtor or obligor the burden of proving that the proceeds of a disposition are so low that, under Section 9-615(f), the actual proceeds should not serve as the basis upon which a deficiency or surplus is calculated. Were the burden placed on the secured party, then debtors might be encouraged to challenge the price received in every disposition to the secured party, a person related to the secured party, or a secondary obligor.
  6. Delay in Applying This Section.  There is an inevitable delay between the time a secured party engages in a noncomplying collection, enforcement, disposition, or acceptance and the time of a subsequent judicial determination that the secured party did not comply with Part 6. During the interim, the secured party, believing that the secured obligation is larger than it ultimately is determined to be, may continue to enforce its security interest in collateral. If some or all of the secured indebtedness ultimately is discharged under this section, a reasonable application of this section would impose liability on the secured party for the amount of any excess, unwarranted recoveries but would not make the enforcement efforts wrongful.

355.9-627. Determination of whether conduct was commercially reasonable.

  1. The fact that a greater amount could have been obtained by a collection, enforcement, disposition, or acceptance at a different time or in a different method from that selected by the secured party is not of itself sufficient to preclude the secured party from establishing that the collection, enforcement, disposition, or acceptance was made in a commercially reasonable manner.
  2. A disposition of collateral is made in a commercially reasonable manner if the disposition is made:
    1. In the usual manner on any recognized market;
    2. At the price current in any recognized market at the time of the disposition; or
    3. Otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.
  3. A collection, enforcement, disposition, or acceptance is commercially reasonable if it has been approved:
    1. In a judicial proceeding;
    2. By a bona fide creditors’ committee;
    3. By a representative of creditors; or
    4. By an assignee for the benefit of creditors.
  4. Approval under subsection (3) of this section need not be obtained, and lack of approval does not mean that the collection, enforcement, disposition, or acceptance is not commercially reasonable.

History. Enact. Acts 2000, ch. 408, § 145, effective July 1, 2001.

Official Comment

  1. Source.  Former Section 9-507(2).
  2. Relationship of Price to Commercial Reasonableness.  Some observers have found the notion contained in subsection (a) (derived from former Section 9-507(2)) (the fact that a better price could have been obtained does not establish lack of commercial reasonableness) to be inconsistent with that found in Section 9-610(b) (derived from former Section 9-504(3)) (every aspect of the disposition, including its terms, must be commercially reasonable). There is no such inconsistency. While not itself sufficient to establish a violation of this Part, a low price suggests that a court should scrutinize carefully all aspects of a disposition to ensure that each aspect was commercially reasonable.

    The law long has grappled with the problem of dispositions of personal and real property which comply with applicable procedural requirements (e.g., advertising, notification to interested persons, etc.) but which yield a price that seems low. This Article addresses that issue in Section 9-615(f). That section applies only when the transferee is the secured party, a person related to the secured party, or a secondary obligor. It contains a special rule for calculating a deficiency or surplus in a complying disposition that yields a price that is “significantly below the range of proceeds that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought.”

  3. Determination of Commercial Reasonableness; Advance Approval.  It is important to make clear the conduct and procedures that are commercially reasonable and to provide a secured party with the means of obtaining, by court order or negotiation with a creditors’ committee or a representative of creditors, advance approval of a proposed method of enforcement as commercially reasonable. This section contains rules that assist in that determination and provides for advance approval in appropriate situations. However, none of the specific methods of disposition specified in subsection (b) is required or exclusive.
  4. “Recognized Market.”  As in Sections 9-610(c) and 9-611(d), the concept of a “recognized market” in subsections (b)(1) and (2) is quite limited; it applies only to markets in which there are standardized price quotations for property that is essentially fungible, such as stock exchanges.

NOTES TO DECISIONS

1.Commercially Reasonable.

Where collateral is sold in a recognized market, Kentucky courts find the transaction to be commercially reasonable as a matter of law, and the law provides that the fact that a greater amount could have been obtained by disposition at a different time or in a different method from that selected by the secured party is not of itself sufficient to preclude the secured party from establishing that the disposition was made in a commercially reasonable manner, under KRS 355.9-627 (1). Layne v. Bank One, 395 F.3d 271, 2005 FED App. 0010P, 2005 U.S. App. LEXIS 332 (6th Cir. Ky. 2005 ).

Trial court erred in granting summary judgment in favor of an account holder on the debtor’s claim that the sale of a vehicle, which secured an underlying note, was conducted by a bank in commercially unreasonable manner; the account holder had not made the bank a party to its action against the debtor and had not presented any evidence that the sale of the vehicle by the bank after the bank repossessed it was commercially reasonable. Harrington v. Asset Acceptance, LLC, 270 S.W.3d 405, 2008 Ky. App. LEXIS 309 (Ky. Ct. App. 2008).

Although a bank was entitled to summary judgment with respect to a debtor’s liability on a note, the bank failed to meet its obligation of affirmatively showing that it acted in a commercially reasonable manner in selling the debtor’s horses, as required by KRS 355.9-610 . Although the bank was not obligated to sell the equine collateral at the highest possible price, the bank provided the court with little to no specific information on the method, manner, time and other terms of the sales, the bank provided no specific evidence regarding the reasonable commercial practices among dealers in horses, much less whether its actions conformed to these practices, the bank failed to show that its efforts to prepare the horses for sale were commercially reasonable, and a drastic decline in value warranted further explanation from the bank. Fifth Third Bank v. Miller, 767 F. Supp. 2d 735, 2011 U.S. Dist. LEXIS 3618 (E.D. Ky. 2011 ).

355.9-628. Nonliability and limitation on liability of secured party — Liability of secondary obligor.

  1. Unless a secured party knows that a person is a debtor or obligor, knows the identity of the person, and knows how to communicate with the person:
    1. The secured party is not liable to the person, or to a secured party or lienholder that has filed a financing statement against the person, for failure to comply with this article; and
    2. The secured party’s failure to comply with this article does not affect the liability of the person for a deficiency.
  2. A secured party is not liable because of its status as secured party:
    1. To a person that is a debtor or obligor, unless the secured party knows:
      1. That the person is a debtor or obligor;
      2. The identity of the person; and
      3. How to communicate with the person; or
    2. To a secured party or lienholder that has filed a financing statement against a person, unless the secured party knows:
      1. That the person is a debtor; and
      2. The identity of the person.
  3. A secured party is not liable to any person, and a person’s liability for a deficiency is not affected, because of any act or omission arising out of the secured party’s reasonable belief that a transaction is not a consumer-goods transaction or a consumer transaction or that goods are not consumer goods, if the secured party’s belief is based on its reasonable reliance on:
    1. A debtor’s representation concerning the purpose for which collateral was to be used, acquired, or held; or
    2. An obligor’s representation concerning the purpose for which a secured obligation was incurred.
  4. A secured party is not liable to any person under KRS 355.9-625 (3)(b) for its failure to comply with KRS 355.9-616 .
  5. A secured party is not liable under KRS 355.9-625 (3)(b) more than once with respect to any one (1) secured obligation.

History. Enact. Acts 2000, ch. 408, § 146, effective July 1, 2001.

Official Comment

  1. Source.  New.
  2. Exculpatory Provisions.  Subsections (a), (b), and (c) contain exculpatory provisions that should be read in conjunction with section 9-605. Without this group of provisions, a secured party could incur liability to unknown persons and under circumstances that would not allow the secured party to protect itself. The broadened definition of the term “debtor” underscores the need for these provisions.

    If a secured party reasonably, but mistakenly, believes that a consumer transaction or consumer-goods transaction is a nonconsumer transaction or nonconsumer-goods transaction, and if the secured party’s belief is based on its reasonable reliance on a representation of the type specified in subsection (c)(1) or (c)(2), then this article should be applied as if the facts reasonably believed and the representation reasonably relied upon were true. For example, if a secured party reasonably believed that a transaction was a nonconsumer transaction and its belief was based on reasonable reliance on the debtor’s representation that the collateral secured an obligation incurred for business purposes, the secured party is not liable to any person, and the debtor’s liability for a deficiency is not affected, because of any act or omission of the secured party which arises out of the reasonable belief. Of course, if the secured party’s belief is not reasonable or, even if reasonable, is not based on reasonable reliance on the debtor’s representation, this limitation on liability is inapplicable.

  3. Inapplicability of Statutory Damages to Section 9-616.  Subsection (d) excludes noncompliance with Section 9-616 entirely from the scope of statutory damage liability under Section 9-625(c)(2).
  4. Single Liability for Statutory Minimum Damages.  Subsection (e) ensures that a secured party will incur statutory damages only once in connection with any one secured obligation.

Part 7. Transition

355.9-701. Effective date.

This article takes effect on July 1, 2001.

History. Enact. Acts 2000, ch. 408, § 147, effective July 1, 2001.

Official Comment

A uniform law as complex as Article 9 necessarily gives rise to difficult problems and uncertainties during the transition to the new law. As is customary for uniform laws, this article is based on the general assumption that all states will have enacted substantially identical versions. While always important, uniformity is essential to the success of this Article. If former Article 9 is in effect in some jurisdictions, and this Article is in effect in others, horrendous complications may arise. For example, the proper place in which to file to perfect a security interest (and thus the status of a particular security interest as perfected or unperfected) would depend on whether the matter was litigated in a state in which former Article 9 was in effect or a state in which this Article was in effect. Accordingly, this section contemplates that states will adopt a uniform effective date for this Article. Any one state’s failure to adopt the uniform effective date will greatly increase the cost and uncertainty surrounding the transition.

Other problems arise from transactions and relationships that were entered into under former Article 9 or under non-UCC law and which remain outstanding on the effective date of this Article. The difficulties arise primarily because this article expands the scope of former Article 9 to cover additional types of collateral and transactions and because it provides new methods of perfection for some types of collateral, different priority rules, and different choice of law rules governing perfection and priority. This section and the other sections in this Part address primarily this second set of problems.

355.9-702. Savings clause.

  1. Except as otherwise provided in this part of this article, the revision of Article 9 in 2000 Ky. Acts ch. 408 applies to a transaction or lien within its scope, even if the transaction or lien was entered into or created before July 1, 2001.
  2. Except as otherwise provided in subsection (3) of this section and KRS 355.9-703 to 355.9-709 :
    1. Transactions and liens that were not governed by the former Article 9 of this chapter, were validly entered into or created before July 1, 2001, and would be subject to the revision of Article 9 in 2000 Ky. Acts ch. 408 if they had been entered into or created on or after July 1, 2001, and the rights, duties, and interests flowing from those transactions and liens remain valid after July 1, 2001; and
    2. The transactions and liens may be terminated, completed, consummated, and enforced as required or permitted by the revision of Article 9 in 2000 Ky. Acts ch. 408 or by the law that otherwise would apply if 2000 Ky. Acts ch. 408 had not taken effect.
  3. The revision of Article 9 in 2000 Ky. Acts ch. 408 does not affect an action, case, or proceeding commenced before July 1, 2001.

History. Enact. Acts 2000, ch. 408, § 148, effective July 1, 2001.

Official Comment

  1. Pre-effective-date, Transactions.  Subsection (a) contains the general rule that this Article applies to transactions, security interests, and other liens within its scope (see Section 9-109), even if the transaction or lien was entered into or created before the effective date. Thus, secured transactions entered into under former Article 9 must be terminated, completed, consummated, and enforced under this Article. Subsection (b) is an exception to the general rule. It applies to valid, pre-effective date, transactions and liens that were not governed by former Article 9 but would be governed by this Article if they had been entered into or created after this Article takes effect. Under subsection (b), these valid transactions, such as the creation of agricultural liens and security interests in commercial tort claims, retain their validity under this Article and may be terminated, completed, consummated, and enforced under this Article. However, these transactions also may be terminated, completed, consummated, and enforced by the law that otherwise would apply had this Article not taken effect.
  2. Judicial Proceedings Commenced Before Effective Date.  As is usual in transition provisions, subsection (c) provides that this Article does not affect litigation pending on the effective date.

355.9-703. Security interest perfected before effective date.

  1. A security interest that is enforceable immediately before July 1, 2001, and would have priority over the rights of a person that becomes a lien creditor at that time is a perfected security interest under the revision of Article 9 in 2000 Ky. Acts ch. 408 if, on July 1, 2001, the applicable requirements for enforceability and perfection under the revision of Article 9 in 2000 Ky. Acts ch. 408 are satisfied without further action.
  2. Except as otherwise provided in KRS 355.9-705 , if, immediately before July 1, 2001, a security interest is enforceable and would have priority over the rights of a person that becomes a lien creditor at that time, but the applicable requirements for enforceability or perfection under the revision of Article 9 in 2000 Ky. Acts ch. 408 are not satisfied on July 1, 2001, the security interest:
    1. Is a perfected security interest for one (1) year after July 1, 2001;
    2. Remains enforceable thereafter only if the security interest becomes enforceable under KRS 355.9-203 before the year expires; and
    3. Remains perfected thereafter only if the applicable requirements for perfection under the revision of Article 9 in 2000 Ky. Acts ch. 408 are satisfied before the year expires.

History. Enact. Acts 2000, ch. 408, § 149, effective July 1, 2001.

Official Comment

  1. Perfected Security Interests Under Former Article 9 and This Article.  This section deals with security interests that are perfected (i.e., that are enforceable and have priority over the rights of a lien creditor) under former Article 9 or other applicable law immediately before this Article takes effect. Subsection (a) provides, not surprisingly, that if the security interest would be a perfected security interest under this Article (i.e., if the transaction satisfies this Article’s requirements for enforceability (attachment) and perfection), no further action need be taken for the security interest to be a perfected security interest.
  2. Security Interests Enforceable and Perfected Under Former Article 9 but Unenforceable or Unperfected Under This Article.  Subsection (b) deals with security interests that are enforceable and perfected under former Article 9 or other applicable law immediately before this Article takes effect, but do not satisfy the requirements for enforceability (attachment) or perfection under this Article. Except as otherwise provided in Section 9-705, these security interests are perfected security interests for one year after the effective date. If the security interest satisfies the requirements for attachment and perfection within that period, the security interest remains perfected thereafter. If the security interest satisfies only the requirements for attachment within that period, the security interest becomes unperfected at the end of the one-year period.
  3. Interpretation of Pre-Effective-Date, Security Agreements.  Section 9-102 defines “security agreement” as “an agreement that creates or provides for a security interest.” Under Section 1-201(3), an “agreement” is a “bargain of the parties in fact.” If parties to a pre-effective-date security agreement describe the collateral by using a term defined in former Article 9 in one way and defined in this Article in another way, in most cases it should be presumed that the bargain of the parties contemplated the meaning of the term under former Article 9.

Example 1: A pre-effective-date, security agreement in a consumer transaction covers “all securities accounts.” The security interest is properly perfected. The collateral description was adequate under former Article 9 (see former Section 9-115(3)) but is insufficient under this Article (see Section 9-108(e)(2)). Unless the debtor authenticates a new security agreement describing the collateral other than by “type” (or Section 9-203(b)(3) otherwise is satisfied) within the one-year period following the effective date, the security interest becomes unenforceable at the end of that period.

Other examples under former Article 9 or other applicable law that may be effective as attachment or enforceability steps but may be ineffective under this Article include an oral agreement to sell a payment intangible or possession by virtue of a notification to a bailee under former Section 9-305. Neither the oral agreement nor the notification would satisfy the revised Section 9-203 requirements for attachment.

Example 2: A pre-effective-date, possessory security interest in instruments is perfected by a bailee’s receipt of notification under former Section 9-305. The bailee has not, however, acknowledged that it holds for the secured party’s benefit under revised Section 9-313. Unless the bailee authenticates a record acknowledging that it holds for the secured party (or another appropriate perfection step is taken) within the one-year period following the effective date, the security interest becomes unperfected at the end of that period.

Example 3: A pre-effective-date, security agreement covers “all accounts” of a debtor. As defined under former Article 9, an “account” did not include a right to payment for lottery winnings. These rights to payment are “accounts” under this Article, however. The agreement of the parties presumptively created a security interest in “accounts” as defined in former Article 9. A different result might be appropriate, for example, if the security agreement explicitly contemplated future changes in the Article 9 definitions of types of collateral—e.g., “‘Accounts’ means ‘accounts’ as defined in the UCC Article 9 of (State X), as that definition may be amended from time to time.” Whether a different approach is appropriate in any given case depends on the bargain of the parties, as determined by applying ordinary principles of contract construction.

355.9-704. Security interest unperfected before effective date.

A security interest that is enforceable immediately before July 1, 2001, but which would be subordinate to the rights of a person that becomes a lien creditor at that time:

  1. Remains an enforceable security interest for one (1) year after July 1, 2001;
  2. Remains enforceable thereafter if the security interest becomes enforceable under KRS 355.9-203 on July 1, 2001, or within one (1) year thereafter; and
  3. Becomes perfected:
    1. Without further action, on July 1, 2001, if the applicable requirements for perfection under the revision of Article 9 in 2000 Ky. Acts ch. 408 are satisfied before or at that time; or
    2. When the applicable requirements for perfection are satisfied if the requirements are satisfied after that time.

History. Enact. Acts 2000, ch. 408, § 150, effective July 1, 2001.

Official Comment

This section deals with security interests that are enforceable but unperfected (i.e., subordinate to the rights of a person who becomes a lien creditor) under former Article 9 or other applicable law immediately before this Article takes effect. These security interests remain enforceable for one year after the effective date, and thereafter if the appropriate steps for attachment under this Article are taken before the one-year period expires. (This section’s treatment of enforceability is the same as that of Section 9-703.) The security interest becomes a perfected security interest on the effective date if, at that time, the security interest satisfies the requirements for perfection under this Article. If the security interest does not satisfy the requirements for perfection until sometime thereafter, it becomes a perfected security interest at that later time.

Example: A security interest has attached under former Article 9 but is unperfected because the filed financing statement covers “all of debtor’s personal property” and controlling case law in the applicable jurisdiction has determined that this identification of collateral in a financing statement is insufficient. Upon the effective date of this Article, the financing statement becomes sufficient under Section 9-504(2). On that date the security interest becomes perfected. (This assumes, of course, that the financing statement is filed in the proper filing office under this Article.)

355.9-705. Effectiveness of action taken before effective date.

  1. If action, other than the filing of a financing statement, is taken before July 1, 2001 and the action would have resulted in priority of a security interest over the rights of a person that becomes a lien creditor had the security interest become enforceable before July 1, 2001, the action is effective to perfect a security interest that attaches under the revision of Article 9 in 2000 Ky. Acts ch. 408 within one (1) year after July 1, 2001. An attached security interest becomes unperfected one (1) year after July 1, 2001, unless the security interest becomes a perfected security interest under the revision of Article 9 in 2000 Ky. Acts ch. 408 before the expiration of that period.
  2. The filing of a financing statement before July 1, 2001, is effective to perfect a security interest to the extent the filing would satisfy the applicable requirements for perfection under the revision of Article 9 in 2000 Ky. Acts ch. 408.
  3. The revision of Article 9 in 2000 Ky. Acts ch. 408 does not render ineffective an effective financing statement that, before July 1, 2001, is filed and satisfies the applicable requirements for perfection under the law of the jurisdiction governing perfection as provided in the former KRS 355.9-103 , or law determining the place of filing as provided in the former KRS 355.9-401 . However, except as otherwise provided in subsections (4) and (5) of this section and KRS 355.9-706 , the financing statement ceases to be effective at the earlier of:
    1. The time the financing statement would have ceased to be effective under the law of the jurisdiction in which it is filed; or
    2. June 30, 2006.
  4. The filing of a continuation statement on or after July 1, 2001, does not continue the effectiveness of the financing statement filed before July 1, 2001. However, upon the timely filing of a continuation statement after July 1, 2001, and in accordance with the law of the jurisdiction governing perfection as provided in Part 3 of this article, the effectiveness of a financing statement filed in the same office in that jurisdiction before July 1, 2001, continues for the period provided by the law of that jurisdiction.
  5. Subsection (3)(b) of this section applies to a financing statement that, before July 1, 2001, is filed against a transmitting utility and satisfies the applicable requirements for perfection under the law of the jurisdiction governing perfection as provided in the former KRS 355.9-103 only to the extent that Part 3 of this article provides that the law of a jurisdiction other than the jurisdiction in which the financing statement is filed governs perfection of a security interest in collateral covered by the financing statement.
  6. A financing statement that includes a financing statement filed before July 1, 2001, and a continuation statement filed on or after July 1, 2001, is effective only to the extent that it satisfies the requirements of Part 5 of this article for an initial financing statement.

History. Enact. Acts 2000, ch. 408, § 151, effective July 1, 2001.

Official Comment

  1. General.  This section addresses primarily the situation in which the perfection step is taken under former Article 9 or other applicable law before the effective date of this Article, but the security interest does not attach until after that date.
  2. Perfection Other Than by Filing.  Subsection (a) applies when the perfection step is a step other than the filing of a financing statement. If the step that would be a valid perfection step under former Article 9 or other law is taken before this Article takes effect, and if a security interest attaches within one year after this Article takes effect, then the security interest becomes a perfected security interest upon attachment. However, the security interest becomes unperfected one year after the effective date, unless the requirements for attachment and perfection under this Article are satisfied within that period.
  3. Perfection by Filing: Ineffective Filings Made Effective.  Subsection (b) deals with financing statements that were filed under former Article 9 and which would not have perfected a security interest under the former Article (because, e.g., they did not accurately describe the collateral or were filed in the wrong place), but which would perfect a security interest under this Article. Under subsection (b), such a financing statement is effective to perfect a security interest to the extent it complies with this Article. Subsection (b) applies regardless of the reason for the filing. For example, a secured party need not wait until after the effective date, to respond to the change this Article makes with respect to the jurisdiction whose law governs perfection of certain security interests. Rather, a secured party may wish to prepare for this change by filing a financing statement before the effective date, in the jurisdiction whose law governs perfection under this Article. On When this Article takes effect, the filing becomes effective to perfect a security interest (assuming the filing satisfies the perfection requirements of this Article). Note, however, that Section 9-706 determines whether a financing statement filed before the effective date, operates to continue the effectiveness of a financing statement filed in another office before the effective date.
  4. Perfection by Filing: Change in Applicable Law or Filing Office.  Subsection (c) provides that a financing statement filed in the proper jurisdiction under former Section 9-103 remains effective for all purposes, despite the fact that this Article would require filing of a financing statement in a different jurisdiction or in a different office in the same jurisdiction. This means that, during the early years of this Article’s effectiveness, it may be necessary to search not only in the filing office of the jurisdiction whose law governs perfection under this Article but also (if different) in the jurisdiction(s) and filing office(s) designated by former Article 9. To limit this burden, subsection (c) provides that a financing statement filed in the jurisdiction determined by former Section 9-103 becomes ineffective at the earlier of the time it would become ineffective under the law of that jurisdiction or June 30, 2006. The June 30, 2006, limitation addresses some nonuniform versions of former Article 9 that extended the effectiveness of a financing statement beyond five years. Note that a financing statement filed before the effective date, may remain effective beyond June 30, 2006, if subsection (d) (concerning continuation statements) or (e) (concerning transmitting utilities) or Section 9-706 (concerning initial financing statements that operate to continue pre-effective-date financing statements) so provides.

    Subsection (c) is an exception to Section 9-703(b). Under the general rule in Section 9-703(b), a security interest that is enforceable and perfected on the effective date of this Article, is a perfected security interest for one year after this Article takes effect, even if the security interest is not enforceable under this Article and the applicable requirements for perfection under this Article have not been met. However, in some cases subsection (c) may shorten the one-year period of perfection; in others, if the security interest is enforceable under Section 9-203, it may extend the period of perfection.

  5. Continuing Effectiveness of Filed Financing Statement.  A financing statement filed before the effective date of this Article, may be continued only by filing in the state and office designated by this Article. This result is accomplished in the following manner: Subsection (d) indicates that, as a general matter, a continuation statement filed on after the effective date of this Article, does not continue the effectiveness of a financing statement filed under the law designated by former Section 9-103. Instead, an initial financing statement must be filed under Section 9-706. The second sentence of subsection (d) contains an exception to the general rule. It provides that a continuation statement is effective to continue the effectiveness of a financing statement filed before this Article takes effect, if this article prescribes not only the same jurisdiction but also the same filing office.
  6. Continuation Statements.  In some cases, this Article reclassifies collateral covered by a financing statement filed under former Article 9. For example, collateral consisting of the right to payment for real property sold would be a “general intangible” under the former Article but an “account” under this Article. To continue perfection under those circumstances, a continuation statement must comply with the normal requirements for a continuation statement. See Section 9-515. In addition, the pre-effective-date, financing statement and continuation statement, taken together, must satisfy the requirements of this Article concerning the sufficiency of the debtor’s name, secured party’s name, and indication of collateral. See subsection (f).

Example 1: On July 3, 1996, D, a State X corporation, creates a security interest in certain manufacturing equipment located in State Y. On July 6, 1996, SP perfects a security interest in the equipment under former Article 9 by filing in the office of the State Y Secretary of State. See former Section 9-103(1)(b). This Article takes effect in States X and Y on July 1, 2001. Under Section 9-705(c), the financing statement remains effective until it lapses in July 2001. See former Section 9-403. Had SP continued the effectiveness of the financing statement by filing a continuation statement in State Y under former Article 9 before July 1, 2001, the financing statement would have remained effective to perfect the security interest through June 30, 2006. See subsection (c)(2). Alternatively, SP could have filed an initial financing statement in State X under subsection (b) or Section 9-706 before the State Y financing statement lapsed. Had SP done so, the security interest would have remained perfected without interruption until the State X financing statement lapsed.

Example 2: On November 8, 2000, D, a State X corporation, creates a security interest in certain manufacturing equipment located in State Y. On November 15, 2000, SP perfects a security interest in the equipment under former Article 9 by filing in the office of the State Y Secretary of State. See former Section 9-103(1)(b). This Article takes effect in States X and Y on July 1, 2001. Under Section 9-705(c), the financing statement ceases to be effective in November, 2005, when it lapses. See Section 9-515. Under this Article, the law of D’s location (State X, see section 9-307) governs perfection. See Section 9-301. Thus, the filing of a continuation statement in State Y on or after July 1, 2001, would not continue the effectiveness of the financing statement. See subsection (d). However, the effectiveness of the financing statement could be continued under Section 9-706.

Example 3: The facts are as in Example 2, except that D is a State Y corporation. Assume State Y adopted former Section 9-401(1) (second alternative). State Y law governs perfection under Part 3 of this Article. (See Sections 9-301 and 9-307.) Under the second sentence of subsection (d), the timely filing of a continuation statement in accordance with the law of State Y continues the effectiveness of the financing statement.

Example 4: The facts are as in Example 3, except that the collateral is equipment used in farming operations and, in accordance with former Section 9-401(1) (second alternative) as enacted in State Y, the financing statement was filed in State Y, in the office of the Shelby County Recorder of Deeds. Under this Article, a continuation statement must be filed in the office of the State Y Secretary of State. See Section 9-501(a)(2). Under the second sentence of subsection (d), the timely filing of a continuation statement in accordance with the law of State Y operates to continue a pre-effective-date, financing statement only if the continuation statement is filed in the same office as the financing statement. Accordingly, the continuation statement is not effective in this case, but the financing statement may be continued under Section 9-706.

Example 5: The facts are as in Example 3, except that State Y enacted former Section 9-401(1) (third alternative). As required by former Section 9-401(1), SP filed financing statements in both the office of the State Y Secretary of State and the office of the Shelby County Recorder of Deeds. Under this Article, a continuation statement must be filed in the office of the State Y Secretary of State. See Section 9-501(a)(2). The timely filing of a continuation statement in that office after this Article takes effect, would be effective to continue the effectiveness of the financing statement (and thus continue the perfection of the security interest), even if the financing statement filed with the county recorder lapses.

Example 6: A pre-effective-date, financing statement covers “all general intangibles” of a debtor. As defined under former Article 9, a “general intangible,” would include rights to payment for lottery winnings. These rights to payment are “accounts” under this Article, however. A post-effective-date, continuation statement will not continue the effectiveness of the pre-effective-date, financing statement with respect to lottery winnings unless it amends the indication of collateral covered to include lottery winnings (e.g., by adding “accounts,” “rights to payment for lottery winnings,” or the like). If the continuation statement does not amend the indication of collateral, the continuation statement will be effective to continue the effectiveness of the financing statement only with respect to “general intangibles” as defined in this Article.

Example 7: The facts are as in Example 6, except that the pre-effective-date, financing statement covers “all accounts and general intangibles.” Even though rights to payment for lottery winnings are “general intangibles” under former Article 9 and “accounts” under this Article, a post-effective-date, continuation statement would continue the effectiveness of the pre-effective-date, financing statement with respect to lottery winnings. There would be no need to amend the indication of collateral covered, inasmuch as the indication (“accounts”) satisfies the requirements of this Article.

355.9-706. When initial financing statement suffices to continue effectiveness of financing statement — Minor errors or omissions.

  1. The filing of an initial financing statement in the office specified in KRS 355.9-501 , continues the effectiveness of a financing statement filed before July 1, 2001, if:
    1. The filing of an initial financing statement in that office would be effective to perfect a security interest under the revision of Article 9 in 2000 Ky. Acts ch. 408;
    2. The pre-effective-date financing statement was filed in an office in another state or another office in this Commonwealth; and
    3. The initial financing statement satisfies subsection (3) of this section.
  2. The filing of an initial financing statement under subsection (1) of this section continues the effectiveness of the pre-effective-date financing statement:
    1. If the initial financing statement is filed before July 1, 2001, for the period provided in the former KRS 355.9-403 with respect to a financing statement; and
    2. If the initial financing statement is filed on or after July 1, 2001, for the period provided in KRS 355.9-515 with respect to an initial financing statement.
  3. To be effective for purposes of subsection (1) of this section, an initial financing statement must:
    1. Satisfy the requirements of Part 5 of this article for an initial financing statement;
    2. Identify the pre-effective-date financing statement by indicating the office in which the financing statement was filed and providing the dates of filing and file numbers, if any, of the financing statement and of the most recent continuation statement filed with respect to the financing statement; and
    3. Indicate that the pre-effective-date financing statement remains effective.
  4. When a secured party files an initial financing statement with the Secretary of State under subsection (1) of this section or under KRS 355.9-707 , the secured party may send a copy of the initial financing statement to the county clerk of the county in which the pre-effective-date financing statement was filed, and, additionally, may send to the county clerk copies of any continuation statement subsequently filed with the Secretary of State that relates to an initial financing statement filed under subsection (1) of this section or under KRS 355.9-707 . The secured party’s election not to send a copy of an initial financing statement or a continuation statement to the county clerk does not affect in any way the perfection of the secured party’s security interest. The county clerk shall append to the pre-effective-date financing statement the copy of any initial financing statement or continuation statement received from a secured party and shall retain the entire file as required by KRS 355.9-710 .
  5. KRS 355.9-506 shall apply to determine whether a financing statement filed under subsection (1) of this section satisfies the requirements of subsection (3)(a) of this section. A financing statement filed under subsection (1) of this section substantially satisfying the requirements of subsection (3)(b) and (c) of this section is effective even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.

History. Enact. Acts 2000, ch. 408, § 152, effective July 1, 2001; 2006, ch. 242, § 61, effective July 12, 2006.

Official Comment

  1. Continuation of Financing Statements Not Filed in Proper Filing Office Under This Article.  This section deals with continuing the effectiveness of financing statements that are filed in the proper state and office under former Article 9, but which would be filed in the wrong state or in the wrong office of the proper state under this Article. Section 9-705(d) provides that, under these circumstances, filing a continuation statement after the effective date of this Article in the office designated by former Article 9 would not be effective. This section provides the means by which the effectiveness of such a financing statement can be continued if this article governs perfection under the applicable choice of law rule: Filing an initial financing statement in the office specified by Section 9-501.

    Although it has the effect of continuing the effectiveness of a pre-effective-date, financing statement, an initial financing statement described in this section is not a continuation statement. Rather, it is governed by the rules applicable to initial financing statements. (However, the debtor need not authorize the filing. See Section 9-707.) Unlike a continuation statement, the initial financing statement described in this section may be filed any time during the effectiveness of the pre-effective-date, financing statement—even before this Article is enacted—and not only within the six months immediately prior to lapse. In contrast to a continuation statement, which extends the lapse date of a filed financing statement for five years, the initial financing statement has its own lapse date, which bears no relation to the lapse date of the pre-effective-date, financing statement whose effectiveness the initial financing statement continues. See subsection (b).

    As subsection (a) makes clear, the filing of an initial financing statement under this section continues the effectiveness of a pre-effective-date, financing statement. If the effectiveness of a pre-effective-date, financing statement lapses before the initial financing statement is filed, the effectiveness of the pre-effective-date, financing statement cannot be continued. Rather, unless the security interest is perfected otherwise, there will be a period during which the security interest is unperfected before becoming perfected again by the filing of the initial financing statement under this section.

    If an initial financing statement is filed under this section before the effective date of this Article, it takes effect on when this Article takes effect, (assuming that it is ineffective under former Article 9). Note, however, that former Article 9 determines whether the filing office is obligated to accept such an initial financing statement. For the reason given in the preceding paragraph, an initial financing statement filed before the effective date of this Article, does not continue the effectiveness of a pre-effective-date, financing statement unless the latter remains effective on the effective date of this Article. Thus, for example, if the effectiveness of the pre-effective-date, financing statement lapses before this Article takes effect, the initial financing statement would not continue its effectiveness.

  2. Requirements of Initial Financing Statement Filed in Lieu of Continuation Statement.  Subsection (c) sets forth the requirements for the initial financing statement under subsection (a). These requirements are needed to inform searchers that the initial financing statement operates to continue a financing statement filed elsewhere and to enable searchers to locate and discover the attributes of the other financing statement. A single initial financing statement may continue the effectiveness of more than one financing statement filed before this Article’s effective date. See Section 1-102(5)(a) (words in the singular include the plural). If a financing statement has been filed in more than one office in a given jurisdiction, as may be the case if the jurisdiction had adopted former Section 9-401(1), third alternative, then an identification of the filing in the central filing office suffices for purposes of subsection (c)(2). If under this Article the collateral is of a type different from its type under former Article 9—as would be the case, e.g., with a right to payment of lottery winnings (a “general intangible” under former Article 9 and an “account” under this Article), then subsection (c) requires that the initial financing statement indicate the type under this Article.

355.9-707. Amendment of pre-effective-date financing statement.

  1. In this section, “pre-effective-date financing statement” means a financing statement filed before July 1, 2001.
  2. On or after July 1, 2001, a person may add or delete collateral covered by, continue or terminate the effectiveness of, or otherwise amend information provided in, a pre-effective-date financing statement only in accordance with the law of the jurisdiction governing perfection as provided in Part 3 of this Article. However, the effectiveness of a pre-effective-date financing statement also may be terminated in accordance with the law of the jurisdiction in which the financing statement is filed.
  3. Except as otherwise provided in subsection (4) of this section, if the law of this Commonwealth governs perfection of a security interest, the information in a pre-effective-date financing statement may be amended on or after July 1, 2001, only if:
    1. The pre-effective-date financing statement and an amendment are filed in the office specified in KRS 355.9-501 ;
    2. An amendment is filed in the office specified in KRS 355.9-501 concurrently with, or after the filing in that office of, an initial financing statement that satisfies KRS 355.9-706 (3); or
    3. An initial financing statement that provides the information as amended and satisfies KRS 355.9-706 (3) is filed in the office specified in KRS 355.9-501.
  4. If the law of this Commonwealth governs perfection of a security interest, the effectiveness of a pre-effective-date financing statement may be continued only under KRS 355.9-705 (4) and (6) or 355.9-706 .
  5. Whether or not the law of this Commonwealth governs perfection of a security interest, the effectiveness of a pre-effective-date financing statement filed in this Commonwealth may be terminated on or after July 1, 2001, by filing a termination statement in the office in which the pre-effective-date financing statement is filed, unless an initial financing statement that satisfies KRS 355.9-706 (3) has been filed in the office specified by the law of the jurisdiction governing perfection as provided in Part 3 of this article as the office in which to file a financing statement.

History. Enact. Acts 2000, ch. 408, § 153, effective July 1, 2001.

Official Comment

  1. Scope of This Section.  This section addresses post-effective-date amendments to pre-effective-date financing statements.
  2. Applicable Law.  Determining how to amend a pre-effective-date financing statement requires one first to determine the jurisdiction whose law applies. Subsection (b) provides that, as a general matter, post-effective-date amendments to pre-effective-date financing statements are effective only if they are accomplished in accordance with the substantive (or local) law of the jurisdiction governing perfection under Part 3 of this Article. However, under certain circumstances, the effectiveness of a financing statement may be terminated in accordance with the substantive law of the jurisdiction in which the financing statement is filed. See Comment 5, below.
  3. Method of Amending.  Subsection (c) provides three methods of effectuating a post-effective-date amendment to a pre-effective-date financing statement. Under subsection (c)(1), if the financing statement is filed in the jurisdiction and office determined by this Article, then an effective amendment may be filed in the same office.
  4. Continuation.  Subsection (d) refers to the two methods by which a secured party may continue the effectiveness of a pre-effective-date financing statement under this Part. The Comments to Sections 9-705 and 9-706 explain these methods.
  5. Termination.  The effectiveness of a pre-effective-date financing statement may be terminated pursuant to subsection (c). This section also provides an alternative method for accomplishing this result: filing a termination statement in the office in which the financing statement is filed. The alternative method becomes unavailable once an initial financing statement that relates to the pre-effective-date financing statement and satisfies Section 9-706(c) is filed in the jurisdiction and office determined by this Article.

Example 1: D is a corporation organized under the law of State Y. It owns equipment located in State X. Under former Article 9, SP properly perfected a security interest in the equipment by filing a financing statement in State X. Under this Article, the law of State Y governs perfection of the security interest. See Sections 9-301, 9-307. After this Article takes effect, SP wishes to amend the financing statement to reflect a change in D’s name. Under subsection (b), the financing statement may be amended in accordance with the law of State Y, i.e., in accordance with subsection (c) as enacted in State Y.

Example 2: The facts are as in Example 1, except that SP wishes to terminate the effectiveness of the State X filing. The first sentence of subsection (b) provides that the financing statement may be terminated after the effective date of this Article in accordance with the law of State Y, i.e., in accordance with subsection (c) as enacted in State Y. However, the second sentence provides that the financing statement also may be terminated in accordance with the law of the jurisdiction in which it is filed, i.e., in accordance with subsection (e) as enacted in State X. If the pre-effective-date financing statement is filed in the jurisdiction whose law governs perfection (here, State Y), then both sentences would designate the law of State Y as applicable to the termination of the financing statement. That is, the financing statement could be terminated in accordance with subsection (c) or (e) as enacted in State Y.

Example 3: D is a corporation organized under the law of State Z. It owns equipment located in State Z. Before the effective date of this Article, SP perfected a security interest in the equipment by filing in two offices in State Z, a local filing office and the office of the Secretary of State. See former Section 9-401(1) (third alternative). State Z enacts this Article and specifies in Section 9-501 that a financing statement covering equipment is to be filed in the office of the Secretary of State. SP wishes to assign its power as secured party of record. Under subsection (b), the substantive law of State Z applies. Because the pre-effective-date financing statement is filed in the office specified in subsection (c)(1) as enacted by State Z, SP may effectuate the assignment by filing an amendment under section 9-514 with the office of the Secretary of State. SP need not amend the local filing, and the priority of the security interest perfected by the filing of the financing statement would not be affected by the failure to amend the local filing.

If a pre-effective-date financing statement is filed in an office other than the one specified by Section 9-501 of the relevant jurisdiction, then ordinarily an amendment filed in that office is ineffective. (Subsection (e) provides an exception for termination statements.) Rather, the amendment must be effectuated by a filing in the jurisdiction and office determined by this Article. That filing may consist of an initial financing statement followed by an amendment, an initial financing statement together with an amendment, or an initial financing statement that indicates the information provided in the financing statement, as amended. Subsection (c)(2) encompasses the first two options; subsection (c)(3) contemplates the last. In each instance, the initial financing statement must satisfy Section 9-706(c).

Example 4: The facts are as in Example 1, except that SP wishes to terminate a financing statement filed in State X. As explained in Example 1, the financing statement may be amended in accordance with the law of the jurisdiction governing perfection under this Article, i.e., in accordance with the substantive law of State Y. As enacted in State Y, subsection (c)(1) is inapplicable because the financing statement was not filed in the State Y filing office specified in Section 9-501. Under subsection (c)(2), the financing statement may be amended by filing in the State Y filing office an initial financing statement followed by a termination statement an initial financing statement together with a termination statement also would be legally sufficient under subsection (c)(2), but Section 9-512(a)(1) may render this method impractical. The financing statement also may be amended under subsection (c)(3), but the resulting initial financing statement is likely to be very confusing.) In each instance, the initial financing statement must satisfy Section 9-706(c). Applying the law of State Y, subsection (e) is inapplicable, because the financing statement was not filed in “this State,” i.e., State Y.

This section affords another option to SP. Subsection (b) provides that the effectiveness of a financing statement may be terminated either in accordance with the law of the jurisdiction governing perfection (here, State Y) or in accordance with the substantive law of the jurisdiction in which the financing statement is filed (here, State X). Applying the law of State X, the financing statement is filed in “this State,” i.e., State X, and subsection (e) applies. Accordingly, the effectiveness of the financing statement can be terminated by filing a termination statement in the State X office in which the financing statement is filed, unless an initial financing statement that relates to the financing statement and satisfies Section 9-706(c) as enacted in State X has been filed in the jurisdiction and office determined by this Article (here, the State Y filing office).

355.9-708. Persons entitled to file initial financing statement or continuation statement.

A person may file an initial financing statement or a continuation statement under this part of this article if:

  1. The secured party of record authorizes the filing; and
  2. The filing is necessary under this part of this article:
    1. To continue the effectiveness of a financing statement filed before July 1, 2001; or
    2. To perfect or continue the perfection of a security interest.

History. Enact. Acts 2000, ch. 408, § 154, effective July 1, 2001.

Official Comment

This section permits a secured party to file an initial financing statement or continuation statement necessary under this part to continue the effectiveness of a financing statement filed before this Article takes effect, or to perfect or otherwise continue the perfection of a security interest. Because a filing described in this section typically operates to continue the effectiveness of a financing statement whose filing the debtor already has authorized, this section does not require authorization from the debtor.

355.9-709. Priority.

  1. The revision of Article 9 in 2000 Ky. Acts ch. 408 determines the priority of conflicting claims to collateral. However, if the relative priorities of the claims were established before July 1, 2001, the former Article 9 of this chapter determines priority.
  2. For purposes of KRS 355.9-322 (1), the priority of a security interest that becomes enforceable under KRS 355.9-203 dates from July 1, 2001, if the security interest is perfected under the revision of Article 9 in 2000 Ky. Acts ch. 408 by the filing of a financing statement before July 1, 2001, which would not have been effective to perfect the security interest under the former Article 9 of this chapter. This subsection does not apply to conflicting security interests each of which is perfected by the filing of such a financing statement.

History. Enact. Acts 2000, ch. 408, § 155, effective July 1, 2001.

Official Comment

  1. Law Governing Priority.  Ordinarily, this Article determines the priority of conflicting claims to collateral. However, when the relative priorities of the claims were established before July 1, 2001, former Article 9 governs.
  2. Financing Statements Ineffective Under Former Article 9 but Effective Under This Article.  If this Article determines priority, subsection (b) may apply. It deals with the case in which a filing that occurs before the effective date of this Article, would be ineffective to perfect a security interest under former Article 9 but effective under this Article. For purposes of Section 9-322(a), the priority of a security interest that attaches on or after July 1, 2001, and is perfected in this manner dates from the time this Article takes effect.

Example 1: In 1999, SP-1 obtains a security interest in a right to payment for goods sold (“account”). SP-1 fails to file a financing statement. This Article takes effect on July 1, 2001. Thereafter, on August 1, 2001, D creates a security interest in the same account in favor of SP-2, who files a financing statement. This Article determines the relative priorities of the claims. SP-2’s security interest has priority under Section 9-322(a)(1).

Example 2: In 1999, SP-1 obtains a security interest in a right to payment for goods sold (“account”). SP-1 fails to file a financing statement. In 2000, D creates a security interest in the same account in favor of SP-2, who likewise fails to file a financing statement. This Article takes effect on July 1, 2001. Because the relative priorities of the security interests were established before the effective date of this Article, former Article 9 governs priority, and SP-1’s security interest has priority under former Section 9-312(5)(b).

Example 3: The facts are as in Example 2, except that, on August 1, 2001, SP-2 files a proper financing statement under this Article. Until August 1, 2001, the relative priorities of the security interests were established before the effective date of this Article, as in Example 2. However, by taking the affirmative step of filing a financing statement, SP-2 established anew the relative priority of the conflicting claims after the effective date. Thus, this Article determines priority. SP-2’s security interest has priority under Section 9-322(a)(1).

As Example 3 illustrates, relative priorities that are “established” before the effective date, do not necessarily remain unchanged following the effective date. Of course, unlike priority contests among unperfected security interests, some priorities are established permanently, e.g., the rights of a buyer of property who took free of a security interest under former Article 9.

One consequence of the rule in subsection (a) is that the mere taking effect of this Article does not of itself adversely affect the priority of conflicting claims to collateral.

Example 4: In 1999, SP-1 obtains a security interest in a right to payment for lottery winnings (a “general intangible” as defined in former Article 9 but an “account” as defined in this Article). SP-1’s security interest is unperfected because its filed financing statement covers only “accounts.” In 2000, D creates a security interest in the same right to payment in favor of SP-2, who files a financing statement covering “accounts and general intangibles.” Before this Article takes effect on July 1, 2001, SP-2’s perfected security interest has priority over SP-1’s unperfected security interest under former Section 9-312(5). Because the relative priorities of the security interests were established before the effective date of this Article, former Article 9 continues to govern priority after this Article takes effect. Thus, SP-2’s priority is not adversely affected by this Article’s having taken effect.

Note that were this article to govern priority, SP-2 would become subordinated to SP-1 under Section 9-322(a)(1), even though nothing changes other than this Article’s having taken effect. Under Section 9-704, SP-1’s security interest would become perfected; the financing statement covering “accounts” adequately covers the lottery winnings and complies with the other perfection requirements of this Article, e.g., it is filed in the proper office.

Example 5: In 1999, SP-1 obtains a security interest in a right to payment for lottery winnings—a “general intangible” (as defined under former Article 9). SP-1’s security interest is unperfected because its filed financing statement covers only “accounts.” In 2000, D creates a security interest in the same right to payment in favor of SP-2, who makes the same mistake and also files a financing statement covering only “accounts.” Before this Article takes effect on July 1, 2001, SP-1’s unperfected security interest has priority over SP-2’s unperfected security interest, because SP-1’s security interest was the first to attach. See former Section 9-312(5)(b). Because the relative priorities of the security interests were established before the effective date of this Article, former Article 9 continues to govern priority after this Article takes effect. Although Section 9-704 makes both security interests perfected for purposes of this Article, both are unperfected under former Article 9, which determines their relative priorities.

Example 6: In 1999, SP-1 obtains a security interest in D’s existing and after-acquired instruments and files a financing statement covering “instruments.” In 2000, D grants a security interest in its existing and after-acquired accounts in favor of SP-2, who files a financing statement covering “accounts.” On or after this Article takes effect on, one of D’s account debtors gives D a negotiable note to evidence its obligation to pay an overdue account. Under the first-to-file-or-perfect rule in Section 9-322(a), SP-1 would have priority in the instrument, which constitutes SP-2’s proceeds. SP-1’s filing in 1999 was earlier than SP-2’s in 2000. However, subsection (b) provides that, for purposes of Section 9-322(a), SP-1’s priority dates from the time this Article takes effect (July 1, 2001). Under Section 9-322(b), SP-2’s priority with respect to the proceeds (instrument) dates from its filing as to the original collateral (accounts). Accordingly, SP-2’s security interest would be senior.

Subsection (b) does not apply to conflicting security interests each of which is perfected by a pre-effective-date, filing that was not effective under former Article 9 but is effective under this Article.

Example 7: In 1999, SP-1 obtains a security interest in D’s existing and after-acquired instruments and files a financing statement covering “instruments.” In 2000, D grants a security interest in its existing and after-acquired instruments in favor of SP-2, who files a financing statement covering “instruments.” After this Article takes effect on July 1, 2001, one of D’s account debtors gives D a negotiable note to evidence its obligation to pay an overdue account. Under the first-to-file-or-perfect rule in Section 9-322(a), SP-1 would have priority in the instrument. Both filings are effective under this Article, see Section 9-705(b), and SP-1’s filing in 1999 was earlier than SP-2’s in 2000. Subsection (b) does not change this result.

355.9-710. Duties of county clerk.

  1. A county clerk who receives a statement tendered by a secured party under Part 4 of the former Article 9, prior to July 1, 2001, that has not been filed or indexed on July 1, 2001, shall file and index the statement as soon as practicable.
  2. Every county clerk shall append to the pre-effective-date financing statement the copies of any initial financing statement or continuation statement received from a secured party under KRS 355.9-706 (4).
  3. The county clerk shall maintain all records filed under Part 4 of the former Article 9 and subsection (2) of this section until the later of:
    1. One (1) year after the lapse of the initial financing statement;
    2. July 1, 2008; or
    3. Such other record-retention requirement as may be applicable under other Kentucky law or administrative regulations.
  4. The county clerk shall respond to requests for information with respect to records maintained under this article in accordance with KRS 355.9-523 (3) and (4) and may charge the fee for issuing certificates authorized in KRS 355.9-525 .
  5. When Internet access is available through the AVIS system or its successor, every county clerk shall provide a means within his or her office by which the Secretary of State’s filing system for this article can be searched and through which electronic filings under this article can be made with the Secretary of State. This subsection shall not be construed to require a secured party to file through the means provided by a county clerk. The county clerk shall neither be required to conduct a search of the Secretary of State’s filing system nor to issue a certificate as to the contents of the system.

History. Enact. Acts 2000, ch. 408, § 156, effective July 1, 2001.

Part 8. Transition Provisions for 2012 Amendments

355.9-801. Effective date of KRS 355.9-801 to 355.9-809.

Amendments to existing statutes and the creation of new statutes in this article contained in 2012 Ky. Acts ch. 132, secs. 60 to 99 shall take effect on July 1, 2013.

History. Repealed, reenact. and amend. Acts 2013, ch. 10, § 3, effective March 14, 2013.

Official Comment

These transition provisions largely track the provisions of Part 7, which govern the transition to the 1998 revision of this Article. The Comments to the sections of Part 7 generally are relevant to the corresponding sections of Part 8. The 2010 amendments are less far-reaching than the 1998 revision. Although Part 8 does not carry forward those Part 7 provisions that clearly would have no application to the transition to the amendments, as a matter of prudence Part 8 does carry forward all Part 7 provisions that are even arguably relevant to the transition.

The most significant transition problem raised by the 2010 amendments arises from changes to Section 9-503(a), concerning the name of the debtor that must be provided for a financing statement to be sufficient. Sections 9-805 and 9-806 address this problem.

Example: On November 8, 2012, Debtor, an individual whose “individual name” is “Lon Debtor” and whose principal residence is located in State A, creates a security interest in certain manufacturing equipment. On November 15, 2012, SP perfects a security interest in the equipment under Article 9 (as in effect prior to the 2010 amendments) by filing a financing statement against “Lon Debtor” in the State A filing office. On July 1, 2013, the 2010 amendments, including Alternative A to Section 9-503(a), take effect in State A. Debtor’s unexpired State A driver’s indicates that Debtor’s name is “Polonius Debtor.” Assuming that a search under “Polonius Debtor” using the filing office’s standard search logic would not disclose the filed financing statement, the financing statement would be insufficient under amended Section 9-503(a)(4) (Alt. A). However, Section 9-805(b) provides that the 2010 amendments do not render the financing statement ineffective. Rather, the financing statement remains effective even if it has become seriously misleading until it would have ceased to be effective had the amendments not taken effect. See Section 9-805(b)(1). SP can continue the effectiveness of the financing statement by filing a continuation statement with the State A filing office. To do so, however, SP must amend Debtor’s name on the financing statement to provide the name that is sufficient under Section 9-503(a)(4) (Alt. A) at the time the continuation statement is filed. See Section 9-805(c), (e).

The most significant transition problem addressed by the 1998 revision arose from the change in the choice-of-law rules governing where to file a financing statement. The 2010 amendments do not change the choice-of-law rules. Even so, the amendments will change the place to file in a few cases, because certain entities that were not previously classified as “registered organizations” would fall within that category under the amendments.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

(3/14/2013). The statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, which are effective July 1, 2013, pursuant to 2013 Ky. Acts ch. 10, secs. 2 and 3, were: KRS 355.9-102 , 355.9-105 , 355.9-203 , 355.9-207 , 355.9-208 , 355.9-301 , 355.9-307 , 355.9-310 , 355.9-311 , 355.9-312 , 355.9-313 , 355.9-314 , 355.9-316 , 355.9-317 , 355.9-326 , 355.9-338 , 355.9-406 , 355.9-408 , 355.9-502 , 355.9-503 , 355.9-507 , 355.9-510 , 355.9-513 A, 355.9-515 , 355.9-516 , 355.9-516 A, 355.9-518 , 355.9-520 , 355.9-521 , 355.9-601 , 355.9-607 , 355.9-801 , 355.9-802 , 355.9-803 , 355.9-804 , 355.9-805 , 355.9-806 , 355.9-807 , 355.9-808 , and 355.9-809 .

(7/12/2012). In 2010, the National Conference of Commissioners on Uniform State Laws and the American Law Institute proposed a Uniform Act for adoption by the states that contained revisions to Article 9 of the Uniform Commercial Code. The effective date for all proposed Article 9 revisions was to be July 1, 2013. Those revisions were enacted in 2012 Ky. Acts Chapter 132, Sections 60 to 99. Sections 60 to 90 contained the substantive Article 9 revisions, and Sections 91 to 99 (codified as KRS 355.9-801 to 355.9-809 ) contained the transitional Article 9 revisions created to handle secured transactions made prior to July 1, 2013. Section 91 of that Act (this statute) and Section 102 of that Act (a noncodified effective date provision) both stated, “Sections 91 to 99 of this Act take effect July 1, 2013.” The normal effective date for legislation enacted at the 2012 Regular Session of the General Assembly is July 12, 2012. In Opinion of the Attorney General 12-010, issued July 3, 2012, Section 91 (this statute) was determined to have contained a manifest clerical error, and should have instead read, “Sections 60 to 90 of this Act take effect July 1, 2013,” thereby making the substantive Article 9 revisions effective on the same date as the transitional Article 9 provisions in conformity with the 2010 Uniform Act proposal and 2012 Ky. Acts Chapter 132, Section 102.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-802. Application.

  1. Except as otherwise provided in this article, this article applies to a transaction or lien within its scope, even if the transaction or lien was entered into or created before July 1, 2013.
  2. KRS 355.9-801 to 355.9-809 do not affect an action, case, or proceeding commenced before July 1, 2013.

History. Enact. Acts 2012, ch. 132, § 92, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-803. Security interest perfected before effective date.

  1. A security interest that is a perfected security interest immediately before July 1, 2013, is a perfected security interest under Article 9 as amended by KRS 355.9-801 to 355.9-809 if, on or after July 1, 2013, the applicable requirements for attachment and perfection under Article 9 as amended by KRS 355.9-801 to 355.9-809 are satisfied without further action.
  2. Except as otherwise provided in KRS 355.9-805 , if, immediately before July 1, 2013, a security interest is a perfected security interest, but the applicable requirements for perfection under this article as amended by KRS 355.9-801 to 355.9-809 , are not satisfied on July 1, 2013, the security interest remains perfected thereafter only if the applicable requirements for perfection under this article, as amended by KRS 355.9-801 to 355.9-809 , are satisfied within one (1) year after July 1, 2013.

History. Enact. Acts 2012, ch. 132, § 93, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-804. Security interest unperfected before effective date.

A security interest that is an unperfected security interest immediately before July 1, 2013, becomes a perfected security interest:

  1. Without further action, on or after July 1, 2013, if the applicable requirements for perfection under this article as amended by KRS 355.9-801 to 355.9-809 are satisfied before or at the time; or
  2. When the applicable requirements for perfection are satisfied if the requirements are satisfied after July 1, 2013.

History. Enact. Acts 2012, ch. 132, § 94, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-805. Effectiveness of action taken before effective date.

  1. The filing of a financing statement before July 1, 2013, is effective to perfect a security interest to the extent the filing would satisfy the applicable requirements for perfection under this article, as amended by KRS 355.9-801 to 355.9-809 .
  2. KRS 355.9-801 to 355.9-809 do not render ineffective an effective financing statement that, before July 1, 2013, is filed and satisfies the applicable requirements for perfection under the law of the jurisdiction governing perfection as provided in this article as it existed before July 1, 2013. However, except as otherwise provided in subsections (3) and (4) of this section and KRS 355.9-806 , the financing statement ceases to be effective:
    1. If the financing statement is filed in this state, at the time the financing statement would have ceased to be effective had this section not become law; or
    2. If the financing statement is filed in another jurisdiction, at the earlier of:
      1. The time the financing statement would have ceased to be effective under the law of that jurisdiction; or
      2. June 30, 2018.
  3. The filing of a continuation statement after July 1, 2013, does not continue the effectiveness of the financing statement filed before July 1, 2013. However, upon the timely filing of a continuation statement after July 1, 2013, and in accordance with the law of the jurisdiction governing perfection as provided in this article, as amended by KRS 355.9-801 to 355.9-809 , the effectiveness of a financing statement filed in the same office in that jurisdiction before July 1, 2013, continues for the period provided by the law of that jurisdiction.
  4. Subsection (2)(b)2. of this section applies to a financing statement that, before July 1, 2013, is filed against a transmitting utility and satisfies the applicable requirements for perfection under the law of the jurisdiction governing perfection as provided in this article as it existed before July 1, 2013, only to the extent that this article as amended by KRS 355.9-801 to 355.9-809 provides that the law of a jurisdiction other than the jurisdiction in which the financing statement is filed governs perfection of a security interest in collateral covered by the financing statement.
  5. A financing statement that includes a financing statement filed before July 1, 2013, and a continuation statement filed after July 1, 2013, is effective only to the extent that it satisfies the requirements of this article, as amended by KRS 355.9-801 to 355.9-809 , for an initial financing statement. A financing statement that indicates that the debtor is a decedent’s estate indicates that the collateral is being administered by a personal representative within the meaning of KRS 355.9-503 (1)(b). A financing statement that indicates that the debtor is a trust or is a trustee acting with respect to property held in trust indicates that the collateral is held in a trust within the meaning of KRS 355.9-503 (1)(c).

History. Enact. Acts 2012, ch. 132, § 95, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-806. When initial financing statement suffices to continue effectiveness of financing statement.

  1. The filing of an initial financing statement in the office specified in KRS 355.9-501 continues the effectiveness of a financing statement filed before July 1, 2013, if:
    1. The filing of an initial financing statement in that office would be effective to perfect a security interest under this article as amended by KRS 355.9-801 to 355.9-809 ;
    2. The pre-effective-date financing statement was filed in an office in another state; and
    3. The initial financing statement satisfies subsection (3) of this section.
  2. The filing of an initial financing statement under subsection (1) of this section continues the effectiveness of the pre-effective-date financing statement:
    1. If the initial financing statement is filed before July 1, 2013, for the period provided in KRS 355.9-515 before July 12, 2012, with respect to an initial financing statement; and
    2. If the initial financing statement is filed after July 1, 2013, for the period provided in KRS 355.9-515 on July 12, 2012, with respect to an initial financing statement.
  3. To be effective for purposes of subsection (1) of this section, an initial financing statement shall:
    1. Satisfy the requirements of KRS Chapter 355 as amended by KRS 355.9-801 to 355.9-809 for an initial financing statement;
    2. Identify the pre-effective-date financing statement by indicating the office in which the financing statement was filed and providing the dates of filing and file numbers, if any, of the financing statement and of the most recent continuation statement filed with respect to the financing statement; and
    3. Indicate that the pre-effective-date financing statement remains effective.

History. Enact. Acts 2012, ch. 132, § 96, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-807. Amendment of pre-effective-date financing statement.

  1. In this section, “pre-effective-date financing statement” means a financing statement filed before July 1, 2013.
  2. After July 1, 2013, a person may add or delete collateral covered by, continue or terminate the effectiveness of, or otherwise amend the information provided in, a pre-effective-date financing statement only in accordance with the law of the jurisdiction governing perfection as provided in this article as amended by KRS 355.9-801 to 355.9-809 . However, the effectiveness of a pre-effective-date financing statement also may be terminated in accordance with the law of the jurisdiction in which the financing statement is filed.
  3. Except as otherwise provided in subsection (4) of this section, if the law of this state governs perfection of a security interest, the information in a pre-effective-date financing statement may be amended after July 1, 2013, only if:
    1. The pre-effective-date financing statement and an amendment are filed in the office specified in KRS 355.9-501 ;
    2. An amendment is filed in the office specified in KRS 355.9-501 concurrently with, or after the filing in that office of, an initial financing statement that satisfies KRS 355.9-806 (3); or
    3. An initial financing statement that provides the information as amended and satisfies KRS 355.9-806 (3) is filed in the office specified in KRS 355.9-501.
  4. If the law of this state governs perfection of a security interest, the effectiveness of a pre-effective-date financing statement may be continued only under KRS 355.9-805 (3) and (5) or 355.9-806 .
  5. Whether or not the law of this state governs perfection of a security interest, the effectiveness of a pre-effective-date financing statement filed in this state may be terminated after July 1, 2013, by filing a termination statement in the office in which the pre-effective-date financing statement is filed, unless an initial financing statement that satisfies KRS 355.9-806 (3) has been filed in the office specified by the law of the jurisdiction governing perfection as provided in this article as amended by KRS 355.9-801 to 355.9-809 as the office in which to file a financing statement.

History. Enact. Acts 2012, ch. 132, § 97, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-808. Person entitled to file initial financing statement or continuation statement.

A person may file an initial financing statement or a continuation statement under this part if:

  1. The secured party of record authorizes the filing; and
  2. The filing is necessary under this part:
    1. To continue the effectiveness of a financing statement filed before July 1, 2013; or
    2. To perfect or continue the perfection of a security interest.

History. Enact. Acts 2012, ch. 132, § 98, effective July 1, 2013.

Legislative Research Commission Notes.

(3/14/2013). 2013 Ky. Acts ch. 10, secs. 2 and 3 provide that the statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, are effective July 1, 2013. This statute was one of those sections. Since only the effective date of a prior Act was altered, and not the text of the affected statutes, reference to 2013 Ky. Acts ch. 10 does not appear in the history for this statute.

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

355.9-809. Priority.

Amendments to existing statutes and the creation of new statutes in this article contained in 2012 Ky. Acts ch. 132, secs. 60 to 99 determine the priority of conflicting claims to collateral. However, if the relative priorities of the claims were established before July 1, 2013, this article as it existed before amendment determines priority.

History. Repealed, reenact. and amend. Acts 2013, ch. 10, § 4, effective March 14, 2013.

Legislative Research Commission Notes.

(3/14/2013). The statutes in Article 9 of the Uniform Commercial Code that were amended or created in 2012 Ky. Acts ch. 132, secs. 60 to 99, which are effective July 1, 2013, pursuant to 2013 Ky. Acts ch. 10, secs. 2 and 3, were: KRS 355.9-102 , 355.9-105 , 355.9-203 , 355.9-207 , 355.9-208 , 355.9-301 , 355.9-307 , 355.9-310 , 355.9-311 , 355.9-312 , 355.9-313 , 355.9-314 , 355.9-316 , 355.9-317 , 355.9-326 , 355.9-338 , 355.9-406 , 355.9-408 , 355.9-502 , 355.9-503 , 355.9-507 , 355.9-510 , 355.9-513 A, 355.9-515 , 355.9-516 , 355.9-516 A, 355.9-518 , 355.9-520 , 355.9-521 , 355.9-601 , 355.9-607 , 355.9-801 , 355.9-802 , 355.9-803 , 355.9-804 , 355.9-805 , 355.9-806 , 355.9-807 , 355.9-808 , and 355.9-809 .

Opinions of Attorney General.

The error in S.B. 97 (2012, ch. 132), whereby the transitional provisions of the act were given an effective date of July 1, 2013 and the substantive provisions were made effective 90 days following approval of the act (July 12, 2012), meets the definition of manifest clerical error. It is obviously apparent from the redundancy in sections 91 and 102 that one of the sections contains a clerical error. The error is also the result of inadvertence by the drafters of the bill rather than legislative determination, as the legislature clearly thought that it was passing a bill that would make all of the changes to UCC Article 9 effective on the same date. Since it is a manifest clerical error, the LRC has the authority to correct it under KRS 7.136 (h). Thus the LRC may correct the error in § 91 of S.B. 97 (2012) so that it reads, “Sections 60 through 90 shall take effect on July 1, 2013.” OAG 12-010 , 2012 Ky. AG LEXIS 124.

Article 10. Other Provisions

Compiler’s Notes.

The official comments in this article are copyrighted by the National Conference of Commissioners of Uniform State Laws and the American Law Institute, and are reproduced by permission.

355.10-101. Provision for transition.

Transactions validly entered into before July 1, 1960, and the rights, duties and interests flowing from them remain valid thereafter and may be terminated, completed, consummated or enforced as required or permitted by any statute or other law amended or repealed by this chapter as though such repeal or amendment had not occurred.

History. Enact. Acts 1958, ch. 77, § 10-102, effective July 1, 1960.

Official Comment

This section provides for the transition to the Code.

Research References and Practice Aids

Kentucky Law Journal.

Ham, The Close Corporation Under Kentucky Law, 50 Ky. L.J. 125 (1961).

355.10-102. Laws not repealed.

The article on documents of title (Article 7) does not repeal or modify any laws prescribing the form or contents of documents of title or the services or facilities to be afforded by bailees, or otherwise regulating bailees’ businesses in respects not specifically dealt with herein; but the fact that such laws are violated does not affect the status of a document of title which otherwise complies with the definition of a document of title (KRS 355.1-201 ).

History. Enact. Acts 1958, ch. 77, § 10-104, effective July 1, 1960.

Official Comment

This section subordinates the Article of this Act on Documents of Title (Article (7)) to the more specialized regulations of particular classes of bailees under other legislation and international treaties. Particularly, the provisions of that Article are superseded by applicable inconsistent provisions regarding the obligation of carriers and the limitation of their liability found in federal legislation dealing with transportation by water (including the Harter Act, Act of February 13, 1893, 27 Stat. 445, and the Carriage of Goods by Sea Act, Act of April 16, 1936, 49 Stat. 1207); the Warsaw Convention on International Air Transportation, 49 Stat. 3000, and Section 20(11) of the Interstate Commerce Act, Act of February 20, 1887, 24 Stat. 386, as amended. The Documents of Title provisions of this Act supplement such legislation largely in matters other than obligation of the bailee, e.g., form and effects of negotiation, procedure in the case of lost documents, effect of overissue, possibility of rapid transmission.

Cross reference:

Section 7-103.

Opinions of Attorney General.

Chattel mortgages filed prior to the effective date of the statute must have a statement of the balance due filed on them every three years to extend the lien of the chattel mortgage. OAG 60-513 .

Article 11. Transition

355.11-102. Use of terminology. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1986, ch. 118, § 86, effective July 1, 1987) was repealed by Acts 2000, ch. 408, § 186, effective July 1, 2001.

355.11-103. Transition to new code — General rule. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1986, ch. 118, § 87, effective July 1, 1987) was repealed by Acts 2000, ch. 408, § 186, effective July 1, 2001.

355.11-104. Transition provision on change of requirement of filing. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1986, ch. 118, § 88, effective July 1, 1987) will be repealed by Acts 2000, ch. 408, § 186, effective July 1, 2001.

355.11-105. Transition provision on change of place of filing. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1986, ch. 118, § 89, effective July 1, 1987) was repealed by Acts 2000, ch. 408, § 186, effective July 1, 2001.

355.11-106. Required refilings. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1986, ch. 118, § 90, effective July 1, 1987) was repealed by Acts 2000, ch. 408, § 186, effective July 1, 2001.

355.11-107. Transition provisions as to priorities. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1986, ch. 118, § 91, effective July 1, 1987) was repealed by Acts 2000, ch. 408, § 186, effective July 1, 2001.

355.11-108. Presumption that rule of law continues unchanged. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1986, ch. 118, § 92, effective July 1, 1987) was repealed by Acts 2000, ch. 408, § 186, effective July 1, 2001.

CHAPTER 356 Negotiable Instruments [Repealed]

356.001. Form of negotiable instrument. [Repealed.]

Compiler’s Notes.

This section (3720b-1) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102.

356.002. Sum certain. [Repealed.]

Compiler’s Notes.

This section (3720b-2) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.003. Unconditional order or promise; negotiability of bonds of governmental agencies and taxing units. [Repealed.]

Compiler’s Notes.

This section (3720b-3: amend. 1942, ch. 145, §§ 1, 2) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.004. Determinable future time. [Repealed.]

Compiler’s Notes.

This section (3720b-4) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.005. Additional provisions, effect on negotiability. [Repealed.]

Compiler’s Notes.

This section (3720b-5) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.006. Other factors not affecting negotiability. [Repealed.]

Compiler’s Notes.

This section (3720b-6) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.007. Payable on demand. [Repealed.]

Compiler’s Notes.

This section (3720b-7) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.008. Payable to order. [Repealed.]

Compiler’s Notes.

This section (3720b-8) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.009. Payable to bearer. [Repealed.]

Compiler’s Notes.

This section (3720b-9) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.010. Sufficiency of terms. [Repealed.]

Compiler’s Notes.

This section (3720b-10) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.011. Date. [Repealed.]

Compiler’s Notes.

This section (3720b-11) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.012. Antedating or postdating of instrument, effect. [Repealed.]

Compiler’s Notes.

This section (3720b-12) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.013. Undated instrument or acceptance; insertion of date. [Repealed.]

Compiler’s Notes.

This section (3720b-13) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.014. When blanks may be filled. [Repealed.]

Compiler’s Notes.

This section (3720b-14) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.015. Incomplete instrument, effect of unauthorized completion before delivery. [Repealed.]

Compiler’s Notes.

This section (3720b-15) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.016. Delivery; when effectual; when presumed. [Repealed.]

Compiler’s Notes.

This section (3720b-16) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.017. Construction of ambiguous instruments. [Repealed.]

Compiler’s Notes.

This section (3720b-17) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.018. Party not bound without signature; trade or assumed name. [Repealed.]

Compiler’s Notes.

This section (3720b-18) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.019. Signature by agent. [Repealed.]

Compiler’s Notes.

This section (3720b-19) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.020. Liability of person signing in representative capacity. [Repealed.]

Compiler’s Notes.

This section (3720b-20) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.021. Signature by procuration. [Repealed.]

Compiler’s Notes.

This section (3720b-21) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.022. Assignment or endorsement by corporation or infant. [Repealed.]

Compiler’s Notes.

This section (3720b-22) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.023. Forged or unauthorized signature. [Repealed.]

Compiler’s Notes.

This section (3720b-23) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.024. Consideration presumed. [Repealed.]

Compiler’s Notes.

This section (3720b-24) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.025. Value defined. [Repealed.]

Compiler’s Notes.

This section (3720b-25) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.026. Holder for value. [Repealed.]

Compiler’s Notes.

This section (3720b-26) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.027. Holder with lien. [Repealed.]

Compiler’s Notes.

This section (3720b-27) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.028. Lack or failure of consideration, when a defense. [Repealed.]

Compiler’s Notes.

This section (3720b-28) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.029. Accommodation party. [Repealed.]

Compiler’s Notes.

This section (3720b-29) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.030. Negotiation; how effected. [Repealed.]

Compiler’s Notes.

This section (3720b-30) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.031. Endorsement, how made. [Repealed.]

Compiler’s Notes.

This section (3720b-31) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.032. Endorsement must be of entire instrument. [Repealed.]

Compiler’s Notes.

This section (3720b-32) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.033. Kinds of endorsement. [Repealed.]

Compiler’s Notes.

This section (3720b-33) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.034. Special and blank endorsements. [Repealed.]

Compiler’s Notes.

This section (3720b-34) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.035. Conversion of blank to special endorsement. [Repealed.]

Compiler’s Notes.

This section (3720b-35) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.036. Restrictive endorsement. [Repealed.]

Compiler’s Notes.

This section (3720b-36) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.037. Rights of restrictive endorsee. [Repealed.]

Compiler’s Notes.

This section (3720b-37) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.038. Qualified endorsement. [Repealed.]

Compiler’s Notes.

This section (3720b-38) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.039. Conditional endorsement. [Repealed.]

Compiler’s Notes.

This section (3720b-39) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.040. Special endorsement. [Repealed.]

Compiler’s Notes.

This section (3720b-40) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.041. Endorsement where payable to two or more persons. [Repealed.]

Compiler’s Notes.

This section (3720b-41) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.042. Endorsement to cashier or fiscal officer of bank or corporation. [Repealed.]

Compiler’s Notes.

This section (3720b-42) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.043. Error in name of payee or endorsee. [Repealed.]

Compiler’s Notes.

This section (3720b-43) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.044. Endorsement in representative capacity. [Repealed.]

Compiler’s Notes.

This section (3720b-44) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.045. Time of endorsement; presumption. [Repealed.]

Compiler’s Notes.

This section (3720b-45) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.046. Place of endorsement; presumption. [Repealed.]

Compiler’s Notes.

This section (3720b-46) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.047. Negotiability of instrument, when terminated. [Repealed.]

Compiler’s Notes.

This section (3720b-47) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.048. Striking out unnecessary endorsement; effect. [Repealed.]

Compiler’s Notes.

This section (3720b-48) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.049. Transfer without endorsement. [Repealed.]

Compiler’s Notes.

This section (3720b-49) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.050. When prior party may negotiate instrument. [Repealed.]

Compiler’s Notes.

This section (3720b-50) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.051. Right of holder to sue. [Repealed.]

Compiler’s Notes.

This section (3720b-51) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.052. Holder in due course. [Repealed.]

Compiler’s Notes.

This section (3720b-52) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.053. Effect of unreasonable delay in negotiation. [Repealed.]

Compiler’s Notes.

This section (3720b-53) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.054. Notice of defect or infirmity in title, effect on rights of holder. [Repealed.]

Compiler’s Notes.

This section (3720b-54) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.055. Title of transferor, when defective. [Repealed.]

Compiler’s Notes.

This section (3720b-55) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.056. Notice of infirmity or defect. [Repealed.]

Compiler’s Notes.

This section (3720b-56) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.057. Rights of holder in due course. [Repealed.]

Compiler’s Notes.

This section (3720b-57) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.058. Rights of holder not in due course. [Repealed.]

Compiler’s Notes.

This section (3720b-58) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.059. Proof of title to instrument; presumptions. [Repealed.]

Compiler’s Notes.

This section (3720b-59) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.060. Liability and admissions of maker. [Repealed.]

Compiler’s Notes.

This section (3720b-60) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.061. Liability and admissions of drawer. [Repealed.]

Compiler’s Notes.

This section (3720b-61) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.062. Liability and admissions of acceptor. [Repealed.]

Compiler’s Notes.

This section (3720b-62) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.063. When signature deemed an endorsement. [Repealed.]

Compiler’s Notes.

This section (3720b-63) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.064. Liability of person signing instrument in blank before delivery. [Repealed.]

Compiler’s Notes.

This section (3720b-64) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.065. Warranties where negotiation is by delivery or by qualified endorsement. [Repealed.]

Compiler’s Notes.

This section (3720b-65) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.066. Warranties of person endorsing without qualification. [Repealed.]

Compiler’s Notes.

This section (3720b-66) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.067. Liability of person endorsing instrument negotiable by delivery. [Repealed.]

Compiler’s Notes.

This section (3720b-67) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.068. Liability as between endorsers. [Repealed.]

Compiler’s Notes.

This section (3720b-68) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.069. Liability of broker or agent negotiating instrument without endorsement. [Repealed.]

Compiler’s Notes.

This section (3720b-69) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.070. Presentment; when necessary; effect. [Repealed.]

Compiler’s Notes.

This section (3720b-70) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.071. Time of presentment. [Repealed.]

Compiler’s Notes.

This section (3720b-71) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.072. Sufficiency of presentment. [Repealed.]

Compiler’s Notes.

This section (3720b-72) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.073. Place of presentment. [Repealed.]

Compiler’s Notes.

This section (3720b-73) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.074. Person to whom instrument presented. [Repealed.]

Compiler’s Notes.

This section (3720b-74) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.075. Time of presentment when instrument payable at bank. [Repealed.]

Compiler’s Notes.

This section (3720b-75) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.076. Death of person primarily liable; how presentment made. [Repealed.]

Compiler’s Notes.

This section (3720b-76) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.077. Presentment when partners liable. [Repealed.]

Compiler’s Notes.

This section (3720b-77) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.078. Presentment to persons jointly liable. [Repealed.]

Compiler’s Notes.

This section (3720b-78) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.079. When presentment not required to charge drawer. [Repealed.]

Compiler’s Notes.

This section (3720b-79) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.080. When presentment not required to charge endorser. [Repealed.]

Compiler’s Notes.

This section (3720b-80) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.081. Delay in presentment; when excused. [Repealed.]

Compiler’s Notes.

This section (3720b-81) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.082. When presentment dispensed with. [Repealed.]

Compiler’s Notes.

This section (3720b-82) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.083. Dishonor by nonpayment. [Repealed.]

Compiler’s Notes.

This section (3720b-83) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.084. Liability of person secondarily liable when instrument dishonored. [Repealed.]

Compiler’s Notes.

This section (3720b-84) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.085. When instrument payable. [Repealed.]

Compiler’s Notes.

This section (3720b-85) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.086. Instrument payable after fixed period, how date of payment determined. [Repealed.]

Compiler’s Notes.

This section (3720b-86) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.087. Effect of making instrument payable at bank. [Repealed.]

Compiler’s Notes.

This section (3720b-87) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.088. Payment in due course. [Repealed.]

Compiler’s Notes.

This section (3720b-88) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.089. Notice of dishonor. [Repealed.]

Compiler’s Notes.

This section (3720b-89) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.090. By whom notice given. [Repealed.]

Compiler’s Notes.

This section (3720b-90) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.091. Notice by agent. [Repealed.]

Compiler’s Notes.

This section (3720b-91) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.092. Effect of notice given on behalf of holder. [Repealed.]

Compiler’s Notes.

This section (3720b-92) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.093. Effect of notice given on behalf of any party. [Repealed.]

Compiler’s Notes.

This section (3720b-93) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.094. Notice when paper dishonored in hands of agent. [Repealed.]

Compiler’s Notes.

This section (3720b-94) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.095. Insufficient written notice; misdescription of instrument. [Repealed.]

Compiler’s Notes.

This section (3720b-95) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.096. Requirements of notice. [Repealed.]

Compiler’s Notes.

This section (3720b-96) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.097. To whom notice given. [Repealed.]

Compiler’s Notes.

This section (3720b-97) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.098. Notice when party is dead. [Repealed.]

Compiler’s Notes.

This section (3720b-98) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.099. Notice to partners. [Repealed.]

Compiler’s Notes.

This section (3720b-99) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.100. Notice to persons jointly liable. [Repealed.]

Compiler’s Notes.

This section (3720b-100) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.101. Notice to bankrupt or insolvent person. [Repealed.]

Compiler’s Notes.

This section (3720b-101) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.102. When notice to be given. [Repealed.]

Compiler’s Notes.

This section (3720b-102) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.103. Time of notice where parties reside at same place. [Repealed.]

Compiler’s Notes.

This section (3720b-103) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.104. Time of notice where parties reside at different places. [Repealed.]

Compiler’s Notes.

This section (3720b-104) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.105. When sender deemed to have given notice by mail. [Repealed.]

Compiler’s Notes.

This section (3720b-105) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.106. What constitutes deposit in post office. [Repealed.]

Compiler’s Notes.

This section (3720b-106) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.107. Time for giving notice of dishonor to antecedent parties. [Repealed.]

Compiler’s Notes.

This section (3720b-107) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.108. Where notice to be sent. [Repealed.]

Compiler’s Notes.

This section (3720b-108) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.109. Waiver of notice. [Repealed.]

Compiler’s Notes.

This section (3720b-109) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.110. Effect of waiver of notice embodied in instrument. [Repealed.]

Compiler’s Notes.

This section (3720b-110) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.111. Waiver of protest; effect. [Repealed.]

Compiler’s Notes.

This section (3720b-111) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.112. When notice of dishonor dispensed with. [Repealed.]

Compiler’s Notes.

This section (3720b-112) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.113. Delay in giving notice of dishonor. [Repealed.]

Compiler’s Notes.

This section (3720b-113) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.114. When notice to drawer not required. [Repealed.]

Compiler’s Notes.

This section (3720b-114) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.115. When notice to endorser not required. [Repealed.]

Compiler’s Notes.

This section (3720b-115) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.116. When notice of subsequent dishonor by nonpayment not required. [Repealed.]

Compiler’s Notes.

This section (3720b-116) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.117. Failure to give notice of dishonor by nonacceptance. [Repealed.]

Compiler’s Notes.

This section (3720b-117) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.118. When protest required. [Repealed.]

Compiler’s Notes.

This section (3720b-118) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.119. Discharge of negotiable instruments. [Repealed.]

Compiler’s Notes.

This section (3720b-119) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.120. Discharge of party secondarily liable. [Repealed.]

Compiler’s Notes.

This section (3720b-120) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.121. Right of party secondarily liable who pays instrument. [Repealed.]

Compiler’s Notes.

This section (3720b-121) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.122. Renunciation of rights by holder. [Repealed.]

Compiler’s Notes.

This section (3720b-122) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.123. Cancellation, when inoperative; burden of proof. [Repealed.]

Compiler’s Notes.

This section (3720b-123) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.124. Material alteration, effect of. [Repealed.]

Compiler’s Notes.

This section (3720b-124) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.125. What constitutes material alteration. [Repealed.]

Compiler’s Notes.

This section (3720b-125) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.126. Bill of exchange defined. [Repealed.]

Compiler’s Notes.

This section (3720b-126) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.127. Drawee liable only upon acceptance. [Repealed.]

Compiler’s Notes.

This section (3720b-127) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.128. Joint drawees. [Repealed.]

Compiler’s Notes.

This section (3720b-128) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.129. Inland and foreign bills of exchange. [Repealed.]

Compiler’s Notes.

This section (3720b-129) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.130. When bill may be treated as promissory note. [Repealed.]

Compiler’s Notes.

This section (3720b-130) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.131. Referee defined. [Repealed.]

Compiler’s Notes.

This section (3720b-131) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.132. Acceptance. [Repealed.]

Compiler’s Notes.

This section (3720b-132) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.133. Holder may require acceptance on face of bill. [Repealed.]

Compiler’s Notes.

This section (3720b-133) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.134. Acceptance on different paper, effect of. [Repealed.]

Compiler’s Notes.

This section (3720b-134) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.135. Effect of unconditional written promise to accept. [Repealed.]

Compiler’s Notes.

This section (3720b-135) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.136. Time of acceptance. [Repealed.]

Compiler’s Notes.

This section (3720b-136) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.137. Retention or destruction of bill an acceptance. [Repealed.]

Compiler’s Notes.

This section (3720b-137) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.138. Acceptance while incomplete or after maturity or dishonor. [Repealed.]

Compiler’s Notes.

This section (3720b-138) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.139. Kinds of acceptance. [Repealed.]

Compiler’s Notes.

This section (3720b-139) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.140. General acceptance. [Repealed.]

Compiler’s Notes.

This section (3720b-140) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.141. Qualified acceptance. [Repealed.]

Compiler’s Notes.

This section (3720b-141) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.142. Qualified acceptance; effect of refusing and of taking; when assent presumed. [Repealed.]

Compiler’s Notes.

This section (3720b-142) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.143. Presentment for acceptance. [Repealed.]

Compiler’s Notes.

This section (3720b-143) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.144. Failure to present or negotiate; release of drawer and endorsers. [Repealed.]

Compiler’s Notes.

This section (3720b-144) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.145. Presentment for acceptance, how made. [Repealed.]

Compiler’s Notes.

This section (3720b-145) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.146. On what days presentment for acceptance may be made. [Repealed.]

Compiler’s Notes.

This section (3720b-146) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.147. Presentment where time is insufficient. [Repealed.]

Compiler’s Notes.

This section (3720b-147) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.148. When presentment for acceptance excused. [Repealed.]

Compiler’s Notes.

This section (3720b-148) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.149. When bill dishonored by nonacceptance. [Repealed.]

Compiler’s Notes.

This section (3720b-149) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.150. Duty of holder upon nonacceptance. [Repealed.]

Compiler’s Notes.

This section (3720b-150) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.151. Right of holder upon nonacceptance. [Repealed.]

Compiler’s Notes.

This section (3720b-151) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.152. When protest required. [Repealed.]

Compiler’s Notes.

This section (3720b-152) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.153. Protest, what to specify. [Repealed.]

Compiler’s Notes.

This section (3720b-153) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.154. By whom protest may be made. [Repealed.]

Compiler’s Notes.

This section (3720b-154) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.155. When protest made. [Repealed.]

Compiler’s Notes.

This section (3720b-155) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.156. Where protest made. [Repealed.]

Compiler’s Notes.

This section (3720b-156) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.157. Protest for both nonacceptance and nonpayment. [Repealed.]

Compiler’s Notes.

This section (3720b-157) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.158. Protest for security when acceptor bankrupt or insolvent. [Repealed.]

Compiler’s Notes.

This section (3720b-158) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.159. When protest dispensed with. [Repealed.]

Compiler’s Notes.

This section (3720b-159) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.160. Protest, how made when bill lost, destroyed or detained. [Repealed.]

Compiler’s Notes.

This section (3720b-160) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.161. Acceptance for honor. [Repealed.]

Compiler’s Notes.

This section (3720b-161) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.162. Acceptance for honor to be written and signed. [Repealed.]

Compiler’s Notes.

This section (3720b-162) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.163. When acceptance deemed to be for honor of drawer. [Repealed.]

Compiler’s Notes.

This section (3720b-163) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.164. Liability of acceptor for honor. [Repealed.]

Compiler’s Notes.

This section (3720b-164) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.165. Liability and admissions of acceptor for honor. [Repealed.]

Compiler’s Notes.

This section (3720b-165) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.166. Maturity of sight bill accepted for honor. [Repealed.]

Compiler’s Notes.

This section (3720b-166) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.167. Protest of bill accepted for honor or containing reference in case of need. [Repealed.]

Compiler’s Notes.

This section (3720b-167) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.168. Time of presentment for payment to acceptor for honor. [Repealed.]

Compiler’s Notes.

This section (3720b-168) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.169. Delay in making presentment to acceptor for honor or referee, when excused. [Repealed.]

Compiler’s Notes.

This section (3720b-169) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.170. Dishonor of bill by acceptor for honor; protest. [Repealed.]

Compiler’s Notes.

This section (3720b-170) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.171. Payment for honor. [Repealed.]

Compiler’s Notes.

This section (3720b-171) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.172. Payment for honor to be attested. [Repealed.]

Compiler’s Notes.

This section (3720b-172) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.173. Notarial act of honor. [Repealed.]

Compiler’s Notes.

This section (3720b-173) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.174. Two or more persons paying bill for honor. [Repealed.]

Compiler’s Notes.

This section (3720b-174) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.175. Effect of payment for honor on subsequent parties. [Repealed.]

Compiler’s Notes.

This section (3720b-175) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.176. Effect of holder refusing to receive payment supra protest. [Repealed.]

Compiler’s Notes.

This section (3720b-176) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.177. Payer for honor entitled to receive bill and protest. [Repealed.]

Compiler’s Notes.

This section (3720b-177) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.178. Bills in set constitute one bill. [Repealed.]

Compiler’s Notes.

This section (3720b-178) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.179. Holder whose title first accrues is owner of bill. [Repealed.]

Compiler’s Notes.

This section (3720b-179) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.180. Liability of holder and subsequent endorsers of bills in set. [Repealed.]

Compiler’s Notes.

This section (3720b-180) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.181. Acceptance of bills in set. [Repealed.]

Compiler’s Notes.

This section (3720b-181) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.182. Payment by acceptor of bill in set without requiring delivery of acceptance. [Repealed.]

Compiler’s Notes.

This section (3720b-182) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.183. Effect of discharging part of bill drawn in a set. [Repealed.]

Compiler’s Notes.

This section (3720b-183) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

Promissory Notes and Checks

356.184. Negotiable promissory note defined. [Repealed.]

Compiler’s Notes.

This section (3720b-184) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.185. Check defined. [Repealed.]

Compiler’s Notes.

This section (3720b-185) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.186. Time of presenting check; effect of delay. [Repealed.]

Compiler’s Notes.

This section (3720b-186) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.187. Certification of check equivalent to acceptance. [Repealed.]

Compiler’s Notes.

This section (3720b-187) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.188. Drawer and endorsers discharged when holder procures certification of check. [Repealed.]

Compiler’s Notes.

This section (3720b-188) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.189. Bank not liable before certification. [Repealed.]

Compiler’s Notes.

This section (3720b-189) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.190. Definitions. [Repealed.]

Compiler’s Notes.

This section (3720b-190) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.191. Persons primarily liable and secondarily liable. [Repealed.]

Compiler’s Notes.

This section (3720b-191) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.192. “Reasonable time” and “unreasonable time.” [Repealed.]

Compiler’s Notes.

This section (3720b-192) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

356.193. Computation of time when day for doing act is Sunday or holiday. [Repealed.]

Compiler’s Notes.

This section (3720b-193: amend. 1948, ch. 150, § 2) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

CHAPTER 357 Bank Collection Code [Repealed]

357.010. Definitions. [Repealed.]

Compiler’s Notes.

This section (3720b-69a) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

357.020. Bank as collection agent. [Repealed.]

Compiler’s Notes.

This section (3720b-69a-1) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

357.030. Item on same bank. [Repealed.]

Compiler’s Notes.

This section (3720b-69a-2) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

357.040. Legal effect of endorsements. [Repealed.]

Compiler’s Notes.

This section (3720b-69a-3) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

357.050. Duty and liability of collecting bank. [Repealed.]

Compiler’s Notes.

This section (3720b-69a-4) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

357.060. Ordinary care in forwarding and presentment. [Repealed.]

Compiler’s Notes.

This section (3720b-69a-5) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

357.070. Items received by mail, when considered paid. [Repealed.]

Compiler’s Notes.

This section (3720b-69a-6) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

357.080. Liability of agent bank for loss in transit. [Repealed.]

Compiler’s Notes.

This section (3720b-69a-7) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

357.090. Medium of payment. [Repealed.]

Compiler’s Notes.

This section (3720b-69a-8) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

357.100. Medium of remittance. [Repealed.]

Compiler’s Notes.

This section (3720b-69a-9) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

357.110. Election to treat as dishonored items presented by mail. [Repealed.]

Compiler’s Notes.

This section (3720b-69a-10) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

357.120. Notice of dishonor of items presented by mail. [Repealed.]

Compiler’s Notes.

This section (3720b-69a-11) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

357.125. Demand items other than for immediate payment over the counter, time within which bank may dishonor or refuse payment; credit given may be revoked, how. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1956, ch. 47, § 1) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

357.130. Insolvency and preferences. [Repealed.]

Compiler’s Notes.

This section (3720b-69a-12) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

CHAPTER 358 Uniform Warehouse Receipts Act [Repealed]

358.010. Warehousemen may issue receipts. [Repealed.]

Compiler’s Notes.

This section (4767b-1) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.020. Form of receipts; essential terms. [Repealed.]

Compiler’s Notes.

This section (4767b-2) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.030. Additional terms. [Repealed.]

Compiler’s Notes.

This section (4767b-3) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.040. Definition of nonnegotiable receipt. [Repealed.]

Compiler’s Notes.

This section (4767b-4) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.050. Definition of negotiable receipt; effect of clause denying negotiability. [Repealed.]

Compiler’s Notes.

This section (4767b-5) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.060. Duplicate receipts to be marked “duplicate.” [Repealed.]

Compiler’s Notes.

This section (4767b-6) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.070. Nonnegotiable receipts to be marked “nonnegotiable” or “not negotiable”; effect of failure to mark. [Repealed.]

Compiler’s Notes.

This section (4767b-7) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.080. Obligation of warehouseman to deliver. [Repealed.]

Compiler’s Notes.

This section (4767b-8) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.090. Persons to whom warehouseman may deliver. [Repealed.]

Compiler’s Notes.

This section (4767b-9) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.100. Warehouseman’s liability for misdelivery. [Repealed.]

Compiler’s Notes.

This section (4767b-10) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.110. Negotiable receipts to be canceled when goods delivered; effect of failure. [Repealed.]

Compiler’s Notes.

This section (4767b-11) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.120. Negotiable receipts to be canceled or marked when part of goods delivered; effect of failure. [Repealed.]

Compiler’s Notes.

This section (4767b-12) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.130. Altered receipts; effect on liability of warehouseman. [Repealed.]

Compiler’s Notes.

This section (4767b-13) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.140. Loss or destruction of receipt; delivery of goods on order of court. [Repealed.]

Compiler’s Notes.

This section (4767b-14) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.150. Effect of duplicate receipt. [Repealed.]

Compiler’s Notes.

This section (4767b-15) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.160. Title or right claimed by warehouseman, effect of. [Repealed.]

Compiler’s Notes.

This section (4767b-16) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.170. Interpleader of adverse claimants. [Repealed.]

Compiler’s Notes.

This section (4767b-17) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.180. Warehouseman to have reasonable time to determine validity of claims. [Repealed.]

Compiler’s Notes.

This section (4767b-18) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.190. Right of third person, when not a defense in action for nondelivery. [Repealed.]

Compiler’s Notes.

This section (4767b-19) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.200. Liability of warehouseman when goods not in existence or not properly described. [Repealed.]

Compiler’s Notes.

This section (4767b-20) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.210. Liability of warehouseman for loss of or injury to goods. [Repealed.]

Compiler’s Notes.

This section (4767b-21) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.220. Goods to be kept separate. [Repealed.]

Compiler’s Notes.

This section (4767b-22) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.230. Fungible goods, when commingling authorized; rights of depositors. [Repealed.]

Compiler’s Notes.

This section (4767b-23) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.240. Liability of warehouseman to depositors of commingled goods. [Repealed.]

Compiler’s Notes.

This section (4767b-24) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.250. Attachment of or levy upon goods for which negotiable receipts have been issued. [Repealed.]

Compiler’s Notes.

This section (4767b-25) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.260. Creditors’ remedies to reach negotiable receipts. [Repealed.]

Compiler’s Notes.

This section (4767b-26) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.270. Warehouseman’s lien; claims included. [Repealed.]

Compiler’s Notes.

This section (4767b-27) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.280. Against what property the lien may be enforced. [Repealed.]

Compiler’s Notes.

This section (4767b-28) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.290. Loss of warehouseman’s lien. [Repealed.]

Compiler’s Notes.

This section (4767b-29) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.300. Extent of lien when no charges enumerated; effect of specific enumeration. [Repealed.]

Compiler’s Notes.

This section (4767b-30) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.310. Warehouseman need not deliver goods until lien satisfied. [Repealed.]

Compiler’s Notes.

This section (4767b-31) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.320. Other remedies of warehouseman against depositor. [Repealed.]

Compiler’s Notes.

This section (4767b-32) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.330. Satisfaction of warehouseman’s lien. [Repealed.]

Compiler’s Notes.

This section (4767b-33) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.340. Perishable and hazardous goods. [Repealed.]

Compiler’s Notes.

This section (4767b-34) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.350. Other methods of enforcing warehouseman’s lien and claim. [Repealed.]

Compiler’s Notes.

This section (4767b-35) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.360. Effect of sale by warehouseman. [Repealed.]

Compiler’s Notes.

This section (4767b-36) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.370. Negotiation of negotiable receipts by delivery; effect of endorsing bearer receipt. [Repealed.]

Compiler’s Notes.

This section (4767b-37) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.380. Negotiation of negotiable receipts by endorsement. [Repealed.]

Compiler’s Notes.

This section (4767b-38) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.390. Transfer without negotiation. [Repealed.]

Compiler’s Notes.

This section (4767b-39) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.400. When receipt may be negotiated by any possessor. [Repealed.]

Compiler’s Notes.

This section (4767b-40) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.410. Rights of person to whom receipt is negotiated. [Repealed.]

Compiler’s Notes.

This section (4767b-41) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.420. Rights of person to whom receipt is transferred; how defeated. [Repealed.]

Compiler’s Notes.

This section (4767b-42) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.430. When transferee of negotiable receipt may compel endorsement. [Repealed.]

Compiler’s Notes.

This section (4767b-43) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.440. Warranties on sale of receipt. [Repealed.]

Compiler’s Notes.

This section (4767b-44) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.450. Endorser not a guarantor. [Repealed.]

Compiler’s Notes.

This section (4767b-45) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.460. No warranty implied when holder of receipt for security demands or accepts payment of debt. [Repealed.]

Compiler’s Notes.

This section (4767b-46) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.470. Negotiation to bona fide purchaser for value, when validity not impaired. [Repealed.]

Compiler’s Notes.

This section (4767b-47) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.480. Negotiation of receipt to bona fide purchaser for value after selling or encumbering goods. [Repealed.]

Compiler’s Notes.

This section (4767b-48) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.490. Vendor’s lien or right of stoppage in transitu not to affect rights of bona fide purchaser; delivery of goods to unpaid seller. [Repealed.]

Compiler’s Notes.

This section (4767b-49) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.500. Issuance of receipt for goods not received; penalty. [Repealed.]

Compiler’s Notes.

This section (4767b-50) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.510. Receipt containing false statement; penalty. [Repealed.]

Compiler’s Notes.

This section (4767b-51) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.520. Issuance of duplicate receipts not marked “duplicate”; penalty. [Repealed.]

Compiler’s Notes.

This section (4767b-52) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.530. Issuance of receipt not showing ownership of goods by warehouseman; penalty. [Repealed.]

Compiler’s Notes.

This section (4767b-53) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.540. Warehouseman not to deliver goods without obtaining receipt; penalty. [Repealed.]

Compiler’s Notes.

This section (4767b-54) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.550. Fraudulent negotiation of receipt by depositor not having unencumbered title to goods; penalty. [Repealed.]

Compiler’s Notes.

This section (4767b-55) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.560. Cases not covered by this chapter. [Repealed.]

Compiler’s Notes.

This section (4767b-56) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.570. Construction of chapter. [Repealed.]

Compiler’s Notes.

This section (4767b-57) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.580. Definitions. [Repealed.]

Compiler’s Notes.

This section (4767b-58) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

358.590. Citation of chapter. [Repealed.]

Compiler’s Notes.

This section (4767b-61) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102, effective July 1, 1960. For present law see KRS Ch. 355.

CHAPTER 359 Self-service Storage Facilities

359.010. Definitions. [Repealed]

History. 4768, 4781; repealed by 2019 ch. 88, § 27, effective August 1, 2019.

359.020. Warehouse receipt or voucher, when may be issued as security. [Repealed]

History. 4772; repealed by 2019 ch. 88, § 27, effective August 1, 2019.

359.030. Warehouseman to keep register. [Repealed]

History. 4777; repealed by 2019 ch. 88, § 27, effective August 1, 2019.

359.040. Civil action for violation of KRS 359.020 or 359.030. [Repealed]

History. 4775; repealed by 2019 ch. 88, § 27, effective August 1, 2019.

359.050. Grain warehouseman’s license. [Repealed]

History. 4782, 4784; 2006, ch. 255, § 27, effective January 1, 2007; repealed by 2019 ch. 88, § 27, effective August 1, 2019.

359.060. Bond of grain warehouseman. [Repealed]

History. 4783; repealed by 2019 ch. 88, § 27, effective August 1, 2019.

359.070. Inspector, weigher and registrar for grain warehouses in city having board of trade — Inspection standards and fees. [Repealed]

History. 4791; repealed by 2019 ch. 88, § 27, effective August 1, 2019.

359.080. Inspector, weigher and registrar for grain warehouses in county not having board of trade. [Repealed.]

Compiler’s Notes.

This section (4793) was repealed by Acts 1978, ch. 118, § 19, effective June 17, 1978. For present law see KRS 67.080 and 67.083 .

359.090. Breach of duty by inspector, weigher or registrar — Improper influence. [Repealed]

History. 4796: amend. Acts 1980, ch. 188, § 279, effective July 15, 1980; repealed by 2019 ch. 88, § 27, effective August 1, 2019.

359.100. Receipt of grain for storage. [Repealed]

History. 4785; repealed by 2019 ch. 88, § 27, effective August 1, 2019.

359.110. Effect of delay in delivering grain. [Repealed]

History. 4789; repealed by 2019 ch. 88, § 27, effective August 1, 2019.

359.120. Handling and moving of grain in storage. [Repealed]

History. 4795; repealed by 2019 ch. 88, § 27, effective August 1, 2019.

359.130. Grain in warehouse, records and reports of. [Repealed]

History. 4790; repealed by 2019 ch. 88, § 27, effective August 1, 2019.

359.140. Storage rates and charges to be posted — Changes in rates and charges. [Repealed]

History. 4792; repealed by 2019 ch. 88, § 27, effective August 1, 2019.

359.150. Grain warehousemen to post copies of grain warehouse law. [Repealed]

History. 4797; repealed by 2019 ch. 88, § 27, effective August 1, 2019.

359.160. Oil warehouses. [Repealed]

History. 4780a-1, 4780a-8; repealed by 2019 ch. 88, § 27, effective August 1, 2019.

359.170. Guaranteeing of receipts, how regulated. [Repealed]

History. 4768a-3; repealed by 2019 ch. 88, § 27, effective August 1, 2019.

359.200. Definitions for KRS 359.210 to 359.250.

As used in KRS 359.210 to 359.250 , unless the context clearly requires otherwise:

  1. “Self-service storage facility” means any real property used for renting or leasing individual storage spaces in which the occupants themselves customarily store and remove their own personal property on a “self-service” basis;
  2. “Rental agreement” means any written agreement that establishes or modifies the terms, conditions, or rules concerning the use and occupancy of a self-service storage facility or self-contained storage unit;
  3. “Leased space” means the individual storage space at a self-service storage facility or in a self-contained storage unit which is rented to an occupant pursuant to a rental agreement;
  4. “Occupant” means a person, a sublessee, successor, or assign, entitled to the use of a leased space at a self-service storage facility or in a self-contained storage unit under a rental agreement;
  5. “Operator” means the owner, operator, lessor, or sublessor of a self-service storage facility or a self-contained storage unit, or an agent or any other person authorized to manage the facility or storage unit, but does not mean a warehouseman, unless the operator issues a warehouse receipt, bill of lading, or other document of title for the personal property stored;
  6. “Personal property” means movable property located within leased space at a self-service storage facility or in a self-contained storage unit and includes but is not limited to goods, wares, merchandise, motor vehicles, watercraft, and household items and furnishings;
  7. “Default” means the failure to perform on time any obligation or duty set forth in the rental agreement;
  8. “Last known address” means that postal address or electronic mail address provided by the occupant in the latest rental agreement or the postal address or electronic mail address provided by the occupant in a subsequent written notice of a change of address;
  9. “Self-contained storage unit” means any unit, including but not limited to a trailer, box, or other shipping container, which is leased by an occupant primarily for use as a storage space, whether the unit is located at a self-service storage facility or at another location designated by the occupant;
  10. “Verified electronic mail” means an electronic message or an executable program or computer file that is transmitted between two (2) or more computers or electronic terminals that the sender has verified by any reasonable means as being a working electronic mail address. The term includes electronic messages that are transmitted within or between computer networks; and
  11. “Verified mail” means any method of mailing that is offered by the United States Postal Service or private delivery service that provides evidence of mailing.

History. Enact. Acts 1988, ch. 360, § 1, effective July 15, 1988; 2008, ch. 3, § 1, effective July 15, 2008; 2014, ch. 67, § 1, effective July 15, 2014.

359.210. Prohibition on using leased spaces for residential purposes.

  1. An operator shall not knowingly permit a leased space at a self-service storage facility or in a self-contained storage unit to be used for residential purposes.
  2. An occupant shall not use a leased space at a self-service storage facility or in a self-contained storage unit for residential purposes.

History. Enact. Acts 1988, ch. 360, § 2, effective July 15, 1988; 2008, ch. 3, § 2, effective July 15, 2008.

359.215. Late fees and other reasonable expense incurred in rent collection or lien enforcement.

  1. A reasonable late fee may be imposed and collected by an owner for each service period that an occupant does not pay rent when due under a rental agreement, provided that the due date for the rental payment is not earlier than the day before the first day of the service period to which the rental payment applies. No late payment fee shall be assessed unless the rental fee remains unpaid for at least five (5) days after the date specified within the rental agreement for the payment of the rental fee.
  2. No late fee may be collected pursuant to this section unless the amount of the fee and the conditions for imposing the fee are stated in the rental agreement or in an addendum to that agreement.
  3. For the purposes of this section, a late fee of twenty dollars ($20) or twenty percent (20%) of the rental fee for each month an occupant does not pay rent, whichever is greater, is deemed reasonable and does not constitute a penalty.
  4. Any reasonable expense incurred as a result of rent collection or lien enforcement by an owner may be charged to the occupant in addition to the late fees permitted by this section.

History. Enact. Acts 2014, ch. 67, § 3, effective July 15, 2014.

359.220. Lien on stored property held by operator of facility — Notice provisions in rental agreement.

  1. The operator of a self-service storage facility or self-contained storage unit shall have a lien on all personal property stored within each leased space for rent, labor, or other charges, and for expenses reasonably incurred in its sale, as provided in KRS 359.200 to 359.250 .
  2. The rental agreement shall contain a statement, in bold type, advising the occupant:
    1. Of the existence of the lien; and
    2. That property stored in the leased space may be sold to satisfy the lien if the occupant is in default.

History. Enact. Acts 1988, ch. 360, § 3, effective July 15, 1988; 2008, ch. 3, § 3, effective July 15, 2008.

359.230. Enforcement of lien against occupant in default — Requirements prior to conduct of sale — Redemption by occupant — Application of proceeds — Rights of purchaser — Limitation on liability of operator — Stored personal property value limit — Alternative to sale of motor vehicle subject of default of more than sixty days.

    1. If the occupant is in default for a period of more than forty-five (45) days, the operator may enforce a lien by selling the property stored in the leased space at a public or private sale, for cash. (1) (a) If the occupant is in default for a period of more than forty-five (45) days, the operator may enforce a lien by selling the property stored in the leased space at a public or private sale, for cash.
    2. Proceeds shall then be applied to satisfy the lien, with any surplus disbursed as provided in subsection (5) of this section.
  1. Before conducting a sale under subsection (1) of this section, the operator shall:
    1. Notify the occupant of the default by regular or verified electronic mail at the occupant’s last known address;
    2. Send a second notice of default by verified mail or verified electronic mail to the occupant at the occupant’s last known address which includes:
      1. A statement that the contents of the occupant’s leased space are subject to the operator’s lien;
      2. A statement of the operator’s claim, indicating the charges due on the date of the notice, the amount of any additional charges which shall become due before the date of sale, and the date those additional charges shall become due;
      3. A demand for payment of the charges due within a specified time, not less than fourteen (14) days after the date of the notice;
      4. A statement that unless the claim is paid within the time stated, the contents of the occupant’s leased space shall be sold at a specified time and place; and
      5. The name, street address, and telephone number of the operator, or his or her designated agent, whom the occupant may contact to respond to the notice; and
    3. At least three (3) days before the sale, advertise the time, place, and terms of the sale in:
      1. A newspaper of general circulation in the jurisdiction where the sale is to be held; or
      2. Any other commercially reasonable manner. The manner of advertisement shall be deemed commercially reasonable if at least three (3) independent bidders participate in, or attend the sale at the time and place advertised.
  2. At any time before a sale under this section, the occupant may pay the amount necessary to satisfy the lien and redeem the occupant’s personal property.
  3. The sale under this section shall be held at the self-service storage facility, the location of the self-contained storage unit where the personal property is stored, or a publicly accessible Web site.
  4. If a sale is held under this section, the operator shall:
    1. Satisfy the lien from the proceeds of the sale;
    2. Hold the balance, if any, for delivery to any other recorded lienholders who present claims within sixty (60) days. Notwithstanding Article 9 of KRS Chapter 355, claims shall be satisfied on a first come first served basis; and
    3. Deliver, upon expiration of sixty (60) days, the balance of any remaining proceeds to the occupant.
  5. A purchaser in good faith of any personal property sold under KRS 359.200 to 359.250 takes the property free and clear of any rights of:
    1. Persons against whom the lien was valid; and
    2. Other lienholders.
  6. If the operator complies with the provisions of KRS 359.200 to 359.250 , the operator’s liability:
    1. To the occupant shall be limited to the net proceeds received from the sale of the personal property;
    2. To other lienholders shall be limited to the net proceeds received from the sale of any personal property covered by that other lien; and
    3. To the occupant or valid lienholders shall be relieved upon full distribution of proceeds in accordance with the provisions of KRS 359.200 to 359.250 .
  7. If an occupant is in default, the operator may deny the occupant access to the leased space.
    1. Unless otherwise specifically provided, all notices required by KRS 359.200 to 359.250 shall be sent by verified mail or verified electronic mail. (9) (a) Unless otherwise specifically provided, all notices required by KRS 359.200 to 359.250 shall be sent by verified mail or verified electronic mail.
      1. Notices sent to the operator shall be sent to the operator’s principal office, as listed on the rental agreement. (b) 1. Notices sent to the operator shall be sent to the operator’s principal office, as listed on the rental agreement.
      2. Notices to the occupant shall be sent to the occupant at the occupant’s last known address.
    2. Notices shall be deemed delivered when deposited with the United States Postal Service, properly addressed as provided in paragraph (b) of this subsection, with postage paid, or sent by verified electronic mail.
  8. Provided, however, unless the rental agreement specifically provides otherwise and until a lien sale under KRS 359.200 to 359.250 , the exclusive care, custody, and control of all personal property stored in the leased space shall remain vested in the occupant.
  9. If the rental agreement specifies a limit on the value of the personal property that may be stored in the occupant’s leased space, the limit shall be deemed to be the maximum value of the stored personal property.
  10. If the occupant is in default for more than sixty (60) days and the personal property stored in the leased space is a motor vehicle as defined in KRS 376.268 , the operator may, in lieu of a sale authorized in this chapter, have the vehicle or watercraft towed or removed from the self-service storage facility, and the towing company shall execute the notice provisions as specified in KRS 281.928 .

History. Enact. Acts 1988, ch. 360, § 4, effective July 15, 1988; 2008, ch. 3, § 4, effective July 15, 2008; 2014, ch. 67, § 2, effective July 15, 2014; 2021 ch. 74, § 11, effective June 29, 2021; 2021 ch. 115, § 1, effective June 29, 2021.

Legislative Research Commission Notes.

(6/29/2021). This statute was amended by 2021 Ky. Acts chs. 74 and 115, which do not appear to be in conflict and have been codified together.

(9/20/96). A reference to “this Act” in subsection (7) of this statute was overlooked in the initial codification of this statute and has been changed to the range of statutes created by 1988 Ky. Acts ch. 360 under KRS 7.136(1)(f).

359.240. Pre-existing rental agreements unaffected.

All rental agreements, entered into before July 15, 1988, which have not been extended or renewed after July 15, 1988, shall remain valid and may be enforced or terminated in accordance with their terms or as permitted by any other statute or law of this state.

History. Enact. Acts 1988, ch. 360, § 5, effective July 15, 1988.

359.250. Short title.

KRS 359.200 to 359.250 shall be known as the “Kentucky Self-Service Storage Act of 1988.”

History. Enact. Acts 1988, ch. 360, § 6, effective July 15, 1988.

359.990. Penalties. [Repealed]

History. 4775, 4784, 4796: amend. Acts 1992, ch. 463, § 40, effective July 14, 1992; repealed by 2019 ch. 88, § 27, effective August 1, 2019.

CHAPTER 360 Interest and Usury

360.010. Legal interest rate — Agreement for higher rate — Contract or obligation — Interest after default — Minimum charge for negotiated bank loan.

  1. Except as provided in KRS 360.040 , the legal rate of interest is eight percent (8%) per annum, but any party or parties may agree, in writing, for the payment of interest in excess of that rate as follows:
    1. At a per annum rate not to exceed four percent (4%) in excess of the discount rate on ninety (90) day commercial paper in effect at the Federal Reserve Bank in the Federal Reserve District where the transaction is consummated or nineteen percent (19%), whichever is less, on money due or to become due upon any contract or other obligation in writing where the original principal amount is fifteen thousand dollars ($15,000) or less; and
    2. At any rate on money due or to become due upon any contract or other obligation in writing where the original principal amount is in excess of fifteen thousand dollars ($15,000).
  2. Any party or parties to a contract or obligation described in subsection (1) of this section, and any party or parties who may assume or guarantee the contract or obligation, shall be bound, subject to KRS 371.190 , for the rate of interest as is expressed in the contract, obligation, assumption, or guaranty, and no law of this state prescribing or limiting interest rates shall apply to the agreement or to any charges which pertain thereto or in connection therewith.
  3. The party entitled to be paid in any written contract or obligation specifying a rate of interest shall be entitled to recover interest after default at the rate of interest as is expressed in the contract or obligation prior to the default and that interest rate shall be the interest rate for the purpose of KRS 360.040(3). If the interest rate expressed in the contract or obligation is a variable rate, the interest rate after default and until judgment shall be calculated and adjusted as provided in the contract or obligation prior to the default.
  4. The party entitled to be paid in any written contract or obligation not specifying a rate of interest or to which no interest rate otherwise applies shall be entitled to recover interest after default and until judgment at the legal rate of interest.
  5. Nothing in this section shall be construed to amend, repeal, or abrogate any other law of this state pertaining to any particular types of transactions for which the maximum rate of interest is specifically prescribed or provided.
  6. Any state or national bank may charge ten dollars ($10) for any loan negotiated at the bank in this state, even if the legal interest does not amount to that sum.

HISTORY: 2218: amend. Acts 1966, ch. 234; 1970, ch. 67, § 2; 1972, ch. 216, § 1; 1974, ch. 321, § 1; 1980, ch. 77, § 1, effective April 1, 1980; 2017 ch. 17, § 3, effective June 29, 2017; 2018 ch. 140, § 1, effective July 14, 2018.

NOTES TO DECISIONS

Analysis

1.Applicability.

Kentucky borrower could not recover under the Kentucky usury law in an action under a money lending contract with a New York lender where the contract provided that the law of New York would apply. Consolidated Jewelers, Inc. v. Standard Financial Corp., 325 F.2d 31, 1963 U.S. App. LEXIS 3517 (6th Cir. Ky. 1963 ).

Because defendant was not a pawnbroker as defined by KRS 226.010 and was not exempt from the application of Chapter 288 regulations, defendant was operating its business in violation of this section and KRS 288.420 and 288.620 (now see KRS 286.4-420 and 286.4-620 ). Commonwealth ex rel. Chandler v. Kentucky Title Loan, Inc., 16 S.W.3d 312, 1999 Ky. App. LEXIS 70 (Ky. Ct. App. 1999).

KRS 360.010 applies to the legal interest rate applicable to bank loans, not to tax refunds; thus, taxpayers seeking refunds of certain ad valorem taxes were not entitled to interest on those refunds under KRS 360.010 . City of Somerset v. Bell, 156 S.W.3d 321, 2005 Ky. App. LEXIS 3 (Ky. Ct. App. 2005).

Judgment in an adversary proceeding in bankruptcy would be altered to clarify that interest awarded to plaintiffs was pre-judgment interest only. An interest rate of 15% was proper, pursuant to this section, because prejudgment interest was governed by state law, and 15% was the rate established in the parties’ contract. Campbell v. Butz (In re Butz), 2018 Bankr. LEXIS 1176 (Bankr. W.D. Ky. Apr. 19, 2018).

2.Interest.

Where applicable interest rate at time of decedent’s death on April 2, 1979 was six percent (6%) and amendment effective April 1, 1980 changed rate to eight percent (8%), interest on proceeds from decedent’s insurance policy would be calculated at a six percent (6%) rate from April 2, 1979 to April 1, 1980 and at eight percent (8%) thereafter until the date of the court order, since the statutory amendment to this section did not provide for express retroactive application and thus could only be given prospective effect under KRS 446.080 . Metropolitan Life Ins. Co. v. Prater, 508 F. Supp. 667, 1981 U.S. Dist. LEXIS 12145 (E.D. Ky. 1981 ).

Trial court’s order that prejudgment interest on a judgment amount in a breach of contract suit be compounded annually was affirmed where eight (8) years passed between the time a subcontractor completed the job on the underlying contract and the entry of the judgment. Reliable Mech., Inc. v. Naylor Indus. Servs., 125 S.W.3d 856, 2003 Ky. App. LEXIS 340 (Ky. Ct. App. 2003).

In a breach of contract action arising from the failure to make contingent benefit payments following the assignment of a coal mining lease, the District Court abused its discretion in setting the prejudgment interest rate at five percent (5%); in light of the liquidated nature of the judgment against the defendant, the District Court did not have discretion under KRS 360.010 to assign a lower rate based on historically low interest rates. Poundstone v. Patriot Coal Co., 485 F.3d 891, 2007 FED App. 0169P, 2007 U.S. App. LEXIS 11004 (6th Cir. Ky. 2007 ).

Awarding postjudgment interest at the legal rate of interest was proper where damages were unliquidated up to the date of judgment on remand because an arbitration award previously had been vacated. Ison v. Robinson, 411 S.W.3d 766, 2013 Ky. App. LEXIS 139 (Ky. Ct. App. 2013).

3.—Maximum Rate.

Where a promisor failed to perform his promise to loan money, this section fixed the maximum recovery which could be had for such failure as the loan could have been procured from other sources at six percent (6%). (This in the absence of proof of inability to obtain the loan elsewhere or special reasons for desiring the loan.) New York Life Ins. Co. v. Pope, 139 Ky. 567 , 68 S.W. 851, 24 Ky. L. Rptr. 485 , 1902 Ky. LEXIS 8 ( Ky. 1902 ).

Mortgage loan servicer’s conduct in imposing unauthorized and improper fees and charges on a consumer, though improper, did not violate KRS 360.010 because there was no showing that the servicer had “knowingly” charged an interest rate greater than the maximum permitted under state law. In the absence of such a showing, the consumer was not entitled to relief under KRS 360.020 . Tolliver v. U.S. Bank (In re Tolliver), 2012 Bankr. LEXIS 3333 (Bankr. E.D. Ky. July 19, 2012).

4.—Right To.

Interest runs as a matter of right on a liquidated demand and, in the case of an unliquidated claim, the allowance of interest rests in the discretion of the jury or of the court trying the case. Magruder v. Ericson, 146 Ky. 89 , 141 S.W. 1195, 1912 Ky. LEXIS 9 ( Ky. 1912 ).

Money due under a written contract bears interest if not paid when due. Covington v. South C. & C. S. R. Co., 147 Ky. 326 , 144 S.W. 17, 1912 Ky. LEXIS 233 ( Ky. 1912 ).

The right to collect interest in this state is by virtue of statute, and is a creature of statute, not of the original common law of England. Coleman v. Reamer's Ex'r, 237 Ky. 603 , 36 S.W.2d 22, 1931 Ky. LEXIS 657 ( Ky. 1931 ).

Interest runs as matter of right on liquidated demands; above unliquidated claims it rests in discretion of jury or court trying case. Middleton v. Middleton, 287 Ky. 1 , 152 S.W.2d 266, 1941 Ky. LEXIS 496 ( Ky. 1 941 ).

Interest was properly allowed on sums which were spent by divorced wife for schooling of sons, and for which she claimed reimbursement from divorced husband, since claim was definite and certain both as to time and amount. Middleton v. Middleton, 287 Ky. 1 , 152 S.W.2d 266, 1941 Ky. LEXIS 496 ( Ky. 1 941 ).

Plaintiffs were entitled to only four percent (4%) interest prior to judgment for breach of duty in connection with purchase of stock rather than the statutory six percent (6%) due to the prevailing interest rates. Speed v. Transamerica Corp., 135 F. Supp. 176, 1955 U.S. Dist. LEXIS 2551 (D. Del. 1955), modified, 235 F.2d 369, 1956 U.S. App. LEXIS 5296 (3d Cir. Del. 1956).

Insurer was entitled to simple interest on a settlement amount that the insurer paid on behalf of an insured subject to the insurer’s reservation of rights, because the insurer had already established that it was entitled to reimbursement of the settlement amount from the insured and the amount could be considered as liquidated as of the date of the settlement payment. Under equitable considerations, simple interest was appropriate. Travelers Prop. Cas. Co. of Am. v. Hillerich & Bradsby Co., 596 F. Supp. 2d 1020, 2008 U.S. Dist. LEXIS 107294 (W.D. Ky. 2008 ).

Assignee of a credit card debt was precluded from collecting statutory interest on the debt since the assignor of the debt expressly waived its right to collect contractual interest which was in lieu of statutory interest, and the assignee had no greater right to collect interest than the assignor. Stratton v. Portfolio Recovery Assocs., LLC, 770 F.3d 443, 2014 FED App. 0266P, 2014 U.S. App. LEXIS 20517 (6th Cir. Ky. 2014 ).

Circuit court erred in dismissing a credit card debtor's counterclaim against the creditor's assignee because the assignee sought to recover the unpaid balance of the credit card debt plus statutory prejudgment interest, the interest had been waived under principles of contract law and statutory construction, and nothing in Kentucky's statute—by specific language, implication, or innuendo—contravened the purpose and spirit of the Fair Debt Collection Practices Act. Harrell v. Unifund CCR Partners, 2015 Ky. App. LEXIS 13 (Ky. Ct. App. Feb. 6, 2015).

5.—Commencement.

Where judgment was reversed by the Court of Appeals and the lower court had allowed withdrawal of the money in litigation, the party withdrawing it had to pay interest on it from the date of withdrawal. Albers v. Norton Co., 147 Ky. 751 , 145 S.W. 757, 1912 Ky. LEXIS 348 ( Ky. 1912 ).

Interest commenced at date money was due where it was due at a fixed time even though the amount was not fixed. Helton v. Hoskins, 278 Ky. 352 , 128 S.W.2d 732, 1939 Ky. LEXIS 426 ( Ky. 1939 ).

Where plaintiff, in action to recover sum misappropriated by executor of father’s estate, made settlement agreement which included agreement to accept designated sum in full satisfaction of claim if sum was paid by a certain date, and conduct of parties thereafter was such as to indicate that they were relying on the settlement agreement, it was proper, in subsequent action by plaintiff to recover on original cause of action, to allow plaintiff only sum fixed by agreement, with interest from date sum was to have been paid, notwithstanding that sum was not paid at time fixed in settlement agreement. Daniels v. Coleman, 291 Ky. 789 , 165 S.W.2d 804, 1942 Ky. LEXIS 324 ( Ky. 1942 ).

Where a tenant proved that it had overpaid the landlord for “common area maintenance” charges, the amount of the overpayment was sufficiently liquidated so as to qualify for the imposition of prejudgment interest, accrued from the date of the filing of the tenant’s counterclaim until the date of judgment. Maysville Marketsquare Assocs. L.P. v. Kroger Co., 2005 U.S. Dist. LEXIS 30166 (E.D. Ky. Nov. 29, 2005).

Trial court did not abuse its discretion by concluding that fundamental issues of fairness justified an award of prejudgment interest when an employer wrongly classified and underpaid employees, under Kentucky's prevailing wage law, on a public project. While prejudgment interest may or may not have been appropriate to the original award in the case, an award of prejudgment interest was properly considered anew on remand. TECO Mech. Contr., Inc. v. Ky. Labor Cabinet, 474 S.W.3d 153, 2014 Ky. App. LEXIS 171 (Ky. Ct. App. 2014).

6.— Usurious.

No usury can be regarded as having been paid until the satisfaction of the principal and the legal interest is the rule. Cambron v. Boldrick, 147 Ky. 524 , 144 S.W. 374, 1912 Ky. LEXIS 270 ( Ky. 1912 ).

Where an agreement in the form of sale and resale was found by the court to be in reality a mortgage, the resale at a price increase of more than the amount of legal interest on the amount involved was usurious. Kaye v. Macmillan, 60 F.2d 7, 1932 U.S. App. LEXIS 2430 (6th Cir. Ky. 1932 ).

Any amount charged as interest above the maximum rate of six percent (6%) is usury. Lindon v. Morgan County Nat'l Bank, 275 Ky. 556 , 122 S.W.2d 126, 1938 Ky. LEXIS 464 ( Ky. 1938 ) (decision prior to 1970 amendment).

Interest paid on a note at the rate of eight percent (8%) from the time it was made in 1920 until May 5, 1930, was usurious. Moore's Adm'x v. Brookins, 277 Ky. 668 , 126 S.W.2d 1059, 1939 Ky. LEXIS 686 ( Ky. 1939 ) (decision prior to 1970 amendment).

Where original series of notes calling for eight percent (8%) interest were replaced by single note bearing six percent (6%) interest, payments under original notes were in nearly every instance for exact amount of interest and were credited as such, except for small sums credited on principal, and new note was for practically same amount as principal of old notes, debtor could not have usurious interest paid on old notes applied as a setoff on principal in suit on new note, but was required to bring independent action for that purpose. Catron v. Jones, 281 Ky. 163 , 135 S.W.2d 419, 1939 Ky. LEXIS 27 ( Ky. 1939 ) (decision prior to 1966 amendment).

An attorney’s fee paid in addition to legal interest in consideration for forbearance is usurious. Schultz v. Provident Loan Ass'n, 289 Ky. 25 , 157 S.W.2d 736, 1941 Ky. LEXIS 17 ( Ky. 1941 ).

In order to state a claim under KRS 360.020 , a person must knowingly take, receive, reserve, or charge a rate of interest greater than is allowed in this section. Hamilton v. York, 987 F. Supp. 953, 1997 U.S. Dist. LEXIS 19780 (E.D. Ky. 1997 ).

Charges incurred by customers of check cashing company were interest from short-term loans, rather than service fees for cashing a check, where customers incurred charges in exchange for extra time to pay back their original check to check cashing company. Hamilton v. York, 987 F. Supp. 953, 1997 U.S. Dist. LEXIS 19780 (E.D. Ky. 1997 ).

7.— Usury as a Defense.

It is the general rule that a law withdrawing the defense of usury from a corporation applies also to individual guarantors, sureties, and indorsers on corporate obligations so that they, as well as the corporation, are precluded from interposing usury as a defense. E'Town Shopping Center, Inc. v. Lexington Finance Co., 436 S.W.2d 267, 1969 Ky. LEXIS 471 ( Ky. 1969 ).

The debtor, a professional banker who held numerous positions at a competitor of the bank, was estopped to claim the defense of usury against the creditor bank, where the debtor knew or should have known of the usury laws and other statutes and regulations concerning the banking industry, the debtor acknowledged that he was told that the interest rates on the notes would be increased, the notes had a term of only one year, and the bank extended the term in exchange for payment of the interest rate prevailing at the time. Broaddus v. National Bank of Lancaster, 709 S.W.2d 461, 1986 Ky. App. LEXIS 1112 (Ky. Ct. App. 1986).

8.— Liability of Surety.

Interest is recoverable of a surety in an action on a bond for payment of money or damages for its nonpayment although the addition of the interest may make the total amount exceed the penalty named in the bond but, in an action for damages on the bond of a peace officer for a tort committed by him, interest may be recovered on the amount of damages awarded only from the date of the judgment. Waddle v. Wilson, 164 Ky. 228 , 175 S.W. 382, 1915 Ky. LEXIS 367 ( Ky. 1915 ).

Where a claim was not an unliquidated damage claim but one to recover under subrogation for sums advanced to contractor to pay materialmen, surety was liable for interest. Western Casualty & Surety Co. v. Meyer, 301 Ky. 487 , 192 S.W.2d 388, 1946 Ky. LEXIS 507 ( Ky. 1946 ).

9.— Lost Bond.

An obligor was compelled to hold interest payments for its own protection on a lost bond when no indemnity bond was offered and could not be charged with interest on the interest payments so withheld. Pensacola & A. R. Co. v. Hilton's Trustee, 147 Ky. 553 , 144 S.W. 1077, 1912 Ky. LEXIS 305 ( Ky. 1912 ).

6.—Usurious.

Where lenders provided funding for a plaintiff’s litigation and received compensation from the plaintiff’s award, the agreements were void as usury because the interest rate provided for in the agreements far exceeds the permissible statutory rate and a transaction does not have to be a loan to fall within the statute. Boling v. Prospect Funding Holdings, LLC, 771 Fed. Appx. 562, 2019 FED App. 0210N, 2019 U.S. App. LEXIS 12630 (6th Cir. Ky. 2019 ).

10.Share of Profits.

Even though a lender could receive profits exceeding the legal rate, an agreement to loan money for a share of the borrower’s business was usurious. Dublin v. Veal, 341 S.W.2d 776, 1960 Ky. LEXIS 85 ( Ky. 1960 ).

11.Contracts Executed in Foreign State.

In a suit by a foreign corporation against a domestic corporation on a contract executed, performed and intended to be performed in another state, interest was allowed at a rate legal in the contracting state although in excess of the legal rate in this state. Big Four Mills, Ltd. v. Commercial Credit Co., 307 Ky. 612 , 211 S.W.2d 831, 1948 Ky. LEXIS 791 ( Ky. 1948 ).

12.Partnerships.

Where a partner paid usurious interest on partnership notes and, in a suit to dissolve the partnership, sought to recover the proportionate share of such usury from the other partner, he was allowed to succeed, as the payment of usury without other evidence is not a violation of the “utmost good faith” which each partner owes toward the partnership. Marcum's Adm'r v. Marcum, 154 Ky. 401 , 157 S.W. 1101, 1913 Ky. LEXIS 119 ( Ky. 1913 ).

After dissolution and before settlement of a partnership business, no interest should be allowed on an undetermined balance, unless there is an agreement between the parties or conditions raising an equity. Waterbury v. Waterbury, 281 Ky. 107 , 134 S.W.2d 1009, 1939 Ky. LEXIS 21 ( Ky. 1939 ).

13.Penalty for Nonpayment of Taxes.

The penalty for nonpayment of taxes may be in excess of six percent (6%), since a tax is “neither a contract for a loan nor a forbearance of money” though it is treated as a debt for the purpose of defining its mode of collection. Specht v. Louisville, 135 Ky. 548 , 122 S.W. 846, 1909 Ky. LEXIS 319 ( Ky. 1909 ).

14.Holders of Second Lien.

If there is any usury in a loan, holders of second lien are entitled to have it purged of usury for their benefit and to subject the remainder of the proceeds to the payment of their lien claim. Cambron v. Boldrick, 147 Ky. 524 , 144 S.W. 374, 1912 Ky. LEXIS 270 ( Ky. 1912 ).

15.Payment of Debt by Life Tenant.

Where (under KRS 394.420 ) a life tenant under a devise paid a debt of the testator and sued for contribution, the value of life interest is to be computed on the basis of six percent (6%), even though at the time of testator’s death money was worth only five percent (5%). Dorn v. Fidelity & Columbia Trust Co., 204 Ky. 211 , 263 S.W. 681, 1924 Ky. LEXIS 399 ( Ky. 1924 ).

16.Procedure.

Those counts of a complaint seeking a declaration that debtor's loan was void and unenforceable under the Kentucky Consumer Loan Act and that creditor filed false proofs of claim on illegal loans were both statutorily and constitutionally core, as they would necessarily be resolved in the claims allowance process, but counts seeking a determination that the loan violated the Kentucky Consumer Protection Act, that creditor committed common law fraud, and that collection activities violated the FDCPA were statutorily but not constitutionally core. Court declined to enforce arbitration provisions as to the counts that were both statutorily and constitutionally core, but did not have the discretion to decline enforcement as to the other counts. Kiskaden v. LVNV Funding, LLC (In re Kiskaden), 571 B.R. 226, 2017 Bankr. LEXIS 996 (Bankr. E.D. Ky. 2017 ).

17.— Discovery.

When sued on a debt which was the accumulation of several years of borrowing, the debtor pleaded usury and, upon a further plea of no records having been kept by him but that the creditor had such records, he was granted a bill of discovery. Tiller v. Cincinnati Discount Co., 270 Ky. 685 , 110 S.W.2d 420, 1937 Ky. LEXIS 129 ( Ky. 1937 ).

18.Statute of Limitations.

The seven (7) year statute of limitations as to sureties did not apply in suit to recover usurious interest where maker paid interest during his life and administratrix paid interest after his death until two (2) years prior to filing suit. Moore's Adm'x v. Brookins, 277 Ky. 668 , 126 S.W.2d 1059, 1939 Ky. LEXIS 686 ( Ky. 1939 ).

19.Transactions.

The word “transactions” does not mean installment loan, for if it was so intended, the legislature could easily have said so. Duff v. Bank of Louisville & Trust Co., 705 S.W.2d 920, 1986 Ky. LEXIS 243 ( Ky. 1986 ).

20.Service fee.

If a person walked into a check cashing establishment with a government check for $1000 and the business gave him $900 for the check, the business would not be subject to usury statutes because the $100 payment would be a service fee, not discounted interest. The $100 charge would be considered a service fee because the business is not receiving $100 for the use of its money, but rather for the service of processing and providing instant cash to unbanked people. Hamilton v. York, 987 F. Supp. 953, 1997 U.S. Dist. LEXIS 19780 (E.D. Ky. 1997 ).

Cited in:

Ingersoll-Rand Financial Corp. v. Electro Coal, Inc., 496 F. Supp. 1289, 1980 U.S. Dist. LEXIS 15369 (E.D. Ky. 1980 ); Brown v. Fulton, Hubbard & Hubbard, 817 S.W.2d 899, 1991 Ky. App. LEXIS 97 (Ky. Ct. App. 1991); Miller v. HLT Check Exchange (In re Miller), 215 B.R. 970, 1997 Bankr. LEXIS 2107 (Bankr. E.D. Ky. 1997 ); Hearn v. Commonwealth, 80 S.W.3d 432, 2002 Ky. LEXIS 135 ( Ky. 2002 ); Ky. Bar Ass’n v. Porath, 397 S.W.3d 905, 2013 Ky. LEXIS 245 ( Ky. 2013 ).

Notes to Unpublished Decisions

2.Interest.

Unpublished decision: Where an insured's home was destroyed in a fire and the insured sought the insured's interpretation of replacement costs under an insurance policy, diversity jurisdiction was proper because the insurer showed that the amount in controversy was “more likely than not” above $75,000 since, inter alia, the insured sought damages amounting to $66,729, attorney's fees, and punitive damages, and the complaint explicitly demanded attorney's fees under Ky. Rev. Stat. Ann. § 304.12-235 , a 12% interest rate, not the lower rate that she alleged applied under Ky. Rev. Stat. Ann. § 360.010 . Hampton v. Safeco Ins. Co., 614 Fed. Appx. 321, 2015 FED App. 0427N, 2015 U.S. App. LEXIS 9763 (6th Cir. Ky. 2015 ).

Opinions of Attorney General.

If the amount of a loan on a revolving credit account exceeds $5,000 or for some other reason does not meet the criteria prescribed in former KRS 287.215 , the legal rate of interest prescribed in this section would apply. OAG 61-60 .

Carrying charges or finance charges in retail installment contracts are not interest charged on a loan of money or forbearance of a debt, and are therefore not affected by the usury laws, where they are provided for in the contract of sale as a part of the purchase price. OAG 68-325 .

Under subsection (3) of KRS 386.030 , loans insured by the federal housing administration are not subject to the maximum rate of interest prescribed by this section. OAG 69-35 .

An agreement on the part of the borrower to pay a mortgage broker a fee of one percent (1%) as an “origination” fee for services rendered in procuring a loan would not render usurious a loan bearing seven percent (7%) interest. OAG 69-484 .

The six percent (6%) restriction of subsection (2)(b) of KRS 173.745 , applicable to library district boards, does not apply to a nonprofit construction corporation organized to build a library and lease it to the library district. OAG 69-552 .

Banks may engage in the practice of discounting by taking interest in advance on short-term notes bearing the maximum interest rate without violating the usury law. OAG 70-276 .

Lenders may charge amounts denominated “service charges” in addition to the maximum interest rates, where such charges are made in good faith for services actually rendered to the borrower and the amount charged is no more than reasonable reimbursement for the expenses incurred by the lender. OAG 70-276 .

Where a long-term real estate loan is made at the maximum legal rate of interest permitted under this section, an additional charge of two percent (2%) of the amount of the loan deducted by the lender at the outset as points would make the loan transaction usurious. OAG 70-284 .

The phrase “single unit family residential real estate,” as used in subsection (1)(a) of this section, includes unimproved lots which are limited by restrictive covenants to be used only for residential purposes. OAG 70-348 .

Any transaction between the mortgagee and a third party wishing to assume the loan is a novation, and if the novation occurs after March 23, 1970, the mortgagee may agree with the third party purchaser to an eight and one-half percent (81/2%) interest rate. OAG 70-598 .

Lenders who made commitments prior to March 23, 1970, cannot disregard such commitments. OAG 70-599 .

The borrower can refinance his interim loan with the interim lender or with a third party. OAG 70-599 .

The parties, the lender and the borrower, may agree to an eight and one-half percent (81/2%) interest rate on money borrowed for the purpose of paying off a construction or interim loan but the entire proceeds from the note must go to pay off the interim or construction loan. OAG 70-599 .

In view of the reason for the exempt classifications in the statutes, this section and KRS 360.025 are constitutional. OAG 70-727 .

A savings and loan association in making loans insured by the FHA can charge “points” to the seller at a percentage of the principal amount of the loan in addition to the maximum legal interest rate as set forth in this section without violating Kentucky’s usury laws. OAG 70-782 .

The law governs the interest rate which may be charged on accounts remaining unpaid after their due date, except where statutory provisions otherwise provide for the charging of delinquency charges. OAG 70-800 .

The exception provided for in subsection (1)(a) of this section is not applicable where an individual refinances his previous mortgage on a residence with another institution, the proceeds of the loan being used to pay off the existing mortgage. OAG 70-802 .

Where a corporation is the party desiring to borrow money for the improvement of a mobile home court, the corporation could not raise usury as a defense to any interest rate agreed to by the parties. OAG 70-802 .

Where an individual wishes to refinance a mortgage on commercial property presently held by another institution, seven and one-half percent (71/2%) would be the interest limit that could be charged on the loan. OAG 70-802 .

If an insurance agent was issuing insurance prior to receiving payment but only as an incident of selling insurance and with no intention of carrying the accounts past a reasonable time for payment, he would not be “engaging in the business of financing” insurance premiums and subsection (1) of this section would be applicable. OAG 71-15 .

Where a son wanted to obtain a home, it was legal for his father to cosign a note for eight and one-half percent (81/2%) and to deliver to the lending institution a mortgage on his own property to secure the loan. OAG 71-25 .

Where a corporation borrowed money at eight and one-half percent (81/2%) interest to purchase and renovate dwellings and then sold them to individuals who assumed the loan at eight and one-half percent (81/2%) interest, the transaction would not be prohibited by the interest ceiling in this section. OAG 71-492 .

An FHA-insured loan bearing interest in excess of 81/2% would not be usurious under Kentucky law. OAG 73-444 .

Loans secured by a lien on one single unit family residential real property cannot have an agreed interest rate exceeding 8.5% regardless of the loan. OAG 73-514 .

Where a seller pays discount points and an independent appraisal of the property has been made justifying the sale price, with no increase in the sale price because of the seller’s payment of the points, then such points payment would not be considered interest under the interest rate limitation of this section. OAG 73-514 .

Where the lender actually turns over all of the insurance premiums to a third-party insurance carrier having no corporate connection with the lender, even if the insurance is a condition for obtaining the loan, then such charge, even though making the cost of the loan exceed the highest legal interest permissible under this section, would not constitute usury. OAG 73-514 .

Where the seller pays the discount points and does not pass on the points to the buyer-borrower in any form, then the law is clear that the points paid to the lender do not constitute interest under this section. OAG 73-567 .

Points discount would not be usurious provided that the points are paid only by the builder and are not passed on, in any manner, to the buyer-borrower. OAG 73-568 .

The origination fee charged to the buyer-borrower by the initial lender is usurious even though a discount is paid by the investor. OAG 73-568 .

Where a corporation secures funds from an investor for a builder to be used to finance single-family houses, and a nonrefundable commitment fee is paid by the builder, if the fee is not passed on in any manner to the borrower-buyer, it would not be interest and thus not usurious. OAG 73-568 .

Where the loan is at 8.5% interest, a 1% origination fee would be an additional sum exacted from the debtor by the creditor and therefore usurious. OAG 73-568 .

Each loan transaction must be separately measured against the interest rate provisions of subsection (1)(b) and (c) (now (1)(b) only) in order to determine the applicability of this subsection and the original principal of the two notes cannot be combined for that purpose as the original principal amount of each note must be used in making these separate calculations (opinion prior to 1974 amendment). OAG 73-738 .

If a bank makes a loan under this section secured by a first mortgage, a second mortgage on the same real estate was prohibited by former KRS 287.215(6). OAG 74-304 .

Where the original principal amount involved in the written obligation is $15,000 or less, the parties may agree in writing to a rate of interest not to exceed 8.5% regardless of whether the loan is secured by a mortgage generally or a mortgage involving one single unit family residential property. OAG 74-381 .

Under former KRS 287.215 a bank may not make two or more loans to a particular borrower at the same time if one of the loans is made pursuant to that section, and, if a second loan is made pursuant to that section, it would be void as a willful violation of the statute and the bank would be barred from receiving any interest or charges on the loan. OAG 75-84 .

While the legal rate of interest is 6% per annum under this section, the parties may agree in writing to any interest rate on money due or to become due upon any contract or other written obligation where the original principal amount is in excess of $15,000, so that 8.5% interest may be agreed to on the amount of $20,000, which interest may be added on to the original principal before determining the instalment amounts since this section does not require amortization or the paying of interest on a progressively reduced principal balance. OAG 76-98 .

The add-on interest method may be employed where the original principal balance is less than $15,000 and where the parties agree in writing on a rate of interest not to exceed 8.5% per annum. OAG 76-136 .

Finance charges in connection with retail sales installment contracts constitute part of the consideration of the sale and the usury statutes do not apply. OAG 77-511 .

Installment loans may be made by a bank under either former KRS 287.215 or this section; if a loan is made for more than $15,000, any rate may be charged, and the 5 and 10 year restrictions of former KRS 287.215 , the only purpose of which is to limit the amount of interest, would not be applicable. OAG 78-221 .

Former KRS 287.215 and this section are not in conflict, but, rather, are supplementary to each other; that is, a bank may lend money under the provisions of either of the sections. OAG 78-221 .

The sole significance of subsection (2) of this section, providing that a bank can charge a $10.00 minimum fee, is that it indicates the clear intention of the Legislature that the pertinent provisions of this chapter apply to banks, as well as to unlicensed lenders. OAG 78-221 .

Any reductions (by payments of borrower) on a loan after it exceeds $15,000 would not alter the negotiated rate of interest (any rate to be agreed on). OAG 79-169 .

The phrase “original principal amount loaned” used in this section simply means the actual amount loaned, i.e., the cash actually transferred to the borrower, for which interest is due or to become due. OAG 79-169 .

This section cannot be applied on the basis of a mere obligation of the lender to loan money at some date in the future; the usury statute cannot be circumvented by an obligation of the lender to lend which may never happen. OAG 79-169 .

Where a borrower made a master note for $16,000, payable one year from date at 10 percent interest, but only actually took advances totaling $13,000, the provision for interest in excess of 8.5 percent would be void under this section, and, if the interest was paid at 10 percent, he could sue lender for twice that amount under KRS 360.020 . OAG 79-169 .

The clear purpose of former KRS 287.215 was to give banks a continuing incentive to make loans involving principal amounts of $15,000 or less to consumers by permitting an interest charge on such loans in excess of that allowed by this section. OAG 80-64 .

The legislature did not intend that the interest rate set by former KRS 287.214 should be applicable to renewals of notes which involved an original principal amount greater than $15,000 even though the amount owed has been reduced to $15,000 or less at the time of the renewal. OAG 80-66 .

Advancing 60 percent of an anticipated tax refund in return for the assignment of the tax refund through the execution of a power of attorney, which in all probability will be received by the lender in six to 12 weeks, is clearly usurious. OAG 82-231 .

The purpose of former KRS 287.215 , governing advance interest, was to empower and encourage banks to make loans at rates in excess of the then stricter usury statutes and to construe this statute as a restriction upon a bank’s ability to loan under this section, when the circumstances are such that the provisions therein are favorable to the bank, would be in derogation of legislative intent. OAG 83-266 .

Research References and Practice Aids

Cross-References.

Bank or trust company may charge interest in advance on installment loans, KRS 286.3-215 .

Contribution, interest allowed from time right accrues, KRS 412.060 .

Credit unions, interest on loans made by, KRS 286.6-435 .

Interest charged against guardians, curators and committees, KRS 387.270 .

Interest on claims against decedent’s estate, KRS 396.085 .

Local or special act regulating rate of interest forbidden, Ky. Const., § 59(21).

Pawnbrokers, maximum interest chargeable by, KRS 226.080 .

Kentucky Law Journal.

Stengel, Should States Adopt the Uniform Consumer Credit Code?, 60 Ky. L.J. 8 (1971).

Kentucky Law Survey, Bondurant and Arvin, Real Property, 69 Ky. L.J. 625 (1980-81).

Comments, Forfeiture and the Land Installment Contract: Sebastian v. Floyd, 72 Ky. L.J. 917 (1983-84).

Northern Kentucky Law Review.

Cox, Lender Liability in the Bluegrass: Are New Theories Emerging Under Kentucky Law?, 16 N. Ky. L. Rev. 43 (1988).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Usury, § 197.00.

360.020. Civil penalty for charging excessive interest — Partial payment applied first to interest.

  1. The taking, receiving, reserving, or charging a rate of interest greater than is allowed by KRS 360.010 , when knowingly done, shall be deemed a forfeiture of the entire interest which the note, bill, or other evidence of debt carries with it, or which has been agreed to be paid thereon. In case the greater rate of interest has been paid, the person by whom it has been paid, or his legal representatives, may recover, in an action in the nature of an action of debt, twice the amount of the interest thus paid from the creditors taking or receiving the same: provided, that such action is commenced within two (2) years from the time the usurious transaction occurred.
  2. Partial payment on a debt bearing interest shall be first applied to the interest then due.

History. 883i-31, 2219: amend. Acts 1944, ch. 173, § 21; 1970, ch. 67, § 3; 1972, ch. 216, § 2.

NOTES TO DECISIONS

1.Applicability.

Ordinarily, this section does not apply where the debtor has the right to direct the application of the payments and exercises that right but property owner accepting ten (10) year payment plan for street improvements did not have the right to direct that payments made by him extinguish current installments and city properly applied payments on accrued interest. Olive Hill v. Gearhart, 289 Ky. 53 , 157 S.W.2d 481, 1941 Ky. LEXIS 13 ( Ky. 1941 ).

Mortgage loan servicer’s conduct in imposing unauthorized and improper fees and charges on a consumer, though improper, did not violate KRS 360.010 because there was no showing that the servicer had “knowingly” charged an interest rate greater than the maximum permitted under state law. In the absence of such a showing, the consumer was not entitled to relief under KRS 360.020 . Tolliver v. U.S. Bank (In re Tolliver), 2012 Bankr. LEXIS 3333 (Bankr. E.D. Ky. July 19, 2012).

2.Service Charges.

A lender of money may properly charge to a borrower the necessary reasonable expenses incident to a loan without incurring the statutory penalty for usury if the consideration for services actually rendered to the borrower and the agreement for services is made in good faith and is not a cloak to conceal usury. Harding v. Kentucky Title Trust Co., 269 Ky. 622 , 108 S.W.2d 539, 1937 Ky. LEXIS 650 ( Ky. 1937 ), cert. denied, 303 U.S. 635, 58 S. Ct. 522, 82 L. Ed. 1095, 1938 U.S. LEXIS 267 (U.S. 1938).

Financing or service charges included in the price of an article sold on the instalment plan are not interest within the meaning of this section, but are considered a part of the consideration of the sale. Munson v. White, 309 Ky. 295 , 217 S.W.2d 641, 1949 Ky. LEXIS 691 ( Ky. 1949 ).

If a person walked into a check cashing establishment with a government check for $1000 and the business gave him $900 for the check, the business would not be subject to usury statutes because the $100 payment would be a service fee, not discounted interest. The $100 charge would be considered a service fee because the business is not receiving $100 for the use of its money, but rather for the service of processing and providing instant cash to unbanked people. Hamilton v. York, 987 F. Supp. 953, 1997 U.S. Dist. LEXIS 19780 (E.D. Ky. 1997 ).

3.Usury.

Where X sold Y notes which X held on a certain bank at face value, even though the notes of that bank were generally circulating at about 40 percent of face value, and took Y’s note in payment, there was no usury in Y’s note. (decided under prior law) Bank of United States v. Waggener, 34 U.S. 378, 9 L. Ed. 163, 1835 U.S. LEXIS 355 (U.S. 1835).

A payment made at the date of renewal of a note, although regarded by the parties at the time as a payment of usurious interest, and the note renewed as to the principal only, was nevertheless regarded as a payment on the principal and all usury purged from the transaction so long as the original obligor remained liable. (This was so, even though new parties signed the renewal who were not on the original note.) Hill v. Cornwall & Bro.'s Assignee, 95 Ky. 512 , 26 S.W. 540, 16 Ky. L. Rptr. 97 , 1894 Ky. LEXIS 60 ( Ky. 1894 ).

Debtor’s suit was properly dismissed because it was a pre-petition cause of action as actionable violations of the Fair Debt Collection Practices Act and Kentucky’s usury laws occurred at or before the time of the creditor’s filing a complaint, and thus, the debtor’s suit was property of the bankruptcy estate, and only his bankruptcy trustee had authority to pursue; only if the debtor scheduled his claims and the trustee declined to pursue them would he be able to reinitiate his suit. Tyler v. DH Capital Mgmt., 736 F.3d 455, 2013 FED App. 0327A, 2013 U.S. App. LEXIS 22562 (6th Cir. Ky. 2013 ).

4.— Legal Consequences.

A contract for legal interest upon a note containing usury worked a forfeiture of the interest accrued on that part of the principal of the note which represented usurious interest accrued on prior notes. (decided under prior law) Rudd v. Planters' Bank of Kentucky, 78 Ky. 513 , 1880 Ky. LEXIS 51 ( Ky. 1880 ).

That a contract calls for the payment of usurious interest shall not prevent the recovery of the principal, or legal interest thereon, or any fees included which are charges other than interest. Simpson v. Kentucky Citizens’ Bldg. & Loan Ass’n, 101 Ky. 496 , 19 Ky. L. Rptr. 1176 , 41 S.W. 570, 1897 Ky. LEXIS 218 ( Ky. 1897 ), overruled, Linton v. Fulton Bldg. & Loan Ass’n, 262 Ky. 198 , 90 S.W.2d 22, 1936 Ky. LEXIS 22 ( Ky. 1936 ), overruled in part, Linton v. Fulton Bldg. & Loan Ass’n, 262 Ky. 198 , 90 S.W.2d 22, 1936 Ky. LEXIS 22 ( Ky. 1936 ) (decision prior to 1970 amendment).

Where evidence showed that defendants had paid eight percent (8%) interest for over ten (10) years and defense of usury in answer was not controverted, judgment in favor of plaintiff should be reduced by amount of usurious interest. Moore's Adm'x v. Brookins, 277 Ky. 668 , 126 S.W.2d 1059, 1939 Ky. LEXIS 686 ( Ky. 1939 ) (decision prior to 1970 amendment).

Courts will not tolerate the collection of usury through the use of any trick, devise or subterfuge and, if there is in substance a receipt of usurious interest, the parties are subject to the statutory consequences no matter what device they may have used to conceal the true character of their dealings and, where the original loan was secured by a chattel mortgage and lender later compelled borrower to pay fee of attorney in return for dropping criminal charges for sale of automobile subject to mortgage, the transaction was usurious. Schultz v. Provident Loan Ass'n, 289 Ky. 25 , 157 S.W.2d 736, 1941 Ky. LEXIS 17 ( Ky. 1941 ).

In respect to incurring the penalty or forfeiture for a violation of the law against usury, the subsequent receipt of usurious interest by the lender on a contract originally untainted with usury renders him liable to the penalty or forfeiture incurred. Schultz v. Provident Loan Ass'n, 289 Ky. 25 , 157 S.W.2d 736, 1941 Ky. LEXIS 17 ( Ky. 1941 ) (decision prior to 1970 amendment).

5.— As Defense.

Where action was instituted by X to recover from Y on a note executed as consideration for the assignment by X to Y of another note, the plea that the assigned note was usurious and that X had knowledge of the usury was a good defense. Wilcoxon v. Morse, 44 S.W. 142, 19 Ky. L. Rptr. 1830 (1898).

Credit for usurious interest paid will be allowed the maker of a note even when sued thereon by a holder in due course. Whitaker v. Smith, 255 Ky. 339 , 73 S.W.2d 1105, 1934 Ky. LEXIS 231 ( Ky. 1934 ).

It is the general rule that a law withdrawing the defense of usury from a corporation applies also to individual guarantors, sureties, and indorsers on corporate obligations so that they, as well as the corporation, are precluded from interposing usury as a defense. E'Town Shopping Center, Inc. v. Lexington Finance Co., 436 S.W.2d 267, 1969 Ky. LEXIS 471 ( Ky. 1969 ).

Where purchaser signed document for purchase of a tract of land which specified an interest rate one percent (1%) above the legal rate only to close the transaction with no intention of ever paying the additional one percent (1%) interest, purchaser was not estopped from setting up usury defense to the action. Gudgel v. Kaelin, 551 S.W.2d 803, 1977 Ky. App. LEXIS 699 (Ky. Ct. App. 1977).

6.— Recovery.

Where, in paying a default judgment, a defendant paid the usury included therein, he was able to recover back such usury, as in the case of any other payment of usury. (decided under prior law) Sherley v. Trabue, 85 Ky. 71 , 2 S.W. 656, 8 Ky. L. Rptr. 649 , 1887 Ky. LEXIS 19 ( Ky. 1887 ).

A surety on a note paid it at maturity at the request of the principal debtor and, as settlement of a suit for contribution, took from the debtor a new note for the amount he had paid. Surety subsequently sued debtor on second note and defense was that it contained usury charged in the first note and which the surety was not legally bound to pay. Under such facts, as the surety was not the usurer, he was allowed to recover the full amount of the notes given him. Blakeley v. Adams, 113 Ky. 398 , 68 S.W. 473, 24 Ky. L. Rptr. 324 , 1902 Ky. LEXIS 78 ( Ky. 1902 ).

Where a partnership borrowed money secured by a lien on the land which the money was used to purchase and subsequently sold the land to one of the partners individually in consideration of his assumption of the partnership debt and a further note secured by a second lien on the land, and this partner went bankrupt, the partnership was entitled to sue to purge the first debt of usury so that the proceeds from the sale of the land would more nearly pay their secondary claim. Also, the assuming partner could not recover usury from the creditor until the debt to the partnership was paid. Cambron v. Boldrick, 147 Ky. 524 , 144 S.W. 374, 1912 Ky. LEXIS 270 ( Ky. 1912 ).

Where a partner paid usurious interest on partnership notes and, in a suit to dissolve the partnership, sought to recover the proportionate share of such usury from the other partner, he was allowed to succeed, as the payment of usury without other evidence is not a violation of the “utmost good faith” which each partner owes toward the partnership. Marcum's Adm'r v. Marcum, 154 Ky. 401 , 157 S.W. 1101, 1913 Ky. LEXIS 119 ( Ky. 1913 ).

Where a surviving partner sued to recover from a deceased partner’s estate a proportionate share of usurious interest paid on a partnership note, the action was not barred by KRS 396.040 , which requires that claims against a decedent’s estate be purged of usury before being paid, as that section applies only to claims arising out of a debtor-creditor relationship. Marcum's Adm'r v. Marcum, 154 Ky. 401 , 157 S.W. 1101, 1913 Ky. LEXIS 119 ( Ky. 1913 ).

A debt may be purged of usury so long as any part of the principal remains unpaid, and the debtor may elect to have all payments made by him upon the indebtedness treated as payments first upon the legal interest due at the time the payments are made and then upon the principal. Brickley v. Standard Mortg. Co., 290 Ky. 125 , 160 S.W.2d 633, 1942 Ky. LEXIS 380 ( Ky. 1942 ).

Where creditor, at time of making loan, deducted usurious service charge of ten percent (10%) of principal of loan, debtor was entitled to credit for amount so deducted together with interest at six percent (6%) on that amount, but was not entitled to credit for interest paid on the excess interest. Brickley v. Standard Mortg. Co., 290 Ky. 125 , 160 S.W.2d 633, 1942 Ky. LEXIS 380 ( Ky. 1942 ).

7.— Assignment of Instrument.

Where a usurious note had passed into the hands of a distributee of an estate, it could be purged of usury in such prorated amount as that distributee’s share represented to the entire estate. (decided under prior law) Perrin v. Ammerman, 3 Ky. Op. 534, 1870 Ky. LEXIS 184 (Ky. Ct. App. Feb. 21, 1870).

The mere assignment of a usurious obligation did not pay the usury in it nor set the statute of limitations to running, because it was the same usurious obligation and no payment had occurred by novation or otherwise. Taulbee v. Hargis, 173 Ky. 433 , 191 S.W. 320, 1917 Ky. LEXIS 492 ( Ky. 1917 ).

8.— Waiver of Claim.

Where a distributee of a creditor’s estate was induced by a debtor to accept the debtor’s note in settlement of the distributee’s right in the estate, the debtor could not later recover for usury paid if the distributee was innocent that the note contained usury at the time he took it. (decided under prior law) Perrin v. Ammerman, 2 Ky. Op. 616, 1868 Ky. LEXIS 530 (Ky. Ct. App. Oct. 14, 1868).

Where one had paid usury and had a right to maintain an action to recover it back, he was under no obligation to his creditors to exercise such right. (decided under prior law) Bell's Assignee v. Merriweather, 8 Ky. Op. 699, 1876 Ky. LEXIS 209 (Ky. Ct. App. May 4, 1876).

The right to reclaim usurious interest depended upon the election of the party who had paid it and, where he died without any effort to reclaim that usury, another could not do it for him. (decided under prior law) Rieke Bros. v. Stron, 10 Ky. Op. 159, 1878 Ky. LEXIS 191 (Ky. Ct. App. Dec. 12, 1878).

When, by agreement between a debtor and his creditor, the debtor was permitted for a consideration to discharge his debt before it was due, the debtor was not by the agreement precluded from recovering all usury paid by him up to that time. Locknane v. United States Sav. & Loan Co., 103 Ky. 265 , 44 S.W. 977, 19 Ky. L. Rptr. 1984 , 1898 Ky. LEXIS 57 ( Ky. 1898 ).

Where borrower, after having paid usury, entered into an agreement with the creditor whereby, in consideration of a new note being issued at less than the legal rate of interest, the borrower waived all claims to recover the usury previously paid, such an agreement would not defeat an action to recover the usury already paid. The law regards the debtor, in executing such a release, as acting under the coercion of the creditor, and yielding to the demand, under the pressure of his condition. Cynthiana Bldg. & Sav. Ass'n v. Ecklar, 112 Ky. 164 , 65 S.W. 335, 23 Ky. L. Rptr. 1467 , 1901 Ky. LEXIS 292 ( Ky. 1901 ), overruled, Linton v. Fulton Bldg. & Loan Ass'n, 262 Ky. 198 , 90 S.W.2d 22, 1936 Ky. LEXIS 22 ( Ky. 1936 ).

Where one assumed the mortgage indebtedness against land as consideration for its transfer, such assuming debtor cannot set up usury in the original debt in a foreclosure suit, as the sale by the original mortgagee was a waiver of his right to defend on the ground of usury. Burnett v. Young Men's Bldg. & Loan Ass'n, 155 Ky. 59 , 159 S.W. 609, 1913 Ky. LEXIS 182 ( Ky. 1913 ).

Where an innocent party, without knowledge that an obligation embraced usury, became the holder of such obligation and thereafter the obligor discharged it by executing a new note to the innocent holder, and the assignor of the old obligation was discharged from liability, the obligor could not complain of usury in it against the new payee nor sue the new payee to recover the usury in the original note. Taulbee v. Hargis, 173 Ky. 433 , 191 S.W. 320, 1917 Ky. LEXIS 492 ( Ky. 1917 ).

Any claim for excess interest on notes prior to compromise settlement agreement was barred by terms of that agreement, since it definitely fixed amount of indebtedness. Staten v. Louisville Trust Co., 289 Ky. 258 , 158 S.W.2d 387, 1942 Ky. LEXIS 518 ( Ky. 1942 ).

9.Interest.

Where a note was executed for land and was not to bear interest until after maturity, the interest stipulated for was no part of the price but was a forbearance. (decided under prior law) McCann's Ex'r v. Bell, 79 Ky. 112 , 1 Ky. L. Rptr. 421 , 1880 Ky. LEXIS 98 ( Ky. 1880 ).

10.— Computations.

In computing the amount due on a note upon which usurious interest has been paid, the usurious interest so paid should be credited upon the debt as of the time of payment. Day's Adm'x v. Davis, 47 S.W. 769, 20 Ky. L. Rptr. 869 (1898).

To ascertain the amount due on a note which has been repeatedly renewed so as to purge it from usury, the sum originally loaned should be taken as the original principal and interest calculated thereon at six percent (6%) until the first renewal. On renewal, unpaid interest should be added to unpaid principal and interest calculated on the new amount until the second renewal or payment. Bramblett v. Deposit Bank of Carlisle, 122 Ky. 324 , 92 S.W. 283, 28 Ky. L. Rptr. 1228 , 1906 Ky. LEXIS 63 ( Ky. 1906 ).

Rule for computing partial payments on interest: “Compute the interest due on said note up to date of any cash payment on same, which may exceed the interest which may have accrued on said note up to that date, and, provided the payment is more than said interest, add the accrued interest to the principal and deduct the payment, the balance constituting a new principal as of that date. Should the payment not be sufficient to satisfy the accrued interest, it will be reverted until the sum of the partial payments is sufficient to satisfy the accrued interest up to the date of the last payment, when the sum of said payments is to be credited in one amount, and are to be deducted as before.” Adams v. Illinois Life Ins. Co., 104 S.W. 718, 31 Ky. L. Rptr. 1041 (1907).

Mere denial by mortgagor that amount due on mortgage is as claimed by plaintiff does not raise issue as to method of calculating interest. Tackett v. Home Owners' Loan Corp., 286 Ky. 388 , 150 S.W.2d 229, 1941 Ky. LEXIS 225 ( Ky. 1941 ).

Since the proper method of interest calculation is prescribed by law, a plaintiff is not required to explain its method of interest calculation when no issue as to method is made. Tackett v. Home Owners' Loan Corp., 286 Ky. 388 , 150 S.W.2d 229, 1941 Ky. LEXIS 225 ( Ky. 1941 ).

In order to state a claim under KRS 360.020 , a person must knowingly take, receive, reserve, or charge a rate of interest greater than is allowed in this section. Hamilton v. York, 987 F. Supp. 953, 1997 U.S. Dist. LEXIS 19780 (E.D. Ky. 1997 ).

Charges incurred by customers of check cashing company were interest from short-term loans, rather than service fees for cashing a check, where customers incurred charges in exchange for extra time to pay back their original check to check cashing company. Hamilton v. York, 987 F. Supp. 953, 1997 U.S. Dist. LEXIS 19780 (E.D. Ky. 1997 ).

11.— Advance Payment.

Interest, if computed at the legal rate, may be collected in advance or deducted from the amount delivered to the debtor upon making the loan without being usurious. Bramblett v. Deposit Bank of Carlisle, 122 Ky. 324 , 92 S.W. 283, 28 Ky. L. Rptr. 1228 , 1906 Ky. LEXIS 63 ( Ky. 1906 ).

It is not a violation of the usury laws to add to the amount of a debt interest thereon at the legal rate for the period which the note is to run, and to take a note for the debt and interest to be due at the end of such period; nor is it a violation to add that the note shall bear interest at the legal rate after maturity. Blair v. Fraley, 172 Ky. 570 , 189 S.W. 886, 1916 Ky. LEXIS 245 ( Ky. 1916 ).

Where a note is made payable in ten (10) years, interest may not be deducted in advance. While the payment of interest in advance in short time loans has not been held usurious, the general rule is that this rule does not apply to loans running for many years. Webb v. Southern Trust Co., 227 Ky. 79 , 11 S.W.2d 988, 1928 Ky. LEXIS 457 ( Ky. 1928 ).

12.Savings and Loan Associations.

Where, to secure a loan from a building and loan association, X was required to buy shares in the company for which he was to pay $24.00 per month for 84 months (the time the loan was to be outstanding) and six percent (6%) interest on the principal, the contract was usurious “by circumlocution.” Southern Bldg. & Loan Ass'n v. Harris, 98 Ky. 41 , 32 S.W. 261, 17 Ky. L. Rptr. 721 , 1895 Ky. LEXIS 15 ( Ky. 1895 ). See Linton v. Fulton Bldg. & Loan Ass'n, 262 Ky. 198 , 90 S.W.2d 22, 1936 Ky. LEXIS 22 ( Ky. 1936 ).

Where a borrower, as a condition to procuring a loan from a building and loan company, was required to buy stock in such company, and the weekly payments which borrower made were jointly to cover the purchase price of the stock and the repayment of the loan with interest, such was merely a device to charge usurious interest. Kleimer v. Covington Perpetual Bldg. & Loan Ass'n, 119 Ky. 724 , 70 S.W. 41, 24 Ky. L. Rptr. 735 , 1902 Ky. LEXIS 178 ( Ky. 1902 ). See Linton v. Fulton Bldg. & Loan Ass'n, 262 Ky. 198 , 90 S.W.2d 22, 1936 Ky. LEXIS 22 ( Ky. 1936 ).

Where, in adjusting accounts between a borrower and a building and loan association (after it had been found that the borrower’s purchase of stock was a mere device to charge usurious interest), the amounts paid towards the purchase of the stock were recredited as payments on the loan, the borrower was not entitled to further credits of dividends which the stock he had contracted to purchase had earned. Kleimer v. Covington Perpetual Bldg. & Loan Ass'n, 119 Ky. 724 , 70 S.W. 41, 24 Ky. L. Rptr. 735 , 1902 Ky. LEXIS 178 ( Ky. 1902 ). See Linton v. Fulton Bldg. & Loan Ass'n, 262 Ky. 198 , 90 S.W.2d 22, 1936 Ky. LEXIS 22 ( Ky. 1936 ).

Where borrower applied to a loan company for a loan and was charged a fee for the obtaining of it, such was an attempt to evade the usury laws, when the finance committee of the lending company alone considered whether the loan should be made or not. Commonwealth Farm Loan Co. v. Caudle, 203 Ky. 761 , 263 S.W. 24, 1924 Ky. LEXIS 1002 ( Ky. 1924 ).

Assessment of premiums and dues against its members by a building and loan association in addition to six percent (6%) interest on their loans was not in violation of Ky. Const., § 59, since the nature of such associations made them proper subject of independent legislation. Linton v. Fulton Bldg. & Loan Ass'n, 262 Ky. 198 , 90 S.W.2d 22, 1936 Ky. LEXIS 22 ( Ky. 1936 ).

13.Loan Brokers.

Where creditor informed broker that she would loan money on land at six percent (6%) and the broker contacted debtor, charging him a fee of one percent (1%) of the loan, payable in advance, for arranging the loan, the broker was agent of the creditor and, hence, the contract was usurious even though six percent (6%) was all creditor received. However, another fee charged for visiting and evaluating the security was proper and not a circumvention of the usury law. Payne v. Henderson, 106 Ky. 135 , 50 S.W. 34, 20 Ky. L. Rptr. 1739 , 1899 Ky. LEXIS 24 ( Ky. 1899 ) (decision prior to 1970 amendment).

Where a borrower applied for a loan through a broker whose function was merely to submit the application to the lender, the lender’s decision being determinative as to whether the loan was made or not, a payment made to the broker by the borrower for procuring the loan could not be set off against the lender as usury. Union Cent. Life Ins. Co. v. Edwards, 219 Ky. 748 , 294 S.W. 502, 1927 Ky. LEXIS 453 ( Ky. 1927 ).

Where a broker was correspondent for several companies which loaned money and, upon borrower’s application for a loan, made it immediately from his own funds and then sent the loan to various of his correspondents until one of them would in their own discretion accept it, the charging by such broker of a fee for arranging the loan would not avoid the contract as a violation of the usury laws even though interest plus fee was over six percent (6%). Webb v. Southern Trust Co., 227 Ky. 79 , 11 S.W.2d 988, 1928 Ky. LEXIS 457 ( Ky. 1928 ).

Where borrower signed an application requesting that loan be obtained for him by a broker, the bonds evidencing the loan were guaranteed by the broker and a surety company, the bonds were payable to bearer and passed as intended immediately out of broker’s hands, the mortgage securing the bonds was executed to a bank as trustee, and the charges assessed by the broker were reasonable, there was no intent or attempt to evade the usury laws and the contract, although calling for the payment of more than the amount legally chargeable as interest, was not usurious. Ashland Nat'l Bank v. Conley, 231 Ky. 844 , 22 S.W.2d 270, 1929 Ky. LEXIS 367 ( Ky. 1929 ).

Where the owners of standing trees made a contract with a sawmill firm by which the latter was to make advances on the trees and have an interest therein and, after certain advances, the original owners entered into a second contract with the firm whereby the firm reconveyed the trees and the original owners agreed to repay the amount already advanced and sums to be advanced and ten percent (10%) interest on both such sums, the agreement providing for ten percent (10%) on the advances previously made was a part of the consideration paid for the reconveyance of the trees and not usurious, but the ten percent (10%) on future advances was usurious. Eddy's Ex'r v. Northup, 23 S.W. 353, 15 Ky. L. Rptr. 434 (1893).

X conveyed property to Y and was to repurchase it by instalment payments. Either party could require immediate completion of the transaction at a lump sum payment of $700. The instalments totaled a sum much larger. Under such facts the conveyance was merely a mortgage and the refusing to demand the $700 a forbearance by the creditor which made the contract a loan of money at a usurious rate of interest. Tomlin v. Morris, 82 S.W. 373, 26 Ky. L. Rptr. 681 , 1904 Ky. LEXIS 388 (Ky. Ct. App. 1904).

Where Y furnished X with list of accounts outstanding and was immediately paid 75 percent of their face by X who then proceeded to attempt collection in the name of Y and, if successful, deducted the 75 percent and a fee of about five percent (5%) and remitted the remainder to Y and, if unsuccessful, Y repurchased, the transaction was not a sale of accounts but a pledge thereof for money advanced and was usurious. In re American Fibre Reed Co., 206 F. 309, 1913 U.S. Dist. LEXIS 1414 (D. Ky. 1913 ), aff'd, 210 F. 893, 1914 U.S. App. LEXIS 2045 (6th Cir. Ky. 1914 ).

Where notes are given in payment for real property purchased, interest in excess of six percent (6%) may be charged as this is not a contract voided by this section, not being a transaction “for the loan or forbearance of money.” Nantz v. Hurst, 166 Ky. 396 , 179 S.W. 400, 1915 Ky. LEXIS 704 ( Ky. 1915 ) (decision prior to 1970 amendment).

Where property admittedly worth $16,000 to $20,000 was sold for $8,000 with a provision for resale to the original vendor at $10,400, payable in five (5) years in monthly instalments, the transaction was in effect a loan at a usurious rate of interest with a mortgage to secure it and the revendor was entitled to only the amount he paid for the land plus lawful interest from the date of resale. Hurt v. Crystal Ice & Cold Storage Co., 215 Ky. 739 , 286 S.W. 1055, 1926 Ky. LEXIS 789 ( Ky. 1926 ).

Where an agreement in the form of sale and resale was found by the court to be in reality a mortgage, the resale at a price increase of more than the amount of legal interest on the amount involved was usurious. Kaye v. Macmillan, 60 F.2d 7, 1932 U.S. App. LEXIS 2430 (6th Cir. Ky. 1932 ).

Where service charges in excess of the amount legally chargeable as interest were included in an instrument providing for the purchase of an automobile as a part of the purchase price, they did not constitute usury. Cartwright v. C. I. T. Corp., 253 Ky. 690 , 70 S.W.2d 388, 1934 Ky. LEXIS 729 ( Ky. 1934 ).

Evidence supported judgment that deed by plaintiff to defendant, with contemporaneous option to repurchase at a higher price, was a valid sale and not a mortgage securing a usurious loan. Wingfield v. Mann, 277 Ky. 519 , 126 S.W.2d 1108, 1939 Ky. LEXIS 704 ( Ky. 1939 ).

15.Nonpayment of Taxes.

The penalty for nonpayment of taxes may be in excess of six percent (6%), since a tax is “neither a contract for a loan nor a forbearance of money” though it is treated as a debt for the purpose of defining its mode of collection. Specht v. Louisville, 135 Ky. 548 , 122 S.W. 846, 1909 Ky. LEXIS 319 ( Ky. 1909 ) (decision prior to 1970 amendment).

16.Attorney’s Fees.

An attorney’s fee paid to a creditor, in addition to legal interest, as a consideration for forbearance on its part in the collection of its judgment for a period of six (6) months and for certain definite periods thereafter if the maturing interest was promptly paid was clearly covered by the law and was recoverable as usurious interest. Fidelity Trust & Safety-Vault Co. v. Ryan, 109 Ky. 240 , 58 S.W. 610, 22 Ky. L. Rptr. 734 , 1900 Ky. LEXIS 192 ( Ky. 1900 ).

17.Refraining from Suit.

Where, upon his creditor threatening to enforce collection of a matured claim, the debtor agreed to pay the creditor’s attorney a fee of $300 if the time would be extended, there was a forbearance and, being in excess of the legal rate of interest, was usurious. Fidelity Trust & Safety-Vault Co. v. Ryan, 109 Ky. 240 , 58 S.W. 610, 22 Ky. L. Rptr. 734 , 1900 Ky. LEXIS 192 ( Ky. 1900 ).

Where a borrower was in arrears in installment repayments of a loan and creditor was not availing himself of the option of declaring the entire debt due, the payment of one percent (1%) of the amount of the debt (in addition to the six percent (6%) interest on the debt), for cancellation of the debt and mortgage securing it, was not usury. Hamilton v. Kentucky Title Sav. Bank & Trust Co., 159 Ky. 680 , 167 S.W. 898, 1914 Ky. LEXIS 848 ( Ky. 1914 ) ( Ky. 1914 ).

Where a creditor on a note, which was for ten (10) years, agreed to release it at the end of two (2) years upon the payment of interest to the date of release and an additional sum, the two (2) being more than the amount of interest legally chargeable for such period, there was no violation of the usury laws, at least as long as the additional sum paid was reasonable. Webb v. Southern Trust Co., 227 Ky. 79 , 11 S.W.2d 988, 1928 Ky. LEXIS 457 ( Ky. 1928 ).

18.Material Alteration.

Where the interest rate in a note was changed from six percent (6%) to eight percent (8%), there was a material alteration, even though the holder could not recover more than six percent (6%). Jones v. Jones, 254 Ky. 475 , 71 S.W.2d 999, 1934 Ky. LEXIS 96 ( Ky. 1934 ).

19.Change of Creditors.

Where, upon the maturity of a note at usurious interest, a new note to a new payee was issued which represented the old indebtedness, and the usury could be traced, such usurious interest was recovered. An important factual distinction would seem to be whether the new payee actually furnished money for the obligor to pay off the old debt or whether the paying of the old debt was a more or less fictional one with no money changing hands. Shirley v. Stephenson, 104 Ky. 518 , 47 S.W. 581, 20 Ky. L. Rptr. 767 , 1898 Ky. LEXIS 195 ( Ky. 1898 ).

Where the surety on a note carrying usurious interest assumed the debt of his principal and executed his own obligation, the name of the principal being dropped, there was a novation so that the principal could recover the usury accrued at the time the new contract was entered into. Mann v. Bank of Elkton, 104 Ky. 852 , 48 S.W. 413, 20 Ky. L. Rptr. 1033 , 1898 Ky. LEXIS 236 ( Ky. 1898 ).

Building and loan company loaned money at a usurious rate and, upon pressing for payment, the debtor borrowed sufficient money from X, president of the company, to discharge the first note including the usury. When X sued on the note given him, the mere fact that he knew that the money he loaned would be used to pay usury to his company was not enough to allow a setoff against him in the amount of such usury. Ratliffe v. Buckler, 61 S.W. 472, 22 Ky. L. Rptr. 1790 , 1901 Ky. LEXIS 647 (Ky. Ct. App. 1901).

Where a bank had collected usurious interest on a note and, when ordered by the bank examiner to collect the debt secured payment because the bank’s cashier personally accepted the debtor’s note, which was discounted at another bank and the proceeds applied to the bank’s note, such was not merely a scheme by the bank to evade the usury laws and the usury paid to the bank was not allowable as a setoff in a suit on his note by the cashier. An important item of evidence was that the cashier personally, as indorser, had paid the second note at maturity and thus come into possession of them for purposes of this suit. Smith v. Smith, 165 Ky. 810 , 178 S.W. 1058, 1915 Ky. LEXIS 595 ( Ky. 1915 ).

20.Renewals.

Where any part of a debt remained unpaid, usury at any time paid on such debt could be reclaimed, even though the evidence of such indebtedness had been several times renewed. (decided under prior law) Trimble v. Delling, 10 Ky. Op. 63, 1878 Ky. LEXIS 138 (Ky. Ct. App. Oct. 8, 1878); Henderson Nat'l Bank v. Martin's Adm'r, 10 Ky. Op. 220, 1879 Ky. LEXIS 135 (Ky. Ct. App. Feb. 6, 1879).

The renewal of a note tainted with usury is not a payment of the usury and the statute of limitations as to recovery of the usury has been paid. Paine v. Levy, 142 Ky. 619 , 134 S.W. 1160, 1911 Ky. LEXIS 272 ( Ky. 1911 ).

Where a debt was often renewed by giving of new obligations, as long as the original obligor remained bound, all usury could be purged from the transaction in a suit to recover on the renewal note. Taulbee v. Hargis, 173 Ky. 433 , 191 S.W. 320, 1917 Ky. LEXIS 492 ( Ky. 1917 ).

Where original series of notes calling for eight percent (8%) interest were replaced by single note bearing six percent (6%) interest, payments under original notes were in nearly every instance for exact amount of interest and were credited as such, except for small sums credited on principal, and new note was for practically same amount as principal of old notes, debtor could not have usurious interest paid on old notes applied as a setoff on principal in suit on new note, but was required to bring independent action for that purpose. Catron v. Jones, 281 Ky. 163 , 135 S.W.2d 419, 1939 Ky. LEXIS 27 ( Ky. 1939 ).

21.National Banks.

Where a note given to a national bank doing business in Kentucky by its terms bore usurious interest until maturity and by law bore legal interest thereafter, the provision for usury forfeited the right to collect any interest, including that after maturity, under 12 USCS § 86. (decided under prior law) Alves v. Henderson Nat'l Bank, 89 Ky. 126 , 9 S.W. 504, 12 Ky. L. Rptr. 69 , 1888 Ky. LEXIS 140 ( Ky. 1888 ).

Where interest, defined by law to be usurious, had been paid to a national bank within Kentucky, the debtor could, under 12 USCS §§ 85, 86, recover back twice the amount of the interest paid. (decided under prior law) Brown v. Marion Nat'l Bank, 92 Ky. 607 , 18 S.W. 635, 13 Ky. L. Rptr. 812 , 1892 Ky. LEXIS 30 (Ky.), writ of error dismissed, 146 U.S. 619, 13 S. Ct. 260, 36 L. Ed. 1106, 1892 U.S. LEXIS 2220 (U.S. 1892).

Where a national bank loaned money at a usurious rate of interest which was included in the face of a note executed therefor, which note was renewed from time to time at usurious rates, it could recover on the last renewal note only the principal of the original loan. Sydner v. Mt. Sterling Nat'l Bank, 94 Ky. 231 , 21 S.W. 1050, 15 Ky. L. Rptr. 4 , 1893 Ky. LEXIS 33 ( Ky. 1893 ) (decision prior to 1970 amendment).

Where usurious interest was charged by a national bank, the debtor by way of defense was not required to rely upon federal laws (12 USCS §§ 85, 86) allowing forfeiture of the entire interest but could rely on the state laws which merely void the excess above the legal rate. Farrow v. First Nat'l Bank, 47 S.W. 594, 209 Ky. L. Rptr. 1413 (1898) (decision prior to 1970 amendment).

Where usurious interest was paid by the execution of a separate note to cover the interest, such interest was regarded as paid even though the principal of the original note was unpaid (in spite of subsection (2) of this section) so that when the creditor was a national bank, the penalties provided by 12 USCS § 86 applied and recovery of twice the interest paid was had. Second Nat'l Bank v. Fitzpatrick, 111 Ky. 228 , 63 S.W. 459, 23 Ky. L. Rptr. 610 , 1901 Ky. LEXIS 188 ( Ky. 1901 ), writ of error dismissed, 189 U.S. 508, 23 S. Ct. 853, 47 L. Ed. 922, 1903 U.S. LEXIS 1390 (U.S. 1903).

Under 12 USCS §§ 85, 86, a national bank operating in Kentucky may charge no more than the legal rate of interest provided for by the state of Kentucky and the penalty for violation is the forfeiture of the right to any interest. Moss v. First Nat'l Bank, 251 Ky. 390 , 65 S.W.2d 88, 1933 Ky. LEXIS 885 ( Ky. 1933 ) (decision prior to 1970 amendment).

Usurious interest previously received by a national bank in the course of renewals of a series of notes, terminating in the one on which the action is brought, cannot be allowed by way of setoff or payment on the principal; therefore, where bank had charged and collected eight percent (8%) interest from the principal in the note except for the period of two (2) years prior to the execution of the last renewal, which was the one sued on, surety was liable for the full amount of the renewal note. Owens v. National Bank of John A. Black, 252 Ky. 292 , 66 S.W.2d 518, 1933 Ky. LEXIS 1015 ( Ky. 1933 ).

Under federal law providing that national bank shall forfeit entire interest on obligations which it accepted by “taking, receiving, reserving or charging” a usurious rate of interest, maker may be relieved of payment of interest in action on obligation, but cannot have interest already paid credited on principal; an independent action must be brought for that purpose. Catron v. Jones, 281 Ky. 163 , 135 S.W.2d 419, 1939 Ky. LEXIS 27 ( Ky. 1939 ).

Where a national bank, which had operated in Kentucky, was in the hands of a receiver, a borrower therefrom could not sue to recover double the amount of usurious interest which he had paid the bank. A national bank during normal operation could pay the amount of the double penalty from its profits so that its creditors and depositors would not suffer. But when the bank is in receivership, any depletion of the estate over and above the amount actually retained by the receiver in violation of 12 USCS § 86 will affect creditors and depositors who were in no way connected with or responsible for the usurious transaction. Anderson v. Hershey, 127 F.2d 884, 1942 U.S. App. LEXIS 4783 (6th Cir. Ky. 1942 ).

22.Suit by Assignee.

The assignee of a claim for the recovery of usury paid may maintain an action thereon without joining the assignor. Fidelity Trust & Safety-Vault Co. v. Ryan, 109 Ky. 240 , 58 S.W. 610, 22 Ky. L. Rptr. 734 , 1900 Ky. LEXIS 192 ( Ky. 1900 ).

23.Partial Payment.

Where unidentified payments were made on an interest-bearing note before the interest was due, they were regarded as having been made in partial payment of the principal. Ross v. Rees, 43 S.W. 215, 19 Ky. L. Rptr. 1215 , 1897 Ky. LEXIS 254 (Ky. Ct. App. 1897).

Where an obligation bore interest, partial payments were first applied to extinguishment of interest accrued and, where the payment was equal to the principal sum in dispute, and the obligee still demanded interest, the payment did not operate as a discharge of the principal sum but was applied first to the interest then due. Commonwealth v. Louisville & N. R. Co., 104 S.W. 267, 31 Ky. L. Rptr. 819 , 1907 Ky. LEXIS 357 (Ky. Ct. App. 1907).

Where partial payments, unidentified as to whether made toward principal or interest, were made on a loan calling for the payment of usurious interest, no usury was regarded as having been paid until the satisfaction of the principal and legal interest. Cambron v. Boldrick, 147 Ky. 524 , 144 S.W. 374, 1912 Ky. LEXIS 270 ( Ky. 1912 ).

Where a payment was insufficient to pay all due interest, it should have been applied to the interest longest due. American Surety Co. v. Skaggs' Guardian, 247 Ky. 687 , 57 S.W.2d 495, 1933 Ky. LEXIS 427 (Ky. Ct. App. 1933).

24.Conflict of Laws.

Where a note was executed in Indiana and made negotiable and payable at a bank there, no bad faith appearing, it was to be judged according to the usury laws of Indiana rather than those of Kentucky where the suit was brought. Brown v. Todd's Adm'r, 29 S.W. 621, 16 Ky. L. Rptr. 697 (1895).

The mere fact that a note, executed in Kentucky, was made payable in another state and received by the payee in that state is not sufficient to establish that it was intended that the law of that state should govern the transaction. William Glenny Glass Co. v. Taylor, 99 Ky. 24 , 34 S.W. 711, 17 Ky. L. Rptr. 1331 , 1896 Ky. LEXIS 42 ( Ky. 1896 ).

Where notes are made payable at the home office of a loan company in another state for the purpose of evading the Kentucky usury laws, the contract will not be enforced for more than the legal rate of interest in Kentucky. Commonwealth Farm Loan Co. v. Caudle, 203 Ky. 761 , 263 S.W. 24, 1924 Ky. LEXIS 1002 ( Ky. 1924 ).

If the real situs of transaction was not in Kentucky and New York lender’s connections with Kentucky were sufficient to justify contracting with reference to the laws of Kentucky, a claim of bad faith could not be made to make New York law inapplicable where the contract stated that it was to be controlled by New York law and New York law did not permit a corporate party to complain or defend on the ground of usury. Consolidated Jewelers, Inc. v. Standard Financial Corp., 325 F.2d 31, 1963 U.S. App. LEXIS 3517 (6th Cir. Ky. 1963 ).

25.Criminal Prosecutions.

Where an obligation bore interest, partial payments were first applied to extinguishment of interest accrued, and where the payment was equal to the principal sum in dispute, and the obligee still demanded interest, the payment did not operate as a discharge of the principal sum but was applied first to the interest then due. (decided under prior law). Henderson Cotton Mfg. Co. v. Lowell Mach. Shop, 9 Ky. L. Rptr. 831 (1888).

Partial payments on a note should first have been applied to the principal even though they were paid as usury, even though there had been renewals of the note and a partial change of obligors. (decided under prior law) Neale v. Rouse, 93 Ky. 151 , 19 S.W. 171, 14 Ky. L. Rptr. 126 , 1892 Ky. LEXIS 56 ( Ky. 1892 ).

Where persons who operated a place devoted to the repeated making of loans in violation of this section were indicted for “keeping a disorderly house,” a demurrer was sustained on the ground that such was not criminally illegal, for a house in which money is habitually loaned at usurious rates is not a disorderly house. Commonwealth v. Mutual Loan & Trust Co., 156 Ky. 299 , 160 S.W. 1042, 1913 Ky. LEXIS 420 ( Ky. 1913 ).

Where an indictment charged a plan to carry out a business of habitually lending money at usurious rates of interest, it sufficiently charged the common-law crime of conspiracy to carry out an “unlawful” act. Commonwealth v. Donoghue, 250 Ky. 343 , 63 S.W.2d 3, 1933 Ky. LEXIS 693 ( Ky. 1933 ).

26.Pleadings.

The purchaser of an equity of redemption could not set up usury as a defense to a bill brought by the mortgagee for foreclosure (at least, when the mortgagor had waived the defense). (decided under prior law) De Wolf v. Johnson, 23 U.S. 367, 6 L. Ed. 343, 1825 U.S. LEXIS 231 (U.S. 1825).

Where one failed to plead usury to an action for a debt and suffered judgment to go against him, he could not, in an action on such judgment, interpose as a defense the amount of usurious interest paid prior to the judgment even though he had a right, after paying the judgment, to sue to recover the amount of usury so paid. Turner v. Hamilton, 88 F. 467, 1898 U.S. App. LEXIS 2804 (C.C.D. Mo. 1898).

Where it was plain from the record that the plaintiff was seeking to recover usury, the court could refuse to give judgment for the usury, even though the plea was not made by the defendant. Hill v. Cornwall & Bro.'s Assignee, 95 Ky. 512 , 26 S.W. 540, 16 Ky. L. Rptr. 97 , 1894 Ky. LEXIS 60 ( Ky. 1894 ).

Where two (2) parties were asserting liens upon the same property owned by a common debtor, either party could make the defense of usury when the facts were such that the debtor could have made such a defense. Banta v. Louisville Sav. Loan & Bldg. Co., 59 S.W. 501, 22 Ky. L. Rptr. 1045 (1900); Kaye v. Macmillan, 60 F.2d 7, 1932 U.S. App. LEXIS 2430 (6th Cir. Ky. 1932 ).

A judgment containing usury will not be reversed unless usury is pleaded, or appears of record, or is otherwise brought to the attention of the court. (Here a witness, in testifying upon another issue, made a statement which tended to show that usury was charged.) Courtney v. Dunning, 201 Ky. 242 , 256 S.W. 411, 1923 Ky. LEXIS 276 ( Ky. 1923 ).

Where lender did not file a cross appeal, an alleged error in disallowing service charges for services not rendered to borrower was not reviewable. Harding v. Kentucky Title Trust Co., 269 Ky. 622 , 108 S.W.2d 539, 1937 Ky. LEXIS 650 ( Ky. 1937 ), cert. denied, 303 U.S. 635, 58 S. Ct. 522, 82 L. Ed. 1095, 1938 U.S. LEXIS 267 (U.S. 1938).

27.— Discovery.

When sued on a debt which was the accumulation of several years of borrowing, the debtor pleaded usury and, upon a further plea of no records having been kept by him but that the creditor had such records, he was granted a bill of discovery. Tiller v. Cincinnati Discount Co., 270 Ky. 685 , 110 S.W.2d 420, 1937 Ky. LEXIS 129 ( Ky. 1937 ).

Cited:

Straub v. Chemical Bank, 608 S.W.2d 71, 1980 Ky. App. LEXIS 386 (Ky. Ct. App. 1980); Miller v. HLT Check Exchange (In re Miller), 215 B.R. 970, 1997 Bankr. LEXIS 2107 (Bankr. E.D. Ky. 1997 ).

Opinions of Attorney General.

Finance charges in connection with retail sales installment contracts constitute part of the consideration of the sale and the usury statutes do not apply. OAG 77-511 .

Where a borrower made a master note for $16,000, payable one year from date at 10 percent interest, but only actually took advances totaling $13,000, the provision for interest in excess of 8.5 percent would be void under KRS 360.010 , and, if the interest was paid at 10 percent, he could sue lender for twice that amount under this section. OAG 79-169 .

Research References and Practice Aids

Cross-References.

Credit unions, legal rate of interest on loans made by, KRS 286.6-435 .

Usury, one-year limitation on action to recover, KRS 413.140 .

Kentucky Law Journal.

Charles, Illegality as a Real Defense Against a Holder in Due Course, 38 Ky. L.J. 492 (1950).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Usury, § 197.00.

360.022. Other laws not affected by KRS 360.010, 360.020, or 360.990.

Nothing contained in KRS 360.010 , 360.020 , or 360.990 shall be construed to amend, repeal, or abrogate any other law of this state pertaining to any particular types of transactions for which exemptions, pleading of defenses is denied, or the maximum rate of interest is specifically prescribed or provided.

History. Enact. Acts 1970, ch. 67, § 4.

360.025. Excess rate of interest prohibited as defense of corporation.

  1. No corporation shall hereafter plead or set up the taking of more than the legal rate of interest, as a defense to any action brought against it to recover damages on, or enforce payment of, or other remedy on, any mortgage, bond, note or other obligation, executed or assumed by such corporation: provided, that this section shall not apply to any action which is now pending or to any suit or action instituted subsequent to June 16, 1960, upon any mortgage, bond, note or other obligation executed or assumed by such corporation prior to June 16, 1960.
  2. The provisions of subsection (1) of this section shall not apply to a corporation, the principal asset of which shall be the ownership of a one (1) or two (2) family dwelling.

History. Enact. Acts 1960, ch. 221, §§ 1, 2, effective June 16, 1960.

NOTES TO DECISIONS

1.Applicability.

It is the general rule that a law withdrawing the defense of usury from a corporation applies also to individual guarantors, sureties, and indorsers on corporate obligations, so that they, as well as the corporation, are precluded from interposing usury as a defense. E'Town Shopping Center, Inc. v. Lexington Finance Co., 436 S.W.2d 267, 1969 Ky. LEXIS 471 ( Ky. 1969 ).

Cited:

Credit Alliance Corp. v. Adams Constr. Corp., 570 S.W.2d 283, 1978 Ky. LEXIS 389 ( Ky. 1978 ); Commissioner v. Bollinger, 485 U.S. 340, 108 S. Ct. 1173, 99 L. Ed. 2d 357, 1988 U.S. LEXIS 1443 (1988).

Opinions of Attorney General.

A corporation issuing debenture bonds after June 16, 1960, could issue bonds bearing interest in excess of six per cent per annum. OAG 63-699 .

Research References and Practice Aids

Northern Kentucky Law Review.

Cox, Lender Liability in the Bluegrass: Are New Theories Emerging Under Kentucky Law?, 16 N. Ky. L. Rev. 43 (1988).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Usury, § 197.00.

360.027. Excess rate of interest prohibited as defense of limited partnership, limited liability company, or business or statutory trust.

  1. No limited partnership, limited liability company, or business or statutory trust shall hereafter plead or set up the taking of more than the legal rate of interest, as a defense to any action brought against it to recover damages on, or enforce payment of, or other remedy on, any mortgage, bond, note or other obligation, executed or assumed by such limited partnership, limited liability, or business or statutory trust; provided, that this section shall not apply to any action instituted subsequent to June 16, 1972, upon any mortgage, bond, note or other obligation executed or assumed by such limited partnership or business trust prior to June 16, 1972.
  2. The provisions of subsection (1) of this section shall not apply to a limited partnership, limited liability company, or business or statutory trust, the principal asset of which shall be the ownership of a one (1) or two (2) family dwelling.

History. Enact. Acts 1972, ch. 198; 1998, ch. 341, § 48, effective July 15, 1998; 2015 ch. 34, § 65, effective June 24, 2015.

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Usury, § 197.00.

360.030. Premiums on insurance to secure loan not considered as interest.

Where an insurance company, as a condition for a secured loan, requires the borrower to insure his life or the life of another, or his property, with the company, and to assign the policy of insurance to the company as security for the loan and agree to pay the premiums thereon during the continuance of the loan, and the premiums charged do not exceed those charged for similar policies to persons who do not obtain loans, the premiums in any such case shall not be considered as interest on the loan, and the loan shall not be rendered usurious by reason of any such requirement.

History. 2219a.

NOTES TO DECISIONS

1.Constitutionality.

This section is unconstitutional, since the title of the law that enacted it violated Ky. Const., § 51. In re Graham, 22 F. Supp. 233, 1938 U.S. Dist. LEXIS 2392 (D. Ky. 1938 ).

2.Usurious Contract.

Where an insurance company, as a condition to lending money, required the borrower to take out insurance, the premium on which together with the interest paid exceeded the allowable rate of interest, the contract was usurious. In re Graham, 22 F. Supp. 233, 1938 U.S. Dist. LEXIS 2392 (D. Ky. 1938 ).

360.040. Interest on judgments.

  1. Except as provided in subsections (2), (3), and (4) of this section, a judgment, including a judgment for prejudgment interest, shall bear six percent (6%) interest compounded annually from the date the judgment is entered. A judgment may be for the principal and accrued interest.
  2. A judgment for unpaid child support payments shall bear twelve percent (12%) interest compounded annually from the date the judgment is entered.
  3. A judgment rendered on a contract, promissory note, or other written obligation shall bear interest at the interest rate established in that contract, promissory note, or other written obligation.
  4. When a claim for unliquidated damages is reduced to judgment, such judgment may bear less interest than six percent (6%) if the court rendering such judgment, after a hearing on that question, is satisfied that the rate of interest should be less than six percent (6%). All interested parties must have due notice of said hearing.

HISTORY: 2220: amend. Acts 1942, ch. 99; 1976, ch. 59, § 2; 1982, ch. 7, § 2, effective July 15, 1982; 2017 ch. 17, § 1, effective June 29, 2017.

Legislative Research Commission Notes.

(6/29/2017). 2017 Ky. Acts ch. 17, sec. 5 provided that amendments made to this statute in 2017 Ky. Acts ch. 17, sec. 2 apply to all worker’s compensation orders entered or settlements approved on or after June 29, 2017, the effective date of that Act.

NOTES TO DECISIONS

1.Constitutionality.

Because this section, which permits accrual of interest in accordance with a written obligation, applies equally to all persons who entered into written obligations containing interest accrual rates, and the reasons that support excepting those interest rates from the general 12% per annum rate are constitutional reasons, this section is not unconstitutional special legislation relating to regulation of the rate of interest under Ky. Const., § 59. Union Trust, Inc. v. Brown, 757 S.W.2d 218, 1988 Ky. App. LEXIS 133 (Ky. Ct. App. 1988).

2.Applicability.

While it is the intent of this section that interest should ordinarily run from the date when each payment becomes due and payable, however, if there are factors making it inequitable to require payment of interest, it may be disallowed. Young v. Young, 479 S.W.2d 20, 1972 Ky. LEXIS 287 ( Ky. 1972 ).

The general interest on judgment statute (this section) does not apply to state agencies without an explicit declaration by the Legislature or contract provisions expressly so stating. Powell v. Board of Educ., 829 S.W.2d 940, 1991 Ky. App. LEXIS 154 (Ky. Ct. App. 1991).

The statute has no application to judgments against the state government or any of its subdivisions. Kenton County Fiscal Court v. Elfers, 981 S.W.2d 553, 1998 Ky. App. LEXIS 104 (Ky. Ct. App. 1998).

Court’s reliance on KRS 360.040 to calculate the post-award, prejudgment interest rate was in accord with the clear intention of the arbitrator, which did not run afoul of § 10 of the Federal Arbitration Act, 9 USCS § 10. GE v. Anson Stamping Co., 426 F. Supp. 2d 579, 2006 U.S. Dist. LEXIS 14406 (W.D. Ky. 2006 ).

Trial court erred in rescinding, on remand from the Supreme Court, an award of KRS 360.040 post-judgment interest in an action by a former state employee against a state agency; since the agency failed to raise the issue of the validity of the award in a first appeal, and as the issue was not addressed by the Supreme Court, the award became final under the law of the case doctrine. Brooks v. Lexington-Fayette Urban County Hous. Auth., 244 S.W.3d 747, 2007 Ky. App. LEXIS 431 (Ky. Ct. App. 2007).

Driver’s sole argument that a 12 percent interest rate as to the judgment should have been lowered because evidence of the current market rates demonstrated that a lower interest rate was appropriate failed as the fact that a trial court could have chosen to impose a lower interest rate did not necessarily mean that its decision to impose a higher rate was an abuse of discretion and the driver pointed to nothing to show that the trial court’s decision to impose the current de facto rate set forth in KRS 360.040 was an abuse of discretion. Morgan v. Scott, 291 S.W.3d 622, 2009 Ky. LEXIS 98 ( Ky. 2009 ).

In a defamation action by employees of the Kentucky Lottery Corporation (KLC), there was no error in awarding the employees postjudgment interest. As a municipal corporation under KRS 154A.020 , KLC has no sovereign immunity to exempt it from the assessment of interest under KRS 360.040 . Hill v. Ky. Lottery Corp., 2010 Ky. LEXIS 82 (Ky. Apr. 22, 2010), sub. op., 327 S.W.3d 412, 2010 Ky. LEXIS 317 ( Ky. 2010 ), modified, 2010 Ky. LEXIS 318 (Ky. Dec. 16, 2010).

Trial court erred in relying on Ky. Rev. Stat. Ann. §§ 360.010(1) and 360.040 to assess the interest rates for judgment interest as the plain language of Ky. Rev. Stat. Ann. §§ 360.040 (3) and 360.010(3) and the express terms of the agreements provided that interest was to be calculated at seven percent. Hellier Manor Apts., Ltd. v. City of Pikeville, 589 S.W.3d 528, 2018 Ky. App. LEXIS 288 (Ky. Ct. App. 2018).

3.Purpose.

This section is not intended to interfere with the terms of an agreement that has been merged into a decree of the court; the statute’s function is to encourage a judgment debtor to timely comply with the terms of the judgment and, in the case of a separation agreement incorporated in a divorce decree, to encourage fulfillment of the obligations incurred in the agreement. Courtenay v. Wilhoit, 655 S.W.2d 41, 1983 Ky. App. LEXIS 338 (Ky. Ct. App. 1983).

This statute’s obvious purpose is to encourage a judgment debtor to promptly comply with the terms of the judgment and to compensate the judgment creditor for the judgment debtor’s use of his money. Stone v. Kentucky Ins. Guar. Ass'n, 908 S.W.2d 675, 1995 Ky. App. LEXIS 187 (Ky. Ct. App. 1995).

In a case alleging breach of fiduciary duty, there was no error in an award of post-judgment interest on $42,000,000 under this statute because the award served the general purpose to compensate a plaintiff for the loss of use of money resulting from the defendant's failure to pay after the extent of its obligation has been fixed by a judgment. Chesley v. Abbott, 524 S.W.3d 471, 2017 Ky. App. LEXIS 47 (Ky. Ct. App. 2017).

4.Application of Payments.

Where, under this section, a judgment was entered to bear interest of six percent (6%) from date of entry and there might not be sufficient money to pay the principal and all accrued interest after the dower was computed, the trial court, in making distribution, should compute and pay dower first and then apply the balance to the satisfaction of the judgment and interest. Mattingly v. Gentry, 419 S.W.2d 745, 1967 Ky. LEXIS 184 ( Ky. 1967 ).

5.Penalties.

Damages or penalty arising under supersedeas bond do not bear interest. Phillips v. Green, 288 Ky. 202 , 155 S.W.2d 841, 1941 Ky. LEXIS 73 ( Ky. 1941 ).

In the absence of statutory requirements, penalties do not bear interest. Phillips v. Green, 288 Ky. 202 , 155 S.W.2d 841, 1941 Ky. LEXIS 73 ( Ky. 1941 ).

6.Interest.
7.—Commencement.

Where judgment denying recovery on sheriff’s bond was reversed, and Court of Appeals directed that judgment be entered for $4,000, entry of judgment by trial court for such sum with interest from date petition was filed was proper. Helton v. Hoskins, 278 Ky. 352 , 128 S.W.2d 732, 1939 Ky. LEXIS 426 ( Ky. 1939 ).

Where plaintiff, in action to recover sum misappropriated by executor of father’s estate, made settlement agreement which included agreement to accept designated sum in full satisfaction of claim if sum was paid by a certain date, and conduct of parties thereafter was such as to indicate that they were relying on the settlement agreement, it was proper, in subsequent action by plaintiff to recover on original cause of action, to allow plaintiff only sum fixed by agreement with interest from date sum was to have been paid, notwithstanding that sum was not paid at time fixed in settlement agreement. Daniels v. Coleman, 291 Ky. 789 , 165 S.W.2d 804, 1942 Ky. LEXIS 324 ( Ky. 1942 ).

The court has jurisdiction to determine from what date interest shall be allowed on an account sued on. McKim v. Smith, 294 Ky. 835 , 172 S.W.2d 634, 1943 Ky. LEXIS 540 ( Ky. 1943 ).

Where judgment granting specific performance of contract for sale of real estate required defendants to pay purchase price when they received payment from the federal government for other real estate sold by them to the federal government, such judgment bore interest only from the time so fixed for payment, and not from the date of the judgment. Farmer v. Stubblefield, 297 Ky. 512 , 180 S.W.2d 405, 1944 Ky. LEXIS 758 ( Ky. 1944 ).

This statute has historically been interpreted as allowing interest on “unliquidated” claims only from date of judgment. Atlantic Painting & Contracting, Inc. v. Nashville Bridge Co., 670 S.W.2d 841, 1984 Ky. LEXIS 224 ( Ky. 1984 ).

Postjudgment interest was improperly awarded to a passenger from the date of the jury verdict, rather than from the date judgment was entered, as pursuant to KRS 360.040 , the statutory rate of interest began to run from the date of entry of the judgment; damages that were established by proof offered during the trial were unliquidated and not subject to prejudgment interest. Jackson v. Tullar, 285 S.W.3d 290, 2007 Ky. App. LEXIS 170 (Ky. Ct. App. 2007).

Post-judgment interest ran from the date of the original judgment because an amended judgment made few changes. Strunk v. Lawson, 447 S.W.3d 641, 2013 Ky. App. LEXIS 111 (Ky. Ct. App. 2013).

8.—Prior to Judgment.

Where money is due at a fixed time, interest starts at that date, even though the amount if not certain or fixed. Helton v. Hoskins, 278 Ky. 352 , 128 S.W.2d 732, 1939 Ky. LEXIS 426 ( Ky. 1939 ).

It is not error to calculate interest on a debt to the day judgment is rendered and include such interest in the judgment. This section contemplates this procedure and the fact that the judgment itself bears interest does not result in an unlawful compounding of interest. Criswell v. Stratton & Tersterstegge Co., 292 Ky. 219 , 165 S.W.2d 563, 1942 Ky. LEXIS 14 ( Ky. 1942 ).

In a diversity action, this section on the question of interest before judgment applied but whether interest was allowable prior to judgment was within the discretion of the trial judge in a nonjury trial. Glens Falls Ins. Co. v. Danville Motors, Inc., 333 F.2d 187, 1964 U.S. App. LEXIS 4978 (6th Cir. Ky. 1964 ).

The trial court erred in ordering that all monthly payments to wife for her interest in partnership property were to bear interest at six percent (6%) per annum from the date due until paid, rather than ordering interest to run from the date of judgment. Johnson v. Johnson, 564 S.W.2d 221, 1978 Ky. App. LEXIS 498 (Ky. Ct. App. 1978).

A decision to award postjudgment interest on accrued prejudgment interest is entirely within the discretion of the trial court. Rudd Constr. Equipment Co. v. Clark Equipment Co., 735 F.2d 974, 1984 U.S. App. LEXIS 21942 (6th Cir. Ky. 1984 ).

Party was entitled to postjudgment interest at up to 12 percent on both the principal and 8 percent prejudgment interest. Borden v. Martin, 765 S.W.2d 34, 1989 Ky. App. LEXIS 15 (Ky. Ct. App. 1989).

9.— — On Accelerated Indebtedness.

A creditor who accelerates an indebtedness by reason of a default should not be deprived of interest which would otherwise accrue during the time between acceleration of the debt and entry of judgment. Capitol Cadillac Olds, Inc. v. Roberts, 813 S.W.2d 287, 1991 Ky. LEXIS 133 ( Ky. 1991 ).

10.— Original Judgment.

In action by one partner for accounting, it was error to allow interest on his portion of assets from date of alleged dissolution, in absence of evidence that other partners wrongfully caused dissolution or excluded plaintiff, or retained his share of the assets an unreasonable length of time, but interest should be allowed from date of judgment. Waterbury v. Waterbury, 278 Ky. 254 , 128 S.W.2d 568, 1939 Ky. LEXIS 402 ( Ky. 1939 ).

Where judgment in action by partner for accounting and dissolution of partnership affairs awarding plaintiff a specific sum was modified on appeal by reducing amount awarded to plaintiff, and judgment was reversed with directions to enter judgment in accordance with opinion, trial court should have allowed interest on amount found due by Court of Appeals as of date of original judgment, and not as of date of judgment entered pursuant to mandate. Waterbury v. Waterbury, 281 Ky. 107 , 134 S.W.2d 1009, 1939 Ky. LEXIS 21 ( Ky. 1939 ).

In action by heirs against administrator and sureties for a settlement and for recovery of sums due heirs from the estate, interest should be allowed only from the date of judgment. Kaufman v. Kaufman's Adm'r, 292 Ky. 351 , 166 S.W.2d 860, 1942 Ky. LEXIS 102 ( Ky. 1942 ).

Where claim is not a fixed and determinate amount, interest should be allowed only from the date of the judgment. Kaufman v. Kaufman's Adm'r, 292 Ky. 351 , 166 S.W.2d 860, 1942 Ky. LEXIS 102 ( Ky. 1942 ).

Where money judgment was reversed on appeal with directions that amount of judgment be reduced to a specified sum, the lower court, on return of the case, was required to allow interest from the date of the original judgment on the amount for which judgment was directed to be entered. Stephens v. Stephens, 300 Ky. 769 , 190 S.W.2d 327, 1945 Ky. LEXIS 638 ( Ky. 1945 ).

The Commonwealth is liable for interest on a judgment from the date of the judgment. Commonwealth, Dep't of Highways v. Young, 380 S.W.2d 239, 1964 Ky. LEXIS 294 ( Ky. 1964 ).

Where judgment n.o.v. was sustained and later set aside by the Court of Appeals, the judgment bore interest from the date of its original entry. Elpers v. Johnson, 386 S.W.2d 267, 1965 Ky. LEXIS 496 ( Ky. 1965 ).

Where court directed a verdict in favor of one of defendants but rendered judgment for specific amount against other defendants and directed verdict was later reversed by the Court of Appeals and judgment entered against all defendants, the judgment against the person for whom the directed verdict had been ordered bore interest from the date on which the original judgment was had. Decker v. Glasscock Trucking Service, Inc., 403 S.W.2d 275, 1966 Ky. LEXIS 329 ( Ky. 1966 ).

11.—Postjudgment.

Because post judgment interest is not included in the definition of “covered claim” under KRS 304.36-050 (3), this section does not carve out an exception for the Kentucky Insurance Guaranty Association (KIGA), for unless KIGA is liable for such interest delaying tactics would be encouraged and policyholders could be subjected to significant financial loss, thus KIGA was liable for interest on a judgment rendered against a covered driver in excess of the maximum obligation imposed on the association by the Kentucky Insurance Guaranty Association Act, KRS 304.36-010 to 304.36-170 . Stone v. Kentucky Ins. Guar. Ass'n, 908 S.W.2d 675, 1995 Ky. App. LEXIS 187 (Ky. Ct. App. 1995).

An original Board of Claims award was not a judgment, and, therefore, the statute did not mandate that interest be compounded annually from the date of the award. Thurman v. Transportation Cabinet, Dep't of Highways, 981 S.W.2d 140, 1998 Ky. App. LEXIS 94 (Ky. Ct. App. 1998).

Because the transportation cabinet unequivocally waived objection to venue, the circuit court could award post-judgment interest under KRS 360.040 on an increased judgment from the date of an original erroneous judgment by a different court. Commonwealth v. Esenbock, 200 S.W.3d 489, 2006 Ky. App. LEXIS 249 (Ky. Ct. App. 2006).

Awarding postjudgment interest at the legal rate of interest was proper where damages were unliquidated up to the date of judgment on remand because an arbitration award previously had been vacated. Ison v. Robinson, 411 S.W.3d 766, 2013 Ky. App. LEXIS 139 (Ky. Ct. App. 2013).

It was not error to conclude the law of the case doctrine barred reduction of a post-judgment interest rate because the matter was finally decided in a prior appeal when the case was remanded with no instruction relevant to the post-judgment interest rate, so a motion to reduce the interest rate pursuant to KRS 360.040 tried to re-litigate a finally decided issue. Univ. Med. Ctr., Inc. v. Beglin, 432 S.W.3d 175, 2014 Ky. App. LEXIS 67 (Ky. Ct. App. 2014).

It was not error to refuse to alter the judgment interest rate under CR 60.02 because whether a drop in market interest rates made the KRS 360.040 judgment interest rate inequitable was a legislative matter. Univ. Med. Ctr., Inc. v. Beglin, 432 S.W.3d 175, 2014 Ky. App. LEXIS 67 (Ky. Ct. App. 2014).

Trial court did not miscalculate interest by including the day on which judgment was entered and an extra day for each leap year because KRS 360.040 said interest accrued from the date judgment was entered. Univ. Med. Ctr., Inc. v. Beglin, 432 S.W.3d 175, 2014 Ky. App. LEXIS 67 (Ky. Ct. App. 2014).

In a contract case, there was no error in a default judgment that limited post-judgment interest on a retail installment contract to 12 percent per annum because a purchaser did not agree to the accrual of interest at any rate, much less at a rate in excess of the statutory rate; the purchaser agreed only to buy a vehicle at a price determined by adding the cost of the vehicle if she had paid cash and the time price differential. Moreover, the court could not deviate from the 12 percent rate because the claim here was for liquidated damages. Serv. Fin. Co. v. Ware, 2015 Ky. App. LEXIS 47 (Ky. Ct. App. Apr. 10, 2015) (Ky. Ct. App. Apr. 10, 2015), op. withdrawn, sub. op., 473 S.W.3d 98, 2015 Ky. App. LEXIS 110 (Ky. Ct. App. 2015).

Trial court properly limited post-judgment interest on a retail installment contract to 12% per annum because (1) the contract sued on was a retail installment agreement in which a buyer agreed to pay a finance charge but did not agree to the accrual of interest at any rate, much less a rate in excess of that stated in Ky. Rev. Stat. Ann. § 360.040 , and (2) a time price differential was expressed as a finance charge calculated under Ky. Rev. Stat. Ann. § 190.110 , and the seller did not compute the finance charge on a simple interest basis, under Ky. Rev. Stat. Ann. § 190.110 (4). Serv. Fin. Co. v. Ware, 473 S.W.3d 98, 2015 Ky. App. LEXIS 110 (Ky. Ct. App. 2015).

Circuit court erred in denying an estate's motion for post-judgment interest on a Board of Claims award because the estate was not claiming that it was entitled to post-judgment interest dating from the original award by the Board of Claims, but from the date of the circuit court's denial where the denial met the definition of a judgment, and even if there had been no determination of the amount that was owed to the estate until the final decision of the state supreme court, the estate was entitled to post-judgment interest accruing from the date on which the circuit court entered the opinion and order reversing the initial award of the Board of Claims. Va. Gaither v. Commonwealth, 2016 Ky. App. LEXIS 93 (Ky. Ct. App. June 3, 2016) (Ky. Ct. App. June 3, 2016), aff’d, 539 S.W.3d 667, 2018 Ky. LEXIS 72 ( Ky. 2018 ).

Fact that the trial court could have chosen to impose a lower interest rate did not mean that its decision to stick with the 12 percent default statutory rate was an abuse of discretion. PBI Bank, Inc. v. Signature Point Condos. LLC, 535 S.W.3d 700, 2016 Ky. App. LEXIS 199 (Ky. Ct. App. 2016).

Trial court did to err in permitting the property to avoid payment of postjudgment interest where the damages to which the holder of the property tax delinquency certificate was entitled in the final judgment were unliquidated, and as such the award of postjudgment interest was not mandatory under Ky. Rev. Stat. Ann. § 360.040 . Hazel Enters., LLC v. Ray, 510 S.W.3d 840, 2017 Ky. App. LEXIS 6 (Ky. Ct. App. 2017).

Circuit court properly awarded a certificate of delinquency holder interest on the certificate and attorney fees because the judgment and order of sale did not resolve the issue of interest, the costs and attorney fees could not be adjudicated at the time the final judgment and order of sale was entered, even if post-judgment interest were properly denied, the holder was entitled to simple interest on the underlying certificate of delinquency until the date of the order of distribution, and the holder was awarded fees well in excess of the $2,000 statutory limit without any finding that those fees were warranted by the complexity of the case. Ky. Tax Bill Servicing, Inc. v. Fultz, 567 S.W.3d 148, 2018 Ky. App. LEXIS 304 (Ky. Ct. App. 2018).

12.— On Judgment Under Appeal.

An unsuccessful appeal from a favorable judgment deemed by the judgment creditor to be inadequate does not toll the running of interest on the initial award in the absence of an unconditional tender of the award to the judgment creditor; in the alternative, the judgment debtor may deposit the award into court subject to unrestricted withdrawal by the judgment creditor. Grange Mut. Casualty Co. v. Hollon, 816 S.W.2d 663, 1991 Ky. App. LEXIS 113 (Ky. Ct. App. 1991).

13.—Divorce.

It was proper for court to allow interest on money judgment awarded to wife in divorce proceeding, including interest on an award of attorney’s fees. Sharp v. Sharp, 516 S.W.2d 875, 1974 Ky. LEXIS 185 ( Ky. 1974 ).

In a divorce action, the trial court erred in failing to impose the legal rate of 12% annual interest upon the deferred payment for the portion of the residence awarded to the former husband. Cochran v. Cochran, 746 S.W.2d 568, 1988 Ky. App. LEXIS 46 (Ky. Ct. App. 1988), overruled in part, Rumpel v. Rumpel, 438 S.W.3d 354, 2014 Ky. LEXIS 331 ( Ky. 2014 ).

This section provides with certain exceptions, that judgment awards shall bear 12% interest, compounded annually, from entry; in this child support arrearages case, interest was ordered to be compounded from the date of the final judgment, February 27, 1990; the trial court could have ordered that interest accrue from the date that each child support payment was due; it certainly did not err in simply awarding post-judgment interest. Thurman v. Commonwealth, 828 S.W.2d 368, 1992 Ky. App. LEXIS 71 (Ky. Ct. App. 1992).

A property settlement agreement and decree which required the husband to pay $7,500 to the wife within three (3) years from the date of the agreement became an enforceable judgment when the payment became delinquent at the end of three (3) years and, therefore, the wife was entitled to 12 percent interest on the $7,500 from the end of the three (3) years unless, on remand, it was determined that such an award was inequitable. Hoskins v. Hoskins, 15 S.W.3d 733, 2000 Ky. App. LEXIS 28 (Ky. Ct. App. 2000).

Because the family court made the findings required by KRS 403.200(1), (2) and 403.220 , it properly awarded maintenance and attorney’s fees to the wife; as the husband had exclusive possession and use of the primary marital asset during the proceedings, retroactive judgment interest at 12 percent was proper under KRS 360.040 . 2005 Ky. App. LEXIS 182 .

In this dissolution action, the trial court did not abuse its discretion in reducing the post-judgment interest rate to five percent per annum; the equities of this case did not support an award of the statutory interest rate where the trial court conducted a hearing on the matter at which the wife did not appear or provide any evidence. Ensor v. Ensor, 2013 Ky. App. LEXIS 61 (Ky. Ct. App. Apr. 12, 2013).

Trial court did not abuse its discretion in reducing a post-judgment interest rate to five percent per annum because the equities of the marital dissolution case did not support an award of the 12 percent statutory interest rate; the trial court set the rate consistent with its earlier rulings. Ensor v. Ensor, 431 S.W.3d 462, 2013 Ky. App. LEXIS 112 (Ky. Ct. App. 2013).

14.— Child Support.

Creditor, as custodial parent, was entitled to receive interest at 12% on judgment for child support arrearages which she obtained in court and this right could not be altered by debtor’s Chapter 13 Plan unless creditor had consented to an alteration of her rights, which she had not, and therefore, the interest at 12% will continue to accrue post-petition on creditor’s claim for child support arrearages and will survive discharge upon completion of debtor’s Chapter 13 Plan. In re Crable, 174 B.R. 62, 1994 Bankr. LEXIS 1782 (Bankr. W.D. Ky. 1994 ).

Because interest was clearly required under KRS 360.040 , a trial court abused its discretion by failing to award interest on arrearages owed by a father. Gibson v. Gibson, 211 S.W.3d 601, 2006 Ky. App. LEXIS 390 (Ky. Ct. App. 2006).

15.— Back Pay.

Award of interest on payment of lost pay where employee was ordered to be reinstated to his former position is not justified since there is no statutory authority or any contract which authorizes the payment of interest. Commonwealth, Dep't of Transp., Bureau of Highways v. Lamb, 549 S.W.2d 504, 1976 Ky. LEXIS 150 ( Ky. 1976 ).

16.— Bankruptcy Plan.

A secured creditor in a Chapter 13 bankruptcy plan is entitled to interest on its secured claim at the market interest rate for consumer loans on the date the plan became effective, rather than the eight percent (8%) legal rate set by this section. In re Benford, 14 B.R. 157, 1981 Bankr. LEXIS 2936 (Bankr. W.D. Ky. 1981 ).

17.— Settlement Agreements.

This section should not be applied to supply what might be perceived as missing terms in a separation agreement. Courtenay v. Wilhoit, 655 S.W.2d 41, 1983 Ky. App. LEXIS 338 (Ky. Ct. App. 1983).

This section did apply to a separation agreement which provided for periodic payments of a fixed sum, but was silent as to interest, and which incorporated in the decree, but did not become applicable until a judgment came into being via a delinquent payment. Courtenay v. Wilhoit, 655 S.W.2d 41, 1983 Ky. App. LEXIS 338 (Ky. Ct. App. 1983).

Where parties’ compromise agreement for payment of balance in satisfaction of judgment in condemnation action did not provide for interest nor was a time for performance fixed, no interest was owed and performance within 33 days from the entry of the order of agreed settlement was reasonable. Withers v. Commonwealth, Dep't of Transp., Bureau of Highways, 656 S.W.2d 747, 1983 Ky. App. LEXIS 357 (Ky. Ct. App. 1983).

18.— Condemnation Actions.

The statutory interest provision of KRS 416.620(5) controls when in conflict with the general statutory interest provision of this section; consequently, six percent (6%) and not 12 percent, therefore, was the proper interest rate on judgment in condemnation suit. Commonwealth, Dep't of Transp., Bureau of Highways v. Crafton-Duncan, Inc., 668 S.W.2d 62, 1984 Ky. App. LEXIS 486 (Ky. Ct. App. 1984).

In an inverse condemnation proceeding, the award of prejudgment and post-judgment interest was clearly erroneous where appellee was never out of possession of the land and where there was no physical taking of the property. Commonwealth, Natural Resources & Environmental Protection Cabinet v. Stearns Coal & Lumber Co., 678 S.W.2d 378, 1984 Ky. LEXIS 204 ( Ky. 1984 ).

19.— Pension Funds.

Under this section, widow erroneously denied benefits was properly entitled to interest, such money being merely compensation for the use of pension funds erroneously denied her; also her costs were in effect funds properly expended to establish her right to benefits. Thus both her costs and interest are directly related to the payment of benefits, and payment thereof does not constitute a violation of KRS 95.620(1). Henderson Police & Fireman Pension Bd. v. Riley, 674 S.W.2d 27, 1984 Ky. App. LEXIS 473 (Ky. Ct. App. 1984).

20.— Less Than Six Percent.

Prior to 1942 amendment to this section giving court authority to fix interest at less than six percent (6%) when claim for unliquidated damages was reduced to judgment, court had no discretion to fix interest on judgment at less than six percent (6%). Kaufman v. Kaufman's Adm'r, 292 Ky. 351 , 166 S.W.2d 860, 1942 Ky. LEXIS 102 ( Ky. 1942 ).

21.— Conversion.

In an action for conversion of sale proceeds representing the secured creditor’s security interest in the collateral, the trial court properly imposed interest against the second creditor at the contract rate established between the debtor and the secured party, rather than the statutory rate of 12%. Nolin Production Credit Asso. v. Canmer Deposit Bank, 726 S.W.2d 693, 1986 Ky. App. LEXIS 1466 (Ky. Ct. App. 1986).

22.— Statutory Liens.

The trial court erred in failing to determine what amount of interest should accrue to the judgment on the statutory engineer’s lien. Perkins v. Daugherty, 722 S.W.2d 907, 1987 Ky. App. LEXIS 418 (Ky. Ct. App. 1987).

23.— Liability of Surety.

A surety on the bond of a guardian is not chargeable with interest from the date of the loss to the estate of the ward when the interest would result in a recovery larger than the face amount of the bond. Polk v. American Casualty Co., 816 S.W.2d 178, 1991 Ky. LEXIS 141 ( Ky. 1991 ).

24.— Deposit Money to Court.

Except in the case of a stakeholder, one depositing money into court does not thereby stop the running of interest against him where such deposit is not a tender to the judgment holder an does not entitle that party to unrestricted use of the money. Adams v. Kentucky Bar Ass'n, 877 S.W.2d 609, 1994 Ky. LEXIS 56 ( Ky. 1994 ).

25.Procedure.

“Hearing” as to reducing the rate of postjudgment interest was sufficient under KRS 360.040 because the paying party objected to the assessment of interest and the opposing party had an ample opportunity to respond. Hill v. Ky. Lottery Corp., 2010 Ky. LEXIS 82 (Ky. Apr. 22, 2010), sub. op., 327 S.W.3d 412, 2010 Ky. LEXIS 317 ( Ky. 2010 ), modified, 2010 Ky. LEXIS 318 (Ky. Dec. 16, 2010).

KRS 360.040 ’s requirement for a “hearing” does not mean more than the basic notion that before the court undertakes to consider the question, an opportunity will be provided to present one’s position on the matter, and an opportunity will be provided to refute the opponent’s position. Therefore, in a case alleging defamation and other causes of action, a trial court did not err by ordering the payment of 6 percent interest where two employees were given an opportunity to respond to a request for less than a 12 percent interest rate. Hill v. Ky. Lottery Corp., 327 S.W.3d 412, 2010 Ky. LEXIS 317 ( Ky. 2010 ).

26.Immunity.

Municipal corporation has no sovereign immunity to exempt it from the assessment of interest under KRS 360.040 . Therefore, interest was properly awarded against a former employer in a case alleging defamation and other causes of action. Hill v. Ky. Lottery Corp., 327 S.W.3d 412, 2010 Ky. LEXIS 317 ( Ky. 2010 ).

When the Cabinet for Health and Family Services (Cabinet) was found to have willfully violated the Open Records Act, it was error to award post-judgment interest against the Cabinet because (1) the Cabinet was entitled to governmental immunity for the Cabinet's discretionary actions, and (2) no “explicit” statute provided an exception to such immunity for an award of post-judgment interest. Cabinet v. Todd Cnty. Std., 488 S.W.3d 1, 2015 Ky. App. LEXIS 171 (Ky. Ct. App. 2015).

27.Suspension.

Scope of trial court’s discretion was not sufficiently broad to allow suspension of post-judgment interest because no factors made it inequitable to require interest on the judgment to accrue between the judgment and the opinion and order. The contractor and surety themselves could have suspended the accrual of post-judgment interest by paying the damages amount to a university and there was no change in the compensatory damages award between the final judgment and the opinion and order. Arete Ventures, Inc. v. Univ. of Kentucky, 619 S.W.3d 906, 2020 Ky. App. LEXIS 87 (Ky. Ct. App. 2020).

Cited in:

Western Casualty & Surety Co. v. Meyer, 301 Ky. 487 , 192 S.W.2d 388, 1946 Ky. LEXIS 507 , 164 A.L.R. 769 ( Ky. 1946 ); Mattingly v. Gentry, 419 S.W.2d 745, 1967 Ky. LEXIS 184 ( Ky. 1967 ); Bush v. Commonwealth, Dep’t of Highways, Transp. Cabinet, 777 S.W.2d 608, 1989 Ky. App. LEXIS 132 (Ky. Ct. App. 1989); Brown v. Fulton, Hubbard & Hubbard, 817 S.W.2d 899, 1991 Ky. App. LEXIS 97 (Ky. Ct. App. 1991); Travelers Ins. Co. v. Corporex Properties, Inc., 798 F. Supp. 423, 1991 U.S. Dist. LEXIS 20626 (E.D. Ky. 1991 ); Church & Mullins Corp. v. Bethlehem Minerals Co., 887 S.W.2d 321, 1992 Ky. LEXIS 94 ( Ky. 1992 ); Emberton v. GMRI, Inc., 299 S.W.3d 565, 2009 Ky. LEXIS 250 ( Ky. 2009 ); Bradley v. Commonwealth, 301 S.W.3d 27, 2009 Ky. LEXIS 326 ( Ky. 2009 ); R.T. Vanderbilt Co. v. Franklin, 290 S.W.3d 654, 2009 Ky. App. LEXIS 16 (Ky. Ct. App. 2009).

NOTES TO UNPUBLISHED DECISIONS

1.Interest.
2.—Prior to Judgment.

Unpublished Decision: Trial court’s judgment erroneously awarded prejudgment interest in the amount of 8 percent per diem, rather than the statutorily authorized 8 percent per annum. Accordingly, remand of the matter was appropriate for a correction of the clerical error. Grant Thornton, LLP v. Yung, 2016 Ky. App. LEXIS 164 (Ky. Ct. App. Sept. 16, 2016, sub. op., 2016 Ky. App. Unpub. LEXIS 890 (Ky. Ct. App. Sept. 16, 2016).

Research References and Practice Aids

Cross-References.

Judgments for the collection of taxes or against persons required to pay money into the treasury bear ten percent (10%) interest, KRS 135.080 .

Kentucky Law Journal.

Kentucky Law Survey, Garvey and Doutt, Civil Procedure, 68 Ky. L.J. 529 (1979-1980).

Northern Kentucky Law Review.

Bartlett, Civil Procedure, 20 N. Ky. L. Rev. 605 (1993).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Usury, § 197.00.

360.050. Presumption as to interest on foreign debt or judgment.

Any indebtedness incurred or judgment rendered out of this state is presumed to bear interest in accordance with the provisions of KRS 360.040 .

History. 2221: amend. Acts 1982, ch. 7, § 3, effective July 15, 1982.

NOTES TO DECISIONS

1.Conflict of Laws.

Where suit was had in Kentucky upon the judgment of another state, it was proper for the court to instruct the jury that they should allow interest on the claim at the rate fixed by the Kentucky law for domestic judgments, as there was no proof as to the interest rate on judgments in such other state. Reynolds v. Powers, 96 Ky. 481 , 29 S.W. 299, 17 Ky. L. Rptr. 1059 , 1895 Ky. LEXIS 99 ( Ky. 1895 ).

360.060. Interest on holdbacks or reserves by persons financing loans on personal property — Reports to dealers.

  1. Each person engaged in the business of financing loans on personal property sold by dealers to purchasers on credit shall pay interest at the rate of two and one-half percent (2.5%) per annum on holdbacks, reserves or other money withheld from the dealer under any contract for financing such a purchase on credit. Interest on such money withheld shall be paid to each dealer on January 1 and July 1 of each year.
  2. Any amount withheld by a person engaged in making such loans shall be due immediately upon the close of the loan account.
  3. Each person engaged in making such loans shall furnish each dealer as of January 1 and July 1 of each year, a report showing the status of the dealer’s reserve or holdback account, if any.

History. 2223-3, 2223-4, 2223-5.

NOTES TO DECISIONS

1.Applicability.

This section did not apply to a contract between a New York lender and a Kentucky borrower where the contract provided that the law of New York would apply and which did not provide for interest on the reserve of accounts receivable. Consolidated Jewelers, Inc. v. Standard Financial Corp., 325 F.2d 31, 1963 U.S. App. LEXIS 3517 (6th Cir. Ky. 1963 ).

Research References and Practice Aids

Cross-References.

Public utilities to pay interest on deposits of patrons, KRS 278.460 .

360.070. Rates of exchange for commercial paper, how fixed.

Once in each month or oftener, each bank and each institution authorized to deal in bills of exchange shall fix the rates of exchange at which bills shall be purchased and enter them upon the proceedings of the board of directors, designating the difference to be made, if any, on account of the time the bill has to run. A copy of the rates shall be posted in some conspicuous place in the public room of the bank or institution. If the rates of exchange are fixed by a branch of the bank or institution, they shall not be entered on its records or acted upon by it until corrected, if necessary, and approved by the principal bank or institution. Any alteration made in the rates of exchange shall, before it is acted upon, be noted on the copy posted in the public room. All officers of any such bank or institution shall conform to its rates of exchange so fixed.

History. 2222.

360.080. Rates of exchange to be transmitted to Governor.

Each bank and each institution authorized to deal in bills of exchange shall, each month, transmit copies of its rates of exchange to the Governor for his information and for the information of the General Assembly.

History. 2223.

360.100. Predatory lending — Definitions — Limitations on high-cost home loans — Conditions — Penalties.

  1. The following definitions apply for the purposes of this section:
    1. “High-cost home loan” means a loan other than an open-end credit plan or a reverse mortgage transaction in which:
      1. The principal amount of the loan is greater than fifteen thousand dollars ($15,000) and does not exceed two hundred thousand dollars ($200,000);
      2. The borrower is a natural person;
      3. The debt is incurred by the borrower primarily for personal, family, or household purposes;
      4. The loan is secured by a mortgage on residential real property or secured by collateral which has a mortgage lien interest in residential real property, which is or will be occupied by the borrower as the borrower’s principal dwelling; and
      5. The terms of the loan exceed either or both of the following thresholds:
        1. Without regard to whether the loan transaction is or may be a “residential mortgage transaction” as defined in 12 C.F.R. 226.2(a)(24), as amended from time to time, the loan at the time the loan is consummated is such that the loan is considered a “mortgage” under section 152 of the Home Ownership and Equity Protection Act of 1994, Pub. L. No. 103-325, 15 U.S.C. sec. 1602 (aa), as the same may be amended from time to time, and regulations adopted pursuant thereto by the Federal Reserve Board, including 12 C.F.R. 226.32, as the same may be amended from time to time; or
        2. The total points and fees payable by the borrower at or before the loan closing exceed the greater of three thousand dollars ($3,000) or six percent (6%) of the total loan amount as shown as the amount financed on the final Truth-in-Lending Statement;
    2. “Lender” means any person who funds or negotiates the terms of a high-cost home loan or acts as a mortgage broker or lender, finance company, or retail installment seller with respect to a high-cost home loan. However, any person who purchases or is otherwise assigned a high-cost home loan shall be subject to an action for violation of this section only if the violation for which the action or proceeding is brought is apparent on the face of the disclosure or the underlying promissory note;
    3. “Material change” means any of the following:
      1. A change in the type of loan being offered, such as a fixed or variable rate loan or a loan with a balloon payment;
      2. A change in the term of the loan, as reflected in the number of monthly payments due before a final payment is scheduled to be made;
      3. An increase in the interest rate of more than one-quarter of one percent (0.25%), or an equivalent increase in the amount of discount points charged;
      4. A change regarding the requirement of escrow for taxes and insurance; and
      5. A change regarding the requirement or payment, or both, of private mortgage insurance; and
      1. “Total points and fees payable by the consumer at or before the loan closing” means all amounts payable by a borrower at or before the closing of a home loan, excluding any interest or time-price differential due at closing on the loan proceeds and includes: (d) 1. “Total points and fees payable by the consumer at or before the loan closing” means all amounts payable by a borrower at or before the closing of a home loan, excluding any interest or time-price differential due at closing on the loan proceeds and includes:
        1. All mortgage broker fees, including fees paid by the consumer directly to the broker, fees paid by the consumer to the creditor for delivery to the broker, and yield spread premiums paid by the creditor to the broker;
        2. Any amount payable under an add-on or discount system of additional charges;
        3. Service, transaction, activity, and carrying charges that exceed similar charges on a noncredit account;
        4. Points, loan fees, assumption fees, finder’s fees, and similar charges;
        5. Appraisal, investigation, and credit report fees when service is provided by the lender or an affiliate and not by a third party;
        6. Charges imposed on a creditor by another person for purchasing or accepting the borrower’s obligation, if the borrower is required to pay the charges in cash, as an addition to the loan obligation, or as a deduction from loan proceeds;
        7. Premiums or other charges for credit life, accident, health, or loss-of-income insurance, or debt-cancellation coverage, whether or not the debt-cancellation coverage is insurance under applicable law; or
        8. Closing agent fees charged by a third party, but only if the lender requires the particular services for which the borrower is charged and the lender requires the imposition of the charge or the lender retains a portion of the charge.
      2. “Total points and fees payable by the consumer at or before the loan closing” does not include real estate related fees paid to third parties if the charge is reasonable, the creditor receives no direct or indirect compensation in connection with the charge, and the charge is not paid to an affiliate of the creditor. Real estate related fees include:
        1. Fees for title examination, abstract of title, title insurance, property survey, and similar purposes;
        2. Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or settlement documents;
        3. Notary and credit report fees;
        4. Property appraisal fees or fees for inspections to assess the value or condition of the property if the service is performed prior to closing, including fees related to pest infestation and flood hazard determinations; and
        5. Amounts required to be paid into escrow or trustee accounts if the amounts would not otherwise be included in the finance charge.
  2. A high-cost home loan shall be subject to the following limitations:
      1. No lender may make, provide, or arrange a high-cost home loan with a prepayment penalty unless the lender offers the borrower a loan without a prepayment penalty, the offer is in writing, and the borrower initials the offer to indicate that the borrower has declined the offer. The lender shall disclose the discount in rate received in consideration for a high-cost home loan with the prepayment penalty; and (a) 1. No lender may make, provide, or arrange a high-cost home loan with a prepayment penalty unless the lender offers the borrower a loan without a prepayment penalty, the offer is in writing, and the borrower initials the offer to indicate that the borrower has declined the offer. The lender shall disclose the discount in rate received in consideration for a high-cost home loan with the prepayment penalty; and
      2. If a borrower declines an offer required in paragraph (a)1. of this subsection, the lender may include a prepayment penalty schedule. No prepayment penalty shall be assessed against the borrower following the third anniversary date of the mortgage or sixty (60) days prior to the date of the first interest rate reset, whichever is less. No prepayment penalty shall exceed three percent (3%) for the first year, two percent (2%) for the second year, and one percent (1%) for the third year of the outstanding balance of the loan; but in no event shall a prepayment penalty be assessed against a borrower refinancing with the mortgage loan company that funded the mortgage;
    1. A high-cost home loan may not contain a provision which permits the lender, in its sole discretion, to accelerate the indebtedness. This provision does not apply when repayment of the loan has been accelerated by default, pursuant to a due-on-sale provision, or pursuant to some other provision of the loan documents unrelated to the payment schedule;
    2. A high-cost home loan may not contain a scheduled payment that is more than twice as large as the average of earlier scheduled payments. This provision does not apply when the payment schedule is adjusted to the seasonal or irregular income of the borrower;
    3. A high-cost home loan may not contain a payment schedule with regular periodic payments that cause the principal balance to increase;
    4. A high-cost home loan may not contain a provision which increases the interest rate after default. This provision does not apply to interest rate changes in a variable rate loan otherwise consistent with the provisions of the loan documents, provided the change in the interest rate is not triggered by the event of default or the acceleration of the indebtedness;
    5. A high-cost home loan may not include terms under which more than two (2) periodic payments required under the loan are consolidated and paid in advance from the loan proceeds provided to the borrower;
    6. A lender may not charge a borrower any fees to modify, renew, extend, or amend a high-cost home loan or to defer any payment due under the terms of a high-cost home loan, unless the fees are less than one-half (1/2) of any fees that would be charged for a refinance or unless the borrower is in default and it is in the borrower’s best interest;
    7. A lender may not make a high-cost home loan unless the borrower has been provided the following notice or a substantially similar notice, in writing, not later than the time that notice provided by 12 C.F.R. 226.31(c), as amended from time to time, is required:
    8. A lender may not make a high-cost home loan unless the lender reasonably believes at the time the loan is consummated that one (1) or more of the borrowers, when considered individually or collectively, will be able to make the scheduled payments to repay the loan based upon a consideration of their current and expected income, current obligations, current employment status, and other financial resources, other than the borrower’s equity in the dwelling which secures repayment of the loan. A borrower shall be presumed to be able to make the scheduled payments to repay the loan if, at the time the loan is consummated:
      1. The borrower’s total monthly debts, including amounts owed under the loan, do not exceed fifty percent (50%) of the borrower’s monthly gross income as verified by the credit application, the borrower’s financial statement, a credit report, financial information provided to the lender by or on behalf of the borrower, or any other reasonable means;
      2. The loan has been approved by an automated underwriting service offered by FNMA or Freddie MAC;
      3. The lender verifies and documents that the borrower has liquid assets equal to fifty percent (50%) of the principal loan amount; or
      4. The borrower has sufficient residual income as defined in the guidelines established in 38 C.F.R. 36.4337(e) and United States Department of Veterans Affairs form 26-6393;
    9. If the proceeds of the high-cost home loan are used to refinance an existing high-cost home loan held by the same lender as noteholder, the lender may not directly or indirectly finance:
      1. Any prepayment fees or penalties payable by the borrower; or
      2. Points and fees, excluding those provided for in 12 C.F.R. 226.4(c)(7), which in the aggregate are in excess of four percent (4%) of the total amount financed;
    10. A lender or mortgage loan broker may not, within one (1) year of the consummation of a high-cost home loan, charge a borrower points and fees in connection with a high-cost home loan if the proceeds of the high-cost home loan are used to refinance an existing high-cost home loan on which points were charged. A lender may not, at any time, charge a borrower points and fees in addition to those allowed by 12 C.F.R. 226.4(c)(7) if the proceeds of the high-cost home loan are used to refinance an existing high-cost home loan, on which points were charged, held by the same lender as noteholder. However, points and fees in accordance with this section may be charged on any proceeds of a high-cost home loan which are in excess of the amount refinanced on the existing high-cost home loan;
    11. A lender may not pay a contractor under a home-improvement contract from the proceeds of a high-cost home loan other than by an instrument payable to the borrower or jointly to the borrower and the contractor, or at the election of the borrower, through a third-party escrow agent in accordance with terms established in a written agreement signed by the borrower, the lender, and the contractor prior to the disbursement;
    12. A lender shall not refinance, replace, or consolidate a zero interest rate or low interest rate loan made by a governmental or nonprofit lender with a high-cost home loan. For purposes of this paragraph, a low interest rate loan is defined as a loan that carries a current interest rate that is two (2) percentage points or more below the current yield on United States Treasury securities with a comparable maturity;
    13. A lender shall not finance single premium credit life, credit accident, credit health, credit disability, or credit loss of income insurance in connection with a high-cost home loan;
    14. A lender shall not make a high-cost home loan unless the lender has made available to the borrower a videotape, or other similar audio-video media format such as DVD or CD, approved by the Department of Financial Institutions, which explains the borrower’s rights and responsibilities with regard to this section or high-cost home loans. A lender shall have available for viewing at least one (1) copy of the video in the principal office and each branch office of the lender;
    15. A lender shall not make a high-cost home loan subject to a mandatory arbitration clause that is oppressive, unfair, unconscionable, or substantially in derogation of the rights of consumers. Arbitration clauses that comply with the standards set forth in the Statement of Principles of the National Consumer Dispute Advisory Committee of the American Arbitration Association in effect on June 24, 2003, shall be presumed not to violate this subsection;
    16. A lender shall not charge a late payment fee on a high-cost home loan except in accordance with the following:
      1. The late payment fee may not be in excess of five percent (5%) of the amount of the payment past due or ten dollars ($10), whichever is greater;
      2. The loan documents must specifically authorize the late payment fee;
      3. The late payment fee may only be assessed for a payment past due fifteen (15) days or more; and
      4. The late payment fee may only be charged once with respect to a single late payment;
    17. A lender may not charge a borrower a fee for the first request of each calendar year for a written payoff calculation. Thereafter, for each subsequent request in a calendar year, the lender may charge a reasonable fee not to exceed in excess of ten dollars ($10) or actual costs, whichever is greater, per request for a written payoff calculation on a high-cost home loan by a borrower in a calendar year;
    18. A lender shall not initiate a foreclosure or other judicial process to terminate a borrower’s interest in residential real property subject to a high-cost home loan without first providing the borrower, at least thirty (30) days prior to the initiation of any process, written notice of default and of the borrower’s right to cure. The notice shall include a statement of the amount needed to be paid by the borrower in order to cure the default and the date by which the payment is due to cure the default. If the amount needed to be paid will change during the thirty (30) day notice period, the notice shall provide information sufficient to enable a calculation of the daily change;
    19. A lender shall not recommend or encourage default on an existing loan or other debt in connection with the closing of a high-cost home loan that refinances all or a portion of the existing loan or debt;
    20. A lender shall not make a high-cost home loan that does not require an escrow account for taxes and insurance;
    21. A lender shall not process the application to make a high-cost home loan if the proceeds shall be used, in whole or in part, to repay the principal of an existing loan secured by the borrower’s principal dwelling that is not a high-cost home loan, without first requiring the borrower to obtain housing counseling by a HUD-approved counselor;
    22. A lender shall not make a high-cost home loan that allows the borrower, for any part or all of the term of the loan, to make payments that are applied only to interest and not to principal;
    23. A lender shall provide timely notice to the borrower of any material change in the terms of a high-cost home loan if the change is made after an application has been taken but before the closing of the loan. Notice shall be deemed timely if given not later than three (3) days after the lender has learned of the change or twenty-four (24) hours before the high-cost home loan is closed, whichever is earlier. If the lender discloses a material change more than three (3) days after learning of the change but still twenty-four (24) hours before the high-cost home loan is closed, it will not be liable for penalties or forfeitures if the lender cures in time for the borrower to avoid any damage;
    24. A lender shall not make a high-cost home loan without verifying the borrower’s income and financial resources through tax returns, payroll receipts, bank records, or other similarly reliable documents, whether provided directly by the borrower or through a third party with the borrower’s permission; and
    25. A lender shall not make a high-cost home loan without verifying the borrower’s reasonable ability to pay all scheduled payments of principal, interest, real estate taxes, homeowner’s insurance, and mortgage insurance premiums, as applicable. For loans in which the interest rate may vary, the reasonable ability to repay shall be determined based upon the following:
      1. In the case of a high-cost home loan in which the rate of interest varies solely in accordance with an index, the interest rate determined by adding the index rate in effect on the date of consummation of the transaction to the maximum margin permitted at any time during the loan agreement; or
      2. In the case of a high-cost home loan in which the rate may vary at any time during the term of the loan for any reason other than in accordance with an index, the interest charged on the loan at the maximum rate that may be charged during the term of the loan.
  3. Except as provided in paragraph (e) of subsection (2) of this section, the making of a high-cost home loan which violates any provisions of subsection (2) of this section is usurious, subject to the penalties of this chapter, and unlawful as an unfair and deceptive act or practice in or affecting commerce in violation of the provisions of KRS 367.170 . The provisions of this section shall apply to any person who in bad faith attempts to avoid the application of this section by:
    1. The structuring of a loan transaction as an open-end credit plan for the purpose and with the intent of evading the provisions of this section when the loan would have been a high-cost home loan if the loan had been structured as a closed-end loan; or
    2. Dividing any loan transaction into separate parts for the purpose and with the intent of evading the provisions of this section; or
    3. Any other such subterfuge. The Attorney General, the commissioner of the Department of Financial Institutions, or any party to a high-cost home loan may enforce the provisions of this section. Any person seeking damages or penalties under the provisions of this section may recover damages under either this chapter or KRS Chapter 367, but not both.
  4. A lender of a high-cost home loan who, when acting in good faith, fails to comply with subsection (2) of this section, will not be deemed to have violated this section if the lender establishes that either:
    1. Within thirty (30) days of the loan closing the borrower is notified of the compliance failure, appropriate restitution is made, and whatever adjustments are necessary are made, at the choice of the borrower, to the loan to either:
      1. Make the high-cost home loan satisfy the requirements of subsection (2) of this section; or
      2. Change the terms of the loan in a manner beneficial to the borrower so that the loan will no longer be considered a high-cost home loan subject to the provisions of this section; or
    2. The compliance failure was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adopted to avoid such errors, and within sixty (60) days after the discovery of the compliance failure, the borrower is notified of the compliance failure, appropriate restitution is made, and whatever adjustments are necessary are made to the loan to either, at the choice of the borrower, make the high-cost home loan satisfy the requirements of subsection (2) of this section or change the terms of the loan in a manner beneficial to the borrower so that the loan will no longer be considered a high-cost home loan subject to the provisions of this section. Examples of a bona fide error include clerical, calculation, computer malfunction and programming, and printing errors.
    3. For purposes of this subsection, “appropriate restitution” means the reimbursement by the lender of any points, fees, interest, or other charges made by the lender and received from the borrower necessary to put the borrower in the same position as he or she would have been had the loan, as adjusted in accordance with paragraphs (a) and (b) of this subsection, been originally made in accordance therewith.
  5. For purposes of this section, any extension of credit shall be deemed to have been made in the Commonwealth of Kentucky, and therefore subject to the provisions of this section, if the lender offers or agrees in Kentucky to lend money to a borrower, who is a resident of Kentucky, on real property located within the Commonwealth of Kentucky, or if such borrower accepts or makes the offer in Kentucky to borrow, regardless of the situs of the contract as specified therein. Any oral or written solicitation or communication to lend originating outside of Kentucky, but forwarded to and received in Kentucky by a borrower who is a resident of Kentucky, shall be deemed to be an offer or agreement to lend in Kentucky and, therefore, subject to this section. Any oral or written solicitation or communication to borrow originating within Kentucky, from a borrower who is a resident of Kentucky, but forwarded to and received by a lender outside of Kentucky, shall be deemed to be an acceptance or offer to borrow in Kentucky. Any oral or written offer, acceptance, solicitation, or communication to lend or borrow, made in Kentucky to, or received in Kentucky from, a borrower who is not a resident of Kentucky, shall be subject to the provisions of this section, applicable federal law, law of the situs of the contract, or law of the residence of the borrower, as the parties may elect. The provisions of this section shall be severable and if any phrase, clause, sentence, or provision is declared to be invalid, the validity of the remainder of this section shall not be affected thereby.

NOTICE TO BORROWER IF YOU OBTAIN THIS LOAN, THE LENDER WILL HAVE A MORTGAGE ON YOUR HOME. YOU COULD LOSE YOUR HOME AND ANY MONEY YOU PUT INTO IT IF YOU DO NOT MEET YOUR OBLIGATIONS UNDER THE LOAN. MORTGAGE LOAN RATES AND CLOSING COSTS AND FEES VARY BASED ON MANY FACTORS, INCLUDING YOUR PARTICULAR CREDIT AND FINANCIAL CIRCUMSTANCES, YOUR EMPLOYMENT HISTORY, THE LOAN-TO-VALUE REQUESTED AND THE TYPE OF PROPERTY THAT WILL SECURE YOUR LOAN. THE LOAN RATE AND FEES COULD ALSO VARY BASED ON WHICH LENDER OR BROKER YOU SELECT. YOU SHOULD SHOP AROUND AND COMPARE LOAN RATES AND FEES. YOU SHOULD ALSO CONSIDER CONSULTING A QUALIFIED INDEPENDENT CREDIT COUNSELOR OR OTHER EXPERIENCED FINANCIAL ADVISOR REGARDING THE RATE, FEES AND PROVISIONS OF THIS MORTGAGE LOAN BEFORE YOU PROCEED. YOU SHOULD CONTACT THE UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT FOR A LIST OF CREDIT COUNSELORS AVAILABLE IN YOUR AREA. YOU ARE NOT REQUIRED TO COMPLETE THIS LOAN AGREEMENT MERELY BECAUSE YOU HAVE RECEIVED THESE DISCLOSURES OR HAVE SIGNED A LOAN APPLICATION. REMEMBER, PROPERTY TAXES AND HOMEOWNER’S INSURANCE ARE YOUR RESPONSIBILITY. NOT ALL LENDERS PROVIDE ESCROW SERVICES FOR THESE PAYMENTS. YOU SHOULD ASK YOUR LENDER ABOUT THESE SERVICES. ALSO, YOUR PAYMENTS ON EXISTING DEBTS CONTRIBUTE TO YOUR CREDIT RATINGS. YOU SHOULD NOT ACCEPT ANY ADVICE TO IGNORE YOUR REGULAR PAYMENTS TO YOUR EXISTING CREDITORS;

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History. Enact. Acts 2003, ch. 64, § 12, effective June 24, 2003; 2008, ch. 175, § 31, effective April 24, 2008; 2010, ch. 24, § 1916, effective July 15, 2010.

Research References and Practice Aids

Kentucky Law Journal.

Barnett, Lending A Helping Hand?: A Guide to Kentucky’s New Predatory Lending Law., 93 Ky. L.J. 473 (2004/2005).

Northern Kentucky Law Review.

2012 Kentucky Survey Issue: Article: Abusive Lending Practices: A Survey of Kentucky’s Legislative Response, 39 N. Ky. L. Rev. 1 (2012).

360.150. Manufactured home financing.

  1. As used in this section, unless the context otherwise requires:
    1. “Lender” means a person regularly engaged in the business of selling or financing manufactured homes:
      1. Who is an arranger of credit; or
      2. Who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four (4) installments (not including a down payment) and to whom the obligation is initially payable, either on the face of the note or contract, or by agreement when there is no note or contract;
    2. “Interest” means finance charge expressed as an annual percentage rate. The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the lender as an incident to or a condition of the extension of credit;
    3. “Manufactured home” means a moveable dwelling unit, designed and constructed for permanent occupancy by a single family, which dwelling contains permanent eating, cooking, sleeping, and sanitary facilities; or a prefabricated dwelling that is manufactured in two (2) or more modules at a location other than a homesite and which is designed to be used as a residence when the modules are transported to the homesite, and the modules are joined together and installed on a permanent foundation system. The term includes the plumbing, heating, air conditioning, and electrical systems contained in the structure; and
    4. “Manufactured home financing transaction” shall include both the credit sale of a manufactured home and a direct loan used to finance the purchase of a manufactured home.
  2. A manufactured home financing transaction may provide for a fixed rate of interest payable in substantially equal successive installments over a fixed term, or may provide that the rate of interest may be adjusted at certain regular intervals. In this latter event, the manufactured home financing transaction shall be subject to the provisions in this section.
  3. Adjustments in the interest rate charged must be based on changes in a specific index, as set forth in the financing agreement. The index may be only:
    1. The monthly average yield on United States Treasury securities adjusted to a constant maturity of five (5) years; or
    2. An index approved by the Federal Home Loan Bank Board or by the Office of the Comptroller of the Currency, Department of the Treasury, for adjustable or variable interest rates on residential mortgage loans.
  4. The rate of interest shall not increase or decrease during the six (6) month period beginning with the date of execution of the financing agreement, and at least six (6) months shall elapse between changes.
  5. Adjustments, either up or down, to the rate of interest on each adjustment date shall, for the initial adjustment, be equal to the difference between the index value in effect on the first day of the second calendar month preceding the adjustment date and the value in effect on the first day of the month in which the financing agreement is executed. For adjustments after the initial adjustment, adjustments shall be equal to the difference between the index value in effect on the first day of the second month preceding the adjustment date and the index value in effect on the first day of the second month preceding the date of the immediately preceding rate adjustment.
  6. Where the stated regular interval between rate adjustments is six (6) months, an adjustment to the interest rate may not result in a rate of interest which is more than one (1) percentage point greater or less than the interest rate in effect prior to such adjustment. If the stated regular interval between rate adjustments exceeds six (6) months, then the maximum adjustment either up or down shall be one (1) percentage point multiplied by the number of whole consecutive six (6) month periods in the interval between rate adjustments.
  7. Any increase in the rate of interest permitted by this section shall be optional with the creditor. Decreases in the rate of interest shall be mandatory whenever the total decrease in the index value equals or exceeds one-quarter (1/4) of one (1) percentage point.
  8. If the creditor agrees to impose limitations on interest rate changes that are more restrictive than the limitations specified in this section, then such limitations shall apply to both increases and decreases.
  9. Any changes in the index which are not reflected in a rate adjustment may, by agreement of the parties, be carried over to subsequent rate adjustment periods, and be implemented to the extent not offset by opposite movement in the index.
  10. By agreement of the parties, adjustments to the rate of interest may result in changes in the amount of regular installment payments due under the financing agreement, or in changes in the term of the financing agreement, or in a combination of such changes in amount and term. Adjustments to the amount of installment payments may be made less frequently than adjustments to the interest rate.
  11. For all manufactured home financing transactions under this section, the creditor shall comply with all applicable requirements and disclosures pursuant to Part I of the Consumer Protection Act (Truth-In-Lending Act), 15 U.S.C. secs. 1601 et seq., as amended, and as implemented by Regulation Z promulgated by the Board of Governors of the Federal Reserve System.
  12. The creditor shall send written notification of any rate adjustment, by first class mail, postage prepaid, at least one (1) month before the date that the new rate of interest shall take effect.
  13. Notwithstanding any of the requirements and limitations set forth by subsections (3) through (12) of this section, the parties may agree on any terms or provisions in the manufactured housing financing agreement as may be authorized or permitted in any program for residential mortgage loans by the Federal Home Loan Bank Board or by the Office of the Comptroller of the Currency, Department of the Treasury, or any other federal department, agency or board. In such event, the creditor shall comply with all applicable limitations, requirements and disclosures of the agency that relate thereto.

History. Enact. Acts 1982, ch. 335, § 1, effective July 15, 1982; 1984, ch. 197, § 1, effective July 13, 1984.

Opinions of Attorney General.

Manufactured home financing transactions which provide for a rate of interest adjusted at certain regular intervals must comply with the requirements of this section. OAG 84-353 .

This section excludes manufactured home financing transactions which provide for a fixed rate of interest payable in substantially equal successive installments over a fixed term; these financing transactions fall under the statutory requirements of the Motor Vehicle Retail Installment Sales Act because they would fall under the broad definition of “motor vehicle” as contained in KRS 190.090(4). Since there is no longer a ceiling on the cash price sale of such transactions, the Motor Vehicle Retail Installment Sales Act would be applicable in all manufactured home financing transactions where there was a fixed rate of interest. OAG 84-353 .

Disclosure of Financing Charges on Installment Credit Transactions

360.210. Policy and purpose of law. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1968, ch. 188, § 1) was repealed by Acts 2000, ch. 157, § 19, effective July 14, 2000.

360.212. Compliance with KRS 360.210 to 360.265 by compliance with federal law. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 67, § 1; 1986, ch. 331, § 49, effective July 15, 1986) was repealed by Acts 2000, ch. 157, § 1, effective July 14, 2000.

360.215. Definitions. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1968, ch. 188, § 2; 1984, ch. 388, § 14, effective July 13, 1984) was repealed by Acts 2000, ch. 157, § 19, effective July 14, 2000.

360.220. Closed-end transactions, information required. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1968, ch. 188, § 6) was repealed by Acts 2000, ch. 157, § 19, effective July 14, 2000.

360.225. Revolving credit transactions, information required. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1968, ch. 188, § 7) was repealed by Acts 2000, ch. 157, § 19, effective July 14, 2000.

360.230. Other credit transactions, information required. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1968, ch. 188, § 8) was repealed by Acts 2000, ch. 157, § 19, effective July 14, 2000.

360.235. Information as to finance charges, how given. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1968, ch. 188, § 5) was repealed by Acts 2000, ch. 157, § 19, effective July 14, 2000.

360.240. Applicability of law — Transactions excluded. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1968, ch. 188, §§ 3, 4) was repealed by Acts 2000, ch. 157, § 19, effective July 14, 2000.

360.245. Lending institutions regulated by other laws subject to disclosure provisions. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1968, ch. 188, § 13) was repealed by Acts 2000, ch. 157, § 19, effective July 14, 2000.

360.250. Rules and regulations, scope. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1968, ch. 188, § 10) was repealed by Acts 2000, ch. 157, § 19, effective July 14, 2000.

360.255. False advertising or representations as to credit transactions prohibited. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1968, ch. 188, § 9; 1970, ch. 92, § 90) was repealed by Acts 2000, ch. 157, § 19, effective July 14, 2000.

360.260. Regulations governing information as to how credit charges determined, powers of commissioner. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1968, ch. 188, § 14) was repealed by Acts 2000, ch. 157, § 19, effective July 14, 2000.

360.265. Willful failure to give information bars collection of financing charge. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1968, ch. 188, § 11) was repealed by Acts 2000, ch. 157, § 19, effective July 14, 2000.

Penalties

360.990. Penalties.

Any person who violates any of the provisions of KRS 360.060 shall be fined not less than ten dollars ($10) nor more than fifty dollars ($50) for each offense.

History. 2223-6: amend. Acts 1970, ch. 67, § 5; 1972, ch. 216, § 3.

360.991. Penalties. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1968, ch. 188, § 12) was repealed by Acts 2000, ch. 157, § 19, effective July 14, 2000.

CHAPTER 361 Uniform Sales Act [Repealed]

361.010. Contracts to sell and sales. [Repealed.]

Compiler’s Notes.

This section (2651b-1) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.020. Capacity; liabilities for necessaries. [Repealed.]

Compiler’s Notes.

This section (2651b-2) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.030. Form of contract or sale. [Repealed.]

Compiler’s Notes.

This section (2651b-3) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.040. Statute of frauds. [Repealed.]

Compiler’s Notes.

This section (2651b-4) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.050. Existing and future goods. [Repealed.]

Compiler’s Notes.

This section (2651b-5) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.060. Undivided shares. [Repealed.]

Compiler’s Notes.

This section (2651b-6) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.070. Destruction of goods sold. [Repealed.]

Compiler’s Notes.

This section (2651b-7) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.080. Destruction of goods contracted to be sold. [Repealed.]

Compiler’s Notes.

This section (2651b-8) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.090. Definition and ascertainment of price. [Repealed.]

Compiler’s Notes.

This section (2651b-9) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.100. Sale at a valuation. [Repealed.]

Compiler’s Notes.

This section (2651b-10) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.110. Effect of conditions. [Repealed.]

Compiler’s Notes.

This section (2651b-11) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.120. Definition of express warranty. [Repealed.]

Compiler’s Notes.

This section (2651b-12) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.130. Implied warranties of title. [Repealed.]

Compiler’s Notes.

This section (2651b-13) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.140. Implied warranty in sale by description. [Repealed.]

Compiler’s Notes.

This section (2651b-14) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.150. Implied warranties of quality. [Repealed.]

Compiler’s Notes.

This section (2651b-15) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.160. Implied warranties in sale by sample. [Repealed.]

Compiler’s Notes.

This section (2651b-16) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.170. No property passes until goods are ascertained. [Repealed.]

Compiler’s Notes.

This section (2651b-17) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.180. Property in specific goods passes when parties so intend. [Repealed.]

Compiler’s Notes.

This section (2651b-18) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.190. Rules for ascertaining intention. [Repealed.]

Compiler’s Notes.

This section (2651b-19) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.200. Reservation of right of possession or property when goods are shipped. [Repealed.]

Compiler’s Notes.

This section (2651b-20) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.210. Sale by auction. [Repealed.]

Compiler’s Notes.

This section (2651b-21) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.220. Risk of loss. [Repealed.]

Compiler’s Notes.

This section (2651b-22) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.230. Sale by a person not the owner. [Repealed.]

Compiler’s Notes.

This section (2651b-23) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.240. Sale by one having a voidable title. [Repealed.]

Compiler’s Notes.

This section (2651b-24) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.250. Sale by seller in possession of goods already sold. [Repealed.]

Compiler’s Notes.

This section (2651b-25) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.260. Creditors’ rights against sold goods in seller’s possession. [Repealed.]

Compiler’s Notes.

This section (2651b-26) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.270. Definition of negotiable documents of title. [Repealed.]

Compiler’s Notes.

This section (2651b-27) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.280. Negotiation of negotiable documents by delivery. [Repealed.]

Compiler’s Notes.

This section (2651b-28) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.290. Negotiation of negotiable documents by endorsement. [Repealed.]

Compiler’s Notes.

This section (2651b-29) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.300. Negotiable documents of title marked “not negotiable.” [Repealed.]

Compiler’s Notes.

This section (2651b-30) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.310. Transfer of nonnegotiable documents. [Repealed.]

Compiler’s Notes.

This section (2651b-31) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.320. Who may negotiate a document. [Repealed.]

Compiler’s Notes.

This section (2651b-32) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.330. Rights of person to whom document has been negotiated. [Repealed.]

Compiler’s Notes.

This section (2651b-33) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.340. Rights of person to whom document has been transferred. [Repealed.]

Compiler’s Notes.

This section (2651b-34) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.350. Transfer of negotiable document without endorsement. [Repealed.]

Compiler’s Notes.

This section (2651b-35) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.360. Warranties on sale of document. [Repealed.]

Compiler’s Notes.

This section (2651b-36) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.370. Endorser not a guarantor. [Repealed.]

Compiler’s Notes.

This section (2651b-37) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.380. When negotiation not impaired by fraud, mistake or duress. [Repealed.]

Compiler’s Notes.

This section (2651b-38) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.390. Attachment or levy upon goods for which a negotiable document has been issued. [Repealed.]

Compiler’s Notes.

This section (2651b-39) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.400. Creditors’ remedies to reach negotiable documents. [Repealed.]

Compiler’s Notes.

This section (2651b-40) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.410. Seller must deliver and buyer accept goods. [Repealed.]

Compiler’s Notes.

This section (2651b-41) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.420. Delivery and payment are concurrent conditions. [Repealed.]

Compiler’s Notes.

This section (2651b-42) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.430. Place, time and manner of delivery. [Repealed.]

Compiler’s Notes.

This section (2651b-43) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.440. Delivery of wrong quantity. [Repealed.]

Compiler’s Notes.

This section (2651b-44) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.450. Delivery in installments. [Repealed.]

Compiler’s Notes.

This section (2651b-45) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.460. Delivery to a carrier on behalf of the buyer. [Repealed.]

Compiler’s Notes.

This section (2651b-46) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.470. Right to examine the goods. [Repealed.]

Compiler’s Notes.

This section (2651b-47) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.480. What constitutes acceptance. [Repealed.]

Compiler’s Notes.

This section (2651b-48) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.490. Acceptance does not bar action for damages. [Repealed.]

Compiler’s Notes.

This section (2651b-49) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.500. Buyer is not bound to return goods wrongly delivered. [Repealed.]

Compiler’s Notes.

This section (2651b-50) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.510. Buyer’s liability for failing to accept delivery. [Repealed.]

Compiler’s Notes.

This section (2651b-51) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.520. Definition of unpaid seller. [Repealed.]

Compiler’s Notes.

This section (2651b-52) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.530. Remedies of an unpaid seller. [Repealed.]

Compiler’s Notes.

This section (2651b-53) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.540. When right of lien may be exercised. [Repealed.]

Compiler’s Notes.

This section (2651b-54) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.550. Lien after part delivery. [Repealed.]

Compiler’s Notes.

This section (2651b-55) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.560. When lien is lost. [Repealed.]

Compiler’s Notes.

This section (2651b-56) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.570. Seller may stop goods on buyer’s insolvency. [Repealed.]

Compiler’s Notes.

This section (2651b-57) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.580. When goods are in transit. [Repealed.]

Compiler’s Notes.

This section (2651b-58) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.590. Ways of exercising the right to stop. [Repealed.]

Compiler’s Notes.

This section (2651b-59) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.600. When and how resale may be made. [Repealed.]

Compiler’s Notes.

This section (2651b-60) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.610. When and how the seller may rescind the sale. [Repealed.]

Compiler’s Notes.

This section (2651b-61) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.620. Effect of sale of goods subject to lien or stoppage in transitu. [Repealed.]

Compiler’s Notes.

This section (2651b-62) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.630. Action for the price. [Repealed.]

Compiler’s Notes.

This section (2651b-63) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.640. Action for damages for nonacceptance of the goods. [Repealed.]

Compiler’s Notes.

This section (2651b-64) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.650. When seller may rescind contract or sale. [Repealed.]

Compiler’s Notes.

This section (2651b-65) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.660. Action for converting or detaining goods. [Repealed.]

Compiler’s Notes.

This section (2651b-66) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.670. Action for failing to deliver goods. [Repealed.]

Compiler’s Notes.

This section (2651b-67) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.680. Specific performance. [Repealed.]

Compiler’s Notes.

This section (2651b-68) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.690. Remedies for breach of warranty. [Repealed.]

Compiler’s Notes.

This section (2651b-69) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.700. Interest and special damages. [Repealed.]

Compiler’s Notes.

This section (2651b-70) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.710. Variation of implied obligations. [Repealed.]

Compiler’s Notes.

This section (2651b-71) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.720. Rights may be enforced by action. [Repealed.]

Compiler’s Notes.

This section (2651b-72) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.730. Rule for cases not provided for by this chapter. [Repealed.]

Compiler’s Notes.

This section (2651b-73) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.740. Interpretation shall give effect to purpose of uniformity. [Repealed.]

Compiler’s Notes.

This section (2651b-74) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.750. Provisions not applicable to mortgages. [Repealed.]

Compiler’s Notes.

This section (2651b-75) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.760. Definitions. [Repealed.]

Compiler’s Notes.

This section (2651b-76) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

361.770. Citation of chapter. [Repealed.]

Compiler’s Notes.

This section (2651b-78) was repealed by Acts 1958, ch. 77, Art. 10, § 10-102. For present law see KRS Ch. 355.

CHAPTER 362 Partnerships

Limited Partnerships

362.010. Limited partnerships, for what purposes may be formed. [Repealed.]

Compiler’s Notes.

This section (3767: amend. Acts 1964, ch. 152) was repealed by Acts 1970, ch. 97, § 31, except as affecting existing limited partnerships to the extent set forth in KRS 362.700 .

362.020. Statement by partners — Verification. [Repealed.]

Compiler’s Notes.

This section (3769: amend. Acts 1960, ch. 151, § 1) was repealed by Acts 1970, ch. 97, § 31, except as affecting existing limited partnerships to the extent set forth in KRS 362.700 .

362.030. Statement and affidavit to be recorded — Publication. [Repealed.]

Compiler’s Notes.

This section (3770: amend. Acts 1966, ch. 239, § 212) was repealed by Acts 1970, ch. 97, § 31, except as affecting existing limited partnerships to the extent set forth in KRS 362.700 .

362.040. General and special partners — Liabilities and powers. [Repealed.]

Compiler’s Notes.

This section (3768: amend. Acts 1960, ch. 151, § 2) was repealed by Acts 1970, ch. 97, § 31, except as affecting existing limited partnerships to the extent set forth in KRS 362.700 .

362.050. Firm name. [Repealed.]

Compiler’s Notes.

This section (3773) was repealed by Acts 1970, ch. 97, § 31, except as affecting existing limited partnerships to the extent set forth in KRS 362.700 .

362.060. When special partner treated as general partner. [Repealed.]

Compiler’s Notes.

This section (3773, 3779) was repealed by Acts 1970, ch. 97, § 31, except as affecting existing limited partnerships to the extent set forth in KRS 362.700 .

362.070. Partners, how to sue and be sued. [Repealed.]

Compiler’s Notes.

This section (3778) was repealed by Acts 1970, ch. 97, § 31, except as affecting existing limited partnerships to the extent set forth in KRS 362.700 .

362.080. Special partner, when liable for capital withdrawn. [Repealed.]

Compiler’s Notes.

This section (3774) was repealed by Acts 1970, ch. 97, § 31, except as affecting existing limited partnerships to the extent set forth in KRS 362.700 .

362.090. Renewal or continuance of partnership. [Repealed.]

Compiler’s Notes.

This section (3772) was repealed by Acts 1970, ch. 97, § 31, except as affecting existing limited partnerships to the extent set forth in KRS 362.700 .

362.095. Foreign limited partnership — Requirements for doing business in this state — Name. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1972, ch. 319, § 1; 1978, ch. 384, § 102, effective June 17, 1978; 1980, ch. 294, § 9, effective July 15, 1980; 1986, ch. 204, § 10, effective July 15, 1986) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

Legislative Research Commission Note.

This section was amended by the 1988 General Assembly and also repealed. Pursuant to KRS 446.260 , the repeal prevails.

362.100. Creditors to be paid before special partner. [Repealed.]

Compiler’s Notes.

This section (3775) was repealed by Acts 1970, ch. 97, § 31, except as affecting existing limited partnerships to the extent set forth in KRS 362.700 .

362.110. Preference to creditor, when invalid. [Repealed.]

Compiler’s Notes.

This section (3776) was repealed by Acts 1970, ch. 97, § 31, except as affecting existing limited partnerships to the extent set forth in KRS 362.700 .

362.120. When partnership deemed to be dissolved. [Repealed.]

Compiler’s Notes.

This section (3771) was repealed by Acts 1970, ch. 97, § 31, except as affecting existing limited partnerships to the extent set forth in KRS 362.700 .

362.130. Dissolution, when to be advertised. [Repealed.]

Compiler’s Notes.

This section (3777) was repealed by Acts 1970, ch. 97, § 31, except as affecting existing limited partnerships to the extent set forth in KRS 362.700 .

Uniform Partnership Act

362.150. Short title.

KRS 362.150 to 362.360 may be cited as Uniform Partnership Act.

History. Enact. Acts 1954, ch. 38, § 1, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Applicability.

The Uniform Partnership Act (KRS 362.150 to 362.360 ) was not applicable to suit brought by three (3) business partners against the executrix and heirs of a deceased partner to have the rights of the parties declared in the settlement of partnership interests, since the controversy arose prior to 1954. Curtis v. Campbell, 336 S.W.2d 355, 1960 Ky. LEXIS 327 ( Ky. 1960 ).

2.Nature of Partnership.

Although the Uniform Partnership Act regards the partnership as a legal entity for many purposes, it applies the “aggregate” concept when it makes partners jointly and severally liable, and therefore no public policy is violated by knowledgeable parties contracting in regard to partnership liability insurance that contemplates the partnership as an aggregate of persons rather than as a legal entity. Hartford Acci. & Indem. Co. v. Huddleston, 514 S.W.2d 676, 1974 Ky. LEXIS 322 ( Ky. 1974 ).

3.Liability of Limited Partners.

While the failure of a limited partnership to register in this Commonwealth may deny the partnership entry into this Commonwealth’s courts and other privileges bestowed upon foreign commercial enterprises, it in no way exposes the limited partners to liability as general partners unless the limited partners actually participate in the conduct of the business within this jurisdiction or by some means lead potential claimants to rely upon the business, not as a limited partnership, but as a firm of general partners. Virginia Partners, Ltd. v. Day, 738 S.W.2d 837, 1987 Ky. App. LEXIS 564 (Ky. Ct. App. 1987).

4.Standard of Conduct.

There is no relation of trust or confidence known to the law that requires of the parties a higher degree of good faith than that of a partnership; nothing less than absolute fairness will suffice. Monin v. Monin, 785 S.W.2d 499, 1989 Ky. App. LEXIS 134 (Ky. Ct. App. 1989).

5.Capacity to Sue.

One very sound legal reason that a partnership does not have the capacity to sue in its own name is that at common law and by Kentucky cases, a partnership did not have that right; the General Assembly has a perfect right to change the common law and previous court decisions and to grant to partnerships the capacity to sue in the partnership name, and such a change in the law must come from an express grant of authority, not from the barest hint or implication that the General Assembly may be trending in that direction. Telamarketing Communications, Inc. v. Liberty Partners, 798 S.W.2d 462, 1990 Ky. LEXIS 109 ( Ky. 1990 ).

Cited:

Dreisbach v. Eifler, 764 S.W.2d 631, 1988 Ky. App. LEXIS 91 (Ky. Ct. App. 1988).

Research References and Practice Aids

Cross-References.

Banking partnership prohibited, KRS 286.3-030 .

Kentucky Bench & Bar.

Vestal & Rutledge, Kentucky’s New Partnership and Limited Partnership Acts: An Introduction (Part 1)., Vol. 71, No. 1, January 2007, Ky. Bench & Bar 24.

Vestal & Rutledge, Kentucky’s New Partnership and Limited Partnership Acts: An Introduction (Part 2)., Vol. 71, No. 2, March 2007, Ky. Bench & Bar 23.

Rutledge, Recent Amendments to Kentucky Business Entity Laws, Vol. 71, No. 5, Sept. 2007, Ky. Bench & Bar 25.

Kentucky Law Journal.

Ham, Kentucky Adopts the Uniform Partnership Act, 43 Ky. L.J. 5 (1954).

Rutledge & Vestal, Making the Obvious Choice Malpractice: LLPs and the Lawyer Liability Time Bomb in Kentucky’s 2005 Tax Modernization., 94 Ky. L.J. 17 (2005/2006).

Vestal & Rutledge, Modern Partnership Law Comes to Kentucky: Comparing the Kentucky Revised Uniform Partnership Act and the Uniform Act from Which it was Derived., 95 Ky. L.J. 715 (2006/2007).

Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 (2008).

362.155. Definitions for KRS 362.150 to 362.360.

In KRS 362.150 to 362.360 :

  1. “Court” includes every court and judge having jurisdiction in the case.
  2. “Business” includes every trade, occupation, or profession.
  3. “Person” includes individuals, partnerships, corporations, and other associations.
  4. “Bankrupt” includes bankrupt under the Federal Bankruptcy Act or insolvent under any state insolvent act.
  5. “Conveyance” includes every assignment, lease, mortgage, or encumbrance.
  6. “Real property” includes land and any interest or estate in land.
  7. “Registered limited liability partnership” includes a partnership formed pursuant to an agreement governed by the laws of this Commonwealth or a state or jurisdiction registered under KRS 362.555 and complying with KRS 14A.3-010 .

History. Enact. Acts 1954, ch. 38, § 2, effective June 17, 1954; 1994, ch. 389, § 94, effective July 15, 1994; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007; 2010, ch. 151, § 148, effective January 1, 2011.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Research References and Practice Aids

Kentucky Bench & Bar.

Vestal & Rutledge, Kentucky’s New Partnership and Limited Partnership Acts: An Introduction (Part 2)., Vol. 71, No. 2, March 2007, Ky. Bench & Bar 23.

Northern Kentucky Law Review.

Mellen, Myre and Lee, Limited Liability Companies and Registered Limited Liability Partnerships in Kentucky: A Practical Analysis, 22 N. Ky. L. Rev. 229 (1995).

362.160. Interpretation of knowledge and notice.

  1. A person has “knowledge” of a fact within the meaning of KRS 362.150 to 362.360 not only when he has actual knowledge thereof, but also when he has knowledge of such other facts as in the circumstances shows bad faith.
  2. A person has “notice” of a fact within the meaning of KRS 362.150 to 362.360 when the person who claims the benefit of the notice:
    1. States the fact to such person; or
    2. Delivers through the mail, or by other means of communication, a written statement of the fact to such person or to a proper person at his place of business or residence.

History. Enact. Acts 1954, ch. 38, § 3, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.165. Rules of construction.

  1. The rule that statutes in derogation of the common law are to be strictly construed shall have no application to KRS 362.150 to 362.360 .
  2. The law of estoppel shall apply under KRS 362.150 to 362.360 .
  3. The law of agency shall apply under KRS 362.150 to 362.360 .
  4. KRS 362.150 to 362.360 shall be so interpreted and construed as to effect its general purpose to make uniform the law of those states which enact it.
  5. KRS 362.150 to 362.360 shall not be construed so as to impair the obligations of any contract existing when they go into effect, nor to affect any action or proceedings begun or right accrued before they take effect.

History. Enact. Acts 1954, ch. 38, § 4, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.170. Rules for other cases.

In any case not provided for in KRS 362.150 to 362.360 the rules of law and equity, including the law merchant, shall govern.

History. Enact. Acts 1954, ch. 38, § 5, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.175. Partnership defined.

  1. A partnership is an association of two (2) or more persons to carry on as co-owners a business for profit and includes, for all purposes of the laws of this Commonwealth, a registered limited liability partnership.
  2. But any association formed under any other statute of this state, or any statute adopted by authority, other than the authority of this state, is not a partnership under KRS 362.150 to 362.360 , unless such association would have been a partnership in this state prior to the adoption of KRS 362.150 to 362.360 ; but KRS 362.150 to 362.360 shall apply to limited partnerships except insofar as the statutes relating to such partnerships are inconsistent herewith.

History. Enact. Acts 1954, ch. 38, § 6, effective June 17, 1954; 1994, ch. 389, § 95, effective July 15, 1994; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Elements.

Trial court properly determined that a partnership between a decedent’s heirs, if it existed at all, was dissolved at the will of one or more partners where it was not clear that the heirs intended to form or maintain a partnership because no definite term or particular undertaking was specified in any formal agreement, and the partners/heirs could not even agree whether they were operating as a partnership or as tenants in common. Moreover, under KRS 362.305 , numerous equitable circumstances existed to justify dissolving the alleged partnership, even if dissolution under KRS 362.300(1)(b) were not mandated. Eversole v. McCurley, 2011 Ky. App. LEXIS 7 (Ky. Ct. App. Jan. 21, 2011, sub. op., 2011 Ky. App. Unpub. LEXIS 975 (Ky. Ct. App. Jan. 21, 2011).

Select sharing of profits on a few select vehicles paid for by defendants without the sharing of profits and expenses of the auto dealer as a whole was not “an association of two (2) or more persons to carry on as co-owners of a business for profit,” KRS 362.175 . This business arrangement was nothing more than a creative arrangement to finance the purchase of certain vehicles owned and sold by debtor in exchange for a portion of the profits from those selective vehicles. Schlarman v. Johns (In re Lewis), 461 B.R. 414, 2011 Bankr. LEXIS 4222 (Bankr. E.D. Ky. 2011 ).

Cited:

Mason v. Hooker’s Adm’r, 275 S.W.2d 596, 1955 Ky. LEXIS 368 ( Ky. 1955 ); Smith v. Hensley, 354 S.W.2d 744, 1961 Ky. LEXIS 14 , 98 A.L.R.2d 340 ( Ky. 1961 ); Smith v. Kelley, 465 S.W.2d 39, 1971 Ky. LEXIS 422 ( Ky. 1971 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint by Partner for Wrongful Dissolution of Partnership, Form 330.01.

362.180. Rules for determining the existence of a partnership.

In determining whether a partnership exists, these rules shall apply:

  1. Except as provided by KRS 362.225 persons who are not partners as to each other are not partners as to third persons.
  2. Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not of itself establish a partnership, whether such co-owners do or do not share any profits made by the use of the property.
  3. The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.
  4. The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment:
    1. As a debt by installments or otherwise,
    2. As wages of an employee or rent to a landlord,
    3. As an annuity to a widow, or widower or representative of a deceased partner,
    4. As interest on a loan, though the amount of payment vary with the profits of the business,
    5. As the consideration for the sale of a goodwill of a business or other property by installments or otherwise.

History. Enact. Acts 1954, ch. 38, § 7; 1974, ch. 386, § 66; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Implied Partnership.

KRS 362.180(1) represents a repudiation of the ancient doctrine of “partnership as to third persons” under which courts formerly implied the existence of partnerships in order to spread liability for losses to third parties in cases where no partnership would otherwise be found. Roethke v. Sanger, 68 S.W.3d 352, 2001 Ky. LEXIS 220 ( Ky. 2001 ).

2.Insufficient Complaint.

A complaint which alleged no theory of personal liability against a spouse for a promissory note executed by her husband and did not specifically allege that the wife was a partner of the jointly owned business at the time the note was executed was insufficient as a matter of law and could not support a default judgment. Cordier v. Lincoln County Nat'l Bank, 702 S.W.2d 428, 1986 Ky. LEXIS 226 ( Ky. 1986 ).

3.Existence of Partnership.

Trial court properly determined that a partnership between a decedent’s heirs, if it existed at all, was dissolved at the will of one or more partners where it was not clear that the heirs intended to form or maintain a partnership because no definite term or particular undertaking was specified in any formal agreement, and the partners/heirs could not even agree whether they were operating as a partnership or as tenants in common. Moreover, under KRS 362.305 , numerous equitable circumstances existed to justify dissolving the alleged partnership, even if dissolution under KRS 362.300(1)(b) were not mandated. Eversole v. McCurley, 2011 Ky. App. LEXIS 7 (Ky. Ct. App. Jan. 21, 2011, sub. op., 2011 Ky. App. Unpub. LEXIS 975 (Ky. Ct. App. Jan. 21, 2011).

Defendants relied on KRS 362.180(4) and argued that their receipt in a share of the profits in the vehicles was prima facie evidence that they were partners in the auto dealer, but this reliance was misplaced because: (i) while defendants certainly received a share of the profits for the sale of particular vehicles, and would have received a share of any profits for the sale of the vehicles herein, they did not share in the overall profits of the dealer, (ii) rather, their select share of the profits was tied to their initiative to provide debtor financing with which to purchase the vehicles for resale by paying debtor for the purchase price of the vehicles at the auction, and (iii) they did not share in the profits “of a business” but rather financed the purchase of particular vehicles for a portion of the profits upon resale. Thus, the business arrangement between debtor and defendants more closely resembled the exception set forth in KRS 362.180(4)(d), or profits received in payment “as interest on a loan.” Schlarman v. Johns (In re Lewis), 461 B.R. 414, 2011 Bankr. LEXIS 4222 (Bankr. E.D. Ky. 2011 ).

Objection Chapter 13 debtors filed to an amended proof of claim a creditor filed against their bankruptcy estate was sustained because the creditor's evidence did not support his allegation that he loaned money to the male debtor so he could operate an auction business he owned; the fact that the parties did not sign promissory notes, that the creditor had access to tax returns the debtor's business filed and used those returns to borrow money on behalf of the business, and that the creditor expected to receive 30% of net commissions from auctions the business conducted showed that the male debtor and the creditor established a partnership under Kentucky's Uniform Partnership Act, Ky. Rev. Stat. Ann. § 362.150 et seq. In re Mik, 2016 Bankr. LEXIS 726 (Bankr. W.D. Ky. Mar. 8, 2016).

Cited:

Smith v. Kelley, 465 S.W.2d 39, 1971 Ky. LEXIS 422 ( Ky. 1971 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Partnership, § 330.00.

362.185. Partnership property.

  1. All property originally brought into the partnership stock or subsequently acquired by purchase or otherwise, on account of the partnership, is partnership property.
  2. Unless the contrary intention appears, property acquired with partnership funds is partnership property.
  3. Any estate in real property may be acquired in the partnership name. Title so acquired can be conveyed only in the partnership name.
  4. A conveyance to a partnership in the partnership name, though without words of inheritance, passes the entire estate of the grantor unless a contrary intent appears.

History. Enact. Acts 1954, ch. 38, § 8, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Evidence of Individual Ownership.

Where a deceased partner had conveyed one-half (1/2) interest in certain property to surviving partner but had not conveyed any interest in the property in question which was held by the deceased partner as sole owner of record, evidence sustained findings that the property in question was not partnership property. Pendleton v. Strange, 381 S.W.2d 617, 1964 Ky. LEXIS 323 ( Ky. 1964 ).

2.Transfer Without Interest.

Wife of a partner who attempted to transfer partnership property could not do so since she had no interest as a partner; thus, since she was not in possession of any interest which she could transfer to plaintiffs, “Assignment of Deed” was null and void. Dreisbach v. Eifler, 764 S.W.2d 631, 1988 Ky. App. LEXIS 91 (Ky. Ct. App. 1988).

Cited:

Telamarketing Communications, Inc. v. Liberty Partners, 798 S.W.2d 462, 1990 Ky. LEXIS 109 ( Ky. 1990 ).

Opinions of Attorney General.

If a partnership continues after the death of a partner, it must act under its former name in conveying real property acquired under that name. OAG 75-223 .

362.190. Partner agent of partnership as to partnership business.

  1. Subject to the limitations set forth in KRS 362.220(2), every partner shall be an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member shall bind the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no authority.
  2. An act of a partner which is not apparently for the carrying on of the business of the partnership in the usual way shall not bind the partnership unless authorized by the other partners.
  3. Unless authorized by the other partners or unless they have abandoned the business, one (1) or more but less than all the partners shall have no authority to:
    1. Assign the partnership property in trust for creditors or on the assignee’s promise to pay the debts of the partnership;
    2. Dispose of the goodwill of the business;
    3. Do any other act which would make it impossible to carry on the ordinary business of a partnership;
    4. Confess a judgment;
    5. Submit a partnership claim or liability to arbitration or reference.
  4. No act of a partner in contravention of a restriction on authority shall bind the partnership to persons having knowledge of the restriction.

History. Enact. Acts 1954, ch. 38, § 9, effective June 17, 1954; 1994, ch. 389, § 96, effective July 15, 1994; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Construction.

In no way does this section mandate that a transaction is void when a partner acts contrary to a restriction on his or her authority. It simply protects the partnership by providing that the entity is not bound by that act. Noble v. National Mines Corp., 774 F.2d 144, 1985 U.S. App. LEXIS 23454 (6th Cir. Ky. 1985 ).

This section codifies a basic tenet of partnership common law, designed to protect the interests of the partnership entity as against those who deal knowledgeably with its partners. Noble v. National Mines Corp., 774 F.2d 144, 1985 U.S. App. LEXIS 23454 (6th Cir. Ky. 1985 ).

Research References and Practice Aids

Kentucky Law Journal.

Booth and Rutledge, The Limited Liability Company Act: Understanding Kentucky’s New Organizational Option, 83 Ky. L.J. 1 (1994-95).

362.195. Conveyance of real property of the partnership.

  1. Where title to real property is in the partnership name, any partner may convey title to such property by a conveyance executed in the partnership name; but the partnership may recover such property unless the partner’s act binds the partnership under the provisions of KRS 362.190(1) or unless such property has been conveyed by the grantee or a person claiming through such grantee to a holder for value without knowledge that the partner, in making the conveyance, has exceeded his authority.
  2. Where title to real property is in the name of the partnership, a conveyance executed by a partner, in his own name, passes the equitable interest of the partnership, provided the act is one within the authority of the partner under the provisions of KRS 362.190(1).
  3. Where title to real property is in the name of one (1) or more but not all the partners, and the record does not disclose the right of the partnership, the partners in whose name the title stands may convey title to such property, but the partnership may recover such property if the partners’ act does not bind the partnership under the provisions of KRS 362.190(1), unless the purchaser of his assignee, is a holder for value, without knowledge.
  4. Where the title to real property is in the name of one (1) or more or all the partners, or in a third person in trust for the partnership, a conveyance executed by a partner in the partnership name, or in his own name, passes the equitable interest of the partnership, provided the act is one within the authority of the partner under the provisions of KRS 362.190(1).
  5. Where the title to real property is in the names of all the partners a conveyance executed by all the partners passes all their rights in such property.

History. Enact. Acts 1954, ch. 38, § 10, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.In General.

A real property transaction, effected even by one without actual authority, is not void. Noble v. National Mines Corp., 774 F.2d 144, 1985 U.S. App. LEXIS 23454 (6th Cir. Ky. 1985 ).

362.200. Partnership bound by admission of partner. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1954, ch. 38, § 11, effective June 17, 1954) was repealed by § 92 of Acts 1990, ch. 88 to contingently become effective as provided by § 93 of Acts 1990, ch. 88. However, § 93 of Acts 1990, ch. 88 was repealed by § 30 of Acts 1992, ch. 324, effective July 1, 1992. Therefore the repeal of this section by § 92 of Acts 1990, ch. 88 became effective July 1, 1992.

362.205. Partnership charged with knowledge of or notice to partner.

Notice to any partner of any matter relating to partnership affairs, and the knowledge of the partner acting in the particular matter, acquired while a partner or then present to his mind, and the knowledge of any other partner who reasonably could and should have communicated it to the acting partner, operate as notice to or knowledge of the partnership, except in the case of a fraud on the partnership committed by or with the consent of that partner.

History. Enact. Acts 1954, ch. 38, § 12, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Knowledge of Fraud.

Where a broker, who had agreed to sell a vendor’s land, joined with a developer in a partnership or joint venture to utilize the land and subsequently formed a corporation to which he sold the land at a price far below its actual value, the developer had constructive knowledge of the fraud practiced on the vendor and could be held liable therefor since each partner is bound by the knowledge of the other, by his wrongful or fraudulent act and by his breach of trust. Fightmaster v. Leffler, 556 S.W.2d 180, 1977 Ky. App. LEXIS 816 (Ky. Ct. App. 1977).

Cited:

McCoy v. American Fidelity Bank & Trust Co., 715 S.W.2d 228, 1986 Ky. LEXIS 311 ( Ky. 1986 ); Eppes v. Snowden, 656 F. Supp. 1267, 1986 U.S. Dist. LEXIS 20811 (E.D. Ky. 1986 ).

362.210. Partnership bound by partner’s wrongful act.

When, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his co-partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act.

History. Enact. Acts 1954, ch. 38, § 13, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Vicarious Liability.

Vicarious liability extends only to negligent acts of an agent committed in the course and scope of the principal’s business, and the test is the same whether the agency relationship is one of partnership, principal/agent, or master/servant. Roethke v. Sanger, 68 S.W.3d 352, 2001 Ky. LEXIS 220 ( Ky. 2001 ).

2.Applicability.

Joint and several liability was properly imposed against three attorneys who had taken excessive fees from settlement funds because the clients’ claims, which included both breach of contract and breach of fiduciary duties, did not sound exclusively in tort and because the attorneys had engaged in a joint enterprise to which partnership liability applied. Abbott v. Chesley, 413 S.W.3d 589, 2013 Ky. LEXIS 367 ( Ky. 2013 ), cert. denied, 572 U.S. 1135, 134 S. Ct. 2672, 189 L. Ed. 2d 210, 2014 U.S. LEXIS 3798 (U.S. 2014).

Research References and Practice Aids

Kentucky Bench & Bar.

Schell and Peden, To Be or Not to Be: That is the Question for PSC’s under TEFRA, Vol. 47, No. 2, April, 1983, Ky. Bench & Bar 10.

Mellen, Registered Limited Liability Partnerships In Kentucky, Vol. 60, No. 1, Winter 1996, Ky. Bench & Bar 39.

Northern Kentucky Law Review.

Mellen, Myre and Lee, Limited Liability Companies and Registered Limited Liability Partnerships in Kentucky: A Practical Analysis, 22 N. Ky. L. Rev. 229 (1995).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Answer-Defense of Acts Performed Outside the Scope of Partnership Activities, Form 330.09.

362.215. Partnership bound by partner’s breach of trust.

The partnership is bound to make good the loss:

  1. Where one partner acting within the scope of his apparent authority receives money or property of a third person and misapplies it; and
  2. Where the partnership in the course of its business receives money or property of a third person and the money or property so received is misapplied by any partner while it is in the custody of the partnership.

History. Enact. Acts 1954, ch. 38, § 14, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Registered Limited Liability Partnerships In Kentucky, Vol. 60, No. 1, Winter 1996, Ky. Bench & Bar 39.

Northern Kentucky Law Review.

Mellen, Myre and Lee, Limited Liability Companies and Registered Limited Liability Partnerships in Kentucky: A Practical Analysis, 22 N. Ky. L. Rev. 229 (1995).

362.220. Nature of partner’s liability.

  1. Except as provided in subsection (2) of this section, all partners shall be liable:
    1. Jointly and severally for everything chargeable to the partnership under KRS 362.210 and 362.215 ; and
    2. Jointly for all other debts and obligations of the partnership; but any partner may enter into a separate obligation to perform a partnership contract.
  2. Subject to subsection (3) of this section and subject to any agreement among the partners, a partner in a registered limited liability partnership shall not be liable directly or indirectly, including by way of indemnification, contribution, assessment or otherwise, for debts, obligations, and liabilities of or chargeable to the partnership, whether arising in tort, contract, or otherwise, arising from negligence, malpractice, wrongful acts, or misconduct committed while the partnership is a registered limited liability partnership and in the course of the partnership business by another partner or an employee, agent, or representative of the partnership.
  3. Subsection (2) of this section shall not affect the liability of a partner in a registered limited liability partnership for his own negligence, wrongful acts, or misconduct.

History. Enact. Acts 1954, ch. 38, § 15, effective June 17, 1954; 1994, ch. 389, § 97, effective July 15, 1994; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Liability of Partnership to Partner.

A judgment by one partner against the other partners for the value of his truck destroyed by employees of the partnership acting within the scope of their employment should be satisfied out of partnership assets before resorting to individual members of the partnership. Smith v. Hensley, 354 S.W.2d 744, 1961 Ky. LEXIS 14 ( Ky. 1961 ).

If negligence of the partnership had caused damage to property of a stranger, the partnership would be liable under this section and KRS 362.210 , so there was no just reason for denying recovery where the property of a partner was destroyed by the negligent acts of employees of the partnership acting within the scope of their employment. Smith v. Hensley, 354 S.W.2d 744, 1961 Ky. LEXIS 14 ( Ky. 1961 ).

2.Failure of Evidence to Disclose Partnership.

In the absence of evidence that wife was a partner or had an interest in her husband’s coal mining business, she was not liable in damages for death of a third person as a result of the negligent operation of a truck owned by her husband in his coal mining business with the husband making payment to the wife for the use of the truck on the basis of coal hauled. Mason v. Hooker's Adm'r, 275 S.W.2d 596, 1955 Ky. LEXIS 368 ( Ky. 1955 ).

3.Insurance.

In an action to recover for the death of the son of a partner under the uninsured motorist coverage of an insurance policy issued to a business partnership, the trial court correctly permitted recovery since the policy, by its terms, treated the partnership as an aggregate of persons rather than as a legal entity, and thus embraced the partners, their spouses, and relatives living in the same household. Hartford Acci. & Indem. Co. v. Huddleston, 514 S.W.2d 676, 1974 Ky. LEXIS 322 ( Ky. 1974 ).

4.Indemnification.

This section and KRS 362.235 both speak to a partner’s liability to a third party and do not address the question of indemnification between partners. Eichberger v. Reid, 728 S.W.2d 533, 1987 Ky. LEXIS 206 ( Ky. 1987 ).

5.Applicability.

Joint and several liability was properly imposed against three attorneys who had taken excessive fees from settlement funds because the clients’ claims, which included both breach of contract and breach of fiduciary duties, did not sound exclusively in tort and because the attorneys had engaged in a joint enterprise to which partnership liability applied. Abbott v. Chesley, 413 S.W.3d 589, 2013 Ky. LEXIS 367 ( Ky. 2013 ), cert. denied, 572 U.S. 1135, 134 S. Ct. 2672, 189 L. Ed. 2d 210, 2014 U.S. LEXIS 3798 (U.S. 2014).

Research References and Practice Aids

Kentucky Bench & Bar.

Schell and Peden, To Be or Not to Be: That is the Question for PSC’s under TEFRA, Vol. 47, No. 2, April, 1983, Ky. Bench & Bar 10.

O’Roark, Professional Responsibility & Liability Trends to Watch in ‘95, Vol. 59, No. 1, Winter 1995, Ky. Bench & Bar 45.

Mellen, Registered Limited Liability Partnerships In Kentucky, Vol. 60, No. 1, Winter 1996, Ky. Bench & Bar 39.

Kentucky Law Journal.

Rutledge & Vestal, Making the Obvious Choice Malpractice: LLPs and the Lawyer Liability Time Bomb in Kentucky’s 2005 Tax Modernization., 94 Ky. L.J. 17 (2005/2006).

Northern Kentucky Law Review.

Mellen, Myre and Lee, Limited Liability Companies and Registered Limited Liability Partnerships in Kentucky: A Practical Analysis, 22 N. Ky. L. Rev. 229 (1995).

362.225. Partner by estoppel.

  1. When a person, by words spoken or written or by conduct, represents himself, or consents to another representing him to anyone, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any such person to whom such representation has been made, who has, on the faith of such representation given credit to the actual or apparent partnership, and if he has made such representation or consented to its being made in a public manner he is liable to such person, whether the representation has or has not been made or communicated to such person so giving credit by or with the knowledge of the apparent partner making the representation or consenting to its being made:
    1. When a partnership liability results, he is liable as though he were an actual member of the partnership.
    2. When no partnership liability results, he is liable jointly with the other persons, if any, so consenting to the contract or representation as to incur liability, otherwise separately.
  2. When a person has been thus represented to be a partner in an existing partnership, or with one or more persons not actual partners, he is an agent of the persons consenting to such representation to bind them to the same extent and in the same manner as though he were a partner in fact, with respect to persons who rely upon the representation. Where all the members of the existing partnership consent to the representation, a partnership act or obligation results; but in all other cases it is the joint act or obligation of the person acting and the persons consenting to the representation.

History. Enact. Acts 1954, ch. 38, § 16, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Reliance.

An essential element of any estoppel is reliance, and a partnership by estoppel, as defined by KRS 362.225 , requires reliance by the person claiming vicarious liability. Roethke v. Sanger, 68 S.W.3d 352, 2001 Ky. LEXIS 220 ( Ky. 2001 ).

Trial court erred when it granted summary judgment on a contractor’s claim of partnership by estoppel with a sanitation district, because they were not legally partners, and the district could only be liable to the contractor if they were. Coppage Constr. Co. v. Sanitation Dist. No. 1, 2019 Ky. App. LEXIS 214 (Ky. Ct. App. Dec. 13, 2019).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Partnership, § 330.00.

362.230. Liability of incoming partner.

A person admitted as a partner into an existing partnership is liable for all the obligations of the partnership arising before his admission as though he had been a partner when such obligations were incurred, except that the liability shall be satisfied only out of partnership property.

History. Enact. Acts 1954, ch. 38, § 17, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Research References and Practice Aids

Northern Kentucky Law Review.

2012 General Law Issue: Article: Migratory Law Partners and the Glue of Unfinished Business, 39 N. Ky. L. Rev. 359 (2012).

362.235. Rules determining rights and duties of partners.

The rights and duties of the partners in relation to the partnership shall be determined, subject to any agreement between them, by the following rules:

  1. Each partner shall be repaid his contributions, whether by way of capital or advances to the partnership property, and share equally in the profits and surplus remaining after all liabilities, including those to partners, are satisfied; and, except as provided in KRS 362.220(2), each partner shall contribute toward the losses, whether of capital or otherwise, sustained by the partnership according to his share in the profits.
  2. Except as provided in KRS 362.220(2), the partnership shall indemnify every partner in respect of payments made and personal liabilities reasonably incurred by him in the ordinary and proper conduct of its business, or for the preservation of its business or property.
  3. A partner, who in aid of the partnership makes any payment or advance beyond the amount of capital which he agreed to contribute, shall be paid interest from the date of the payment or advance.
  4. A partner shall receive interest on the capital contributed by him only from the date when repayment should be made.
  5. All partners have equal rights in the management and conduct of the partnership business.
  6. No partner shall be entitled to remuneration for acting in the partnership business, except that a surviving partner shall be entitled to reasonable compensation for his services in winding up the partnership affairs.
  7. No person shall become a member of a partnership without the consent of all the partners.
  8. Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners; but no act in contravention of any agreement between the partners shall be done rightfully without the consent of all the partners.

History. Enact. Acts 1954, ch. 38, § 18, effective June 17, 1954; 1994, ch. 389, § 98, effective July 15, 1994; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Obligation Under Lease.

Although the lease was signed before the partner became a partner, he was liable for rent and taxes following default under the lease where the obligation arose after he became a partner. Setzer's Steel Systems, Inc. v. Chenault Dev. Corp., 725 S.W.2d 22, 1987 Ky. App. LEXIS 420 (Ky. Ct. App. 1987).

2.Indemnification.

This section and KRS 362.220 both speak to a partner’s liability to a third party and do not address the question of indemnification between partners. Eichberger v. Reid, 728 S.W.2d 533, 1987 Ky. LEXIS 206 ( Ky. 1987 ).

Cited:

Smith v. Kelley, 465 S.W.2d 39, 1971 Ky. LEXIS 422 ( Ky. 1971 ); Glidewell v. Glidewell, 790 S.W.2d 925, 1990 Ky. App. LEXIS 73 (Ky. Ct. App. 1990).

Research References and Practice Aids

Northern Kentucky Law Review.

2012 General Law Issue: Article: Migratory Law Partners and the Glue of Unfinished Business, 39 N. Ky. L. Rev. 359 (2012).

Treatises

Petrilli, Kentucky Family Law, 1991 Supp., Common Law Marriage, § 7.3.

362.240. Partnership books.

The partnership books shall be kept, subject to any agreement between the partners, at the principal place of business of the partnership, and every partner shall at all times have access to and may inspect and copy any of them.

History. Enact. Acts 1954, ch. 38, § 19, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.245. Duty of partners to render information.

Partners shall render on demand true and full information on all things affecting the partnership to any partner or to the legal representative of any deceased partner or partner under legal disability.

History. Enact. Acts 1954, ch. 38, § 20; 1956, ch. 89; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.250. Partner accountable as a fiduciary.

  1. Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.
  2. This section applies also to the representatives of a deceased partner engaged in the liquidation of the affairs of the partnership as the personal representatives of the last surviving partner.
  3. That a transaction was fair to the partnership shall not constitute a defense to the breach of the obligation in subsection (1) of this section.

History. Enact. Acts 1954, ch. 38, § 21, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007; 2012, ch. 81, § 124, effective July 12, 2012.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Duty of Disclosure.

Partners, in their relations with other partners, must maintain a higher degree of good faith due to the partnership agreement. The requirement of full disclosure among partners as to partnership business cannot be escaped. Marsh v. Gentry, 642 S.W.2d 574, 1982 Ky. LEXIS 315 ( Ky. 1982 ).

Where partnership owned two (2) thoroughbred horses and defendant partner bought one (1) horse from the partnership through an agent without informing the plaintiff partner that defendant was the actual purchaser of the horse, and where defendant obtained the plaintiff’s consent to sale of the second horse by misleading the plaintiff into believing that the second horse bought by a third party, defendant breached his duty of disclosure under this section. Marsh v. Gentry, 642 S.W.2d 574, 1982 Ky. LEXIS 315 ( Ky. 1982 ).

Research References and Practice Aids

Kentucky Law Journal.

Goldman, The University and the Liberty of Its Students — A Fiduciary Theory, 54 Ky. L.J. 643 (1966).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint by Partner Against Partnership for Accounting of Profits, Form 330.08.

362.255. Right to an account.

Any partner shall have the right to a formal account as to partnership affairs:

  1. If he is wrongfully excluded from the partnership business or possession of its property by his co-partners;
  2. If the right exists under the terms of any agreement;
  3. As provided by KRS 362.250 ;
  4. Whenever other circumstances render it just and reasonable.

History. Enact. Acts 1954, ch. 38, § 22, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.260. Continuation of partnership beyond fixed term.

  1. When a partnership for a fixed term or particular undertaking is continued after the termination of such term or particular undertaking without any express agreement, the rights and duties of the partners remain the same as they were at such termination, so far as is consistent with a partnership at will.
  2. A continuation of the business by the partners or such of them as habitually acted therein during the term, without any settlement or liquidation of the partnership affairs, is prima facie evidence of a continuation of the partnership.

History. Enact. Acts 1954, ch. 38, § 23, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.265. Extent of property rights of a partner.

The property rights of a partner are (1) his rights in specific partnership property, (2) his interest in the partnership, and (3) his right to participate in the management.

History. Enact. Acts 1954, ch. 38, § 24, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.270. Nature of a partner’s right in specific partnership property.

  1. A partner is co-owner with his partners of specific partnership property holding as a tenant in partnership.
  2. The incidents of this tenancy are such that:
    1. A partner, subject to the provisions of KRS 362.150 to 362.360 and to any agreement between the partners, has an equal right with his partners to possess specific partnership property for partnership purposes; but he has no right to possess such property for any other purpose without the consent of his partners.
    2. A partner’s right in specific partnership property is not assignable except in connection with the assignment of rights of all the partners in the same property.
    3. A partner’s right in specific partnership property is not subject to attachment or execution, except on a claim against the partnership. When partnership property is attached for a partnership debt the partners, or any of them, or the representatives of a deceased partner, cannot claim any right under the homestead or exemption laws.
    4. On the death of a partner his right in specific partnership property vests in the surviving partner or partners, except where the deceased was the last surviving partner, when his right in such property vests in his legal representative. Such surviving partner or partners, or the legal representative of the last surviving partner, has no right to possess the partnership property for any but a partnership purpose.
    5. A partner’s right in specific partnership property is not subject to dower, curtesy, or allowances to widows, widowers, heirs, or next of kin.

History. Enact. Acts 1954, ch. 38, § 25; 1974, ch. 386, § 67; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Transfer Without Interest.

Wife of a partner who attempted to transfer partnership property could not do so since she had no interest as a partner; thus, since she was not in possession of any interest which she could transfer to plaintiffs, “Assignment of Deed” was null and void. Dreisbach v. Eifler, 764 S.W.2d 631, 1988 Ky. App. LEXIS 91 (Ky. Ct. App. 1988).

Research References and Practice Aids

Kentucky Law Journal.

Bratt, Family Protection Under Kentucky’s Inheritance Laws: Is the Family Really Protected? 76 Ky. L.J. 387 (1987-88).

Muyskens, Married in Kentucky: A Surviving Spouse’s Dower Right in Personalty, 96 Ky. L.J. 99 (2007).

362.275. Nature of partner’s interest in the partnership.

A partner’s interest in the partnership is his share of the profits and surplus, and the same is personal property.

History. Enact. Acts 1954, ch. 38, § 26, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Conflict of Laws.

The property of two partners residing in Kentucky, both real and personal, used in the operation and conduct of the partnership acquired a business situs in North Carolina which had become an integrated part of a local business located in North Carolina and, under the uniform partnership act, each partner’s interest was treated as personal property under the North Carolina law which had adopted the English and American minority common-law rule of the “out-and-out” conversion theory which converted the interest of a partner into intangible property for all purposes and, on the death of one of the partners, his estate had a chose in action or right to demand money under the North Carolina law which was includable for Kentucky inheritance tax purposes. Lynch v. Kentucky Tax Com., 333 S.W.2d 257, 1960 Ky. LEXIS 182 ( Ky. 1960 ).

2.Transfer of Interest.

For a wife of a partner to have validly transferred an interest in the partnership, it must be demonstrated that she had an interest in the partnership. Dreisbach v. Eifler, 764 S.W.2d 631, 1988 Ky. App. LEXIS 91 (Ky. Ct. App. 1988).

362.280. Assignment of partner’s interest.

  1. A conveyance by a partner of his interest in the partnership does not of itself dissolve the partnership, nor, as against the other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books; but it merely entitles the assignee to receive in accordance with his contract the profits to which the assigning partner would otherwise be entitled.
  2. In case of a dissolution of the partnership, the assignee is entitled to receive his assignor’s interest and may require an account from the date only of the last account agreed to by all the partners.

History. Enact. Acts 1954, ch. 38, § 27; 1968, ch. 152, § 150; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Research References and Practice Aids

Kentucky Law Journal.

Booth and Rutledge, The Limited Liability Company Act: Understanding Kentucky’s New Organizational Option, 83 Ky. L.J. 1 (1994-95).

Northern Kentucky Law Review.

Mellen, Myre and Lee, Limited Liability Companies and Registered Limited Liability Partnerships in Kentucky: A Practical Analysis, 22 N. Ky. L. Rev. 229 (1995).

362.285. Partner’s interest subject to charging order.

  1. This section provides the exclusive remedy by which the judgment creditor of a partner or the transferee of a partner may satisfy a judgment out of the judgment debtor’s transferable interest.
  2. On application to a court of competent jurisdiction by a judgment creditor of a partner or a partner’s transferee, a court may charge the transferable interest of the judgment debtor with payment of the unsatisfied amount of the judgment. To the extent so charged, the judgment creditor has only the rights of a transferee and shall have no right to participate in the management of or to cause the dissolution of the partnership. The court may appoint a receiver of the share of the distributions due or to become due to the judgment debtor in respect of the partnership and make all other orders, directions, accounts, and inquiries the judgment debtor might have made or which the circumstances of the case may require to give effect to the charging order.
  3. A charging order constitutes a lien on and the right to receive distributions made with respect to the judgment debtor’s transferable interest in the partnership.
  4. The court may order a foreclosure of the interest subject to the charging order at any time. The purchaser at the foreclosure sale has the rights of a transferee. A charging order does not of itself constitute an assignment of the transferable interest.
  5. At any time before foreclosure, an interest charged may be redeemed:
    1. By the judgment debtor;
    2. With property other than partnership property, by one (1) or more of the other partners; or
    3. With partnership property, by one (1) or more of the other partners with the consent of all of the partners whose interests are not so charged.
  6. This section does not deprive a partner of a right under exemption laws with respect to the partner’s interest in the partnership.
  7. The partnership is not a necessary party to an application for a charging order. Service of the charging order on a partnership may be made by the court granting the charging order or as the court may otherwise direct.
  8. This section shall not apply to the enforcement of a judgment by a partnership against a partner of that partnership.
  9. This section shall apply to the issuance of a charging order against the interest of a partner or assignee of a partner of a foreign partnership.

HISTORY: Enact. Acts 1954, ch. 38, § 28, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007; repealed, reenact., and amend., Acts 2010, ch. 133, § 49, effective July 15, 2010; 2017 ch. 193, § 16, effective June 29, 2017.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

Cited:

In re Hargis, 44 B.R. 225, 1984 Bankr. LEXIS 4559 (Bankr. W.D. Ky. 1984 ).

Research References and Practice Aids

Northern Kentucky Law Review.

Kentucky Survey Issue: Article: The 2010 Amendments to Kentucky’s Business Entity Laws, 38 N. Ky. L. Rev. 383 (2011).

362.290. Dissolution defined.

The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.

History. Enact. Acts 1954, ch. 38, § 29, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

Cited:

Fischer v. Fischer, 2003 Ky. App. LEXIS 215 (Ky. Ct. App. 2003), rehearing denied, 2003 Ky. App. LEXIS 294 (Ky. Ct. App. 2003), rev’d, 197 S.W.3d 98, 2006 Ky. LEXIS 172 ( Ky. 2006 ).

Research References and Practice Aids

Northern Kentucky Law Review.

Mellen, Myre and Lee, Limited Liability Companies and Registered Limited Liability Partnerships in Kentucky: A Practical Analysis, 22 N. Ky. L. Rev. 229 (1995).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Notice of Dissolution of Partnership, Form 330.04.

362.295. Partnership not terminated by dissolution.

On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed.

History. Enact. Acts 1954, ch. 38, § 30, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Winding Up.

Where a partnership was effectively dissolved by a father’s letter expressing an unequivocal desire to dissolve pursuant to KRS 362.300(1)(b) even though no real steps were taken to wind up the partnership under KRS 362.295 , a grant of partial summary judgment was in error because all provisions that were not germane to winding up under KRS 362.310 were extinguished; as a result the trial court erred in granting partial summary judgment enforcing a buy-sell amendment to the partnership agreement. Fischer v. Fischer, 2003 Ky. App. LEXIS 215 (Ky. Ct. App. Aug. 29, 2003), rev'd, 197 S.W.3d 98, 2006 Ky. LEXIS 172 ( Ky. 2006 ).

Research References and Practice Aids

Northern Kentucky Law Review.

2012 General Law Issue: Article: Migratory Law Partners and the Glue of Unfinished Business, 39 N. Ky. L. Rev. 359 (2012).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Notice of Dissolution of Partnership, Form 330.04.

362.300. Causes of dissolution.

Dissolution is caused:

  1. Without violation of the agreement between the partners:
    1. By the termination of the definite term or particular undertaking specified in the agreement,
    2. By the express will of any partner when no definite term or particular undertaking is specified,
    3. By the express will of all the partners who have not assigned their interests or suffered them to be charged for their separate debts, either before or after the termination of any specified term or particular undertaking,
    4. By the expulsion of any partner from the business bona fide in accordance with such a power conferred by the agreement between the partners;
  2. In contravention of the agreement between the partners, where the circumstances do not permit a dissolution under any other provision of this section, by the express will of any partner at any time;
  3. By any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership;
  4. By the death of any partner;
  5. By the bankruptcy of any partner or the partnership;
  6. By decree of court under KRS 362.305 .

History. Enact. Acts 1954, ch. 38, § 31, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Letter of Expression.

Where a partnership was effectively dissolved by a father’s letter expressing an unequivocal desire to dissolve pursuant to KRS 362.300(1)(b) even though no real steps were taken to wind up the partnership under KRS 362.295 , a grant of partial summary judgment was in error because all provisions that were not germane to winding up under KRS 362.310 were extinguished; as a result the trial court erred in granting partial summary judgment enforcing a buy-sell amendment to the partnership agreement. Fischer v. Fischer, 2003 Ky. App. LEXIS 215 (Ky. Ct. App. Aug. 29, 2003), rev'd, 197 S.W.3d 98, 2006 Ky. LEXIS 172 ( Ky. 2006 ).

2.Particular Undertaking.

Testator’s letter to his partner indicating his intent to dissolve the partnership under KRS 362.300(1)(b) was ineffective to do so, as the partnership, which was formed for the purchasing, leasing, and selling of a specified parcel of real estate, was for a “particular undertaking,” since it could be accomplished at some point in the future. Fischer v. Fischer, 197 S.W.3d 98, 2006 Ky. LEXIS 172 ( Ky. 2006 ).

Trial court properly determined that a partnership between a decedent’s heirs, if it existed at all, was dissolved at the will of one or more partners where it was not clear that the heirs intended to form or maintain a partnership because no definite term or particular undertaking was specified in any formal agreement, and the partners/heirs could not even agree whether they were operating as a partnership or as tenants in common. Moreover, under KRS 362.305 , numerous equitable circumstances existed to justify dissolving the alleged partnership, even if dissolution under KRS 362.300(1)(b) were not mandated. Eversole v. McCurley, 2011 Ky. App. LEXIS 7 (Ky. Ct. App. Jan. 21, 2011, sub. op., 2011 Ky. App. Unpub. LEXIS 975 (Ky. Ct. App. Jan. 21, 2011).

Cited:

In re Hargis, 44 B.R. 225, 1984 Bankr. LEXIS 4559 (Bankr. W.D. Ky. 1984 ); Dreisbach v. Eifler, 764 S.W.2d 631, 1988 Ky. App. LEXIS 91 (Ky. Ct. App. 1988).

362.305. Dissolution by decree of court.

  1. On application by or for a partner the court shall decree a dissolution whenever:
    1. A partner has been adjudged mentally disabled by a court of competent jurisdiction in any judicial proceeding or is shown to be of unsound mind,
    2. A partner becomes in any other way incapable of performing his part of the partnership contract,
    3. A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business,
    4. A partner willfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him,
    5. The business of the partnership can only be carried on at a loss,
    6. Other circumstances render a dissolution equitable.
  2. On the application of the purchaser of a partner’s interest under KRS 362.280 or 362.285 :
    1. After the termination of the specified term or particular undertaking,
    2. At any time if the partnership was a partnership at will when the interest was assigned or when the charging order was issued.

History. Enact. Acts 1954, ch. 38, § 32, effective June 17, 1954; 1978, ch. 92, § 10, effective June 17, 1978; 1982, ch. 141, § 94, effective July 1, 1982; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section was amended by § 101 of Acts 1980, Ch. 396, effective July 1, 1982; however, Acts 1982, ch. 141, § 146, effective July 1, 1982 repealed Acts 1980, ch. 396.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Neglect of Partnership.

Where the court found that the outside business dealings of one of the partners resulted in neglect of his partnership duties and breached the partnership agreement, the court rightfully ordered a dissolution of the partnership. Allen v. Cummings, 500 S.W.2d 795, 1973 Ky. LEXIS 265 ( Ky. 1973 ).

2.Equitable Circumstances.

Trial court properly determined that a partnership between a decedent’s heirs, if it existed at all, was dissolved at the will of one or more partners where it was not clear that the heirs intended to form or maintain a partnership because no definite term or particular undertaking was specified in any formal agreement, and the partners/heirs could not even agree whether they were operating as a partnership or as tenants in common. Moreover, under KRS 362.305 , numerous equitable circumstances existed to justify dissolving the alleged partnership, even if dissolution under KRS 362.300(1)(b) were not mandated. Eversole v. McCurley, 2011 Ky. App. LEXIS 7 (Ky. Ct. App. Jan. 21, 2011, sub. op., 2011 Ky. App. Unpub. LEXIS 975 (Ky. Ct. App. Jan. 21, 2011).

Cited:

In re Hargis, 44 B.R. 225, 1984 Bankr. LEXIS 4559 (Bankr. W.D. Ky. 1984 ).

362.310. General effect of dissolution on authority of partner.

Except so far as may be necessary to wind up partnership affairs or to complete transactions begun but not then finished, dissolution terminates all authority of any partner to act for the partnership,

  1. With respect to the partners,
    1. When the dissolution is not by the act, bankruptcy or death of a partner; or
    2. When the dissolution is by such act, bankruptcy or death of a partner, in cases where KRS 362.315 so requires.
  2. With respect to persons not partners, as declared in KRS 362.320 .

History. Enact. Acts 1954, ch. 38, § 33, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Post Dissolution Authority.

Where a partnership was effectively dissolved by a father’s letter expressing an unequivocal desire to dissolve pursuant to KRS 362.300(1)(b) even though no real steps were taken to wind up the partnership under KRS 362.295 , a grant of partial summary judgment was in error because all provisions that were not germane to winding up under KRS 362.310 were extinguished; as a result the trial court erred in granting partial summary judgment enforcing a buy-sell amendment to the partnership agreement. Fischer v. Fischer, 2003 Ky. App. LEXIS 215 (Ky. Ct. App. Aug. 29, 2003), rev'd, 197 S.W.3d 98, 2006 Ky. LEXIS 172 ( Ky. 2006 ).

Research References and Practice Aids

Northern Kentucky Law Review.

2012 General Law Issue: Article: Migratory Law Partners and the Glue of Unfinished Business, 39 N. Ky. L. Rev. 359 (2012).

362.315. Right of partner to contribution from co-partners after dissolution.

Where the dissolution is caused by the act, death or bankruptcy of a partner, each partner is liable to his co-partners for his share of any liability created by any partner acting for the partnership as if the partnership had not been dissolved unless:

  1. The dissolution being by act of any partner, the partner, acting for the partnership had knowledge of the dissolution;
  2. The dissolution being by the death or bankruptcy of a partner, the partner acting for the partnership had knowledge or notice of the death or bankruptcy; or
  3. The liability arises from a debt, obligation, or liability for which the partner is not liable as provided in KRS 362.220(2).

History. Enact. Acts 1954, ch. 38, § 34, effective June 17, 1954; 1994, ch. 389, § 99, effective July 15, 1994; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.320. Power of partner to bind partnership to third persons after dissolution.

  1. After dissolution a partner can bind the partnership except as provided in subsection (3):
    1. By any act appropriate for winding up partnership affairs or completing transactions unfinished at dissolution;
    2. By any transaction which would bind the partnership if dissolution had not taken place, provided the other party to the transaction:

      (I) Had extended credit to the partnership prior to dissolution and had no knowledge or notice of the dissolution; or

      (II) Though he had not so extended credit, had nevertheless known of the partnership prior to dissolution, and, having no knowledge or notice of dissolution, the fact of dissolution had not been advertised in a newspaper of general circulation in the place (or in each place if more than one) at which the partnership business was regularly carried on.

  2. The liability of a partner under paragraph (b) of subsection (1) shall be satisfied out of partnership assets alone when such partner had been prior to dissolution:
    1. Unknown as a partner to the person with whom the contract is made; and
    2. So far unknown and inactive in partnership affairs that the business reputation of the partnership could not be said to have been in any degree due to his connection with it.
  3. The partnership is in no case bound by any act of a partner after dissolution:
    1. Where the partnership is dissolved because it is unlawful to carry on the business, unless the act is appropriate for winding up partnership affairs; or
    2. Where the partner has become bankrupt; or
    3. Where the partner has no authority to wind up partnership affairs; except by a transaction with one who:

      (I) Had extended credit to the partnership prior to dissolution and had no knowledge or notice of his want of authority; or

      (II) Had not extended credit to the partnership prior to dissolution, and, having no knowledge or notice of his want of authority, the fact of his want of authority has not been advertised in the manner provided for advertising the fact of dissolution in subdivision (II) of paragraph (b) of subsection (1) of this section.

  4. Nothing in this section shall affect the liability under KRS 362.225 of any person who after dissolution represents himself or consents to another representing him as a partner in a partnership engaged in carrying on business.

History. Enact. Acts 1954, ch. 38, § 35, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Constructive Knowledge.

Constructive knowledge is not sufficient to constitute knowledge under subsection (2). Ranier v. Kiger Ins., 998 S.W.2d 515, 1999 Ky. App. LEXIS 86 (Ky. Ct. App. 1999).

362.325. Effect of dissolution on partner’s existing liability.

  1. The dissolution of the partnership shall not of itself discharge the existing liability of any partner.
  2. A partner shall be discharged from any existing liability upon dissolution of the partnership by an agreement to that effect between himself, the partnership creditor, and the person or partnership continuing the business; and the agreement may be inferred from the course of dealing between the creditor having knowledge of the dissolution and the person or partnership continuing the business.
  3. If a person agrees to assume the existing obligations of a dissolved partnership, the partners whose obligations have been assumed shall be discharged from any liability to any creditor of the partnership who, knowing of the agreement, consents to a material alteration in the nature or time of payment of the obligations.
  4. The individual property of a deceased partner shall be liable for obligations of the partnership incurred while he was a partner and for which he was liable under KRS 362.220 but subject to the prior payment of his separate debts.

History. Enact. Acts 1954, ch. 38, § 36, effective June 17, 1954; 1994, ch. 389, § 100, effective July 15, 1994; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

Cited:

First & Peoples Bank v. Fielder, 323 S.W.2d 853, 1959 Ky. LEXIS 341 ( Ky. 1959 ).

362.330. Right to wind up.

Unless otherwise agreed the partners who have not wrongfully dissolved the partnership or the legal representative of the last surviving partner, not bankrupt, has the right to wind up the partnership affairs; provided, however, that any partner, his legal representative or his assignee, upon cause shown, may obtain winding up by the court.

History. Enact. Acts 1954, ch. 38, § 37, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

Cited:

In re Hargis, 44 B.R. 225, 1984 Bankr. LEXIS 4559 (Bankr. W.D. Ky. 1984 ).

Research References and Practice Aids

Northern Kentucky Law Review.

2012 General Law Issue: Article: Migratory Law Partners and the Glue of Unfinished Business, 39 N. Ky. L. Rev. 359 (2012).

362.335. Rights of partners to application of partnership property.

  1. When dissolution is caused in any way, except in contravention of the partnership agreement, each partner as against his co-partners and all persons claiming through them in respect of their interest in the partnership, unless otherwise agreed, may have the partnership property applied to discharge its liabilities, and the surplus applied to pay in cash the net amount owing to the respective partners. But if dissolution is caused by expulsion of a partner, bona fide under the partnership agreement and if the expelled partner is discharged from all partnership liabilities, either by payment or agreement under subsection (2) of KRS 362.325 , he shall receive in cash only the net amount due him from the partnership.
  2. When dissolution is caused in contravention of the partnership agreement the rights of the partners shall be as follows:
    1. Each partner who has not caused dissolution wrongfully shall have:

      (I) All the rights specified in subsection (1) of this section, and

      (II) The right, as against each partner who has caused the dissolution wrongfully, to damages for breach of the agreement.

    2. The partners who have not caused the dissolution wrongfully, if they all desire to continue the business in the same name, either by themselves or jointly with others, may do so, during the agreed term for the partnership and for that purpose may possess the partnership property, provided they secure the payment by bond approved by the court, or pay to any partner who has caused the dissolution wrongfully, the value of his interest in the partnership at the dissolution, less any damages recoverable under subdivision (II) of paragraph (a) of subsection (2) of this section, and in like manner indemnify him against all present or future partnership liabilities.
    3. A partner who has caused the dissolution wrongfully shall have:

      (I) If the business is not continued under the provisions of paragraph (b) of this subsection, all the rights of a partner under subsection (1) of this section, subject to subdivision (II) of paragraph (a) of this subsection.

(II) If the business is continued under paragraph (b) of this subsection the right as against his co-partners and all claiming through them in respect of their interests in the partnership, to have the value of his interest in the partnership, less any damages caused to his co-partners by the dissolution, ascertained and paid him in cash, or the payment secured by bond approved by the court, and to be released from all existing liabilities of the partnership; but in ascertaining the value of the partner’s interest the value of the goodwill of the business shall not be considered.

History. Enact. Acts 1954, ch. 38, § 38, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

1.Damages.

The partner violating the partnership agreement was not entitled to damages for breach of the partnership agreement. Allen v. Cummings, 500 S.W.2d 795, 1973 Ky. LEXIS 265 ( Ky. 1973 ).

Cited:

In re Hargis, 44 B.R. 225, 1984 Bankr. LEXIS 4559 (Bankr. W.D. Ky. 1984 ).

362.340. Rights where partnership is dissolved for fraud or misrepresentation.

Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of one (1) of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled:

  1. To a lien on, or right of retention of, the surplus of the partnership property after satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advances contributed by him; and
  2. To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any payments made by him in respect of the partnership liabilities; and
  3. To be indemnified by the person guilty of the fraud or making the representation against all debts and liabilities of the partnership.

History. Enact. Acts 1954, ch. 38, § 39, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.345. Rules for distribution.

In settling accounts between the partners after dissolution, the following rules shall be observed, subject to any agreement to the contrary:

  1. The assets of the partnership are:
    1. The partnership property,
    2. The contributions of the partners specified in subsection (4) of this section.
  2. The liabilities of the partnership shall rank in order of payment, as follows:
    1. Those owing to creditors other than partners,
    2. Those owing to partners other than for capital and profits,
    3. Those owing to partners in respect of capital,
    4. Those owing to partners in respect of profits.
  3. The assets shall be applied in the order of their declaration in subsection (1) of this section to the satisfaction of the liabilities.
  4. Except as provided in KRS 362.220(2):
    1. The partners shall contribute, as provided by subsection (1) of KRS 362.235 the amount necessary to satisfy the liabilities; and
    2. If any, but not all, of the partners are insolvent, or, not being subject to process, refuse to contribute, the other partners shall contribute their share of the liabilities, and, in the relative proportions in which they share the profits, the additional amount necessary to pay the liabilities.
  5. An assignee for the benefit of creditors or any person appointed by the court shall have the right to enforce the contributions specified in subsection (4) of this section.
  6. Any partner or his legal representative shall have the right to enforce the contributions specified in subsection (4) of this section, to the extent of the amount which he has paid in excess of his share of the liability.
  7. The individual property of a deceased partner shall be liable for the contributions specified in subsection (4) of this section.
  8. When partnership property and the individual properties of the partners are in possession of a court for distribution, partnership creditors shall have priority on partnership property and separate creditors on individual property, saving the rights of lien or secured creditors as heretofore.
  9. If a partner has become bankrupt or his estate is insolvent, the claims against his separate property shall rank in the following order:
    1. Those owing to separate creditors,
    2. Those owing to partnership creditors,
    3. Those owing to partners by way of contribution.

History. Enact. Acts 1954, ch. 38, § 40, effective June 17, 1954; 1994, ch. 389, § 101, effective July 15, 1994; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

Cited:

First & Peoples Bank v. Fielder, 323 S.W.2d 853, 1959 Ky. LEXIS 341 ( Ky. 1959 ); In re Hargis, 44 B.R. 225, 1984 Bankr. LEXIS 4559 (Bankr. W.D. Ky. 1984 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint by Partner to Surcharge Settlement Based on Erroneous Statement of Business Made by Retiring Partner, Form 330.03.

362.350. Liability of persons continuing the business in certain cases.

  1. When any new partner is admitted into an existing partnership, or when any partner retires and assigns (or the representative of the deceased partner assigns) his rights in partnership property to two (2) or more of the partners, or to one (1) or more of the partners and one (1) or more third persons, if the business is continued without liquidation of the partnership affairs, creditors of the first or dissolved partnership are also creditors of the partnership so continuing the business.
  2. When all but one (1) partner retire and assign (or the representative of a deceased partner assigns) their rights in partnership property to the remaining partner, who continues the business without liquidation of partnership affairs, either alone or with others, creditors of the dissolved partnership are also creditors of the person or partnership so continuing the business.
  3. When any partner retires or dies and the business of the dissolved partnership is continued as set forth in subsections (1) and (2) of this section, with the consent of the retired partners or the representative of the deceased partner, but without any assignment of his right in partnership property, rights of creditors of the dissolved partnership, and of the creditors of the person or partnership continuing the business shall be as if such assignment had been made.
  4. When all the partners or their representatives assign their rights in partnership property to one (1) or more third persons who promise to pay the debts and who continue the business of the dissolved partnership, creditors of the dissolved partnership are also creditors of the person or partnership continuing the business.
  5. When any partner wrongfully causes a dissolution and the remaining partners continue the business under the provisions of paragraph (b) of subsection (2) of KRS 362.335 , either alone or with others, and without liquidation of the partnership affairs, creditors of the dissolved partnership are also creditors of the person or partnership continuing the business.
  6. When a partner is expelled and the remaining partners continue the business either alone or with others, without liquidation of the partnership affairs, creditors of the dissolved partnership are also creditors of the person or partnership continuing the business.
  7. The liability of a third person becoming a partner in the partnership continuing the business, under this section, to the creditors of the dissolved partnership shall be satisfied out of partnership property only.
  8. When the business of a partnership after dissolution is continued under any conditions set forth in this section the creditors of the dissolved partnership, as against the separate creditors of the retiring or deceased partner or the representative of the deceased partner, have a prior right to any claim of the retired partner or the representative of the deceased partner against the person or partnership continuing the business, on account of the retired or deceased partner’s interest in the dissolved partnership or on account of any consideration promised for such interest or for his right in partnership property.
  9. Nothing in this section shall be held to modify any right of creditors to set aside any assignment on the ground of fraud.
  10. The use by the person or partnership continuing the business of the partnership name, or the name of a deceased partner as part thereof, shall not of itself make the individual property of the deceased partner liable for any debts contracted by such person or partnership.

History. Enact. Acts 1954, ch. 38, § 41, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.355. Rights of retiring or estate of deceased partner when the business is continued.

When any partner retires or dies, and the business is continued under any of the conditions set forth in subsections (1), (2), (3), (5), and (6) of KRS 362.350 or paragraph (b) of subsection (2) of KRS 362.335 , without any settlement of accounts as between him or his estate and the person or partnership continuing the business, unless otherwise agreed, he or his legal representative as against such persons or partnership may have the value of his interest at the date of dissolution ascertained, and shall receive as an ordinary creditor an amount equal to the value of his interest in the dissolved partnership with interest, or, at his option or at the option of his legal representative, in lieu of interest, the profits attributable to the use of his right in the property of the dissolved partnership; provided that the creditors of the dissolved partnership as against the separate creditors, or the representative of the retired or deceased partner, shall have priority on any claim arising under this section, as provided by subsection (8) of KRS 362.350 .

History. Enact. Acts 1954, ch. 38, § 42, effective June 17, 1954; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.360. Accrual of actions.

The right to an account of his interest shall accrue to any partner, or his legal representative, as against the winding up partners or the surviving partners or the person or partnership continuing the business, at the date of dissolution in the absence of any agreement to the contrary.

History. Enact. Acts 1954, ch. 38, § 43, effective June 17, 1954; repeal by 2006, ch. 149, ch 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Uniform Limited Partnership Act

362.401. Definitions.

As used in KRS 362.403 to 362.525 , unless the context otherwise requires, the term:

  1. “Certificate of limited partnership” means the certificate referred to in KRS 362.415 , or the certificate of limited partnership as amended or restated;
  2. “Business entity” means a domestic or foreign limited liability company, corporation, partnership, limited partnership, business or statutory trust and not-for-profit unincorporated association;
  3. “Contribution” means any cash, property, services rendered, or a promissory note or other obligation to contribute cash or property or to perform services, which a partner contributes to a limited partnership in his capacity as a partner;
  4. “Event of withdrawal of a general partner” means an event that causes a person to cease to be a general partner as provided in KRS 362.445 ;
  5. “Foreign limited partnership” means a limited partnership formed under the laws of any state other than this state and having as partners one (1) or more general partners and one (1) or more limited partners;
  6. “General partner” means a person who has been admitted to a limited partnership as a general partner in accordance with the partnership agreement and is named in the certificate of limited partnership as a general partner;
  7. “Limited partner” means a person who has been admitted to a limited partnership as a limited partner in accordance with the partnership agreement;
  8. “Limited partnership” or “domestic limited partnership” means a partnership formed by two (2) or more persons under the laws of this state and having one (1) or more general partners and one (1) or more limited partners;
  9. “Name of record with the Secretary of State” means any real, fictitious, reserved, registered, or assumed name of a business entity;
  10. “Partner” means a limited partner or general partner;
  11. “Partnership agreement” means any valid agreement, written or oral, of the partners as to the affairs of a limited partnership and the conduct of its business;
  12. “Partnership interest” means a partner’s share of the profits and losses of a limited partnership and the right to receive distributions of partnership assets;
  13. “Person” means a natural person; trust; estate; or business entity;
  14. “Real name” shall have the meaning set forth in KRS 365.015 ; and
  15. “State” means a state, territory, or possession of the United States, the District of Columbia or the Commonwealth of Puerto Rico.

History. Enact. Acts 1988, ch. 284, § 1, effective July 15, 1988; 2007, ch. 137, § 142, effective June 26, 2007; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007; repealed and reenact., Acts 2010, ch. 51, § 142, effective July 15, 2010.

Compiler’s Notes.

This section (101 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Legislative Research Commission Note.

(7/15/2010). 2010 Ky. Acts ch. 51, sec. 183, provides, “The specific textual provisions of Sections 1 to 178 of this Act which reflect amendments made to those sections by 2007 Ky. Acts ch. 137 shall be deemed effective as of June 26, 2007, and those provisions are hereby made expressly retroactive to that date, with the remainder of the text of those sections being unaffected by the provisions of this section.”

(6/26/2007). 2007 Ky. Acts ch. 137, sec. 142, subsection (14) cited “Section 164 of this Act.” It is apparent from context that the section referred to should have been Section 163 of the Act, KRS 365.015 . The Reviser of Statutes has made this change under the authority of KRS 7.136 .

Research References and Practice Aids

Kentucky Bench & Bar.

Rutledge, Recent Amendments to Kentucky Business Entity Laws, Vol. 71, No. 5, Sept. 2007, Ky. Bench & Bar 25.

Kentucky Law Journal.

Booth and Rutledge, The Limited Liability Company Act: Understanding Kentucky’s New Organizational Option, 83 Ky. L.J. 1 (1994-95).

Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 (2008).

Northern Kentucky Law Review.

Mellen, Myre and Lee, Limited Liability Companies and Registered Limited Liability Partnerships in Kentucky: A Practical Analysis, 22 N. Ky. L. Rev. 229 (1995).

362.403. Name of limited partnership.

The name of each limited partnership shall satisfy the requirements of KRS 14A.3-010 .

History. Enact. Acts 1988, ch. 284, § 2, effective July 15, 1988; 2007, ch. 137, § 143, effective June 26, 2007; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007; repealed and reenact., Acts 2010, ch. 51, § 143, effective July 15, 2010; repealed, reenact., and amend., Acts 2010, ch. 151, § 88, effective January 1, 2011.

Compiler’s Notes.

This section (102 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Legislative Research Commission Notes.

(1/1/2011). This section was repealed, reenacted, and amended by 2010 Ky. Acts ch. 151, and repealed and reenacted by 2010 Ky. Acts ch. 51. Pursuant to Section 184 of Acts ch. 51, it was the intent of the General Assembly that the repeal and reenactment not serve to void the amendment, and these Acts do not appear to be in conflict, therefore, they have been codified together.

(7/15/2010). 2010 Ky. Acts ch. 51, sec. 183, provides, “The specific textual provisions of Sections 1 to 178 of this Act which reflect amendments made to those sections by 2007 Ky. Acts ch. 137 shall be deemed effective as of June 26, 2007, and those provisions are hereby made expressly retroactive to that date, with the remainder of the text of those sections being unaffected by the provisions of this section.”

Research References and Practice Aids

Kentucky Law Journal.

Booth and Rutledge, The Limited Liability Company Act: Understanding Kentucky’s New Organizational Option, 83 Ky. L.J. 1 (1994-95).

362.405. Reservation of name. [Repealed.]

Compiler’s Notes.

This section (Repealed and reenact., Acts 2010, ch. 51, § 144) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.3-020 .

362.407. Recordkeeping office — Agent for service of process — Requirement for agent’s written acceptance of appointment.

Each limited partnership shall continuously maintain in this Commonwealth:

  1. A registered office and registered agent that comply with KRS 14A.4-010 ; and
  2. An office which may, but need not be, a place of business in this state, at which shall be kept the records required by KRS 362.409 to be maintained.

History. Enact. Acts 1988, ch. 284, § 4, effective July 15, 1988; 1998, ch. 341, § 49, effective July 15, 1998; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007; 2010, ch. 151, § 89, effective January 1, 2011.

Compiler’s Notes.

This section (104 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.409. Records to be kept.

  1. Each limited partnership shall keep, at the office referred to in KRS 362.407(2), the following records:
    1. A current list of the full names and last known business, residence, or mailing addresses of all partners, separately identifying in alphabetical order the general partners and the limited partners;
    2. A copy of the certificate of limited partnership and all certificates of amendment thereto, together with executed copies of any powers of attorney pursuant to which any certificate was executed;
    3. Copies of the limited partnership’s federal, state and local income tax returns and reports, if any, for the three (3) most recent years;
    4. Copies of any then effective written partnership agreement and of any financial statements of the limited partnership for the three (3) most recent years; and
    5. Unless contained in a written partnership agreement, a writing setting out:
      1. The amount of cash and a description and statement of the agreed value of the other property or services contributed by each partner and which each partner has agreed to contribute;
      2. The times at which, or events upon the happening of which, any additional contributions agreed to be made by each partner are to be made;
      3. Any right of a partner to receive distributions, or of a general partner to make distributions to a partner, that includes a return of all or any part of the partner’s contribution; and
      4. Any events upon the happening of which the limited partnership is to be dissolved and its affairs wound up.
  2. Records kept under this section may be inspected and copied during ordinary business hours at the reasonable request, and at the expense, of any partner.

History. Enact. Acts 1988, ch. 284, § 5, effective July 15, 1988; 1994, ch. 389, § 116, effective July 15, 1994; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007; 2010, ch. 151, § 122, effective January 1, 2011.

Compiler’s Notes.

This section (105 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

NOTES TO DECISIONS

1.Litigation Discovery.

During litigation, the procedures allowed under Kentucky’s civil discovery rules are broader than those allowed under KRS 271B.16-020 and KRS 362.409 or KRS 362.1-403 , assuming that the plaintiff has made a colorable claim for something other than mere enforcement of those shareholder/partner statutes. Edwards v. Hickman, 237 S.W.3d 183, 2007 Ky. LEXIS 218 ( Ky. 2007 ).

362.410. Limited partnership defined. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 1) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.411. Nature of business that may be carried on. [Repealed]

A limited partnership may carry on any business that a partnership without limited partners may carry on.

History. Enact. Acts 1988, ch. 284, § 6, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (106 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.413. Business transactions of partners with partnership. [Repealed]

Except as provided in the partnership agreement, a partner may lend money to, and transact other business with, the limited partnership and, subject to other applicable law, shall have the same rights and obligations with respect thereto as a person who is not a partner.

History. Enact. Acts 1988, ch. 284, § 7, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (107 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.415. Formation — Certificate of limited partnership.

  1. In order to form a limited partnership, a certificate of limited partnership shall be executed and filed with the Secretary of State. The certificate shall be in the form prescribed by the Secretary of State and shall set forth:
    1. The name of the limited partnership;
    2. The address of the office and the name and address of the agent for service of process required to be maintained by KRS 14A.4-010 or predecessor law;
    3. The name and the business address of each general partner;
    4. A mailing address for the limited partnership;
    5. The latest date upon which the limited partnership is to dissolve; and
    6. Any other matters the general partners determine to include therein.
  2. A limited partnership shall be formed at the time of the filing of the certificate of limited partnership with the Secretary of State or at any later time specified in the certificate of limited partnership, which shall be a date certain and shall not be later than the ninetieth day after the date it is filed, if, in either case, there has been substantial compliance with the requirements of this section.

History. Enact. Acts 1988, ch. 284, § 8, effective July 15, 1988; 1998, ch. 341, § 52, effective July 15, 1998; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007; 2010, ch. 151, § 110, effective January 1, 2011.

Compiler’s Notes.

This section (201 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Research References and Practice Aids

Kentucky Law Journal.

Booth and Rutledge, The Limited Liability Company Act: Understanding Kentucky’s New Organizational Option, 83 Ky. L.J. 1 (1994-95).

362.417. Amendment to or restatement of certificate.

  1. A certificate of limited partnership may be amended by filing a certificate of amendment that satisfies the requirements of KRS 14A.2-010 to 14A.2-150 with the Secretary of State. The certificate of amendment shall be in the form prescribed by the Secretary of State and shall set forth:
    1. The name of the limited partnership;
    2. The date of filing the certificate of limited partnership; and
    3. The amendment to the certificate of limited partnership.
    1. Within thirty (30) days after the happening of any of the following events, an amendment to a certificate of limited partnership reflecting the occurrence of the event or events, shall be filed: (2) (a) Within thirty (30) days after the happening of any of the following events, an amendment to a certificate of limited partnership reflecting the occurrence of the event or events, shall be filed:
      1. The admission of a new general partner;
      2. The withdrawal of a general partner;
      3. The continuation of the business under KRS 362.487 after an event of withdrawal of a general partner; or
      4. A change in name of the limited partnership.
    2. A general partner who becomes aware that any statement in a certificate of limited partnership was false when made, or that any arrangements or other facts described in the certificate have changed, making the certificate inaccurate in any respect, shall promptly amend the certificate.
    3. A certificate may be amended at any time for any other proper purpose the general partners determine.
  2. If an amendment to a certificate is filed within the thirty (30) day period referred to in subsection (2) of this section, no person shall be liable because the amendment was not filed earlier.
  3. A certificate of amendment shall be effective as provided in KRS 14A.2-070 .
  4. A limited partnership may, if desired, integrate into a single instrument all of the provisions of its certificate of limited partnership which are then in effect and operative as a result of filing with the Secretary of State one (1) or more certificates of amendment and it may, at the same time, further amend its certificate of limited partnership.
  5. If the restated certificate of limited partnership merely restates and integrates, but does not further amend the certificate of limited partnership as theretofore amended, it shall be specifically designated in its heading as a “restated certificate of limited partnership.” If the restated certificate restates and integrates and also further amends in any respect the certificate of limited partnership as theretofore amended, it shall be specifically designated in its heading as an “amended and restated certificate of limited partnership”. A restated, or amended and restated, certificate of limited partnership shall be executed and filed in the same manner as a certificate of amendment.
  6. Upon the filing of a restated, or amended and restated, certificate of limited partnership with the Secretary of State, or upon its future effective date or time as provided for therein, the initial certificate of limited partnership, as amended, shall be superseded. Thereafter, the restated certificate of limited partnership, including further amendments made thereto, shall be the certificate of limited partnership of the limited partnership.

History. Enact. Acts 1988, ch. 284, § 9, effective July 15, 1988; 1994, ch. 389, § 117, effective July 15, 1994; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007; 2010, ch. 151, § 111, effective January 1, 2011.

Compiler’s Notes.

This section (202 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

362.419. Cancellation of certificate. [Repealed]

A certificate of limited partnership shall be canceled upon the dissolution and the completion of winding up of the partnership or at any other time there are no limited partners. A certificate of cancellation shall be in the form prescribed by the Secretary of State and shall be filed with the Secretary of State and shall set forth:

  1. The name of the limited partnership;
  2. The date of filing of the certificate of limited partnership;
  3. The reason for filing the certificate of cancellation; and
  4. Any other information the general partners filing the certificate of cancellation determine to include therein.

History. Enact. Acts 1988, ch. 284, § 10, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (203 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.420. Formation — Filing fee. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 2; 1978, ch. 384, § 490, effective June 17, 1978; 1986, ch. 342, § 2, effective July 15, 1986; 1988, ch. 187, § 2) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

Legislative Research Commission Note.

This section was amended by the 1988 General Assembly and also repealed. Pursuant to KRS 446.260 , the repeal prevails.

362.421. Execution of certificates. [Repealed]

  1. Each certificate required by KRS 362.403 to 362.525 to be filed with the Secretary of State shall be executed in the following manner:
    1. An original certificate of limited partnership signed by all general partners;
    2. A certificate of amendment, signed by at least one (1) general partner and by each other general partner designated in the certificate as a new general partner; and
    3. A certificate of cancellation, signed by all general partners.
  2. Any person may sign a certificate of limited partnership, certificate of amendment or certificate of cancellation by an attorney-in-fact, but a power of attorney to sign a certificate of amendment relating to the admission of a general partner shall specifically describe the admission.
  3. The execution of a certificate of limited partnership, certificate of amendment or certificate of cancellation by a general partner shall constitute an affirmation under the penalties of perjury that the facts stated therein are true.

History. Enact. Acts 1988, ch. 284, § 11, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (204 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.423. Execution of certificate by judicial act. [Repealed]

If a person required by KRS 362.421 to execute a certificate of limited partnership, certificate of amendment or certificate of cancellation fails or refuses to do so, any other person who is adversely affected by the failure or refusal may petition the Circuit Court to direct the execution of the certificate. If the court finds that it is proper for the certificate to be executed and that any person so designated has failed or refused to execute the certificate, the court shall order the Secretary of State to record an appropriate certificate.

History. Enact. Acts 1988, ch. 284, § 12, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (205 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.425. Filing in office of Secretary of State. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1988, ch. 284, § 13; repeal by 2006, ch. 149, § 239, withdrawn by 2007, ch. 137, § 180) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.2-100 .

362.427. Liability for false statement in certificate. [Repealed]

If a certificate of limited partnership, certificate of amendment or certificate of cancellation contains a false statement, a person who suffers loss by reliance on that statement may recover damages for the loss from:

  1. Any person who executed the certificate, or caused another to execute it on his behalf, and knew, and any general partner who knew or should have known, the statement to be false at the time the certificate was executed; and
  2. Any general partner who thereafter knows or should have known that any arrangement or other fact described in the certificate has changed, making the statement inaccurate in any material respect, within a sufficient time before the statement was relied upon reasonably to have enabled that general partner to cancel or amend the certificate or to file a petition for its cancellation or amendment pursuant to KRS 362.423 .

History. Enact. Acts 1988, ch. 284, § 14, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (207 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.429. Scope of notice.

The fact that a certificate of limited partnership is on file with the Secretary of State shall constitute notice that the partnership is a limited partnership and the persons designated therein as general partners are general partners, but shall not constitute notice of any other fact.

History. Enact. Acts 1988, ch. 284, § 15, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (208 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Research References and Practice Aids

Kentucky Law Journal.

Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 (2008).

362.430. Business which may be carried on. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 3) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.431. Delivery of certificate to limited partners.

Upon the return by the Secretary of State pursuant to KRS 14A.2-100 (3) of a certificate, the general partners shall deliver or mail a copy of the certificate of limited partnership and each certificate of amendment or certificate of cancellation to each limited partner unless the partnership agreement provides otherwise.

History. Enact. Acts 1988, ch. 284, § 16, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007; 2010, ch. 151, § 147, effective January 1, 2011.

Compiler’s Notes.

This section (209 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

362.433. Admission of limited partners. [Repealed]

  1. A person shall become a limited partner on the later of:
    1. The date the original certificate of limited partnership is filed; or
    2. At any later date specified in the records of the limited partnership as the date that person shall become a limited partner.
  2. After the filing of a limited partnership’s original certificate of limited partnership, a person may be admitted as an additional limited partner:
    1. In the case of a person acquiring a partnership interest directly from the limited partnership, upon compliance with the partnership agreement or, if the partnership agreement does not so provide, upon the written consent of all partners; and
    2. In the case of an assignee of a partnership interest of a partner who has the power, as provided in KRS 362.483 , to grant the assignee the right to become a limited partner, upon the exercise of that power and compliance with any conditions limiting the grant or exercise of the power.

History. Enact. Acts 1988, ch. 284, § 17, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (301 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.435. Voting rights of limited partners. [Repealed]

Subject to KRS 362.437 , the partnership agreement may grant to all or a specified group of the limited partners the right to vote, with or without the concurrence of the general partners, on a per capita or any other basis on any matter and may make any appropriate provision for the exercise of such voting right.

History. Enact. Acts 1988, ch. 284, § 18, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (302 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.437. Liability of limited partners to third parties. [Repealed]

  1. Except as provided in subsection (4) of this section, a limited partner shall not be liable for the obligations of a limited partnership unless he is also a general partner or, in addition to the exercise of his rights and powers as a limited partner, he participates in the control of the business. However, if the limited partner participates in the control of the business, he shall be liable only to persons who transact business with the limited partnership reasonably believing, based upon the limited partner’s conduct, that the limited partner is a general partner.
  2. A limited partner shall not participate in the control of the business within the meaning of subsection (1) solely by doing one (1) or more of the following things:
    1. Being a contractor for, or an agent or employee of, the limited partnership or of a general partner or being an officer, director, or shareholder of a general partner that is a corporation;
    2. Consulting with or advising a general partner with respect to the business of the limited partnership;
    3. Acting as surety, guarantor or endorser for the limited partnership, guaranteeing or assuming one (1) or more specific obligations of the limited partnership or providing collateral for the limited partnership;
    4. Taking any action required or permitted by law to bring or pursue a derivative action in the right of the limited partnership;
    5. Requesting, attending or participating in a meeting of partners;
    6. Proposing, approving, or disapproving, by voting or otherwise, one (1) or more of the following matters:
      1. The dissolution and winding up of the limited partnership;
      2. The sale, exchange, lease, mortgage, assignment, pledge, or other transfer of, or granting of a security interest in, all, or substantially all, of the assets of the limited partnership;
      3. The incurrence, renewal, refinancing, payment or other discharge of indebtedness by the limited partnership other than in the ordinary course of its business;
      4. A change in the nature of the business;
      5. The admission or removal of a general partner;
      6. The admission or removal of a limited partner;
      7. A transaction involving an actual or potential conflict of interest between a general partner and the limited partnership or the limited partners;
      8. An amendment to the partnership agreement or certificate of limited partnership; and
      9. A matter related to the business of the limited partnership not otherwise enumerated in this subsection which the partnership agreement states in writing is subject to the approval or disapproval of limited partners;
    7. Winding up the limited partnership pursuant to KRS 362.491 ; or
    8. Exercising any right or power permitted to limited partners under KRS 362.403 to 362.525 and not specifically enumerated in this subsection.
  3. The enumeration in subsection (2) of this section shall not mean that the possession or exercise by a limited partner of any power other than a power enumerated in that subsection constitutes participation by him in the business of the limited partnership.
  4. A limited partner who knowingly permits his name to be used in the name of the limited partnership, except under a circumstance permitted by KRS 362.403(2), shall be liable to creditors who extend credit to the limited partnership without actual knowledge that the limited partner is not a general partner.

History. Enact. Acts 1988, ch. 284, § 19, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (303 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Research References and Practice Aids

Kentucky Law Journal.

Booth and Rutledge, The Limited Liability Company Act: Understanding Kentucky’s New Organizational Option, 83 Ky. L.J. 1 (1994-95).

Northern Kentucky Law Review.

Mellen, Myre and Lee, Limited Liability Companies and Registered Limited Liability Partnerships in Kentucky: A Practical Analysis, 22 N. Ky. L. Rev. 229 (1995).

362.439. Liability of person erroneously believing to be a limited partner. [Repealed]

  1. Except as provided in subsection (2) of this section, a person who makes a contribution to a business enterprise and erroneously, but in good faith, believes that he has become a limited partner in the enterprise shall not be a general partner in the enterprise and shall not be bound by its obligations by reason of making the contribution, receiving distributions from the enterprise, or exercising any rights of a limited partner, if, within a reasonable time after ascertaining the mistake he:
    1. Causes an appropriate certificate of limited partnership or a certificate of amendment to be executed and filed; or
    2. Withdraws from future equity participation in the enterprise by executing and filing with the Secretary of State a certificate declaring withdrawal under this section.
  2. A person who makes a contribution of the kind described in subsection (1) of this section shall be liable as a general partner to any third party who transacts business with the enterprise before the person withdraws and an appropriate certificate is filed to show withdrawal or before an appropriate certificate is filed to show that the person is not a general partner, but in either case, only if the third party actually believed in good faith that the person was a general partner at the time of the transaction.

History. Enact. Acts 1988, ch. 284, § 20, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (304 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.440. Character of limited partner’s contribution. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 4) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.441. Limited partner’s right to information. [Repealed]

Each limited partner may:

  1. Inspect and copy any of the partnership records required to be maintained by KRS 362.409 ; and
  2. Obtain from the general partners from time to time, upon reasonable demand, and subject to such reasonable standards as may be set forth in the partnership agreement, or otherwise established by the general partners, and for any purpose reasonably related to the limited partner’s interest as a limited partner:
    1. True and full information regarding the state of the business and financial condition of the limited partnership;
    2. Promptly after becoming available, copies of the limited partnership’s federal, state, and local income tax returns for each year; and
    3. Such other information regarding the affairs of the limited partnership as is just and reasonable.

History. Enact. Acts 1988, ch. 284, § 21, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (305 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.443. Admission of additional general partners. [Repealed]

After the filing of a limited partnership’s original certificate of limited partnership, additional general partners may be admitted as provided in writing in the partnership agreement or, if the partnership agreement does not provide in writing for the admission of additional general partners, with the written consent of all partners.

History. Enact. Acts 1988, ch. 284, § 22, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (401 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.445. Events of withdrawal of general partner. [Repealed]

Except as approved by the specific written consent of all partners at the time, a person shall cease to be a general partner of a limited partnership upon the happening of any of the following events:

  1. The general partner withdraws from the limited partnership as provided in KRS 362.463 ;
  2. The general partner ceases to be a member of the limited partnership as provided in KRS 362.479 ;
  3. The general partner is removed as a general partner in accordance with the partnership agreement;
  4. Unless otherwise provided in writing in the partnership agreement, the general partner:
    1. Makes an assignment for the benefit of creditors;
    2. Files a voluntary petition in bankruptcy;
    3. Is adjudged a bankrupt or insolvent or has entered against him an order for any relief in any bankruptcy or insolvency proceeding;
    4. Files a petition or answer seeking for himself any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any statute, law, or regulation;
    5. Files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against him in any proceeding of this nature; or
    6. Seeks, consents to, or acquiesces in the appointment of a trustee, receiver, or liquidator of the general partner or of all or any substantial part of his properties.
  5. Unless otherwise provided in writing in the partnership agreement, one hundred twenty (120) days after the commencement of any proceeding against the general partner seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any statute, law, or regulation, if the proceeding has not been dismissed, or if within ninety (90) days after the appointment without the general partner’s consent or acquiescence of a trustee, receiver, or liquidator of the general partner or of all or any substantial part of the general partner’s properties, the appointment has not been vacated or stayed, or ninety (90) days after the expiration of any such stay, the appointment has not been vacated.
  6. In the case of a general partner who is a natural person, his death or the entry of an order by a court of competent jurisdiction adjudicating him incompetent to manage his person or his property.
  7. In the case of a general partner who is acting as a general partner by virtue of being a trustee of a trust, upon the termination of the trust, but not merely the substitution of a new trustee.
  8. In the case of a general partner that is a separate partnership, upon the dissolution and commencement of winding up of the separate partnership.
  9. In the case of a general partner that is a corporation, upon the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its certificate of incorporation or its equivalent; or
  10. In the case of a general partner that is an estate, upon the distribution by the fiduciary of the entire interest of the estate in the partnership.

History. Enact. Acts 1988, ch. 284, § 23, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (402 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.447. General power and liabilities of general partners. [Repealed]

  1. Except as provided in KRS 362.403 to 362.525 or in the partnership agreement, a general partner of a limited partnership shall have all of the rights and powers, and is subject to all of the restrictions, of a partner in a partnership without limited partners.
  2. Except as provided in KRS 362.403 to 362.525 , a general partner of a limited partnership shall have all of the liabilities of a partner in a partnership without limited partners to persons other than the partnership and the other partners. Except as provided in KRS 362.403 to 362.525 or in the partnership agreement, a general partner of a limited partnership shall have all of the liabilities of a partner in a partnership without limited partners to the partnership and to the other partners.

History. Enact. Acts 1988, ch. 284, § 24, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (403 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.449. Contributions by general partner. [Repealed]

A general partner of a limited partnership may make contributions to the limited partnership and share in the profits and losses of, and in distributions from, the limited partnership as a general partner. A general partner also may make contributions to the limited partnership, and share in the profits and losses of, and distributions from, the limited partnership, as a limited partner. A person who is both a general partner and a limited partner shall have all of the rights and powers, and shall be subject to all of the restrictions and liabilities of a general partner, and, except as provided in the partnership agreement, also shall have all of the powers, and shall be subject to all of the restrictions, of a limited partner to the extent of his participation in the partnership as a limited partner.

History. Enact. Acts 1988, ch. 284, § 25, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (405 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.450. A name not to contain surname of limited partner — Exceptions. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 5) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.451. Voting rights of general partners. [Repealed]

The partnership agreement may grant to all, or certain identified general partners or a specified class or group of the general partners, the right to vote on a per capita or any other basis, separately or with all or any class or group of the limited partners or the general partners, on any matter and may make appropriate provision for the exercise of such voting rights.

History. Enact. Acts 1988, ch. 284, § 26, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (405 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.453. Form of contribution. [Repealed]

The contribution of a partner may be in cash, property, or services rendered, or a promissory note or other obligation to contribute cash or property or to perform services.

History. Enact. Acts 1988, ch. 284, § 27, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (501 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.455. Liability for contribution. [Repealed]

  1. A promise by a limited partner to contribute to the limited partnership shall not be enforceable unless it is set out in a writing signed by or on behalf of, pursuant to a power of attorney which need not be of record, the limited partner.
  2. Except as provided in the partnership agreement, a partner shall be obligated to the limited partnership to perform any enforceable promise to contribute cash or property or to perform services, even if he is unable to perform because of his death or disability or any other reason. If a partner does not make the required contribution of property or services, he shall be obligated, at the option of the limited partnership, to contribute cash equal to that portion of the value, as stated in the partnership records required to be kept pursuant to KRS 362.409 , of the stated contribution that has not been made.
  3. Unless otherwise provided in the partnership agreement, the obligation of a partner to make a contribution or return money or other property paid or distributed in violation of this section may be compromised only by consent of all the partners. Notwithstanding the compromise, a creditor of a limited partnership who extends credit or otherwise acts in reliance upon that obligation after the partner has signed a writing which reflects the obligation, and before the amendment or cancellation of the writing to reflect the compromise, may enforce the original obligation.

History. Enact. Acts 1988, ch. 284, § 28, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (502 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.457. Sharing of profits and losses. [Repealed]

The profits and losses of a limited partnership shall be allocated among the partners, and among classes of partners, in the manner provided in writing in the partnership agreement. If the partnership agreement does not so provide in writing, profits and losses shall be allocated on the basis of the value, as stated in the partnership records required to be kept pursuant to KRS 362.409 , of the contributions made by each partner to the extent they have been received by the partnership and have not been returned.

History. Enact. Acts 1988, ch. 284, § 29, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (503 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.459. Sharing of distributions. [Repealed]

Distributions of cash or other assets of a limited partnership shall be allocated among the partners, and among classes of partners, in the manner provided in writing in the partnership agreement. If the partnership agreement does not so provide in writing, distributions shall be made on the basis of the value, as stated in the partnership records required to be kept pursuant to KRS 362.409 , of the contributions made by each partner to the extent they have been received by the partnership and have not been returned.

History. Enact. Acts 1988, ch. 284, § 30, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (504 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.460. Liability for false statements in certificate. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 6) was repealed by Acts 1988, ch. 284, § 65 effective July 15, 1988.

362.461. Interim distributions. [Repealed]

Except as provided in KRS 362.473 , a partner shall be entitled to receive distributions from a limited partnership before his withdrawal from the limited partnership and before the dissolution and winding up thereof to the extent and at the times or upon the happening of the events specified in the partnership agreement.

History. Enact. Acts 1988, ch. 284, § 31, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (601 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.463. Withdrawal of general partner.

A general partner may withdraw from a limited partnership at any time by giving written notice to the other partners, but if the withdrawal violates the partnership agreement, the limited partnership may recover from the withdrawing general partner, in addition to any other remedies available to it, damages for breach of the partnership agreement and offset the damages against the amount otherwise distributable to him.

History. Enact. Acts 1988, ch. 284, § 32, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (602 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.465. Withdrawal of limited partner. [Repealed]

Unless otherwise provided in a partnership agreement, a limited partner has no right to withdraw from a limited partnership. If the partnership agreement does not specify a time a limited partner may withdraw, a limited partner may not withdraw prior to the time for the dissolution and winding up of the limited partnership without the unanimous consent of the partners.

History. Enact. Acts 1988, ch. 284, § 33, effective July 15, 1988; 1998, ch. 341, § 50, effective July 15, 1998; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (603 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.467. Distribution upon withdrawal. [Repealed]

Except as provided in KRS 362.473 , upon withdrawal, a withdrawing partner shall receive any distribution to which he is entitled in writing under the partnership agreement.

History. Enact. Acts 1988, ch. 284, § 34, effective July 15, 1988; 1998, ch. 341, § 51, effective July 15, 1998; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (604 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.469. Distribution in kind. [Repealed]

Except as provided in writing in the partnership agreement:

  1. A partner, regardless of the nature of his contribution, shall not demand or receive any distribution from a limited partnership in any form other than cash.
  2. A partner shall not be compelled to accept a distribution of any asset in kind from a limited partnership to the extent that the percentage of the asset distributed to him exceeds a percentage of that asset which is equal to the percentage in which he shares in distributions from the limited partnership.

History. Enact. Acts 1988, ch. 284, § 35, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (605 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.470. Limited partner not liable to creditors unless he takes part in control of business — Acts that do not constitute control of business. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 7; 1984, ch. 93, § 1, effective July 13, 1984) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.471. Right of distribution. [Repealed]

At the time a partner becomes entitled to receive a distribution, he shall have the status of, and be entitled to all remedies available to, a creditor of the limited partnership with respect to the distribution.

History. Enact. Acts 1988, ch. 284, § 36, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (606 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.473. Limitation of distribution.

A partner shall not receive a distribution from a limited partnership to the extent that, after giving effect to the distribution, all liabilities of the limited partnership, other than liabilities to partners on account of their partnership interests, exceed the fair value of the partnership assets.

History. Enact. Acts 1988, ch. 284, § 37, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (607 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Research References and Practice Aids

Kentucky Law Journal.

Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 (2008).

362.475. Liability upon return of contributions. [Repealed]

    1. If a partner receives the return of any part of his contribution without violation of the partnership agreement or KRS 362.403 to 362.525 , he shall be liable to the limited partnership for a period of one (1) year thereafter for the amount of the returned contribution, without interest, but only to the extent necessary to discharge the limited partnership’s liabilities to creditors who extended credit to the limited partnership during the period the contribution was held by the limited partnership. (1) (a) If a partner receives the return of any part of his contribution without violation of the partnership agreement or KRS 362.403 to 362.525 , he shall be liable to the limited partnership for a period of one (1) year thereafter for the amount of the returned contribution, without interest, but only to the extent necessary to discharge the limited partnership’s liabilities to creditors who extended credit to the limited partnership during the period the contribution was held by the limited partnership.
    2. If a partner receives the return of any part of his contribution in violation of the partnership agreement or KRS 362.403 to 362.525, he shall be liable to the limited partnership for a period of six (6) years thereafter for the amount of the contribution, without interest, wrongfully returned.
  1. A partner shall receive a return of his contribution to the extent that a distribution to him reduces his share of the fair value of the net assets of the limited partnership below the value, as set forth in the partnership records required to be kept pursuant to KRS 362.409 , of his contribution which has not been distributed to him.

History. Enact. Acts 1988, ch. 284, § 38, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (608 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.477. Nature of partnership interest. [Repealed]

A partnership interest shall be personal property.

History. Enact. Acts 1988, ch. 284, § 39, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (701 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.479. Assignment of partnership interest. [Repealed]

Unless otherwise provided in the partnership agreement:

  1. A partnership interest shall be assignable in whole or in part;
  2. An assignment of a partnership interest shall not dissolve a limited partnership or entitle the assignee to become or to exercise any rights of a partner;
  3. An assignment shall entitle the assignee to receive such distributions, and to receive such allocation of income, gain, loss, deduction or credit or similar item, to which the assignor was entitled, to the extent assigned; and
  4. A partner shall cease to be a partner upon the assignment of all of his partnership interest.

History. Enact. Acts 1988, ch. 284, § 40, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (702 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.480. Admission of additional limited partners. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 8) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.481. Rights of judgment creditor.

  1. This section provides the exclusive remedy by which the judgment creditor of a partner or the transferee of a partner may satisfy a judgment out of the judgment debtor’s transferable interest.
  2. On application to a court of competent jurisdiction by any judgment creditor of a partner or a partner’s transferee, the court may charge the transferable interest of the judgment debtor with payment of the unsatisfied amount of the judgment. To the extent so charged, the judgment creditor has only the rights of a transferee, and shall have no right to participate in the management of or to cause the dissolution of the partnership. The court may appoint a receiver of the share of the distributions due or to become due to the judgment debtor in respect of the partnership and make all other orders, directions, accounts, and inquiries the judgment debtor might have made or which the circumstances of the case may require to give effect to the charging order.
  3. A charging order constitutes a lien on and the right to receive distributions made with respect to the judgment debtor’s transferable interest. A charging order does not of itself constitute an assignment of the transferable interest.
  4. The court may order a foreclosure upon the transferable interest subject to the charging order at any time. The purchaser at the foreclosure sale has the rights of a transferee.
  5. At any time before foreclosure, an interest charged may be redeemed:
    1. By the judgment debtor;
    2. With property other than limited partnership property, by one (1) or more of the other partners; or
    3. With limited partnership property, by the limited partnership with the consent of all partners whose interests are not so charged.
  6. This section does not deprive any partner or a partner’s transferee of the benefit of any exemption laws applicable to the partner’s or transferee’s transferable interest.
  7. The partnership is not a necessary party to an application for a charging order. Service of the charging order on a partnership may be made by the court granting the charging order or as the court may otherwise direct.
  8. This section shall not apply to the enforcement of a judgment by a limited partnership against a partner of that partnership.
  9. This section shall apply to the issuance of a charging order against the interest of a partner or assignee of a partner of a foreign partnership.

HISTORY: Enact. Acts 1988, ch. 284, § 41, effective July 15, 1988; 1998, ch. 341, § 53, effective July 15, 1998; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007; repealed, reenact., and amend., Acts 2010, ch. 133, § 50, effective July 15, 2010; 2017 ch. 193, § 17, effective June 29, 2017.

Compiler’s Notes.

This section (703 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.483. Right of assignee to become limited partner. [Repealed]

  1. An assignee of a partnership interest, including an assignee of a general partner, may become a limited partner if and to the extent that:
    1. The assignor gives the assignee that right in accordance with the provisions of the partnership agreement; or
    2. All other partners consent.
  2. An assignee who has become a limited partner shall have, to the extent assigned, the rights and powers, and shall be subject to the restrictions and liabilities, of a limited partner under the partnership agreement and KRS 362.403 to 362.525 . An assignee who becomes a limited partner also shall be liable for the obligations of his assignor to make and return contributions as provided in KRS 362.455 and 362.475 . However, the assignee shall not be obligated for liabilities unknown to the assignee at the time he became a limited partner and which could not be ascertained from the partnership agreement.
  3. If an assignee of a partnership interest becomes a limited partner, the assignor shall not be released from his liability to the limited partnership under KRS 362.427 and 362.455 .

History. Enact. Acts 1988, ch. 284, § 42, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (704 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.485. Power of estate of deceased or incompetent partner. [Repealed]

If a partner who is an individual dies, or a court of competent jurisdiction adjudges a partner who is an individual to be incompetent to manage his person or his property, the partner’s executor, administrator, guardian, conservator, or other legal representative may exercise all the partner’s rights for the purpose of settling his estate or administering his property, including any power the partner had to give an assignee the right to become a limited partner. If a partner is a corporation, partnership, trust, or other entity and is dissolved or terminated, the powers of that partner may be exercised by its legal representative or successor.

History. Enact. Acts 1988, ch. 284, § 43, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (705 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Research References and Practice Aids

Kentucky Law Journal.

Booth and Rutledge, The Limited Liability Company Act: Understanding Kentucky’s New Organizational Option, 83 Ky. L.J. 1 (1994-95).

362.487. Nonjudicial dissolution. [Repealed]

A limited partnership shall be dissolved, and its affairs shall be wound up, upon the happening of the first to occur of the following events:

  1. At the time specified in the certificate of limited partnership;
  2. An event specified in writing in the partnership agreement;
  3. The written consent of all partners;
  4. An event of withdrawal of a general partner, unless at the time there is at least one (1) other general partner, and the written provisions of the partnership agreement permit the business of the limited partnership to be carried on by the remaining general partner and that partner does so; but the limited partnership shall not be dissolved and shall not be required to be wound up by reason of any event of withdrawal if, within ninety (90) days after the withdrawal, all partners agree in writing to continue the business of the limited partnership and to the appointment of one (1) or more additional general partners if necessary or desired; or
  5. The entry of a decree of judicial dissolution under KRS 362.489 .

History. Enact. Acts 1988, ch. 284, § 44, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (801 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.489. Judicial dissolution. [Repealed]

On application by or for a partner, the Circuit Court for the county in which the certificate of limited partnership is recorded may order dissolution of a limited partnership if it is not reasonably practicable to carry on the business in conformity with the partnership agreement.

History. Enact. Acts 1988, ch. 284, § 45, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (802 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.490. Rights, powers and liabilities of a general partner. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 9) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.491. Winding up. [Repealed]

Except as otherwise provided in the partnership agreement, the general partners who have not wrongfully dissolved a limited partnership or, if none, the limited partners, may wind up the limited partnership’s affairs; but the Circuit Court for the county in which the certificate of limited partnership is recorded, upon cause shown, may wind up the limited partnership affairs upon application of any partner, his legal representative or assignee.

History. Enact. Acts 1988, ch. 284, § 46, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (803 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.493. Distribution of assets. [Repealed]

Upon the winding up of a limited partnership, the assets shall be distributed as follows:

  1. To creditors, including partners who are creditors, to the extent permitted by law, in satisfaction of liabilities of the limited partnership, other than liabilities for distributions to partners under KRS 362.403 to 362.525 ;
  2. Except as otherwise provided in the partnership agreement, to partners and former partners in satisfaction of liabilities for distributions under KRS 362.403 to 362.525 ; and
  3. Except as otherwise provided in the partnership agreement, to partners first for the return of their contributions and secondly, respecting their partnership interests, in the proportions in which the partners share in distributions.

History. Enact. Acts 1988, ch. 284, § 47, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (804 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Research References and Practice Aids

Kentucky Law Journal.

Booth and Rutledge, The Limited Liability Company Act: Understanding Kentucky’s New Organizational Option, 83 Ky. L.J. 1 (1994-95).

362.495. Law governing foreign limited partnerships. [Repealed.]

History. Enact. Acts 1988, ch. 284, § 57, effective July 15, 1988; 1994, ch. 389, § 119, effective July 15, 1994 was repealed by Acts 2007, ch. 137, § 181, effective June 26, 2007 and 2010, ch. 51, § 180, effective July 15, 2010.

Compiler's Notes.

This section (Enact. Acts 1988, ch. 284, § 48, effective July 15, 1988) was repealed by Acts 2007, ch. 137, § 181, effective June 26, 2007 and 2010, ch. 51, § 180, effective July 15, 2010.

This section was previously repealed by Acts 2006, ch. 149, § 239, to be effective January 1, 2008, but that repeal was withdrawn by Acts 2007, ch. 137, § 180.

Legislative Research Commission Notes.

(7/15/2010). This section was repealed in 2010 Ky. Acts ch. 51, sec. 179, effective July 15, 2010. However, 2010 Ky. Acts ch. 51, sec. 180, provides that “The repeals set out in Section 179 of this Act are hereby expressly made retroactive to the first moment of June 26, 2007.” That language, therefore, applies to this section, and the repeal will be applied retroactively to affirm the repeal of this section contained in 2007 Ky. Acts ch. 137, sec. 181, effective June 26, 2007.

362.497. Registration of foreign limited partnership. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1988, ch. 284, § 53, effective July 15, 1988; 1994, ch. 389, § 118, effective July 15, 1994; 1998, ch. 341, § 54, effective July 15, 1998) was repealed by Acts 2007, ch. 137, § 181, effective June 26, 2007 and 2010, ch. 51, § 180, effective July 15, 2010.

Legislative Research Commission Notes.

(7/15/2010). This section was repealed in 2010 Ky. Acts ch. 51, sec. 179, effective July 15, 2010. However, 2010 Ky. Acts ch. 51, sec. 180, provides that “The repeals set out in Section 179 of this Act are hereby expressly made retroactive to the first moment of June 26, 2007.” That language, therefore, applies to this section, and the repeal will be applied retroactively to affirm the repeal of this section contained in 2007 Ky. Acts ch. 137, sec. 181, effective June 26, 2007.

362.499. Filing of application by foreign limited partnership. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1988, ch. 284, § 54, effective July 15, 1988) was repealed by Acts 2007, ch. 137, § 181, effective June 26, 2007 and 2010, ch. 51, § 180, effective July 15, 2010.

Legislative Research Commission Notes.

(7/15/2010). This section was repealed in 2010 Ky. Acts ch. 51, sec. 179, effective July 15, 2010. However, 2010 Ky. Acts ch. 51, sec. 180, provides that “The repeals set out in Section 179 of this Act are hereby expressly made retroactive to the first moment of June 26, 2007.” That language, therefore, applies to this section, and the repeal will be applied retroactively to affirm the repeal of this section contained in 2007 Ky. Acts ch. 137, sec. 181, effective June 26, 2007.

362.500. Rights of a limited partner. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 10) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.501. Name under which foreign limited partnership must register. [Repealed.]

History. Enact. Acts 1988, ch. 284, § 57, effective July 15, 1988; 1994, ch. 389, § 119, effective July 15, 1994 was repealed by Acts 2007, ch. 137, § 181, effective June 26, 2007 and 2010, ch. 51, § 180, effective July 15, 2010.

Compiler's Notes.

This section (Enact. Acts 1988, ch. 284, § 55, effective July 15, 1988) was repealed by Acts 2007, ch. 137, § 181, effective June 26, 2007 and 2010, ch. 51, § 180, effective July 15, 2010.

This section was previously repealed by Acts 2006, ch. 149, § 239, to be effective January 1, 2008, but that repeal was withdrawn by Acts 2007, ch. 137, § 180.

Legislative Research Commission Notes.

(7/15/2010). This section was repealed in 2010 Ky. Acts ch. 51, sec. 179, effective July 15, 2010. However, 2010 Ky. Acts ch. 51, sec. 180, provides that “The repeals set out in Section 179 of this Act are hereby expressly made retroactive to the first moment of June 26, 2007.” That language, therefore, applies to this section, and the repeal will be applied retroactively to affirm the repeal of this section contained in 2007 Ky. Acts ch. 137, sec. 181, effective June 26, 2007.

362.503. Changes and amendment. [Repealed.]

History. Enact. Acts 1988, ch. 284, § 57, effective July 15, 1988; 1994, ch. 389, § 119, effective July 15, 1994 was repealed by Acts 2007, ch. 137, § 181, effective June 26, 2007 and 2010, ch. 51, § 180, effective July 15, 2010.

Compiler's Notes.

This section (Enact. Acts 1988, ch. 284, § 56, effective July 15, 1988) was repealed by Acts 2007, ch. 137, § 181, effective June 26, 2007 and 2010, ch. 51, § 180, effective July 15, 2010.

This section was previously repealed by Acts 2006, ch. 149, § 239, to be effective January 1, 2008, but that repeal was withdrawn by Acts 2007, ch. 137, § 180.

Legislative Research Commission Notes.

(7/15/2010). This section was repealed in 2010 Ky. Acts ch. 51, sec. 179, effective July 15, 2010. However, 2010 Ky. Acts ch. 51, sec. 180, provides that “The repeals set out in Section 179 of this Act are hereby expressly made retroactive to the first moment of June 26, 2007.” That language, therefore, applies to this section, and the repeal will be applied retroactively to affirm the repeal of this section contained in 2007 Ky. Acts ch. 137, sec. 181, effective June 26, 2007.

362.505. Cancellation of registration of foreign limited partnership. [Repealed.]

History. Enact. Acts 1988, ch. 284, § 57, effective July 15, 1988; 1994, ch. 389, § 119, effective July 15, 1994 was repealed by Acts 2007, ch. 137, § 181, effective June 26, 2007 and 2010, ch. 51, § 180, effective July 15, 2010.

Compiler's Notes.

This section (Enact. Acts 1988, ch. 284, § 57, effective July 15, 1988) was repealed by Acts 2007, ch. 137, § 181, effective June 26, 2007 and 2010, ch. 51, § 180, effective July 15, 2010.

This section was previously repealed by Acts 2006, ch. 149, § 239, to be effective January 1, 2008, but that repeal was withdrawn by Acts 2007, ch. 137, § 180.

Legislative Research Commission Notes.

(7/15/2010). This section was repealed in 2010 Ky. Acts ch. 51, sec. 179, effective July 15, 2010. However, 2010 Ky. Acts ch. 51, sec. 180, provides that “The repeals set out in Section 179 of this Act are hereby expressly made retroactive to the first moment of June 26, 2007.” That language, therefore, applies to this section, and the repeal will be applied retroactively to affirm the repeal of this section contained in 2007 Ky. Acts ch. 137, sec. 181, effective June 26, 2007.

362.507. Registration required for access to courts — Effects of failure to register. [Repealed.]

History. Enact. Acts 1988, ch. 284, § 57, effective July 15, 1988; 1994, ch. 389, § 119, effective July 15, 1994 was repealed by Acts 2007, ch. 137, § 181, effective June 26, 2007 and 2010, ch. 51, § 180, effective July 15, 2010.

Compiler's Notes.

This section (Enact. Acts 1988, ch. 284, § 57, effective July 15, 1988; 1994, ch. 389, § 119, effective July 15, 1994) was repealed by Acts 2007, ch. 137, § 181, effective June 26, 2007 and 2010, ch. 51, § 180, effective July 15, 2010.

This section was previously repealed by Acts 2006, ch. 149, § 239, to be effective January 1, 2008, but that repeal was withdrawn by Acts 2007, ch. 137, § 180.

Legislative Research Commission Notes.

(7/15/2010). This section was repealed in 2010 Ky. Acts ch. 51, sec. 179, effective July 15, 2010. However, 2010 Ky. Acts ch. 51, sec. 180, provides that “The repeals set out in Section 179 of this Act are hereby expressly made retroactive to the first moment of June 26, 2007.” That language, therefore, applies to this section, and the repeal will be applied retroactively to affirm the repeal of this section contained in 2007 Ky. Acts ch. 137, sec. 181, effective June 26, 2007.

362.509. Action by Attorney General to restrain foreign limited partnership from transacting business. [Repealed.]

History. Enact. Acts 1988, ch. 284, § 57, effective July 15, 1988; 1994, ch. 389, § 119, effective July 15, 1994 was repealed by Acts 2007, ch. 137, § 181, effective June 26, 2007 and 2010, ch. 51, § 180, effective July 15, 2010.

Compiler's Notes.

This section (Enact. Acts 1988, ch. 284, § 58, effective July 15, 1988) was repealed by Acts 2007, ch. 137, § 181, effective June 26, 2007 and 2010, ch. 51, § 180, effective July 15, 2010.

This section was previously repealed by Acts 2006, ch. 149, § 239, to be effective January 1, 2008, but that repeal was withdrawn by Acts 2007, ch. 137, § 180.

Legislative Research Commission Notes.

(7/15/2010). This section was repealed in 2010 Ky. Acts ch. 51, sec. 179, effective July 15, 2010. However, 2010 Ky. Acts ch. 51, sec. 180, provides that “The repeals set out in Section 179 of this Act are hereby expressly made retroactive to the first moment of June 26, 2007.” That language, therefore, applies to this section, and the repeal will be applied retroactively to affirm the repeal of this section contained in 2007 Ky. Acts ch. 137, sec. 181, effective June 26, 2007.

362.510. Status of person erroneously believing himself a limited partner. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 11) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.511. Right of limited partner to bring derivative action. [Repealed]

A limited partner may bring an action in the right of a limited partnership to recover a judgment in its favor if general partners with authority to do so have refused to bring the action or if an effort to cause those general partners to bring the action is not likely to succeed.

History. Enact. Acts 1988, ch. 284, § 49, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (1001 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Research References and Practice Aids

Kentucky Law Journal.

Booth and Rutledge, The Limited Liability Company Act: Understanding Kentucky’s New Organizational Option, 83 Ky. L.J. 1 (1994-95).

362.513. Derivative action: proper plaintiff. [Repealed]

In a derivative action, the plaintiff shall be a partner at the time of bringing the action and either:

  1. At the time of the transaction of which he complains; or
  2. His status as a partner shall have devolved upon him by operation of law or pursuant to the terms of the partnership agreement from a person who was a partner at the time of the transaction.

History. Enact. Acts 1988, ch. 284, § 50, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (1002 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Research References and Practice Aids

Kentucky Law Journal.

Booth and Rutledge, The Limited Liability Company Act: Understanding Kentucky’s New Organizational Option, 83 Ky. L.J. 1 (1994-95).

362.515. Derivative action: pleadings. [Repealed]

In a derivative action, the complaint shall set forth with particularity the effort of the plaintiff to secure initiation of the action by a general partner or the reasons for not making the effort.

History. Enact. Acts 1988, ch. 284, § 51, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (1003 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Research References and Practice Aids

Kentucky Law Journal.

Booth and Rutledge, The Limited Liability Company Act: Understanding Kentucky’s New Organizational Option, 83 Ky. L.J. 1 (1994-95).

362.517. Derivative action: expenses. [Repealed]

If a derivative action is successful, in whole or in part, or if anything is received by the plaintiff as a result of a judgment, compromise, or settlement of any action or claim, the court may award the plaintiff reasonable expenses, including reasonable attorney’s fees. If anything is so received by the plaintiff, the court shall make the award of plaintiff’s expenses payable out of those proceeds and shall direct plaintiff to remit to the limited partnership the remainder. If those proceeds are insufficient to reimburse the plaintiff’s reasonable expenses, the court may direct that any award of plaintiff’s expenses, or a portion thereof, be paid by the limited partnership.

History. Enact. Acts 1988, ch. 284, § 52, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (1004 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Research References and Practice Aids

Kentucky Law Journal.

Booth and Rutledge, The Limited Liability Company Act: Understanding Kentucky’s New Organizational Option, 83 Ky. L.J. 1 (1994-95).

362.519. Construction and application of act. [Repealed]

KRS 362.403 to 362.525 shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of KRS 362.403 to 362.525 among states enacting it.

History. Enact. Acts 1988, ch. 284, § 59, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (1101 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.520. One person both general and limited partner. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 12) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.521. Effect on existing partnerships.

  1. A limited partnership formed under any statute of this state prior to the adoption of KRS 362.403 to 362.525 , until or unless it becomes a limited partnership under KRS 362.2-102 to 362.2-977 , shall continue to be governed by the provisions of the statute under which it was formed.
  2. A limited partnership formed under any statute of this state prior to the adoption of KRS 362.2-102 to 362.2-977 may elect to become subject to KRS 362.2-102 to 362.2-977 upon the filing of an amended and restated certificate of limited partnership which complies with the provisions of KRS 362.2-201 .
  3. Upon the occurrence of any event which would require the filing of a certificate of amendment by a limited partnership under KRS 362.403 to 362.525 or under the statute under which the limited partnership was formed, the limited partnership shall file an amended and restated certificate of limited partnership which complies with the provisions of KRS 362.2-201 .
  4. A limited partnership formed under any statute of this state prior to the adoption of KRS 362.403 to 362.525 shall not be required to change its name to include the word “Limited” or its abbreviation “Ltd.” before the time it becomes subject to KRS 362.2-102 to 362.2-977 .

History. Enact. Acts 1988, ch. 284, § 60, effective July 15, 1988; 2006, ch. 149, § 238, effective July 12, 2006; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (1104 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

This section is set out above to reflect corrections to references throughout the section due to the renumbering of KRS 362.2-1207 as 362.2-977 by the state reviser effective in 2013.

NOTES TO DECISIONS

Cited:

Lach v. Man O’ War, LLC, 256 S.W.3d 563, 2008 Ky. LEXIS 66 ( Ky. 2008 ).

362.523. Applicability of Uniform Partnership Act. [Repealed]

In any case not provided for in KRS 362.401 to 362.525 , the provisions of KRS 362.155 to 362.360 and the rules of law and equity shall govern.

History. Enact. Acts 1988, ch. 284, § 61, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (1105 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.525. Effect of repeal of prior statute. [Repealed]

The repeal of any statutory provision by 1988 Acts Ch. 284, sec. 65, shall not impair, or otherwise affect, the organization or the continued existence of a limited partnership existing on July 15, 1988, nor does the repeal impair any contract or affect any right accrued before July 15, 1988.

History. Enact. Acts 1988, ch. 284, § 62, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (1106 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

Cited:

Lach v. Man O’ War, LLC, 256 S.W.3d 563, 2008 Ky. LEXIS 66 ( Ky. 2008 ).

362.527. Short title. [Repealed]

KRS 362.401 to 362.525 may be cited as the “Kentucky Revised Uniform Limited Partnership Act.”

History. Enact. Acts 1988, ch. 284, § 63, effective July 15, 1988; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

This section (1102 RULPA) is derived from the 1976 RULPA, with 1985 amendments, drafted and approved by the National Conference of Commissioners on Uniform State Laws.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.530. Loans and other business transactions with limited partner. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 13 effective July 15, 1986) was repealed by Acts 1988, ch. 284, § 65 effective July 15, 1988.

362.531. Merger of domestic limited partnerships with domestic or foreign limited partnerships, limited liability companies, or corporations. [Repealed]

  1. One (1) or more domestic limited partnerships may merge pursuant to a written plan of merger described in subsection (2) of this section with one (1) or more domestic or foreign limited partnerships, limited liability companies, or corporations if:
    1. The merger is not prohibited by the partnership agreement of any domestic limited partnership that is a party to the merger, and each domestic limited partnership that is a party to the merger, approves the plan of merger in accordance with this chapter and complies with the applicable terms of its partnership agreement in effecting the merger;
    2. Each domestic limited liability company, as a party to the merger, complies with the applicable merger provisions of the Kentucky Revised Statutes;
    3. Each domestic corporation, as a party to the merger, complies with the applicable merger provisions of KRS Chapter 271B;
    4. The merger is permitted by the laws of the state or country under which each foreign limited partnership, foreign limited liability company, or foreign corporation party to the merger is formed, organized, or incorporated, and each foreign limited partnership, limited liability company, or corporation complies with those laws in effecting the merger; and
  2. The written plan of merger shall set forth:
    1. The name of each constituent business entity that is a party to the merger and the name of the surviving business entity into which each constituent business entity proposes to merge;
    2. The terms and conditions of the proposed merger, including but not limited to, a statement which sets forth whether limited liability is retained by the surviving business entity;
    3. The manner and basis of converting the partnership interests in each limited partnership and the interests in each business entity that is a party to the merger into interests, shares, or other securities or obligations, as the case may be, of the surviving entity, or of any other business entity, or, in whole or in part, into cash or other property;
    4. The amendments to the articles of organization of a limited liability company, or articles of incorporation of a corporation or certificate of limited partnership, as the case may be, of the surviving business entity as are desired to be effected by the merger, or that no changes are desired;
    5. Other provisions relating to the proposed merger that are deemed necessary or desirable.

History. Enact. Acts 1994, ch. 389, § 112, effective July 15, 1994; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

NOTES TO DECISIONS

Cited:

Lach v. Man O’ War, LLC, 256 S.W.3d 563, 2008 Ky. LEXIS 66 ( Ky. 2008 ).

Research References and Practice Aids

Northern Kentucky Law Review.

Mellen, Myre and Lee, Limited Liability Companies and Registered Limited Liability Partnerships in Kentucky: A Practical Analysis, 22 N. Ky. L. Rev. 229 (1995).

362.536. Domestic limited partnership’s approval of plan of merger — Amendment — Abandonment. [Repealed]

  1. Each domestic limited partnership that is to be a party to a proposed merger shall approve the proposed merger, unless the partnership agreement of that limited partnership provides otherwise, by the unanimous vote of the partners of the partnership.
  2. A plan of merger may provide for the manner, if any, in which the plan may be amended at any time before the filing of the articles of merger with the Secretary of State.
  3. Unless the domestic limited partnership’s partnership agreement or the plan of merger, once authorized, provides otherwise, the merger may be abandoned at any time before the filing of the articles of merger with the Secretary of State by the affirmative vote of all partners of the domestic limited partnership (subject to any contractual rights) in accordance with the procedure set forth in the plan of merger, if any.

History. Enact. Acts 1994, ch. 389, § 113, effective July 15, 1994; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.540. Relation of limited partners among themselves. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 14 effective June 18, 1970) was repealed by Acts 1988, ch. 284, § 65 effective July 15, 1988.

362.541. Articles of merger. [Repealed]

  1. After a plan of merger is approved by each domestic or foreign limited partnership, limited liability company, or corporation that is a party to the merger, the surviving domestic or foreign limited partnership, limited liability company, or corporation shall deliver to the Secretary of State for filing articles of merger duly executed by each party to the merger setting forth:
    1. The name of jurisdiction of formation or organization of each constituent business entity which is to merge;
    2. The plan of merger;
    3. The name of the surviving business entity;
    4. A statement that the plan of merger was duly authorized and approved by each constituent business entity in accordance with the laws applicable to such business entity; and
    5. If the surviving entity is not a business entity organized under the laws of this Commonwealth, a statement that the surviving business entity:
      1. Agrees that it may be served with process in this Commonwealth in any proceeding for enforcement of any obligation of any constituent business entity party to the merger that was organized under the laws of this Commonwealth, as well as for enforcement of any obligation of the surviving business entity arising from the merger; and
      2. Appoints the Secretary of State as its agent for service of process in any such proceedings. The surviving entity shall specify the address to which a copy of process shall be mailed to it by the Secretary of State.
  2. The merger shall take effect on the later of the date of the filing of the articles of merger or the date set forth in the articles of merger, in which case it shall not be later than ninety (90) days after the date on which the articles of merger were filed.
  3. Upon the merger taking effect, if the surviving entity in the merger is a foreign limited partnership or limited liability company, the entity shall be deemed:
    1. To appoint the Secretary of State as its agent for service of process in a proceeding to enforce any obligation or rights of dissenting shareholders of each domestic corporation party to the merger;
    2. To agree that it will promptly pay to the dissenting shareholders of each domestic corporation party to the merger the amount, if any, to which they are entitled under Subtitle 13 of KRS 271B; and
    3. To agree, to the extent required by Section 200 of the Constitution, that the courts of this Commonwealth shall retain jurisdiction over that part of the corporate property within the limits of this Commonwealth in all matters which may arise as if the transaction had not taken place.
  4. The articles of merger filed by the surviving entity in accordance with this section shall also be deemed to have been filed for any domestic limited liability company party to the merger in accordance with the applicable provisions of the Kentucky Revised Statutes and for any domestic corporation party to the merger in accordance with KRS Chapter 271B.
  5. The filing of articles of merger shall act as a certificate of cancellation as described in KRS 362.419 for a domestic limited partnership that is not the surviving entity of the merger and that partnership’s certificate of limited partnership shall be canceled upon the effective date of the articles of merger.
  6. The Secretary of State shall receive a fee of fifty dollars ($50) for the filing of each articles of merger.

History. Enact. Acts 1994, ch. 389, § 114, effective July 15, 1994; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.546. Effect of merger. [Repealed]

When a merger takes effect:

  1. The separate existence of every domestic limited partnership that is a party to the merger except the surviving domestic limited partnership, if any, shall cease;
  2. The title to all real estate and other property owned by each domestic limited partnership that is a party to the merger shall be vested in the surviving entity without reversion or impairment;
  3. The surviving entity shall be responsible for all liabilities of each domestic limited partnership that is a party to the merger;
  4. A proceeding pending by or against any domestic limited partnership party to the merger may be continued as if the merger had not occurred, or the surviving entity may be substituted in the proceeding for the domestic limited partnership whose existence ceased;
  5. If a domestic limited partnership is the surviving entity of the merger, the certificate of limited partnership and partnership agreement of that limited partnership shall be amended to the extent provided in the plan of merger; and
  6. The partnership interests of every domestic limited partnership that is a party to the merger that are to be converted into partnership interests, membership interests, shares or other securities or obligations of the surviving limited partnership, limited liability company or corporation or into cash or other property, in whole or in part, shall be so converted and the former holders of such partnership interests shall be entitled only to the rights provided in the plan of merger.

History. Enact. Acts 1994, ch. 389, § 115, effective July 15, 1994; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.550. Compensation of limited partner. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 15 effective June 18, 1970) was repealed by Acts 1988, ch. 284, § 65 effective July 15, 1988.

Registered Limited Liability Partnerships

362.555. Registered limited liability partnership — Manner of registration.

  1. To become and to continue as a registered limited liability partnership, a partnership that is not a limited partnership shall file with the Secretary of State a statement or a renewal statement, as the case may be, that satisfies the requirements of KRS 14A.2-010 to 14A.2-150 stating the name of the partnership that satisfies the requirements of KRS 14A.3-010 ; the address of its principal office; the number of partners; the names of the partners; a brief statement of the business in which the partnership engages; and that the partnership registers its status or renews its status, as the case may be, as a registered limited liability partnership.
  2. The statement or renewal statement shall be executed by a majority in interest of the partners or by one (1) or more partners authorized to execute a statement or renewal statement.
  3. The statement or renewal statement shall be accompanied by a fee of two hundred dollars ($200).
  4. The Secretary of State shall register as a registered limited liability partnership, and shall renew the registration of any registered limited liability partnership, any partnership that submits a completed statement or renewal statement with the required fee.
  5. Registration shall be effective for one (1) year after the date a statement is filed, unless voluntarily withdrawn by filing with the Secretary of State a written withdrawal notice executed by a majority in interest of the partners or by one (1) or more partners authorized to execute a withdrawal notice. Registration, whether pursuant to an original statement or a renewal statement, as a registered limited liability partnership shall be renewed if, during the sixty (60) day period preceding the date the statement or renewal statement otherwise would have expired, the partnership files with the Secretary of State a renewal statement. Registration pursuant to a renewal statement shall expire one (1) year after the date the registration would have expired if the last renewal of the registration had not occurred.
  6. The status of a partnership as a registered limited liability partnership shall not be affected by changes made in the information stated in the statement or renewal statement after the filing of the statement or renewal statement.
  7. The Secretary of State may provide forms for use under this section.

History. Enact. Acts 1994, ch. 389, § 102, effective July 15, 1994; 1998, ch. 341, § 55, effective July 15, 1998; 2007, ch. 137, § 145, effective June 26, 2007; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007; repealed and reenact., Acts 2010, ch. 51, § 145, effective July 15, 2010; 2010, ch. 151, § 112, effective January 1, 2011.

Legislative Research Commission Notes.

(1/1/2011). This section was amended by 2010 Ky. Acts ch. 151, and repealed and reenacted by 2010 Ky. Acts ch. 51. Pursuant to Section 184 of Acts ch. 51, it was the intent of the General Assembly that the repeal and reenactment not serve to void the amendment, and these Acts do not appear to be in conflict, therefore, they have been codified together.

(7/15/2010). 2010 Ky. Acts ch. 51, sec. 183, provides, “The specific textual provisions of Sections 1 to 178 of this Act which reflect amendments made to those sections by 2007 Ky. Acts ch. 137 shall be deemed effective as of June 26, 2007, and those provisions are hereby made expressly retroactive to that date, with the remainder of the text of those sections being unaffected by the provisions of this section.”

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Registered Limited Liability Partnerships In Kentucky, Vol. 60, No. 1, Winter 1996, Ky. Bench & Bar 39.

Vestal & Rutledge, Kentucky’s New Partnership and Limited Partnership Acts: An Introduction (Part 1)., Vol. 71, No. 1, January 2007, Ky. Bench & Bar 24.

Rutledge, Recent Amendments to Kentucky Business Entity Laws, Vol. 71, No. 5, Sept. 2007, Ky. Bench & Bar 25.

Kentucky Law Journal.

Rutledge & Vestal, Making the Obvious Choice Malpractice: LLPs and the Lawyer Liability Time Bomb in Kentucky’s 2005 Tax Modernization., 94 Ky. L.J. 17 (2005/2006).

Northern Kentucky Law Review.

Mellen, Myre and Lee, Limited Liability Companies and Registered Limited Liability Partnerships in Kentucky: A Practical Analysis, 22 N. Ky. L. Rev. 229 (1995).

362.560. Withdrawal or reduction of limited partner’s contribution. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 16 effective June 18, 1970) was repealed by Acts 1988, ch. 284, § 65 effective July 15, 1988.

362.565. Name of registered limited liability partnership. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1994, ch. 389, § 103; repeal by 2006, ch. 149, § 239, withdrawn by 2007, ch. 137, § 180) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.3-010 .

362.570. Liability of limited partner to partnership. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 17 effective June 18, 1970) was repealed by Acts 1988, ch. 284, § 65 effective July 15, 1988.

362.575. Intent and policy of Commonwealth regarding registered limited liability partnerships.

  1. A registered limited liability partnership, formed and existing under KRS 362.155 , 362.175 , 362.190 , 362.220 , 362.235 , 362.315 , 362.325 , 362.345 , and KRS 362.555 to 362.605 , may conduct its business, carry on its operations, and have and exercise the powers granted by KRS 362.155 , 362.175 , 362.190 , 362.220 , 362.235 , 362.315 , 362.325 , 362.345 , and KRS 362.555 to 362.605 in any state, territory, district, or possession of the United States or in any foreign country.
  2. It is the intent of the General Assembly that the legal existence of any registered limited liability partnership formed and existing under KRS 362.155 , 362.175 , 362.190 , 362.220 , 362.235 , 362.315 , 362.325 , 362.345 , and KRS 362.555 to 362.605 shall be recognized outside the boundaries of this Commonwealth and that the laws of this Commonwealth governing any registered limited liability partnership transacting business outside this Commonwealth shall be granted the protection of full faith and credit under the Constitution of the United States.
  3. It is the policy of this Commonwealth that the internal affairs of registered limited liability partnerships, formed and existing under KRS 362.155 , 362.175 , 362.190 , 362.220 , 362.235 , 362.315 , 362.325 , 362.345 , and KRS 362.555 to 362.605 , including the liability of partners for debts, obligations, and liabilities chargeable to partnerships, shall be subject to and governed by the laws of this Commonwealth.
  4. Subject to any statutes for the regulation and control of specific types of business limited liability partnerships, formed and existing under the laws of another state or jurisdiction, may engage in any business in this Commonwealth.
  5. It is the policy of this Commonwealth that the internal affairs of partnerships, including limited liability partnerships, formed and existing under the laws of another state or jurisdiction, including the liability of partners for debts, obligations, and liabilities chargeable to partnerships, shall be subject to and governed by the laws of that other state or jurisdiction.

History. Enact. Acts 1994, ch. 389, § 104, effective July 15, 1994; 2007, ch. 137, § 170, effective June 26, 2007; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007; repealed and reenact., Acts 2010, ch. 51, § 170, effective July 15, 2010.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Legislative Research Commission Notes.

(7/15/2010). 2010 Ky. Acts ch. 51, sec. 183, provides, “The specific textual provisions of Sections 1 to 178 of this Act which reflect amendments made to those sections by 2007 Ky. Acts ch. 137 shall be deemed effective as of June 26, 2007, and those provisions are hereby made expressly retroactive to that date, with the remainder of the text of those sections being unaffected by the provisions of this section.”

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Registered Limited Liability Partnerships In Kentucky, Vol. 60, No. 1, Winter 1996, Ky. Bench & Bar 39.

Northern Kentucky Law Review.

Mellen, Myre and Lee, Limited Liability Companies and Registered Limited Liability Partnerships in Kentucky: A Practical Analysis, 22 N. Ky. L. Rev. 229 (1995).

362.580. Nature of limited partner’s interest in partnership. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 18 effective June 18, 1970) was repealed by Acts 1988, ch. 284, § 65 effective July 15, 1988.

362.585. Registration of foreign limited liability partnership — Effect of withdrawal — Injunctive action by Attorney General. [Repealed.]

Legislative Research Commission Notes.

(7/15/2010). This section was repealed in 2010 Ky. Acts ch. 51, sec. 179, effective July 15, 2010. However, 2010 Ky. Acts ch. 51, sec. 180, provides that “The repeals set out in Section 179 of this Act are hereby expressly made retroactive to the first moment of June 26, 2007.” That language, therefore, applies to this section, and the repeal will be applied retroactively to affirm the repeal of this section contained in 2007 Ky. Acts ch. 137, sec. 181, effective June 26, 2007.

362.590. Assignments of limited partner’s interest. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 19 effective July 15, 1986) was repealed by Acts 1988, ch. 284, § 65 effective July 15, 1988.

362.595. Result of failure to comply with KRS 362.555 — Service of process.

  1. The failure of a registered limited liability partnership to comply with any requirements of KRS 362.555 shall not impair the validity of any contract, deed, mortgage, security interest, lien, or act of the registered limited liability partnership or prevent the registered limited liability partnership from defending any action, suit, or proceeding in any court of this Commonwealth.
  2. Subject to subsection (3) of this section, the protection from liability of a partner of a registered limited liability partnership under KRS 362.220(2) shall not be altered by reason of the failure of the partnership to comply with any requirements of KRS 362.555 .
  3. A partner in a partnership which has previously filed a statement under KRS 362.555 , and which has failed to comply with the renewal statement requirements of KRS 362.555 , shall not be entitled to protection from liability under KRS 362.220(2) in any action or proceeding brought by any person who did business with the partnership during the period it failed to comply and who did not at that time have actual knowledge that it was a limited liability partnership.

History. Enact. Acts 1994, ch. 389, § 106, effective July 15, 1994; 2007, ch. 137, § 146, effective June 26, 2007; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007; repeal and reenact., Acts 2010, ch. 51, § 146, effective July 15, 2010.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

Legislative Research Commission Notes.

(7/15/2010). 2010 Ky. Acts ch. 51, sec. 183, provides, “The specific textual provisions of Sections 1 to 178 of this Act which reflect amendments made to those sections by 2007 Ky. Acts ch. 137 shall be deemed effective as of June 26, 2007, and those provisions are hereby made expressly retroactive to that date, with the remainder of the text of those sections being unaffected by the provisions of this section.”

Research References and Practice Aids

Kentucky Bench & Bar.

Mellen, Registered Limited Liability Partnerships In Kentucky, Vol. 60, No. 1, Winter 1996, Ky. Bench & Bar 39.

Northern Kentucky Law Review.

Mellen, Myre and Lee, Limited Liability Companies and Registered Limited Liability Partnerships in Kentucky: A Practical Analysis, 22 N. Ky. L. Rev. 229 (1995).

362.600. Effect of retirement, death or insanity of a general partner. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 20 effective June 18, 1970) was repealed by Acts 1988, ch. 284, § 65 effective July 15, 1988.

362.601. Circumstances preventing distribution — Liability for unlawful distribution.

  1. A registered limited liability partnership shall not make a distribution to the extent that at the time of the distribution and after giving effect to the distribution, all liabilities for the registered limited liability partnership exceed the fair value of the assets of the registered limited liability partnership, other than liabilities to partners or transferees on account of their transferable interest in liabilities for which the recourse of creditors is limited to specified property. The fair value of property that is subject to a liability for which the recourse of partners is limited shall be included in the assets of the registered limited liability partnership only to the extent that the fair value of that property exceeds that liability.
  2. A partner or transferee of a registered limited liability partnership who receives a distribution in violation of subsection (1) of this section is liable to the partnership for the amount of that distribution. A proceeding under this section shall be barred unless it is commenced within two (2) years after the date on which the distribution is paid to the partner or transferee.
  3. This section does not affect any obligation or liability of a partner or transferee of a registered limited liability partnership under an agreement or other applicable law for the amount of a distribution.
  4. For purposes of this section, the term “distribution” does not include amounts constituting reasonable compensation for present or past services or reasonable payments made in the ordinary course of business pursuant to a bona fide retirement plan or other benefits program.

History. Enact. Acts 2010, ch. 133, § 4, effective July 15, 2010.

362.605. Suits by and against partnerships — Effect of judgments.

  1. A general partnership may sue or be sued in its real name. A judgment by or against a partnership shall bind the partnership as if it were a legal entity. A judgment against a partnership shall not bind a partner in his individual capacity except to the extent permitted by KRS 362.220 .
  2. A limited partnership may sue or be sued in its real name. A judgment by or against a limited partnership shall bind the limited partnership as a legal entity. Judgment against a limited partnership shall not bind a general partner in his, her or its individual capacity except to the extent permitted by KRS 362.447 and 362.220 , and only if the general partner is named as a party in the action.
  3. The real name of a partnership or limited partnership shall be determined in accordance with KRS 365.015 .

History. Enact. Acts 1994, ch. 389, § 107, effective July 15, 1994; repeal by 2006, ch. 149, § 239, effective January 1, 2008, withdrawn by 2007, ch. 137, § 180, effective June 26, 2007; 2015 ch. 34, § 55, effective June 24, 2015.

Compiler’s Notes.

2006 Ky. Acts, ch. 149, § 239, provided for the repeal of this section effective January 1, 2008. However, that repeal was withdrawn by 2007 Ky. Acts ch. 137, § 180, effective June 26, 2007.

362.610. Death of limited partner. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 21) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.620. Rights of creditors of limited partner. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 22) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.630. Distribution of assets. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 23) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.640. When certificate shall be cancelled or amended. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 24) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.650. Requirements for amendment and for cancellation of certificate — Filing fee. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 25; 1978, ch. 384, § 491, effective June 17, 1978; 1986, ch. 342, § 3, effective July 15, 1986) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

Legislative Research Commission Note.

This section was amended by the 1988 General Assembly and also repealed. Pursuant to KRS 446.260 , the repeal prevails.

362.660. Parties to actions. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 26) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.670. Name of act. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 27) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.680. Rules of construction. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 28) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.690. Rules for cases not provided for in KRS 362.410 to 362.700. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 29) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.700. Provisions for existing limited partnerships. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 97, § 30) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

362.710. Application of KRS 365.015. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1986, ch. 342, § 4, effective July 15, 1986) was repealed by Acts 1988, ch. 284, § 65, effective July 15, 1988.

Subchapter 1. Kentucky Revised Uniform Partnership Act (2006)

362.1-1001. Statement of qualification. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.1-931 , effective 2013.

362.1-1002. Name of limited liability partnership. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 70) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.3-010 .

362.1-1003. Circumstances preventing distribution — Liability for unlawful distribution. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.1-932 , effective 2013.

General Provisions

362.1-101. Definitions for subchapter.

As used in this subchapter, unless the context otherwise requires:

  1. “Business” includes every trade, occupation, and profession;
  2. “Debtor in bankruptcy” means a person who is the subject of:
    1. An order for relief under Title 11 of the United States Code or a comparable order under a successor statute of general application; or
    2. A comparable order under federal, state, or foreign law governing insolvency;
  3. “Deliver” or “delivery” means any method of delivery used in conventional commercial practice, including delivery by hand, mail, commercial delivery, and electronic transmission;
  4. “Distribution” means a transfer of money or other property from a partnership to a partner in the partner’s capacity as a partner or to the transferee of all or a part of a partner’s transferable interest;
  5. “Electronic transmission” or “electronically transmitted” means any process of communication not directly involving the physical transfer of paper that is suitable for the retention, retrieval, and reproduction of information by the recipient;
  6. “Entity” means a corporation, foreign corporation, not-for-profit corporation, profit or not-for-profit unincorporated association, business or statutory trust, estate, partnership, limited partnership, trust, two (2) or more persons having a joint or common economic interest, and a state, national, or foreign government;
  7. “Foreign limited liability partnership” means a partnership that:
    1. Is formed under laws other than the laws of this Commonwealth; and
    2. Has the status of a limited liability partnership under those laws;
  8. “Limited liability partnership” means a partnership that has filed a statement of qualification under KRS 362.1-931 and does not have a similar statement in effect in any other jurisdiction;
  9. “Name of record with the Secretary of State” means any real, fictitious, reserved, registered, or assumed name of an entity;
  10. “Partnership” means an association of two (2) or more persons to carry on as co-owners a business for profit formed under KRS 362.1-202 , predecessor law, or comparable law of another jurisdiction;
  11. “Partnership agreement” means the agreement, whether written, oral, or implied, among the partners concerning the partnership, including amendments to the partnership agreement;
  12. “Partnership at will” means a partnership in which the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking;
  13. “Partnership interest” or “partner’s interest in the partnership” means all of a partner’s interests in the partnership, including the partner’s transferable interest and all management and other rights;
  14. “Person” means an individual, an entity, or any other legal or commercial entity;
  15. “Professional partnership” means a partnership organized under this subchapter or the laws of another state or foreign country for purposes that include, but are not limited to, the providing of one (1) or more professional services. Except as otherwise expressly provided in this subchapter, all provisions of this subchapter governing partnerships shall be applicable to professional partnerships;
  16. “Professional services” mean the personal services rendered by physicians, osteopaths, optometrists, podiatrists, chiropractors, dentists, nurses, pharmacists, psychologists, occupational therapists, veterinarians, engineers, architects, landscape architects, certified public accountants, public accountants, physical therapists, and attorneys;
  17. “Property” means all property, real, personal, or mixed, tangible or intangible, or any interest therein;
  18. “Regulatory board” means the agency that is charged by law with the licensing and regulation of the practice of the profession which the professional partnership is organized to provide;
  19. “Sign” or “signature” includes any manual, facsimile, conformed, or electronic signature;
  20. “State” means a state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any territory or insular possession subject to the jurisdiction of the United States;
  21. “Statement” means a statement of partnership authority under KRS 362.1-303 , a statement of denial under KRS 362.1-304 , a statement of dissociation under KRS 362.1-704 , a statement of dissolution under KRS 362.1-805 , a statement of merger under KRS 362.1-907 , a statement of qualification under KRS 362.1-931 , a statement of foreign qualification under KRS 362.1-951 , or an amendment or cancellation of any of the foregoing; and
  22. “Transfer” includes an assignment, conveyance, lease, mortgage, deed, and encumbrance.

History. Enact. Acts 2006, ch. 149, § 1, effective July 12, 2006.

Compiler’s Notes.

This section is set out above to reflect the renumbering of KRS 362.1-1001 to 362.1-931 and 362.1-1102 to 362.1-951 by the state reviser effective in 2013.

Research References and Practice Aids

Kentucky Bench & Bar.

Rutledge, Recent Amendments to Kentucky Business Entity Laws, Vol. 71, No. 5, Sept. 2007, Ky. Bench & Bar 25.

Kentucky Law Journal.

Campbell, Bumping Along the Bottom: Abandoned Principles and Failed Fiduciary Standards in Uniform Partnership and LLC Statutes, 96 Ky. L.J. 163 (2007).

Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 (2008).

362.1-102. Knowledge and notice.

  1. A person knows a fact if the person has actual knowledge of it.
  2. A person has notice of a fact if the person:
    1. Knows of it;
    2. Has received a notification of it;
    3. Has reason to know it exists from all of the facts known to the person at the time in question; or
    4. By reason of a filing or recording to the extent provided by and subject to the limitations set forth in KRS 362.1-303 (4) or (5), 362.1-704 (3), or 362.1-805 (3).
  3. A person notifies or gives a notification to another by taking steps reasonably calculated to inform the other person in ordinary course, whether or not the other person obtains knowledge of it.
  4. A person receives a notification when the notification:
    1. Comes to the person’s attention; or
    2. Is duly delivered at the person’s place of business or at any other place held out by the person as a place for receiving communications.
  5. Except as otherwise provided in subsection (6) of this section, a person other than an individual knows, has notice, or receives a notification of a fact for purposes of a particular transaction when the individual conducting the transaction knows, has notice, or receives a notification of the fact, or in any event when the fact would have been brought to the individual’s attention if the person had exercised reasonable diligence. The person exercises reasonable diligence if it maintains reasonable routines for communicating significant information to the individual conducting the transaction and there is reasonable compliance with the routines. Reasonable diligence does not require an individual acting for the person to communicate information unless the communication is part of the individual’s regular duties or the individual has reason to know of the transaction and that the transaction would be materially affected by the information.
  6. A partner’s knowledge, notice, or receipt of a notification of a fact relating to the partnership is effective immediately as knowledge by, notice to, or receipt of a notification by the partnership, except in the case of a fraud on the partnership committed by or with the consent of that partner.

History. Enact. Acts 2006, ch. 149, § 2, effective July 12, 2006.

362.1-103. Effect of partnership agreement — Nonwaivable provisions.

  1. Except as otherwise provided in subsection (2) of this section, relations among the partners and between the partners and the partnership are governed by the partnership agreement. To the extent the partnership agreement does not otherwise provide, this subchapter governs relations among the partners and between the partners and the partnership.
  2. The partnership agreement shall not:
    1. Vary the rights and duties under KRS 362.1-105 except to eliminate the duty to provide copies of statements to all of the partners;
    2. Unreasonably restrict the right of access to books and records under KRS 362.1-403 (2) or unreasonably restrict the right to information KRS 362.1-403 (3);
    3. Eliminate the duty of loyalty under KRS 362.1-404 (2) or 362.1-603 (2)(c), but:
      1. The partnership agreement may identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable; or
      2. All of the partners or a number or percentage specified in the partnership agreement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty;
    4. Unreasonably reduce the duty of care under KRS 362.1-404 (3) or 362.1-603 (2)(c);
    5. Eliminate the obligation of good faith and fair dealing under KRS 362.1-404, but the partnership agreement may prescribe the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable;
    6. Vary the power to dissociate as a partner under KRS 362.1-602 (1), except to require the notice under KRS 362.1-601 (1) to be in writing;
    7. Vary the right of a partner or the partnership to seek a partner’s expulsion by judicial determination or vary the right of a court to expel a partner in the events specified in KRS 362.1-601 (5);
    8. Vary the requirement to wind up the partnership business in cases specified in KRS 362.1-801 (4), (5), or (6); or
    9. Vary the law applicable to a limited liability partnership under KRS 362.1-106 (2); or
    10. Vary the liabilities and remedies under KRS 362.1-405 to a greater extent than variations are in fact made under this section in the substantive rights in the partnership agreement giving rise to the partner claims at issue.
  3. If a written partnership agreement contains a provision to the effect that any amendment to the partnership agreement must be in writing and adopted in accordance with the provisions of the partnership agreement, that provision shall be enforceable in accordance with its terms, and any agreement among the partners concerning the partnership which is not in writing and adopted in accordance with the provisions of the partnership agreement shall not be part of the partnership agreement.
  4. A partnership agreement may provide that the interest of any partner who fails to make any contribution that the partner is obligated to make or who otherwise violates an obligation undertaken in the partnership agreement shall be subject to specified penalties for, or specified consequences of, such failure. Such penalty or consequence may take the form of reducing or eliminating the defaulting partner’s proportionate interest in the partnership, subordinating the partner’s interest to that of nondefaulting partners, a forced sale of that interest, forfeiture of his or her interest, the lending by other partners of the amount necessary to meet the defaulting partner’s commitment, a fixing of the value of his or her interest by appraisal or by formula and redemption or sale of the interest in the partnership at such value, or other penalty or consequence.
  5. A partnership agreement may provide rights to any person, including a person who is not a partner or not otherwise a party to the partnership agreement, to the extent set forth therein.
  6. No partner or other person shall have a vested property right resulting from any provision of a partnership agreement which may not be modified by its amendment or as otherwise permitted by law.

History. Enact. Acts 2006, ch. 149, § 3, effective July 12, 2006; 2010, ch. 133, § 51, effective July 15, 2010.

Research References and Practice Aids

Northern Kentucky Law Review.

Kentucky Survey Issue: Article: The 2010 Amendments to Kentucky’s Business Entity Laws, 38 N. Ky. L. Rev. 383 (2011).

362.1-104. Supplemental principles of law.

  1. Unless displaced by particular provisions of this subchapter, the principles of law and equity supplement this subchapter.
  2. If an obligation to pay interest arises under this subchapter and the rate is not specified, then the rate is that specified in KRS 360.010 .
  3. Subject to KRS 362.1-103 (2), it shall be the policy of the Commonwealth in this subchapter to give maximum effect to the principles of freedom of contract and the enforceability of partnership agreements. Although this subchapter is in derogation of common law, the rules of construction that require strict construction of statutes that are in derogation of common law shall not apply to its provisions. Except as otherwise expressly provided herein, this subchapter shall not be construed to impair the obligation of any contract existing when this subchapter, or any amendment thereto, becomes effective, nor to affect any action or proceeding begun, or right accrued before this subchapter or any amendment thereto takes effect.
  4. A professional partnership shall be governed by the laws, whether statutory or common law, applicable to other partnerships. Except for the provisions of this subchapter concerning the personal liability of partners, employees, and agents of a partnership, nothing in this subchapter shall restrict, limit, or expand in any manner the authority and duty of any regulatory board to:
    1. License individual persons providing professional services; and
    2. Regulate the practice of persons providing professional services which are within the jurisdiction of the regulatory board, even though the persons are partners, employees, or agents of a professional partnership, or provide professional services through a professional partnership, including the establishment of regulations concerning:
      1. The qualifications of partners of a professional partnership;
      2. The transfer of partnership interests in a professional partnership; or
      3. The provision of one (1) or more professional services through a professional partnership.
  5. Action validly taken pursuant to a provision of this chapter shall not be deemed invalid solely because it is identical or similar in substance to an action that could have been taken pursuant to some other provision of this chapter but fails to satisfy one (1) or more requirements prescribed by such other provision.

History. Enact. Acts 2006, ch. 149, § 4, effective July 12, 2006; 2010, ch. 133, § 52, effective July 15, 2010.

362.1-105. Execution, filing, and recording of statements.

  1. A statement may be filed in the office of Secretary of State. A statement shall satisfy the requirements of KRS 14A.2-010 to 14A.2-150 . A filed statement has the effect provided in this subchapter with respect to partnership property located in or transactions that occur in this Commonwealth.
  2. A certified copy of a statement that has been filed in the office of the Secretary of State may be filed with and recorded by any county clerk to which the statement is presented for filing and recording.
  3. A statement filed by a partnership shall be executed by at least two (2) partners. Other statements shall be executed by a partner or other person authorized by this subchapter.
  4. A person authorized by this subchapter to file a statement may amend or cancel the statement by filing an amendment or cancellation that names the partnership, identifies the statement, and states the substance of the amendment or cancellation. No amendment or cancellation shall be made with respect to a statement of merger or statement of dissolution after filing with the Secretary of State.
  5. A person authorized by this subchapter to file a statement may correct a filed statement if the statement contains information that was incorrect as of the time of the original filing or if the statement was defectively executed, attested, sealed, verified, or acknowledged. A statement is corrected by filing with the Secretary of State a statement of correction that describes the original filing, specifies the information that was incorrect as of the original filing or the manner in which the execution was defective, corrects the incorrect information or the defective execution, and is accompanied by a copy of the original defective statement, accompanied by the proper filing fee. A statement of correction shall be effective as of the effective date of the statement it corrects except as to persons relying on the uncorrected document adversely affected by the correction. As to those persons, the statement of correction shall be effective in the same manner as they were on notice of the original statement.
  6. A person who files a statement pursuant to this section shall promptly send a copy of the statement to every nonfiling partner and to any other person named as a partner in the statement. Failure to send a copy of a statement to a partner or other person does not limit the effectiveness of the statement as to a person not a partner.
  7. A person who executes a statement shall be deemed to have declared under penalty of perjury that to that person’s knowledge the contents of the statement are accurate.
  8. The Secretary of State may collect a fee for filing or providing a certified copy of a statement. The county clerk may collect a fee of ten dollars ($10) for recording a statement.
  9. The Secretary of State may prescribe and furnish on request forms for:
    1. A statement of change of registered office or registered agent;
    2. An application to reserve a name;
    3. An application to cancel the reservation of a name;
    4. A resignation of a registered agent or registered office or both;
    5. An annual report; and
    6. An amendment to the annual report.
  10. The Secretary of State may mandate the use of the forms listed in subsection (9) of this section.
  11. The Secretary of State may prescribe and furnish on request forms for any other records required or permitted to be filed pursuant to this subchapter, but their use shall not be mandatory.

History. Enact. Acts 2006, ch. 149, § 5, effective July 12, 2006; 2007, ch. 137, § 169, effective June 26, 2007; repealed and reenact., Acts 2010, ch. 51, § 169, effective July 15, 2010; 2010, ch. 151, § 90, effective January 1, 2011.

Legislative Research Commission Notes.

(1/1/2011). This section was amended by 2010 Ky. Acts ch. 151, and repealed and reenacted by 2010 Ky. Acts ch. 51. Pursuant to Section 184 of Acts ch. 51, it was the intent of the General Assembly that the repeal and reenactment not serve to void the amendment, and these Acts do not appear to be in conflict, therefore, they have been codified together.

(7/15/2010). 2010 Ky. Acts ch. 51, sec. 183, provides, “The specific textual provisions of Sections 1 to 178 of this Act which reflect amendments made to those sections by 2007 Ky. Acts ch. 137 shall be deemed effective as of June 26, 2007, and those provisions are hereby made expressly retroactive to that date, with the remainder of the text of those sections being unaffected by the provisions of this section.”

Research References and Practice Aids

Kentucky Law Journal.

Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 (2008).

362.1-106. Governing law.

  1. Except as otherwise provided in subsection (2) of this section, the law of the jurisdiction in which a partnership has its chief executive office governs relations among the partners and between the partners and the partnership.
  2. The law of this Commonwealth governs relations among the partners and between the partners and the partnership and the liability of partners for an obligation of a limited liability partnership.

History. Enact. Acts 2006, ch. 149, § 6, effective July 12, 2006.

362.1-107. Partnership subject to amendment or repeal of subchapter.

A partnership governed by this subchapter is subject to any amendment to or repeal of this subchapter.

History. Enact. Acts 2006, ch. 149, § 7, effective July 12, 2006.

362.1-108. Requirements for documents to be entitled to filing by Secretary of State.

A statement delivered to the Secretary of State for filing, whether submitted by a partnership, a foreign partnership, or otherwise, shall satisfy the requirements of KRS 14A.2-010 to 14A.2-150 .

History. Enact. Acts 2006, ch. 149, § 8, effective July 12, 2006; repealed, reenact. and amend. Acts 2010, ch. 151, § 91, effective January 1, 2011.

362.1-109. Fees for filing documents with Secretary of State.

The Secretary of State shall collect the following fees when the statements described in this subsection are delivered for filing:

  1. Statement of Partnership Authority  . . . . . $40.00
  2. Statement of Denial  . . . . . $20.00
  3. Statement of Dissociation  . . . . . $20.00
  4. Statement of Dissolution  . . . . . $40.00
  5. Statement of Merger  . . . . . $40.00
  6. Statement of Qualification  . . . . . $40.00
  7. Amendment to a Statement of Qualification  . . . . . $40.00
  8. Statement of Foreign Qualification  . . . . . $90.00
  9. Reinstatement of a Statement of Qualification  . . . . . $100.00
  10. All other filings  . . . . . $40.00

History. Enact. Acts 2006, ch. 149, § 9, effective July 12, 2006; 2007, ch. 137, § 147, effective June 26, 2007; repealed and reenact., Acts 2010, ch. 51, § 147, effective July 15, 2010; repealed, reenact. and amend., Acts 2010, ch. 151,§ 92, effective January 1, 2011.

Legislative Research Commission Notes.

(1/11/2011). This section was repealed, reenacted, and amended by 2010 Ky. Acts ch. 151, and repealed and reenacted by 2010 Ky. Acts ch. 51. Pursuant to Section 184 of Acts ch. 51, it was the intent of the General Assembly that the repeal and reenactment not serve to void the amendment, and these Acts do not appear to be in conflict, therefore, they have been codified together.

(7/15/2010). 2010 Ky. Acts ch. 51, sec. 183, provides, “The specific textual provisions of Sections 1 to 178 of this Act which reflect amendments made to those sections by 2007 Ky. Acts ch. 137 shall be deemed effective as of June 26, 2007, and those provisions are hereby made expressly retroactive to that date, with the remainder of the text of those sections being unaffected by the provisions of this section.”

362.1-110. Effective time and date of document.

A statement filed by or with respect to a partnership shall be effective as provided in KRS 14A.2-070 .

History. Enact. Acts 2006, ch. 149, § 10, effective July 12, 2006; repealed and reenact., Acts 2010, ch. 151, § 93, effective January 1, 2011.

362.1-1101. Law governing foreign limited liability partnership. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 71) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.9-010 .

362.1-1102. Statement of foreign qualification. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.1-951 , effective 2013.

362.1-1103. Effect of failure to qualify. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 73) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.9-020 .

362.1-1104. Activities not constituting transacting business. [Repealed.]

Compiler’s Notes.

This section (Repealed and reenact., Acts 2010, ch. 51, § 151) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.9-010 .

362.1-1105. Action by Attorney General. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.1-952 , effective 2013.

362.1-111. Duty of Secretary of State to file document — Manner of filing — Effect of filing or refusal to file. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 11) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.2-100 .

362.1-112. Appeal of refusal of Secretary of State to file. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 12) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.2-110 .

362.1-113. Effect of certificate of Secretary of State attached to copy of statement filed. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 13) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.2-120 .

362.1-114. Partnership names.

The name of a partnership as set forth on a statement of qualification or statement of foreign qualification shall satisfy the requirements of KRS 14A.3-010 .

History. Enact. Acts 2006, ch. 149, § 14, effective July 12, 2006; repealed, reenact., and amend., Acts 2010, ch. 151,§ 94, effective January 1, 2011.

Research References and Practice Aids

Kentucky Law Journal.

Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 (2008).

362.1-115. Reserved partnership name. [Repealed.]

Compiler’s Notes.

This section (Repealed and reenact., Acts 2010, ch. 51, § 148) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.3-020 .

362.1-116. Registration of name of foreign partnership. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 16) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.3-040 .

362.1-117. Registered office — Registered agent.

Each limited liability partnership and each foreign limited liability partnership authorized to transact business in the Commonwealth shall continuously maintain in this Commonwealth a registered office and a registered agent that comply with KRS 14A.4-010 .

History. Enact. Acts 2006, ch. 149, § 17, effective July 12, 2006; repealed, reenact., and amend., Acts 2010, ch. 151, § 95.

362.1-118. Change of registered office or registered agent. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 18) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.4-020 .

362.1-119. Resignation of registered agent. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 19) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.4-030 .

362.1-120. Service of process.

An agent named pursuant to KRS 362.1-303 (1)(a)3. is not a registered agent for the partnership, and service of process is not accomplished against that agent.

History. Enact. Acts 2006, ch. 149, § 20, effective July 12, 2006; repealed, reenact., and amend., Acts 2010, ch. 151, § 96, effective January 1, 2011.

362.1-1201. Uniformity of application and construction. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.1-971 , effective 2013.

362.1-1202. Short title for subchapter. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.1-972 , effective 2013.

362.1-1203. Severability clause. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.1-973 , effective 2013.

362.1-1204. Effective date — Applicability. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.1-974 , effective 2013.

362.1-1205. Savings clause. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.1-975 , effective 2013.

362.1-121. Annual report.

Each limited liability partnership and each foreign limited liability partnership authorized to transact business in this Commonwealth shall deliver to the Secretary of State for filing an annual report in the office of the Secretary of State on such form as shall be prescribed by the Secretary of State as provided in KRS 14A.6-010 .

History. Enact. Acts 2006, ch. 149, § 21, effective July 12, 2006; 2010, ch. 133, § 53, effective July 15, 2010; 2010, ch. 151, § 97, effective January 1, 2011.

Legislative Research Commission Notes.

(1/1/2011). This section was amended by 2010 Ky. Acts chs. 133 and 151, which do not appear to be in conflict and have been codified together.

362.1-122. Administrative dissolution of a statement of qualification or statement of partnership authority.

  1. The Secretary of State may commence a proceeding to administratively dissolve a statement of qualification if:
    1. The limited liability partnership does not deliver its annual report with the Secretary of State on or before the due date;
    2. The limited liability partnership is without a registered agent or registered office in this Commonwealth for sixty (60) days or more; or
    3. The limited liability partnership does not notify the Secretary of State within sixty (60) days that its registered agent or registered office has been changed, that its registered agent has resigned, or that its registered office has been discontinued.
  2. If the Secretary of State determines that one (1) or more grounds exist under subsection (1) of this section for the administrative dissolution of a statement of qualification, then the Secretary of State shall serve the partnership with written notice of the determination by mailing such notice by first class mail to the limited liability partnership at the street address of the partnership’s chief executive office as set forth in the partnership’s most recent annual report filed pursuant to KRS 362.1-121 or, if none, that set forth in the statement of partnership qualification filed pursuant to KRS 14A.6-010 or the statement of foreign qualification filed by a foreign limited liability partnership pursuant to KRS 362.1-951 .
  3. If the limited liability partnership does not correct each ground for dissolution or demonstrate to the reasonable satisfaction of the Secretary of State that each ground determined by the Secretary of State does not exist within sixty (60) days from the date on which the notice was mailed, then the Secretary of State shall administratively dissolve the statement of qualification by signing a certificate of dissolution that recites the ground or grounds for dissolution and its effective date. The Secretary of State shall file the original certificate and serve a copy on the limited liability partnership by mailing such certificate by first class mail to the partnership at its chief executive office address. The administrative dissolution of a statement of qualification shall not terminate the authority of the registered agent of the partnership.
  4. The administrative dissolution of a statement of qualification affects only the partnership’s status as a limited liability partnership and is not an event of dissolution of the partnership.
  5. The partnership whose statement of qualification has been administratively dissolved may apply to the Secretary of State for reinstatement of the statement at any time after the effective date of the dissolution by filing an application that:
    1. Recites the name of the partnership, identifies the statement that was administratively dissolved and the effective date of that administrative dissolution;
    2. States that the ground or grounds for dissolution either did not exist or have been eliminated;
    3. States that the name of the partnership satisfies the requirements of KRS 14A.3-010 ; and
    4. Is accompanied by the reinstatement penalty and the current fee for filing each delinquent annual report.
  6. If the Secretary of State determines that the application contains the information required by subsection (5) of this section and that the information provided therein is correct, then the Secretary of State shall cancel the certificate of administrative dissolution and prepare a certificate reciting the cancellation of the administrative dissolution and the effective date thereof, file the original of the certificate, and serve a copy on the partnership by mailing the certificate by first class mail to the partnership at its chief executive office address. When the revocation of the administrative dissolution is effective, it shall relate back to and take effect as of the effective date of the administrative dissolution, and the statement or statements shall be in full force and effect as if the administrative dissolution had never occurred.
  7. If the Secretary of State denies a partnership’s application for reinstatement of its statement of qualification following administrative dissolution, then the Secretary of State shall serve the partnership with written notice that explains the reason or reasons for denial by mailing the notice by first class mail to the partnership at its chief executive office address. The partnership may appeal the denial of reinstatement to the Franklin Circuit Court within thirty (30) days after the service of the notice of the denial transmitted to the partnership. The partnership may appeal by petitioning the court to set aside the administrative dissolution and attaching to the petition copies of the Secretary of State’s certificate of administrative dissolution, the partnership’s application for reinstatement, and the Secretary of State’s notice of denial. The court may summarily order the Secretary of State to reinstate the statement of qualification or may take any other action the court considers appropriate. The court’s final decision may be appealed as in any other civil proceedings.

History. Enact. Acts 2006, ch. 149, § 22, effective July 12, 2006; 2010, ch. 133, § 54, effective July 15, 2010; and 2010, ch. 151, §§ 128, 130, effective January 1, 2011.

Legislative Research Commission Notes.

(1/1/2011). This section was amended by 2010 Ky. Acts chs. 133 and 151, which do not appear to be in conflict and have been codified together.

362.1-123. Revocation of a statement of foreign qualification. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 23; 2010, ch. 133, § 55) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.9-070 , 14A.9-080 .

Nature of Partnership

362.1-201. Partnership as entity.

  1. A partnership is an entity distinct from its partners.
  2. A limited liability partnership is a partnership and continues to be the same entity that existed before the filing of a statement of qualification under KRS 362.1-931 .

History. Enact. Acts 2006, ch. 149, § 24, effective July 12, 2006.

Compiler’s Notes.

This section is set out above to reflect the renumbering of KRS 362.1-1001 to 362.1-931 by the state reviser effective in 2013.

Research References and Practice Aids

Kentucky Bench & Bar.

Rutledge, Recent Amendments to Kentucky Business Entity Laws, Vol. 71, No. 5, Sept. 2007, Ky. Bench & Bar 25.

362.1-202. Formation of partnership.

  1. Except as otherwise provided in subsection (2) of this section, the association of two (2) or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.
  2. An association formed under a statute other than this subchapter, a predecessor statute, or a comparable statute of another jurisdiction is not a partnership under this subchapter.
  3. In determining whether a partnership is formed, the following rules apply:
    1. Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property.
    2. The sharing of gross returns does not by itself establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived.
    3. A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment:
      1. Of a debt by installments or otherwise;
      2. For services as an independent contractor or of wages or other compensation to an employee;
      3. Of rent;
      4. Of an annuity or other retirement or health benefit to a beneficiary, representative, or designee of a deceased or retired partner;
      5. Of interest or other charge on a loan, even if the amount of payment varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral; or
      6. For the sale of the goodwill of a business or other property by installments or otherwise.

History. Enact. Acts 2006, ch. 149, § 25, effective July 12, 2006.

362.1-203. Partnership property.

Property transferred to or otherwise acquired by a partnership is property of the partnership and not of the partners individually.

History. Enact. Acts 2006, ch. 149, § 26, effective July 12, 2006.

362.1-204. When property is partnership property.

  1. Property is partnership property if acquired in the name of:
    1. The partnership; or
    2. One (1) or more partners with an indication in the instrument transferring title to the property of the person’s capacity as a partner or of the existence of a partnership but without an indication of the name of the partnership.
  2. Property is acquired in the name of the partnership by a transfer to:
    1. The partnership in its name; or
    2. One (1) or more partners in their capacity as partners in the partnership, if the name of the partnership is indicated in the instrument transferring title to the property.
  3. Property is presumed to be partnership property if purchased with partnership assets, even if not acquired in the name of the partnership or of one (1) or more partners with an indication in the instrument transferring title to the property of the person’s capacity as a partner or of the existence of a partnership.
  4. Property acquired in the name of one (1) or more of the partners, without an indication in the instrument transferring title to the property of the person’s capacity as a partner or of the existence of a partnership and without use of partnership assets, is presumed to be separate property, even if used for partnership purposes.

History. Enact. Acts 2006, ch. 149, § 27, effective July 12, 2006.

Relations of Partners to Persons Dealing with Partnership

362.1-301. Partner agent of partnership.

Subject to the effect of a statement of partnership authority under KRS 362.1-303 :

  1. Each partner is an agent of the partnership for the purpose of its business. An act of a partner, including the execution of an instrument in the partnership name, for apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership, unless the partner had no authority to act for the partnership in the particular matter and the person with whom the partner was dealing had notice that the partner lacked authority.
  2. An act of a partner which is not apparently for carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership only if the act was authorized by all of the other partners.

History. Enact. Acts 2006, ch. 149, § 28, effective July 12, 2006.

362.1-302. Transfer of partnership property.

  1. Partnership property may be transferred as follows:
    1. Subject to the effect of a statement of partnership authority under KRS 362.1-303 , partnership property held in the name of the partnership may be transferred by an instrument of transfer executed by a partner in the partnership name.
    2. Partnership property held in the name of one (1) or more partners with an indication in the instrument transferring the property to them of their capacity as partners or of the existence of a partnership, but without an indication of the name of the partnership, may be transferred by an instrument of transfer executed by the persons in whose name the property is held.
    3. Partnership property held in the name of one (1) or more persons other than the partnership, without an indication in the instrument transferring the property to them of their capacity as partners or of the existence of a partnership, may be transferred by an instrument of transfer executed by the persons in whose name the property is held.
  2. A partnership may recover partnership property from a transferee only if it proves that execution of the instrument of initial transfer did not bind the partnership under KRS 362.1-301 and:
    1. As to a subsequent transferee who gave value for property transferred under subsection (1)(a) or (b) of this section, proves that the subsequent transferee had notice that the person who executed the instrument of initial transfer lacked authority to bind the partnership; or
    2. As to a transferee who gave value for property transferred under subsection (1)(c) of this section, proves that the transferee had notice that the property was partnership property and that the person who executed the instrument of initial transfer lacked authority to bind the partnership.
  3. A partnership shall not recover partnership property from a subsequent transferee if the partnership would not have been entitled to recover the property, under subsection (2) of this section, from any earlier transferee of the property.
  4. If a person holds all of the partners’ interests in the partnership, all of the partnership property vests in that person. The person may execute a document in the name of the partnership to evidence vesting of the property in that person and may file or record the document.

History. Enact. Acts 2006, ch. 149, § 29, effective July 12, 2006.

362.1-303. Statement of partnership authority.

  1. A partnership may file a statement of partnership authority, which:
    1. Shall include:
      1. The name of the partnership, which shall comply with KRS 14A.3-010 ;
      2. The street address of its chief executive office and of one (1) office in this Commonwealth, if any;
      3. The names and mailing addresses of all of the partners or of an agent appointed and maintained by the partnership for the purpose of subsection (2) of this section;
      4. The names of the partners authorized to execute an instrument transferring real property held in the name of the partnership;
      5. The date any statement of qualification or statement of foreign qualification was previously filed by the partnership with the Secretary of State; and
    2. May state the authority, or limitations on the authority, of some or all of the partners to enter into other transactions on behalf of the partnership and any other matter.
  2. The agent named in the statement of partnership authority pursuant to subsection (1)(a)3. of this section, if any, shall maintain a list of the names and mailing addresses of all of the partners and make it available to any person on written request for good cause shown.
  3. If a filed statement of partnership authority is executed pursuant to KRS 362.1-105 (3) and states the name of the partnership but does not contain all of the other information required by subsection (1) of this section, then the statement nevertheless operates with respect to a person not a partner as provided in subsections (4) and (5) of this section.
  4. Except as otherwise provided in subsection (7) of this section, a filed statement of partnership authority supplements the authority of a partner to enter into transactions on behalf of the partnership as follows:
    1. Except for transfers of real property, a grant of authority contained in a filed statement of partnership authority is conclusive in favor of a person who gives value without notice to the contrary, so long as and to the extent that a limitation on that authority is not then contained in another filed statement. A filed cancellation of a limitation on authority revives the previous grant of authority.
    2. A grant of authority to transfer real property held in the name of the partnership contained in a certified copy of a filed statement of partnership authority recorded in the office for recording transfers of that real property is conclusive in favor of a person who gives value without having notice to the contrary, so long as and to the extent that a certified copy of a filed statement containing a limitation on that authority is not then of record in the office for recording transfers of that real property. The recording in the office for recording transfers of that real property of a certified copy of a filed cancellation of a limitation on authority revives the previous grant of authority.
  5. A person not a partner has knowledge of a limitation on the authority of a partner to transfer real property held in the name of the partnership if a certified copy of the filed statement containing the limitation on authority is of record in the office for recording transfers of that real property.
  6. Except as otherwise provided in subsections (4) and (5) of this section and KRS 362.1-702 and 362.1-803 , a person not a partner does not have notice of a limitation on the authority of a partner merely because the limitation is contained in a filed statement.
  7. Unless earlier canceled, a filed statement of partnership authority is canceled by operation of law five (5) years after the date on which the statement, or the most recent amendment to the statement of partnership authority expressly extending its term for not more than five (5) years from the date of the amendment, was filed with the Secretary of State.

History. Enact. Acts 2006, ch. 149, § 30, effective July 12, 2006; 2010, ch. 151, § 129, effective January 1, 2011.

362.1-304. Statement of denial.

A partner or other person named as a partner in a filed statement of partnership authority or in a list maintained by an agent pursuant to KRS 362.1-303 (2) may file a statement of denial stating the name of the partnership, the date of filing of the statement of partnership authority, and the fact that is being denied, which may include denial of a person’s authority or status as a partner. A statement of denial is a limitation on authority as provided in KRS 362.1-303 (4) and (5).

History. Enact. Acts 2006, ch. 149, § 31, effective July 12, 2006.

362.1-305. Partnership liable for partner’s actionable conduct.

  1. A partnership is liable for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course of business of the partnership or with authority of the partnership.
  2. If, in the course of the partnership’s business or while acting with authority of the partnership, a partner receives or causes the partnership to receive money or property of a person not a partner, and the money or property is misapplied by a partner, then the partnership is liable for the loss.

History. Enact. Acts 2006, ch. 149, § 32, effective July 12, 2006.

362.1-306. Partner’s liability.

  1. Except as otherwise provided in subsections (2) and (3) of this section, all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law.
  2. A person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the person’s admission as a partner.
  3. An obligation of a partnership arising out of or related to circumstances or events occurring or incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of indemnification, contribution, assessment, or otherwise, for such an obligation solely by reason of being or so acting as a partner. This subsection applies notwithstanding anything inconsistent in the partnership agreement that existed immediately before the vote required to become a limited liability partnership under KRS 362.1-931 (2).
  4. Subsection (3) of this section shall not affect the liability of a partner in a limited liability partnership for his own negligence, wrongful acts, or misconduct.

History. Enact. Acts 2006, ch. 149, § 33, effective July 12, 2006; 2012, ch. 81, § 115, effective July 12, 2012.

362.1-307. Actions by and against partnership and partners.

  1. A partnership may sue and be sued in the name of the partnership.
  2. An action may be brought against the partnership and, to the extent not inconsistent with KRS 362.1-306 , any or all of the partners in the same action or in separate actions.
  3. A judgment against a partnership is not by itself a judgment against a partner. A judgment against a partnership may not be satisfied from a partner’s assets unless there is also a judgment against the partner.
  4. A judgment creditor of a partner shall not levy execution against the assets of a partner to satisfy a judgment based on a claim against the partnership unless the partner is personally liable for the claim under KRS 362.1-306 and:
    1. A judgment based on the same claim has been obtained against the partnership and a writ of execution on the judgment has been returned unsatisfied in whole or in part;
    2. The partnership is a debtor in bankruptcy;
    3. The partner has agreed that the creditor need not exhaust partnership assets;
    4. A court grants permission to the judgment creditor to levy execution against the assets of a partner based on a finding that partnership assets subject to execution are clearly insufficient to satisfy the judgment, that exhaustion of partnership assets is excessively burdensome, or that the grant of permission is an appropriate exercise of the court’s equitable powers; or
    5. Liability is imposed on the partner by law or contract independent of the existence of the partnership.
  5. This section applies to any partnership liability or obligation resulting from a representation by a partner or purported partner under KRS 362.1-308 .
  6. A partner in a limited liability partnership is not a proper party to a proceeding against such a partnership solely by reason of being a partner.

History. Enact. Acts 2006, ch. 149, § 34, effective July 12, 2006.

362.1-308. Liability of purported partner.

  1. If a person, by words or conduct, purports to be a partner or consents to being represented by another as a partner in a partnership or with one (1) or more persons not partners, then the purported partner is liable to a person to whom the representation is made, if that person, relying on the representation, enters into a transaction with the actual or purported partnership and the purported partner would have been personally liable for obligations of the partnership under KRS 362.1-306 (1).
  2. Subject to subsection (1) of this section, if the representation, either by the purported partner or by a person with the purported partner’s consent, is made in a public manner, then the purported partner is liable to a person who relies upon the purported partnership even if the purported partner is not aware of being held out as a partner to the claimant. If partnership liability results, then the purported partner is liable with respect to that liability as if the purported partner were a partner. If no partnership liability results, then the purported partner is liable with respect to that liability jointly and severally with any other person consenting to the representation.
  3. Subject to subsection (1) of this section, if a person is thus represented to be a partner in an existing partnership, or with one or more persons not partners, then the purported partner is an agent of persons consenting to the representation to bind them to the same extent and in the same manner as if the purported partner were a partner, with respect to persons who enter into transactions in reliance upon the representation. If all of the partners of the existing partnership consent to the representation, then a partnership act or obligation results. If fewer than all of the partners of the existing partnership consent to the representation, then the person acting and the partners consenting to the representation are jointly and severally liable.
  4. A person is not liable as a partner merely because the person is named by another in a statement of partnership authority.
  5. A person does not continue to be liable as a partner merely because of a failure to file a statement of dissociation or to amend a statement of partnership authority to indicate the partner’s dissociation from the partnership.
  6. Except as otherwise provided in subsections (1) and (2) of this section, persons who are not partners as to each other are not liable as partners to other persons.

History. Enact. Acts 2006, ch. 149, § 35, effective July 12, 2006.

Relations of Partners to Each Other and to Partnership

362.1-401. Partner’s rights and duties.

  1. Each partner is deemed to have an account that is:
    1. Credited with an amount equal to the money plus the value of any other property, net of the amount of any liabilities, the partner contributes to the partnership and the partner’s share of the partnership profits; and
    2. Charged with an amount equal to the money plus the value of any other property, net of the amount of any liabilities, distributed by the partnership to the partner and the partner’s share of the partnership losses.
  2. Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partner’s share of the profits.
  3. A partnership shall reimburse a partner for payments made and indemnify a partner for liabilities incurred by the partner in the ordinary course of the business of the partnership or for the preservation of its business or property.
  4. A partnership shall reimburse a partner for an advance to the partnership beyond the amount of capital the partner agreed to contribute.
  5. A payment or advance made by a partner which gives rise to a partnership obligation under subsection (3) or (4) of this section constitutes a loan to the partnership which accrues interest from the date of the payment or advance.
  6. Each partner has equal rights in the management and conduct of the partnership business.
  7. A partner may use or possess partnership property only on behalf of the partnership.
  8. A partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership.
  9. A person may become a partner only with the consent of all of the partners.
  10. A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the consent of all of the partners.
  11. This section does not affect the obligations of a partnership to other persons under KRS 362.1-301 .

History. Enact. Acts 2006, ch. 149, § 36, effective July 12, 2006.

362.1-402. Distributions in kind.

  1. A partner, regardless of the nature of the partner’s contribution, has no right to demand and receive any distribution in kind from a partnership. A partner shall not be compelled to accept a distribution of any asset in kind from a partnership to the extent that the percentage of the asset distributed to the partner exceeds a percentage of that asset which is equal to the percentage in which the partner shares in distributions from the partnership. A partner may be compelled to accept a distribution of any asset in kind from a partnership to the extent that the percentage of the asset distributed to the partner is equal to a percentage of that asset which is equal to the percentage in which the partner shares in distributions from the partnership.
  2. The property of a partnership subject to this subchapter shall not be subject to KRS 381.135(1)(a)1.

History. Enact. Acts 2006, ch. 149, § 37, effective July 12, 2006.

362.1-403. Partner’s rights and duties with respect to information.

  1. A partnership shall keep its books and records, if any, at its chief executive office.
  2. A partnership shall provide partners and their agents and attorneys access to its books and records. It shall provide former partners and their agents and attorneys access to books and records pertaining to the period during which they were partners. The right of access provides the opportunity to inspect and copy books and records during ordinary business hours. A partnership may impose a reasonable charge, covering the costs of labor and material, for copies of documents furnished.
  3. Each partner and the partnership shall furnish to a partner, and to the legal representative of a deceased partner or partner under legal disability:
    1. Without demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties under the partnership agreement or this subchapter; and
    2. On demand, any other information concerning the partnership’s business and affairs, except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances.
  4. The partnership agreement may impose reasonable limitations upon use of information obtained under this section and may define appropriate remedies, including liquidated damages, for the breach of any reasonable limitation on use.

History. Enact. Acts 2006, ch. 149, § 38, effective July 12, 2006.

NOTES TO DECISIONS

1.Litigation Discovery.

During litigation, the procedures allowed under Kentucky’s civil discovery rules are broader than those allowed under KRS 271B.16-020 and KRS 362.409 or KRS 362.1-403 , assuming that the plaintiff has made a colorable claim for something other than mere enforcement of those shareholder/partner statutes. Edwards v. Hickman, 237 S.W.3d 183, 2007 Ky. LEXIS 218 ( Ky. 2007 ).

362.1-404. General standards of partner’s conduct.

  1. The fiduciary duties a partner owes to the partnership and the other partners include the duty of loyalty and the duty of care set forth in subsections (2) and (3) of this section.
  2. A partner’s duty of loyalty to the partnership and the other partners includes, but is not limited to, the following:
    1. To account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity;
    2. To refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and
    3. To refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.
  3. A partner’s duty of care to the partnership and the other partners in the conduct and winding up of the partnership business includes, but is not limited to, acting with the care that a reasonable person in a like position would exercise under similar circumstances and in a manner that the partner believes to be in the best interests of the partnership.
  4. A partner shall discharge the duties to the partnership and the other partners under this subchapter or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing.
  5. A partner does not violate a duty or obligation under this subchapter or under the partnership agreement merely because the partner’s conduct furthers the partner’s own interest. That a transaction was fair to the partnership shall not constitute a defense to the breach of the obligation in subsection (2) of this section.
  6. A partner may lend money to, borrow money from, act as a surety, guarantor, or endorser for, guarantee or assume one (1) or more specific obligations of, provide collateral for and transact other business with the partnership, and as to each loan or transaction the rights and obligations of the partner are the same as those of a person who is not a partner, subject to other applicable law.
  7. This section applies to a person winding up the partnership business as the personal or legal representative of the last surviving partner as if the person were a partner.

History. Enact. Acts 2006, ch. 149, § 39, effective July 12, 2006; 2012, ch. 81, § 116, effective July 12, 2012.

Research References and Practice Aids

Kentucky Law Journal.

Campbell, Bumping Along the Bottom: Abandoned Principles and Failed Fiduciary Standards in Uniform Partnership and LLC Statutes, 96 Ky. L.J. 163 (2007).

362.1-405. Actions by partnership and partners.

  1. A partnership may maintain an action against a partner for a breach of the partnership agreement, or for the violation of a duty to the partnership causing harm to the partnership.
  2. A partner may maintain an action against the partnership or another partner for legal or equitable relief, with or without an accounting as to partnership business, to:
    1. Enforce the partner’s rights under the partnership agreement;
    2. Enforce the partner’s rights under this subchapter, including:
      1. The partner’s rights under KRS 362.1-401 , 362.1-403 , or 362.1-404 ;
      2. The partner’s right on dissociation to have the partner’s interest in the partnership purchased pursuant to KRS 362.1-701 or enforce any other right under KRS 362.1-601 to 362.1-705 ; or
      3. The partner’s right to compel a dissolution and winding up of the partnership business under or enforce any other right under KRS 362.1-801 to 362.1-807 ; or
    3. Enforce the rights and otherwise protect the interests of the partner, including rights and interests arising independently of the partnership relationship.
  3. The accrual of, and any time limitation on, a right of action for a remedy under this section is governed by KRS Chapter 413. A right to an accounting upon a dissolution and winding up does not revive a claim barred by law.

History. Enact. Acts 2006, ch. 149, § 40, effective July 12, 2006.

362.1-406. Continuation of partnership beyond definite term or particular undertaking.

  1. If a partnership for a definite term or particular undertaking is continued, without an express agreement, after the expiration of the term or completion of the undertaking, then the rights and duties of the partners remain the same as they were at the expiration or completion, so far as is consistent with a partnership at will.
  2. If the partners, or the partners who habitually acted in the business during the term or undertaking, continue the business without any settlement or liquidation of the partnership, then they are presumed to have agreed that the partnership will continue.

History. Enact. Acts 2006, ch. 149, § 41, effective July 12, 2006.

Transferees and Creditors of Partner

362.1-501. Partner not co-owner of partnership property.

Partnership property is owned by the partnership as an entity. A partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred, either voluntarily or involuntarily.

History. Enact. Acts 2006, ch. 149, § 42, effective July 12, 2006.

362.1-502. Partner’s transferable interest in partnership.

The only transferable interest of a partner in the partnership is the partner’s share of the profits and losses of the partnership and the partner’s right to receive distributions. The interest is personal property.

History. Enact. Acts 2006, ch. 149, § 43, effective July 12, 2006.

362.1-503. Transfer of partner’s transferable interest.

  1. A transfer, in whole or in part, of a partner’s transferable interest in the partnership:
    1. Is permissible;
    2. Does not by itself cause the partner’s dissociation or a dissolution and winding up of the partnership business; and
    3. Does not, as against the other partners or the partnership, entitle the transferee, during the continuance of the partnership, to participate in the management or conduct of the partnership business, to require access to information concerning partnership transactions, or to inspect or copy the partnership books or records.
  2. A transferee of a partner’s transferable interest in the partnership has a right:
    1. To receive, in accordance with the transfer, distributions to which the transferor would otherwise be entitled;
    2. To receive upon the dissolution and winding up of the partnership business, in accordance with the transfer, the net amount otherwise distributable to the transferor; and
    3. To seek under KRS 362.1-801 (6) a judicial determination that it is equitable to wind up the partnership business.
  3. In a dissolution and winding up, a transferee is entitled to an account of partnership transactions only from the date of the latest account agreed to by all of the partners.
  4. Upon transfer, the transferor retains the rights and duties of a partner other than the transferable interest so transferred.
  5. A partnership need not give effect to a transferee’s rights under this section until it has notice of the transfer.
  6. A transfer of a partner’s transferable interest in the partnership in violation of a restriction on transfer contained in the partnership agreement is ineffective as to a person having notice of the restriction at the time of transfer.
  7. Limitations upon transfer set forth in KRS 362.1-501 to 362.1-504 or adopted by the partners in accordance with this subchapter are enforceable notwithstanding KRS 355.9-406 and 355.9-408 .

History. Enact. Acts 2006, ch. 149, § 44, effective July 12, 2006.

362.1-504. Partner’s transferable interest subject to charging order.

  1. This section provides the exclusive remedy by which the judgment creditor of a partner or the transferee of a partner may satisfy a judgment out of the judgment debtor’s transferable interest.
  2. On application to a court of competent jurisdiction by a judgment creditor of a partner or a partner’s transferee, a court may charge the transferable interest of the judgment debtor with payment of the unsatisfied amount of the judgment. To the extent so charged, the judgment creditor has only the rights of a transferee and shall have no right to participate in the management of or to cause the dissolution of the partnership. The court may appoint a receiver of the share of the distributions due or to become due to the judgment debtor in respect of the partnership and make all other orders, directions, accounts, and inquiries the judgment debtor might have made or which the circumstances of the case may require to give effect to the charging order.
  3. A charging order constitutes a lien on and the right to receive distributions made with respect to the judgment debtor’s transferable interest in the partnership.
  4. The court may order a foreclosure of the interest subject to the charging order at any time. The purchaser at the foreclosure sale has the rights of a transferee. A charging order does not of itself constitute an assignment of the transferable interest.
  5. At any time before foreclosure, an interest charged may be redeemed:
    1. By the judgment debtor;
    2. With property other than partnership property, by one (1) or more of the other partners; or
    3. With partnership property, by one (1) or more of the other partners with the consent of all of the partners whose interests are not so charged.
  6. This subchapter does not deprive a partner or a partner’s transferee of a right under exemption laws with respect to the partner’s or transferee’s interest in the partnership.
  7. The partnership is not a necessary party to an application for a charging order. Service of the charging order on a partnership may be made by the court granting the charging order or as the court may otherwise direct.
  8. This section shall not apply to the enforcement of a judgment by a partnership against a partner of that partnership.
  9. This section shall apply to the issuance of a charging order against the interest of a partner or transferee of a partner of a foreign partnership.

HISTORY: Enact. Acts 2006, ch. 149, § 45, effective July 12, 2006; 2007, ch. 137, § 149, effective June 26, 2007; repealed and reenact., Acts 2010, ch. 51, § 149, effective July 15, 2010; 2010, ch. 133, § 56, effective July 15, 2010; 2017 ch. 193, § 18, effective June 29, 2017.

Legislative Research Commission Notes.

(7/15/2010). 2010 Ky. Acts ch. 51, sec. 183, provides, “The specific textual provisions of Sections 1 to 178 of this Act which reflect amendments made to those sections by 2007 Ky. Acts ch. 137 shall be deemed effective as of June 26, 2007, and those provisions are hereby made expressly retroactive to that date, with the remainder of the text of those sections being unaffected by the provisions of this section.”

(7/15/2010). This section was amended by 2010 Ky. Acts ch. 133, and repealed and reenacted by 2010 Ky. Acts ch. 51. Pursuant to Section 184 of Acts ch. 51, it was the intent of the General Assembly that the repeal and reenactment not serve to void the amendment, and these Acts do not appear to be in conflict; therefore, they have been codified together.

Research References and Practice Aids

Kentucky Bench & Bar.

Rutledge, Recent Amendments to Kentucky Business Entity Laws, Vol. 71, No. 5, Sept. 2007, Ky. Bench & Bar 25.

Kentucky Law Journal.

Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 (2008).

Partner’s Dissociation

362.1-601. Events causing partner’s dissociation.

A partner is dissociated from a partnership upon the occurrence of any of the following events:

  1. When the partnership has notice of the partner’s express will to withdraw as a partner unless a later date is specified by the partner in the notice;
  2. An event agreed to in the partnership agreement as causing the partner’s dissociation;
  3. The partner’s expulsion pursuant to the partnership agreement;
  4. The partner’s expulsion by the unanimous vote of the other partners if:
    1. It is unlawful to carry on the partnership business with that partner;
    2. There has been a transfer of all or substantially all of that partner’s transferable interest in the partnership, other than a transfer for security purposes that has not been foreclosed, or a court order charging the partner’s interest, which has not been foreclosed;
    3. Within ninety (90) days after the partnership notifies a corporate partner that it will be expelled because it has filed a certificate of dissolution or the equivalent, its charter has been revoked, or its right to conduct business has been suspended by the jurisdiction of its incorporation, there is no revocation of the certificate of dissolution or no reinstatement of its charter or its right to conduct business; or
    4. A partnership that is a partner has been dissolved and its business is being wound up;
  5. On application by the partnership or another partner, the partner’s expulsion by judicial determination because:
    1. The partner engaged in wrongful conduct that adversely and materially affected the partnership business;
    2. The partner willfully or persistently committed a material breach of the partnership agreement or of a duty owed to the partnership or the other partners under KRS 362.1-404 ; or
    3. The partner engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with the partner;
  6. The partner’s:
    1. Becoming a debtor in bankruptcy;
    2. Executing an assignment for the benefit of creditors;
    3. Seeking, consenting to, or acquiescing in the appointment of a trustee, receiver, or liquidator of that partner or of all or substantially all of that partner’s property; or
    4. Failing, within ninety (90) days after the appointment, to have vacated or stayed the appointment of a trustee, receiver, or liquidator of the partner or of all or substantially all of the partner’s property obtained without the partner’s consent or acquiescence, or failing within ninety (90) days after the expiration of a stay to have the appointment vacated;
  7. In the case of a partner who is an individual:
    1. The partner’s death;
    2. The appointment of a guardian or general conservator for the partner; or
    3. A judicial determination that the partner has otherwise become incapable of performing the partner’s duties under the partnership agreement;
  8. In the case of a partner that is a trust or is acting as a partner by virtue of being a trustee of a trust, distribution of the trust’s entire transferable interest in the partnership, but not merely by reason of the substitution of a successor trustee;
  9. In the case of a partner that is an estate or is acting as a partner by virtue of being a personal representative of an estate, distribution of the estate’s entire transferable interest in the partnership, but not merely by reason of the substitution of a successor personal representative; or
  10. Termination of any other partner who is an entity.

History. Enact. Acts 2006, ch. 149, § 46, effective July 12, 2006.

362.1-602. Partner’s power to dissociate — Wrongful dissociation.

  1. A partner has the power to dissociate at any time, rightfully or wrongfully, by express will pursuant to KRS 362.1-601 (1).
  2. A partner’s dissociation is wrongful only if any of the following apply:
    1. It is in breach of an express provision of the partnership agreement; or
    2. In the case of a partnership for a definite term or particular undertaking, before the expiration of the term or the completion of the undertaking if any of the following apply:
      1. The partner withdraws by express will, unless the withdrawal follows within ninety (90) days after another partner’s dissociation by death or otherwise under KRS 362.1-601 (6) to (10) or wrongful dissociation under this subsection;
      2. The partner is expelled by judicial determination under KRS 362.1-601 (5);
      3. The partner is dissociated by becoming a debtor in bankruptcy; or
      4. In the case of a partner who is not an individual, trust other than a business trust, or estate, the partner is expelled or otherwise dissociated because it willfully dissolved or terminated.
  3. A partner who wrongfully dissociates is liable to the partnership and to the other partners for damages caused by the dissociation. The liability is in addition to any other obligation of the partner to the partnership or to the other partners.

History. Enact. Acts 2006, ch. 149, § 47, effective July 12, 2006.

362.1-603. Effect of partner’s dissociation.

  1. If a partner’s dissociation results in a dissolution and winding up of the partnership business, then KRS 362.1-801 to 362.1-807 apply; otherwise, KRS 362.1-701 to 362.1-705 apply.
  2. Upon a partner’s dissociation, the dissociating partner’s:
    1. Right to participate in the management and conduct of the partnership business terminates, except as otherwise provided in KRS 362.1-803 ;
    2. Duty of loyalty under KRS 362.1-404 (2)(c) terminates; and
    3. Duty of loyalty under KRS 362.1-404 (2)(a) and (b) and duty of care under KRS 362.1-404(3) continue only with regard to matters arising and events occurring before the partner’s dissociation, unless the partner participates in winding up the partnership’s business pursuant to KRS 362.1-803 .

History. Enact. Acts 2006, ch. 149, § 48, effective July 12, 2006.

Partner’s Dissociation When Business Not Wound Up

362.1-701. Purchase of dissociated partner’s interest.

  1. If a partner is dissociated from a partnership without resulting in a dissolution and winding up of the partnership business under KRS 362.1-801 , then the partnership shall cause the dissociated partner’s interest in the partnership to be purchased for a buyout price determined pursuant to subsection (2) of this section.
  2. The buyout price of a dissociated partner’s interest is the amount that would have been distributable to the dissociating partner under KRS 362.1-807 (2) if, on the date of dissociation, the assets of the partnership were sold at a price equal to the greater of the liquidation value or the value based on a sale of the entire business as a going concern without the dissociated partner and the partnership were wound up as of that date. Interest shall be paid from the date of dissociation to the date of payment.
  3. Damages for wrongful dissociation under KRS 362.1-602 (2), and all other amounts owing, whether or not presently due, from the dissociated partner to the partnership, shall be offset against the buyout price. Interest shall be paid from the date the amount owed becomes due to the date of payment.
  4. A partnership shall indemnify a dissociated partner whose interest is being purchased against all partnership liabilities, whether incurred before or after the dissociation, except liabilities incurred by an act of the dissociated partner under KRS 362.1-702 .
  5. If no agreement for the purchase of a dissociated partner’s interest is reached within one hundred twenty (120) days after a written demand for payment, then the partnership shall pay, or cause to be paid, in cash to the dissociated partner the amount the partnership estimates to be the buyout price and accrued interest, reduced by any offsets and accrued interest under subsection (3) of this section.
  6. If a deferred payment is authorized under subsection (8) of this section, then the partnership may tender a written offer to pay the amount it estimates to be the buyout price and accrued interest, reduced by any offsets under subsection (3) of this section, stating the time of payment, the amount and type of security for payment, and the other terms and conditions of the obligation.
  7. The payment or tender required by subsection (5) or (6) of this section shall be accompanied by the following:
    1. A statement of partnership assets and liabilities as of the date of dissociation;
    2. The latest available partnership balance sheet and income statement, if any;
    3. An explanation of how the estimated amount of the payment was calculated; and
    4. Written notice that the payment is in full satisfaction of the obligation to purchase unless, within one hundred twenty (120) days after the written notice, the dissociated partner commences an action to determine the buyout price, any offsets under subsection (3) of this section, or other terms of the obligation to purchase.
  8. A partner who wrongfully dissociates before the expiration of a definite term or the completion of a particular undertaking is not entitled to payment of any portion of the buyout price until the expiration of the term or completion of the undertaking, unless the partner establishes to the satisfaction of the court that earlier payment will not cause undue hardship to the business of the partnership. A deferred payment shall be adequately secured and bear interest.
  9. A dissociated partner may maintain an action against the partnership, pursuant to KRS 362.1-405 (2)(b)2., to determine the buyout price of that partner’s interest, any offsets under subsection (3) of this section, or other terms of the obligation to purchase. The action shall be commenced within one hundred twenty (120) days after the partnership has tendered payment or an offer to pay or within one (1) year after written demand for payment if no payment or offer to pay is tendered. The court shall determine the buyout price of the dissociated partner’s interest, any offset due under subsection (3) of this section, and accrued interest, and enter judgment for any additional payment or refund. If deferred payment is authorized under subsection (8) of this section, then the court shall also determine the security for payment and other terms of the obligation to purchase. The court may assess reasonable attorney’s fees and the fees and expenses of appraisers or other experts for a party to the action, in amounts the court finds equitable, against a party that the court finds acted arbitrarily, vexatiously, or not in good faith. The finding may be based on the partnership’s failure to tender payment or an offer to pay or to comply with subsection (7) of this section.

History. Enact. Acts 2006, ch. 149, § 49, effective July 12, 2006.

362.1-702. Dissociated partner’s power to bind and liability to partnership.

  1. For two (2) years after a partner dissociates without resulting in a dissolution and winding up of the partnership business, the partnership, including a surviving partnership under KRS 362.1-901 to 362.1-908 , is bound by an act of the dissociated partner which would have bound the partnership under KRS 362.1-301 before dissociation only if at the time of entering into the transaction the other party:
    1. Reasonably believed that the dissociated partner was then a partner;
    2. Did not have notice of the partner’s dissociation; and
    3. Is not deemed to have knowledge under KRS 362.1-303 (5) or notice under KRS 362.1-704 (3).
  2. A dissociated partner is liable to the partnership for any damage caused to the partnership arising from an obligation incurred by the dissociated partner after dissociation for which the partnership is liable under subsection (1) of this section.

History. Enact. Acts 2006, ch. 149, § 50, effective July 12, 2006.

362.1-703. Dissociated partner’s liability to other persons.

  1. A partner’s dissociation does not of itself discharge the partner’s liability for a partnership obligation incurred before dissociation. A dissociated partner is not liable for a partnership obligation incurred after dissociation, except as otherwise provided in subsection (2) of this section.
  2. A partner who dissociates without resulting in a dissolution and winding up of the partnership business is liable as a partner to the other party in a transaction entered into by the partnership, or a surviving partnership under KRS 362.1-901 to 362.1-908 , within two (2) years after the partner’s dissociation, only if the partner is liable for the obligation under KRS 362.1-306 and at the time of entering into the transaction the other party:
    1. Reasonably believed that the dissociated partner was then a partner;
    2. Did not have notice of the partner’s dissociation; and
    3. Is not deemed to have knowledge under KRS 362.1-303 (5)  or notice under KRS 362.1-704 (3).
  3. By agreement with the partnership creditor and the partners continuing the business, a dissociated partner may be released from liability for a partnership obligation.
  4. A dissociated partner is released from liability for a partnership obligation if a partnership creditor, with notice of the partner’s dissociation but without the partner’s consent, agrees to a material alteration in the nature or time of payment of a partnership obligation.

History. Enact. Acts 2006, ch. 149, § 51, effective July 12, 2006.

362.1-704. Statement of dissociation.

  1. A dissociated partner or the partnership may file a statement of dissociation stating the name of the partnership and that the partner is dissociated from the partnership.
  2. A statement of dissociation is a limitation on the authority of a dissociated partner for the purposes of KRS 362.1-303 (4) and (5).
  3. For the purposes of KRS 362.1-702 (1)(c) and 362.1-703 (2)(c), a person not a partner has notice of the dissociation ninety (90) days after the statement of dissociation is filed.

History. Enact. Acts 2006, ch. 149, § 52, effective July 12, 2006.

362.1-705. Continued use of partnership name.

Continued use of a partnership name, or a dissociated partner’s name as part of the partnership name, by partners continuing the business does not of itself make the dissociated partner liable for an obligation of the partners or the partnership continuing the business.

History. Enact. Acts 2006, ch. 149, § 53, effective July 12, 2006.

Winding Up Partnership Business

362.1-801. Events causing dissolution and winding up of partnership business.

A partnership is dissolved, and its business shall be wound up, only upon the occurrence of any of the following events:

  1. In a partnership at will, the partnership’s having notice from a partner, other than a partner who is dissociated under KRS 362.1-601 (2) to (10), of that partner’s express will to withdraw as a partner, or on a later date specified by the partner;
  2. In a partnership for a definite term or particular undertaking:
    1. Within ninety (90) days after a partner’s dissociation by death or otherwise under KRS 362.1-601 (6) to (10) or wrongful dissociation under KRS 362.1-602 (2), the express will of at least half of the remaining partners to wind up the partnership business, for which purpose a partner’s rightful dissociation pursuant to KRS 362.1-602 (2)(b)1. constitutes the expression of that partner’s will to wind up the partnership business;
    2. The express will of all of the partners to wind up the partnership business; or
    3. The expiration of the term or the completion of the undertaking;
  3. An event agreed to in the partnership agreement resulting in the winding up of the partnership business;
  4. An event that makes it unlawful for all or substantially all of the business of the partnership to be continued, but a cure of illegality within ninety (90) days after notice to the partnership of the event is effective retroactively to the date of the event for purposes of this section;
  5. On application by a partner, a judicial determination that:
    1. The economic purpose of the partnership is likely to be unreasonably frustrated;
    2. Another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner; or
    3. It is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement; or
  6. On application by a transferee of a partner’s transferable interest, a judicial determination that it is equitable to wind up the partnership business:
    1. After the expiration of the term or completion of the undertaking, if the partnership was for a definite term or particular undertaking at the time of the transfer or entry of the charging order that gave rise to the transfer; or
    2. At any time, if the partnership was a partnership at will at the time of the transfer or entry of the charging order that gave rise to the transfer.

History. Enact. Acts 2006, ch. 149, § 54, effective July 12, 2006.

Research References and Practice Aids

Northern Kentucky Law Review.

2012 General Law Issue: Article: Migratory Law Partners and the Glue of Unfinished Business, 39 N. Ky. L. Rev. 359 (2012).

362.1-802. Partnership continues after dissolution.

  1. Subject to subsection (2) of this section, a partnership continues after dissolution only for the purpose of winding up its business. The partnership is terminated when the winding up of its business is completed.
  2. At any time after the dissolution of a partnership and before the winding up of its business is completed, all of the partners, including any dissociating partner other than a wrongfully dissociating partner, may waive the right to have the partnership’s business wound up and the partnership terminated. In that event:
    1. The partnership resumes carrying on its business as if dissolution had never occurred, and any liability incurred by the partnership or a partner after the dissolution and before the waiver is determined as if dissolution had never occurred; and
    2. The rights of a third party accruing under KRS 362.1-804 (1) or arising out of conduct in reliance on the dissolution before the third party has notice of the waiver shall not be adversely affected.
  3. The dissolution of a partnership that is or was a limited liability partnership shall not abate or suspend KRS 362.1-306 (3).

History. Enact. Acts 2006, ch. 149, § 55, effective July 12, 2006; 2007, ch. 137, § 150, effective June 26, 2007; repealed and reenact., Acts 2010, ch. 51, § 150, effective July 15, 2010.

Legislative Research Commission Notes.

(7/15/2010). 2010 Ky. Acts ch. 51, sec. 183, provides, “The specific textual provisions of Sections 1 to 178 of this Act which reflect amendments made to those sections by 2007 Ky. Acts ch. 137 shall be deemed effective as of June 26, 2007, and those provisions are hereby made expressly retroactive to that date, with the remainder of the text of those sections being unaffected by the provisions of this section.”

Research References and Practice Aids

Kentucky Law Journal.

Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 (2008).

Northern Kentucky Law Review.

2012 General Law Issue: Article: Migratory Law Partners and the Glue of Unfinished Business, 39 N. Ky. L. Rev. 359 (2012).

362.1-803. Right to wind up partnership business.

  1. After dissolution, a partner who has not wrongfully dissociated may participate in winding up the partnership’s business, but on application of any partner, partner’s legal representative, or transferee, the Circuit Court for the county in which the registered office is located or, if none, the Franklin Circuit Court, for good cause shown, may order judicial supervision of the winding up.
  2. The legal representative of the last surviving partner may wind up a partnership’s business.
  3. A person winding up a partnership’s business may preserve the partnership business or property as a going concern for a reasonable time, prosecute and defend actions and proceedings, whether civil, criminal, or administrative, settle and close the partnership’s business, dispose of and transfer the partnership’s property, discharge the partnership’s liabilities, distribute the assets of the partnership pursuant to KRS 362.1-807 , settle disputes by mediation or arbitration, and perform other necessary acts.

History. Enact. Acts 2006, ch. 149, § 56, effective July 12, 2006.

Research References and Practice Aids

Northern Kentucky Law Review.

2012 General Law Issue: Article: Migratory Law Partners and the Glue of Unfinished Business, 39 N. Ky. L. Rev. 359 (2012).

362.1-804. Partner’s power to bind partnership after dissolution.

Subject to KRS 362.1-805 , a partnership is bound by a partner’s act after dissolution that:

  1. Is appropriate for winding up the partnership business; or
  2. Would have bound the partnership under KRS 362.1-301 before dissolution, if the other party to the transaction did not have notice of the dissolution.

History. Enact. Acts 2006, ch. 149, § 57, effective July 12, 2006.

Research References and Practice Aids

Northern Kentucky Law Review.

2012 General Law Issue: Article: Migratory Law Partners and the Glue of Unfinished Business, 39 N. Ky. L. Rev. 359 (2012).

362.1-805. Statement of dissolution.

  1. After dissolution, a partner who has not wrongfully dissociated may file a statement of dissolution stating the name of the partnership, that the partnership has dissolved and is winding up its business, and the date of dissolution.
  2. A statement of dissolution cancels a filed statement of partnership authority for the purposes of KRS 362.1-303 (4) and is a limitation on authority for the purposes of KRS 362.1-303 (5).
  3. For the purposes of KRS 362.1-301 and 362.1-804 , a person not a partner has notice of the dissolution and the limitation on the partners’ authority as a result of the statement of dissolution ninety (90) days after it is filed.
  4. After filing a statement of dissolution, a dissolved partnership may file and, if appropriate, record a statement of partnership authority which will operate with respect to a person not a partner as provided in KRS 362.1-303 (4) and (5) in any transaction, whether or not the transaction is appropriate for winding up the partnership business.

History. Enact. Acts 2006, ch. 149, § 58, effective July 12, 2006.

362.1-806. Partner’s liability to other partners after dissolution.

  1. Except as otherwise provided in subsection (2) of this section and KRS 362.1-306 , after dissolution a partner is liable to the other partners for the partner’s share of any partnership liability incurred under KRS 362.1-804 .
  2. A partner who, with knowledge of the dissolution, incurs a partnership liability under KRS 362.1-804 (2) by an act that is not appropriate for winding up the partnership business is liable to the partnership for any damage caused to the partnership arising from the liability.

History. Enact. Acts 2006, ch. 149, § 59, effective July 12, 2006.

Research References and Practice Aids

Northern Kentucky Law Review.

2012 General Law Issue: Article: Migratory Law Partners and the Glue of Unfinished Business, 39 N. Ky. L. Rev. 359 (2012).

362.1-807. Settlement of accounts and contributions among partners.

  1. In winding up a partnership’s business, the assets of the partnership, including the contributions of the partners required by this section, shall be applied to discharge its obligations to creditors, including, to the extent permitted by law, partners who are creditors. Any surplus shall be applied to pay the net amount distributable to partners in accordance with their right to distributions under subsection (2) of this section.
  2. Each partner is entitled to a settlement of all partnership accounts upon winding up the partnership business. In settling accounts among the partners, profits and losses that result from the liquidation of the partnership assets shall be credited and charged to the partners’ accounts. The partnership shall make a distribution to a partner in an amount equal to any excess of the credits over the charges in the partner’s account. A partner shall contribute to the partnership an amount equal to any excess of the charges over the credits in the partner’s account but excluding from the calculation charges attributable to an obligation for which the partner is not personally liable under KRS 362.1-306 .
  3. If a partner fails to contribute the full amount required under subsection (2) of this section, then all of the other partners shall contribute, in the proportions in which those partners share partnership losses, the additional amount necessary to satisfy the partnership obligations for which they are personally liable under KRS 362.1-306 . A partner or partner’s legal representative may recover from the other partners any contributions the partner makes to the extent the amount contributed exceeds that partner’s share of the partnership obligations for which the partner is personally liable under KRS 362.1-306 .
  4. After the settlement of accounts, each partner shall contribute, in the proportion in which the partner shares partnership losses, the amount necessary to satisfy partnership obligations that were not known at the time of the settlement and for which the partner is personally liable under KRS 362.1-306 .
  5. The estate of a deceased partner is liable for the partner’s obligation to contribute to the partnership.
  6. An assignee for the benefit of creditors of a partnership or a partner, or a person appointed by a court to represent creditors of a partnership or a partner, may enforce a partner’s obligation to contribute to the partnership.

History. Enact. Acts 2006, ch. 149, § 60, effective July 12, 2006.

Research References and Practice Aids

Northern Kentucky Law Review.

2012 General Law Issue: Article: Migratory Law Partners and the Glue of Unfinished Business, 39 N. Ky. L. Rev. 359 (2012).

Conversion and Mergers

362.1-901. Definitions for KRS 362.1-901 to 362.1-908.

As used in KRS 362.1-901 to 362.1-908 :

  1. “Converted organization” means the entity resulting from a conversion;
  2. “Converting organization” means the entity undertaking a conversion;
  3. “General partner” means a partner in a partnership and a general partner in a limited partnership;
  4. “Limited liability company” means a limited liability company organized under the Kentucky Limited Liability Company Act or comparable law of another jurisdiction;
  5. “Limited liability partnership” means a limited liability partnership as provided for in KRS 362.1-931 ;
  6. “Limited partner” means a limited partner in a limited partnership;
  7. “Limited partnership” means a limited partnership created under the Kentucky Uniform Limited Partnership Act (2006), predecessor law, or comparable law of another jurisdiction; and
  8. “Partner” includes both a general partner and a limited partner.

History. Enact. Acts 2006, ch. 149, § 61, effective July 12, 2006; 2012, ch. 81, § 117, effective July 12, 2012.

362.1-902. Conversion of partnership to limited partnership.

  1. A partnership may be converted to a limited partnership pursuant to this section.
  2. The terms and conditions of a conversion of a partnership to a limited partnership shall be approved by all of the partners or by a number or percentage specified for conversion in the partnership agreement.
  3. After the conversion is approved by the partners, the partnership shall cancel any statement of qualification, statement of partnership authority, or certificate of assumed name filed with the Secretary of State and file a certificate of limited partnership in the jurisdiction in which the limited partnership is to be formed. In addition to all other requirements, the certificate shall include:
    1. A statement that the partnership was converted to a limited partnership from a partnership;
    2. Its former name; and
    3. A statement of the number of votes cast by the partners for and against the conversion and, if the vote is less than unanimous, the number or percentage required to approve the conversion under the partnership agreement.
  4. The conversion takes effect when the certificate of limited partnership is filed or at any later date specified in the certificate.
  5. A general partner who becomes a limited partner as a result of the conversion remains liable as a general partner for an obligation incurred by the partnership before the conversion takes effect. If the other party to a transaction with the limited partnership reasonably believes when entering the transaction that the limited partner is a general partner, then the limited partner is liable for an obligation incurred by the limited partnership within ninety (90) days after the conversion takes effect. The limited partner’s liability for all other obligations of the limited partnership incurred after the conversion takes effect is that of a limited partner as provided in Subchapter 2 of this chapter.
  6. A partnership may be converted to a limited liability company as provided in KRS 275.370 .

History. Enact. Acts 2006, ch. 149, § 62, effective July 12, 2006.

362.1-903. Conversion of limited partnership to partnership.

  1. A limited partnership may be converted to a partnership pursuant to this subsection.
    1. Notwithstanding a provision to the contrary in a limited partnership agreement, the terms and conditions of a conversion of a limited partnership to a partnership shall be approved by all of the partners.
    2. After the conversion is approved by the partners, the limited partnership shall cancel its certificate of limited partnership and any certificate of assumed name filed with the Secretary of State.
    3. The conversion takes effect when the certificate of limited partnership is canceled.
    4. A limited partner who becomes a general partner as a result of the conversion remains liable only as a limited partner for an obligation incurred by the limited partnership before the conversion takes effect. Except as otherwise provided in KRS 362.1-306 , the partner is liable as a general partner for an obligation of the partnership incurred after the conversion takes effect.
    1. A limited liability company may be converted to a limited liability partnership pursuant to this subsection. (2) (a) A limited liability company may be converted to a limited liability partnership pursuant to this subsection.
    2. Notwithstanding a provision to the contrary in the operating agreement, the terms and conditions of a conversion of a limited liability company to a limited liability partnership shall be approved by all of the members.
    3. After the conversion is approved by the members, the limited liability company shall file with the Secretary of State a statement of qualification satisfying the requirements of KRS 362.1-931 (3) and including as well the name of the predecessor limited liability company and a statement that the predecessor limited liability company was converted to a limited liability partnership.
    4. The conversion takes effect upon the effective time and date of the statement of qualification as provided for in KRS 14A.2-070 .
    5. A member who becomes a general partner as a result of a conversion remains liable only as a member for an obligation incurred by the limited liability company before the conversion takes effect. Except as otherwise provided in KRS 362.1-306 , a partner is liable as a general partner for an obligation of the partnership incurred after the conversion takes effect.

History. Enact. Acts 2006, ch. 149, § 63, effective July 12, 2006; 2012, ch. 81, § 118, effective July 12, 2012.

362.1-904. Effect of conversion — Entity unchanged.

  1. A converted organization that has been converted pursuant to KRS 362.1-901 to 362.1-908 is for all purposes the same entity that existed before the conversion.
  2. When a conversion takes place:
    1. All property and contract rights owned by, and all rights, privileges, and immunities of, the converting organization shall remain vested in the converted organization without assignment, reversions, or impairment and without the converting organization having been dissolved;
    2. All obligations of the converting partnership organization shall continue as obligations of the converted organization;
    3. An action or proceeding pending against the converting partnership organization may be continued as if the organization had not occurred, and the name of the converted organization may be substituted in any pending action or proceeding for the name of the converting organization;
    4. Any written partnership agreement of the converted partnership or limited partnership shall be binding upon each person who becomes a partner in the converted partnership or limited partnership; and
    5. Except as otherwise provided in the plan of conversion, the terms and conditions of the plan of conversion take effect.
  3. Unless otherwise provided in the partnership agreement, a partner has no right to dissent from a conversion.

History. Enact. Acts 2006, ch. 149, § 64, effective July 12, 2006; 2012, ch. 81, § 119, effective July 12, 2012.

362.1-905. Merger of partnerships.

  1. Pursuant to a plan of merger approved as provided in subsection (3) of this section, a partnership may be merged with one (1) or more partnerships or limited partnerships.
  2. The plan of merger shall set forth:
    1. The name of each partnership or limited partnership that is a party to the merger;
    2. The name of the surviving entity into which the other partnerships or limited partnerships will merge;
    3. Whether the surviving entity is a partnership or a limited partnership and the status of each partner;
    4. The terms and conditions of the merger;
    5. The manner and basis of converting the interests of each party to the merger into interests or obligations of the surviving entity, or into money or other property in whole or part; and
    6. The street address of the surviving entity’s chief executive office.
  3. The plan of merger shall be approved:
    1. In the case of a partnership that is a party to the merger, by all of the partners, or a number or percentage specified for merger in the partnership agreement; and
    2. In the case of a limited partnership that is a party to the merger, by the vote required for approval of a merger by the law of the state or foreign jurisdiction in which the limited partnership is organized and, in the absence of such a specifically applicable law, by all of the partners, notwithstanding a provision to the contrary in the partnership agreement.
  4. After a plan of merger is approved and before the merger takes effect, the plan may be amended or abandoned as provided in the plan.
  5. The merger takes effect on the later of:
    1. The approval of the plan of merger by all parties to the merger, as provided in subsection (3) of this section;
    2. The filing of all documents required by law to be filed as a condition to the effectiveness of the merger; or
    3. Subject to KRS 14A.2-070 , any effective date specified in the plan of merger.

History. Enact. Acts 2006, ch. 149, § 65, effective July 12, 2006; 2010, ch. 151, § 127, effective January 1, 2011.

362.1-906. Effect of merger.

  1. When a merger takes effect:
    1. The separate existence of every partnership or limited partnership that is a party to the merger, other than the surviving entity, ceases;
    2. All property owned by each of the merged partnerships or limited partnerships vests in the surviving entity;
    3. All obligations of every partnership or limited partnership that is a party to the merger become the obligations of the surviving entity; and
    4. An action or proceeding pending against a partnership or limited partnership that is a party to the merger may be continued as if the merger had not occurred, or the surviving entity may be substituted as a party to the action or proceeding.
  2. The Secretary of State of this Commonwealth is the agent for service of process in an action or proceeding against a surviving foreign partnership or limited partnership to enforce an obligation of a domestic partnership or limited partnership that is a party to a merger. The surviving entity shall promptly notify the Secretary of State of the mailing address of its chief executive office and of any change of address. Upon receipt of process, the Secretary of State shall mail a copy of the process to the surviving foreign partnership or limited partnership.
  3. A partner of the surviving partnership or limited partnership is liable for:
    1. All obligations of a party to the merger for which the partner was personally liable before the merger;
    2. All other obligations of the surviving entity incurred before the merger by a party to the merger, but those obligations may be satisfied only out of property of the entity; and
    3. Except as otherwise provided in KRS 362.1-306 , all obligations of the surviving entity incurred after the merger takes effect, but those obligations may be satisfied only out of property of the entity if the partner is a limited partner.
  4. If the obligations incurred before the merger by a party to the merger are not satisfied out of the property of the surviving partnership or limited partnership, then the general partners of that party immediately before the effective date of the merger shall contribute the amount necessary to satisfy that party’s obligations to the surviving entity, in the manner provided in KRS 362.1-807 or in the Limited Partnership Act of the jurisdiction in which the party was formed, as the case may be, as if the merged party were dissolved.
  5. A partner of a party to a merger who does not become a partner of the surviving partnership or limited partnership is dissociated from the entity, of which that partner was a partner, as of the date the merger takes effect. The surviving entity shall cause the partner’s interest in the entity to be purchased under KRS 362.1-701 or another statute specifically applicable to that partner’s interest with respect to a merger. The surviving entity is bound under KRS 362.1-702 by an act of a general partner dissociated under this subsection, and the partner is liable under KRS 362.1-703 for transactions entered into by the surviving entity after the merger takes effect.
  6. Unless otherwise provided in the partnership agreement, a partner has no right to dissent from a merger.
  7. If the surviving business entity is a partnership, the written partnership agreement provided for in the plan of merger, if any, shall be binding upon each partner in that partnership.

History. Enact. Acts 2006, ch. 149, § 66, effective July 12, 2006; 2010, ch. 133, § 57, effective July 15, 2010.

362.1-907. Statement of merger.

  1. After a merger, the surviving partnership or limited partnership may file a statement that one (1) or more partnerships or limited partnerships have merged into the surviving entity.
  2. A statement of merger shall contain:
    1. The name of each partnership or limited partnership that is a party to the merger;
    2. The name of the surviving entity into which the other partnerships or limited partnership were merged;
    3. The street address of the surviving entity’s chief executive office and of an office in this Commonwealth, if any;
    4. Whether the surviving entity is a partnership or a limited partnership; and
    5. The effective date of this merger as determined in accordance with KRS 362.1-905 (5).
  3. Except as otherwise provided in subsection (4) of this section, for the purposes of KRS 362.1-302 , property of the surviving partnership or limited partnership which before the merger was held in the name of another party to the merger is property held in the name of the surviving entity upon filing a statement of merger.
  4. For the purposes of KRS 362.1-302 , real property of the surviving partnership or limited partnership which before the merger was held in the name of another party to the merger is property held in the name of the surviving entity upon recording a certified copy of the statement of merger in the office for recording transfers of that real property.
  5. A filed and, if appropriate, recorded statement of merger, executed and declared to be accurate pursuant to KRS 362.1-105 (3), stating the name of a partnership or limited partnership that is a party to the merger in whose name property was held before the merger and the name of the surviving entity, but not containing all of the other information required by subsection (2) of this section, operates with respect to the partnerships or limited partnerships named to the extent provided in subsections (3) and (4) of this section.
  6. A limited partnership party to a merger with a partnership shall file with the Secretary of State such documents as are provided for in the law governing the limited partnership.

History. Enact. Acts 2006, ch. 149, § 67, effective July 12, 2006.

362.1-908. Provisions of KRS 362.1-901 to 362.1-908 nonexclusive.

KRS 362.1-901 to 362.1-908 are not exclusive. Partnerships or limited partnerships may be converted or merged in any other manner provided by law.

History. Enact. Acts 2006, ch. 149, § 68, effective July 12, 2006.

Limited Liability Partnership

362.1-931. Statement of qualification.

  1. A partnership may become a limited liability partnership pursuant to this section.
  2. The terms and conditions on which a partnership becomes a limited liability partnership shall be approved by the vote necessary to amend the partnership agreement except, in the case of a partnership agreement that expressly considers obligations to contribute to the partnership, the vote necessary to amend those provisions.
  3. After the approval required by subsection (2) of this section, a partnership may become a limited liability partnership by filing with the Secretary of State a statement of qualification. The statement shall contain:
    1. The name of the partnership, which shall comply with KRS 14A.3-010 ;
    2. The address of the partnership’s chief executive office and, if different, the street address of an office in this Commonwealth, if any;
    3. The street address of the partnership’s registered office, and the name of its registered agent that comply with KRS 14A.4-010 ;
    4. A statement that the partnership elects to be a limited liability partnership; and
    5. The date any statement of partnership authority was previously filed with the Secretary of State.
  4. The status of a partnership as a limited liability partnership remains effective, regardless of changes in the partnership, until the statement of qualification is canceled pursuant to KRS 362.1-105 (4) or administratively dissolved pursuant to KRS 362.1-122 .
  5. The status of a partnership as a limited liability partnership and the liability of its partners is not affected by errors or later changes in the information required to be contained in the statement of qualification under subsection (3) of this section.
  6. The filing of a statement of qualification establishes that a partnership has satisfied all conditions precedent to the qualification of the partnership as a limited liability partnership.
  7. An amendment or cancellation of a statement of qualification is effective when it is filed or on a deferred effective date specified in the amendment or cancellation. An amendment to a statement of qualification shall include the date of filing of the statement being amended and all information required in an initial statement of qualification. A cancellation of a statement of qualification shall include the name of the partnership and the date of filing of the statement of qualification.

History. Enact. Acts 2006, ch. 149, § 69, effective July 12, 2006; 2010, ch. 151, § 98, effective January 1, 2011.

Compiler’s Notes.

This section was formerly compiled as KRS 362.1-1001 .

362.1-932. Circumstances preventing distribution — Liability for unlawful distribution.

  1. A limited liability partnership shall not make a distribution to the extent that at the time of and after giving effect to the distribution, all liabilities of the limited liability partnership exceed the fair value of the assets of the limited liability partnership, other than liabilities to partners or transferees on account of their transferable interest in liabilities for which the recourse of creditors is limited to specified property. The fair value of property that is subject to a liability for which the recourse of partners is limited shall be included in the assets of the limited liability partnership only to the extent that the fair value of that property exceeds that liability.
  2. A partner or transferee of a limited liability partnership who receives a distribution in violation of subsection (1) of this section is liable to the partnership for the amount of that distribution. A proceeding under this section shall be barred unless it is commenced within two (2) years of the date on which the distribution is paid to the partner or transferee.
  3. This section does not affect any obligation or liability of a partner or transferee of a limited liability partnership under an agreement or other applicable law for the amount of a distribution.
  4. For purposes of this section, the term “distribution” does not include amounts constituting reasonable compensation for present or past services or reasonable payments made in the ordinary course of business pursuant to a bona fide retirement plan or other benefits program.

History. Enact. Acts 2010, ch. 133, § 5, effective July 15, 2010.

Compiler’s Notes.

This section was formerly compiled as KRS 362.1-1003 .

Foreign Limited Liability Partnership

362.1-951. Statement of foreign qualification.

  1. Before transacting business in this Commonwealth, a foreign limited liability partnership shall file a statement of foreign qualification. The statement shall contain:
    1. The name of the foreign limited liability partnership which satisfies the requirements of KRS 14A.3-010 ;
    2. The street address of the partnership’s chief executive office and, if different, the street address of an office of the partnership in this Commonwealth, if any;
    3. The partnership’s registered office and the name of its registered agent at that office, which shall comply with KRS 14A.4-010 ; and
    4. Its jurisdiction of organization.
  2. The status of a partnership as a foreign limited liability partnership remains effective, regardless of changes in the partnership, until it is canceled pursuant to KRS 362.1-105 (4) or revoked pursuant to KRS 14A.9-080 .
  3. If the name of a foreign limited liability partnership is not distinguishable upon the records of the Secretary of State, then it may file a statement of foreign qualification using a fictitious name that is distinguishable upon the records of the Secretary of State, in which instance the statement of foreign qualification shall be filed under the fictitious name, shall recite that the partnership has filed the statement of foreign qualification under a fictitious name, and shall include in the statement its real name in its jurisdiction of organization.
  4. Whether a foreign limited liability partnership is transacting business in the Commonwealth shall be determined under KRS 14A.9-010 (2).
  5. The consequences to a foreign limited liability partnership transacting business without a statement of foreign qualification shall be as set forth in KRS 14A.9-020 .
  6. A statement of foreign qualification shall authorize the foreign limited liability partnership to transact business in this Commonwealth subject to the right of the Commonwealth to revoke the statement.
  7. A foreign limited liability partnership, having filed a statement of foreign qualification, shall have the same as, but no greater rights than, and shall have the same, but no greater privileges than, and except as otherwise provided by this subchapter, shall be subject to the same duties, restrictions, penalties, and liabilities now or later imposed on, a limited liability partnership.

History. Enact. Acts 2006, ch. 149, § 72, effective July 12, 2006; 2010, ch. 151, § 99, effective January 1, 2011; 2012, ch. 81, § 120, effective July 12, 2012.

Compiler’s Notes.

This section was formerly compiled as KRS 362.1-1102 .

362.1-952. Action by Attorney General.

The Attorney General may maintain an action to restrain a foreign limited liability partnership from transacting business in this Commonwealth in violation of this subchapter.

History. Enact. Acts 2006, ch. 149, § 75, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.1-1105 .

Miscellaneous Provisions

362.1-971. Uniformity of application and construction.

This subchapter shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this subchapter among the states enacting it.

History. Enact. Acts 2006, ch. 149, § 76, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.1-1201 .

362.1-972. Short title for subchapter.

This subchapter may be cited as the Kentucky Revised Uniform Partnership Act (2006).

History. Enact. Acts 2006, ch. 149, § 77, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.1-1202 .

Research References and Practice Aids

Kentucky Law Journal.

Vestal & Rutledge, Modern Partnership Law Comes to Kentucky: Comparing the Kentucky Revised Uniform Partnership Act and the Uniform Act from Which it was Derived., 95 Ky. L.J. 715 (2006/2007).

Northern Kentucky Law Review.

Vestal and Rutledge, The Uniform Limited Partnership Act (2001) Comes to Kentucky: An Owner’s Manual, 34 N. Ky. L. Rev. 411 (2007).

362.1-973. Severability clause.

If any provision of this subchapter or its application to any person or circumstance is held invalid, then the invalidity shall not affect other provisions or applications of this subchapter which can be given effect without the invalid provision or application, and to this end the provisions of this subchapter are severable.

History. Enact. Acts 2006, ch. 149, § 78, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.1-1203 .

362.1-974. Effective date — Applicability.

  1. This subchapter governs only a partnership:
    1. Formed on or after July 12, 2006, except a partnership that is continuing the business of a dissolved partnership under KRS 362.350 ; and
    2. Formed prior to July 12, 2006, that elects, as provided by subsection (2) of this section, to be governed by this subchapter.
  2. A partnership formed prior to July 12, 2006, voluntarily may elect, in the manner provided in its partnership agreement or by law for amending the partnership agreement, to be governed by this subchapter. The filing by the partnership of a statement pursuant to this subchapter shall constitute an election to be bound by this subchapter. The provisions of this subchapter relating to the liability of the partnership’s partners to third parties apply to limit those partners’ liability to a third party who has engaged in business with the partnership within one (1) year before the partnership’s election to be governed by this subchapter only if the third party has notice of the partnership’s election to be governed by this subchapter.

History. Enact. Acts 2006, ch. 149, § 79, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.1-1204 .

Legislative Research Commission Notes.

(7/12/2006). Under the authority of KRS 7.136(1)(h), during codification a manifest clerical or typographical error occurring in 2006 Ky. Acts. ch. 149, sec. 79, has been corrected. It is clear from the context of the Act that the word “section” appearing in the second sentence of subsection (2) should have been “subchapter.”

362.1-975. Savings clause.

This subchapter does not affect an action or proceeding commenced or right accrued before this subchapter takes effect.

History. Enact. Acts 2006, ch. 149, § 80, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.1-1205 .

Subchapter 2. Kentucky Uniform Limited Partnership Act (2006)

362.2-1001. Direct actions by partner. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-931 , effective 2013.

362.2-1002. Derivative action. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-932 , effective 2013.

362.2-1003. Proper plaintiff. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-933 , effective 2013.

362.2-1004. Pleading. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-934 , effective 2013.

362.2-1005. Proceeds and expenses. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-935 , effective 2013.

General Provisions

362.2-102. Definitions for subchapter.

As used in this subchapter, unless the context otherwise requires:

  1. “Certificate of limited partnership” means the certificate required by KRS 362.2-201 or filed under KRS 362.415 and includes the certificate as amended or restated;
  2. “Contribution” means any benefit provided by a person to a limited partnership in order to become a partner or in the person’s capacity as a partner;
  3. “Debtor in bankruptcy” means a person that is the subject of:
    1. An order for relief under Title 11 of the United States Code or a comparable order under a successor statute of general application; or
    2. A comparable order under federal, state, or foreign law governing insolvency;
  4. “Deliver” or “delivery” means any method of delivery used in conventional commercial practice, including delivery by hand, mail, commercial delivery, and electronic transmission;
  5. “Designated office” means:
    1. With respect to a limited partnership, the office that a limited partnership is required to designate and maintain under KRS 362.2-114 ; and
    2. With respect to a foreign limited partnership, its principal office;
  6. “Distribution” means a transfer of money or other property from a limited partnership to a partner in the partner’s capacity as a partner or to a transferee on account of a transferable interest owned by the transferee;
  7. “Electronic transmission” or “electronically transmitted” means any process of communication not directly involving the physical transfer of paper that is suitable for the retention, retrieval, and reproduction of information by the recipient;
  8. “Entity” means a corporation, foreign corporation, not-for-profit corporation, profit and not-for-profit unincorporated associations, business or statutory trust, estate, partnership, limited partnership, trust, two (2) or more persons having a joint or common economic interest, and a state, national, or foreign government;
  9. “Foreign limited partnership” means a partnership formed under the laws of a jurisdiction other than this Commonwealth and required by those laws to have one (1) or more general partners and one (1) or more limited partners and includes a foreign limited liability limited partnership;
  10. “Foreign limited liability limited partnership” means a foreign limited partnership whose general partners have limited liability for the obligations of the foreign limited partnership under a provision similar to KRS 362.2-404 (3);
  11. “General partner” means:
    1. With respect to a limited partnership, a person that:
      1. Has been admitted as a general partner under KRS 362.2-401 ; or
      2. Was a general partner in a limited partnership when that limited partnership became subject to this subchapter under KRS 362.2-974 (1) and (2); and
    2. With respect to a foreign limited partnership, a person that has rights, powers, and obligations similar to those of a general partner in a limited partnership;
  12. “Limited liability limited partnership,” except in the phrase “foreign limited liability limited partnership,” means a limited partnership whose certificate of limited partnership states that the limited partnership is a limited liability limited partnership;
  13. “Limited partner” means:
    1. With respect to a limited partnership, a person that:
      1. Has been admitted as a limited partner under KRS 362.2-301 ; or
      2. Was a limited partner in a limited partnership when that limited partnership became subject to this subchapter under KRS 362.2-974 (1) and (2); and
    2. With respect to a foreign limited partnership, a person that has rights, powers, and obligations similar to those of a limited partner in a limited partnership;
  14. “Limited partnership,” except in the phrases “foreign limited partnership” and “foreign limited liability limited partnership,” means an entity, having one (1) or more general partners and one (1) or more limited partners, which is formed under this subchapter by two (2) or more persons or becomes subject to this subchapter under KRS 362.2-974 (1) and (2). The term includes a limited liability limited partnership;
  15. “Name of record with the Secretary of State” means any real, fictitious, reserved, registered, or assumed name of an entity;
  16. “Partner” means a limited partner or general partner;
  17. “Partnership agreement” means the partners’ agreement, oral, implied, in record form, or in any combination, concerning the limited partnership. The term includes the agreement as amended;
  18. “Person” means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, or any other legal or commercial entity;
  19. “Principal office” means the office where the principal executive office of a limited partnership or foreign limited partnership is located, whether or not the office is located in this Commonwealth;
  20. “Professional services” mean the personal services rendered by physicians, osteopaths, optometrists, podiatrists, chiropractors, dentists, nurses, pharmacists, psychologists, occupational therapists, veterinarians, engineers, architects, landscape architects, certified public accountants, public accountants, physical therapists, and attorneys;
  21. “Record” means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form;
  22. “Required information” means the information that a limited partnership is required to maintain under KRS 362.2-111 ;
  23. “Sign” or “signature” includes any manual, facsimile, or conformed or electronic signature;
  24. “State” means a State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any territory or insular possession subject to the jurisdiction of the United States;
  25. “Transfer” includes an assignment, conveyance, deed, bill of sale, lease, mortgage, security interest, encumbrance, gift, and transfer by operation of law;
  26. “Transferable interest” means the partner’s right to receive distributions; and
  27. “Transferee” means a person to which all or part of a transferable interest has been transferred, whether or not the transferor is a partner.

History. Enact. Acts 2006, ch. 149, § 81, effective July 12, 2006.

Compiler’s Notes.

This section is set out above to reflect the renumbering of KRS 362.1-1204 to 362.1-974 by the state reviser effective in 2013.

NOTES TO DECISIONS

Cited:

Lach v. Man O’ War, LLC, 256 S.W.3d 563, 2008 Ky. LEXIS 66 ( Ky. 2008 ).

Research References and Practice Aids

Kentucky Bench & Bar.

Rutledge, Recent Amendments to Kentucky Business Entity Laws, Vol. 71, No. 5, Sept. 2007, Ky. Bench & Bar 25.

Kentucky Law Journal.

Campbell, Bumping Along the Bottom: Abandoned Principles and Failed Fiduciary Standards in Uniform Partnership and LLC Statutes, 96 Ky. L.J. 163 (2007).

Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 (2008).

362.2-103. Knowledge and notice.

  1. A person knows a fact if the person has actual knowledge of it.
  2. Except as otherwise provided in subsections (3) and (4) of this section, a person has notice of a fact if the person:
    1. Knows of it;
    2. Has received a notification of it; or
    3. Has reason to know it exists from all of the facts known to the person at the time in question.
  3. Subject to subsection (4) of this section, a certificate of limited partnership on file in the office of the Secretary of State is notice that the partnership is a limited partnership and the persons designated in the certificate as general partners are general partners, but is not notice of any other fact.
  4. A person has notice of:
    1. Another person’s dissociation as a general partner ninety (90) days after the effective date of an amendment to the certificate of limited partnership which states that the other person has dissociated or ninety (90) days after the effective date of a statement of dissociation pertaining to that other person, whichever occurs first;
    2. A limited partnership’s dissolution ninety (90) days after the effective date of an amendment to the certificate of limited partnership stating that the limited partnership is dissolved;
    3. A limited partnership’s cancellation ninety (90) days after the effective date of a statement of cancellation;
    4. A limited partnership’s conversion under KRS 362.2-951 to 362.2-963 ninety (90) days after the effective date of the articles of conversion; and
    5. A merger under KRS 362.2-951 to 362.2-963 ninety (90) days after the effective date of the articles of merger.
  5. A person notifies or gives a notification to another person by taking steps reasonably required to inform the other person in ordinary course, whether or not the other person learns of it.
  6. A person receives a notification when the notification:
    1. Comes to the person’s attention; or
    2. Is duly delivered at the person’s place of business or at any other place held out by the person as a place for receiving communications.
  7. Except as otherwise provided in subsection (8) of this section, an entity knows, has notice, or receives a notification of a fact for purposes of a particular transaction when the individual conducting the transaction for the entity knows, has notice, or receives a notification of the fact, or in any event when the fact would have been brought to the individual’s attention if the entity had exercised reasonable diligence. An entity exercises reasonable diligence if it maintains reasonable routines for communicating significant information to the individual conducting the transaction for the entity, and there is reasonable compliance with the routines. Reasonable diligence does not require an individual acting for the entity to communicate information unless the communication is part of the individual’s regular duties or the individual has reason to know of the transaction, and that the transaction would be materially affected by the information.
  8. A general partner’s knowledge, notice, or receipt of a notification of a fact relating to the limited partnership is effective immediately as knowledge by, notice to, or receipt of a notification by the limited partnership, except in the case of a fraud on the limited partnership committed by or with the consent of the general partner. A limited partner’s knowledge, notice, or receipt of a notification of a fact relating to the limited partnership is not effective as knowledge by, notice to, or receipt of a notification by the limited partnership.

History. Enact. Acts 2006, ch. 149, § 82, effective July 12, 2006.

Compiler’s Notes.

This section is set out above to reflect the renumbering of “KRS 362.1-1101 to 362.2-1113 ” to “KRS 362.2-951 to 362.2-963 ” by the state reviser effective in 2013.

362.2-104. Nature, purpose, and duration of entity.

  1. A limited partnership is an entity distinct from its partners. A limited partnership is the same entity regardless of whether its certificate states that the limited partnership is a limited liability limited partnership.
  2. A limited partnership may be organized under this subchapter for any lawful purpose except for rendering a professional service.
  3. A limited partnership has a perpetual duration.

History. Enact. Acts 2006, ch. 149, § 83, effective July 12, 2006.

362.2-105. Powers of limited partnership.

A limited partnership has the powers to do all things necessary or convenient to carry on its activities, including the power to sue, be sued, and defend in its own name and to maintain an action against a partner for harm caused to the limited partnership by an actual or threatened injury to the limited partnership, breach of the partnership agreement, or violation of a duty to the partnership.

History. Enact. Acts 2006, ch. 149, § 84, effective July 12, 2006.

362.2-106. Governing law.

  1. The law of this Commonwealth governs relations among the partners of a limited partnership, and between the partners and the limited partnership, and the liability of partners as partners for an obligation of a limited partnership.
  2. A limited partnership governed by this subchapter is subject to any amendment or repeal of this subchapter.

History. Enact. Acts 2006, ch. 149, § 85, effective July 12, 2006; 2010, ch. 133, § 58, effective July 15, 2010.

Research References and Practice Aids

Northern Kentucky Law Review.

Kentucky Survey Issue: Article: The 2010 Amendments to Kentucky’s Business Entity Laws, 38 N. Ky. L. Rev. 383 (2011).

362.2-107. Supplemental principles of law — Rate of interest.

  1. Unless displaced by particular provisions of this subchapter, the principles of law and equity supplement this subchapter.
  2. If an obligation to pay interest arises under this subchapter and the rate is not specified, then the rate is that specified in KRS 360.010 .
  3. Subject to KRS 362.2-110 (2), it shall be the public policy of the Commonwealth in this subchapter to give maximum effect to the principles of freedom of contract and the enforceability of partnership agreements. Unless displaced by particular provisions of this subchapter, the principles of law and equity shall supplement this subchapter. Although this subchapter is in derogation of the common law, the rules of construction that require strict construction of statutes that are in derogation of common law shall not apply to its provisions. Except as otherwise expressly provided herein, this subchapter shall not be construed to impair the obligation of any contract existing when this subchapter, or any amendment thereto, becomes effective, nor to affect any action or proceeding begun or right accrued before this subchapter or any amendment thereto takes effect.
  4. Action validly taken pursuant to a provision of this chapter shall not be deemed invalid solely because it is identical or similar in substance to an action that could have been taken pursuant to some other provision of this chapter but fails to satisfy one (1) or more requirements prescribed by such other provision.

History. Enact. Acts 2006, ch. 149, § 86, effective July 12, 2006; 2010, ch. 133, § 59, effective July 15, 2010.

362.2-108. Name of limited partnership.

The name of a limited partnership shall satisfy the requirements of KRS 14A.3-010 .

History. Enact. Acts 2006, ch. 149, § 87, effective July 12, 2006; repealed and reenact., Acts 2010, ch. 151, § 100, effective January 1, 2011.

Research References and Practice Aids

Kentucky Law Journal.

Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 (2008).

362.2-109. Reservation of name. [Repealed.]

Compiler’s Notes.

This section (Repealed and reenact., Acts 2010, ch. 51, § 152) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.3-020 .

362.2-110. Effect of partnership agreement — Nonwaivable provisions.

  1. Except as otherwise provided in subsection (2) of this section, the partnership agreement governs relations among the partners and between the partners and the partnership. To the extent the partnership agreement does not otherwise provide, this subchapter governs relations among the partners and between the partners and the partnership.
  2. The partnership agreement shall not:
    1. Vary a limited partnership’s power under KRS 362.2-105 to sue, be sued, and defend in its own name;
    2. Vary the law applicable to a limited partnership under KRS 362.2-106 ;
    3. Vary the requirements of KRS 362.2-204 ;
    4. Vary the information required under KRS 362.2-111 or unreasonably restrict the right to information under KRS 362.2-304 and 362.2-407 , but the partnership agreement may provide a different location for the maintenance of the books and records, and impose reasonable limitations on the availability and use of information obtained under those sections, and may define appropriate remedies, including liquidated damages, for a breach of any reasonable limitation on use;
    5. Eliminate the duty of loyalty under KRS 362.2-408 , but the partnership agreement may:
      1. Identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable; and
      2. Specify the number or percentage of partners which may authorize or ratify, after full disclosure to all partners of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty;
    6. Unreasonably reduce the duty of care under KRS 362.2-408 (3);
    7. Eliminate the obligation of good faith and fair dealing under KRS 362.2-305 (2) and 362.2-408(4), but the partnership agreement may prescribe the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable;
    8. Vary the power of a person to dissociate as a general partner under KRS 362.2-604 (1), except to require that the notice under KRS 362.2-603 (1) be in a record;
    9. Vary the right of a court to decree dissolution in the circumstances specified in KRS 362.2-802 ;
    10. Vary the requirement to wind up the partnership’s business as specified in KRS 362.2-803 ;
    11. Unreasonably restrict the right to bring an action under KRS 362.2-931 to 362.2-935 ; or
    12. Restrict the right of a partner under KRS 362.2-960 (1) to consent to a merger or conversion or the right of a general partner under KRS 362.2-960 (2) to consent to an amendment to the certificate of limited partnership which deletes a statement that the limited partnership is a limited liability limited partnership.
  3. If a written partnership agreement contains a provision to the effect that any amendment to the partnership agreement must be in writing and adopted in accordance with the provisions of the partnership agreement, that provision shall be enforceable in accordance with its terms, and any agreement among the partners concerning the partnership which is not in writing and adopted in accordance with the provisions of the partnership agreement shall not be part of the partnership agreement.
  4. A partnership agreement may provide that the interest of any partner who fails to make any contribution that the partner is obligated to make or who otherwise violates an obligation undertaken in the partnership agreement shall be subject to specified penalties for, or specified consequences of, such failure. Such penalty or consequence may take the form of:
    1. Reducing or eliminating the defaulting partner’s proportionate interest in the partnership;
    2. Subordinating the partner’s interest to that of nondefaulting partners;
    3. A forced sale of that interest;
    4. Forfeiture of his or her interest;
    5. The lending by other partners of the amount necessary to meet the defaulting partner’s commitment;
    6. A fixing of the value of his or her interest by appraisal or by formula and redemption or sale of the interest in the partnership at such value; or
    7. Other penalty or consequence.
  5. A partnership agreement may provide rights to any person, including a person who is not a partner or not otherwise a party to the partnership agreement, to the extent set forth therein.
  6. No partner or other person shall have a vested property right resulting from any provision of a certificate of limited partnership or partnership agreement which may not be modified by its amendment or as otherwise permitted by law.

History. Enact. Acts 2006, ch. 149, § 89, effective July 12, 2006; 2010, ch. 133, § 60, effective July 15, 2010.

362.2-1101. Definitions for KRS 362.2-1101 to 362.2-1113. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-951 , effective 2013.

362.2-1102. Conversion. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-952 , effective 2013.

362.2-1103. Action on plan of conversion by converting limited partnership. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-953 , effective 2013.

362.2-1104. Filings required for conversion — Effective date. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-954 , effective 2013.

362.2-1105. Effect of conversion. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-955 , effective 2013.

362.2-1106. Merger. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-956 , effective 2013.

362.2-1107. Action on plan of merger by constituent limited partnership. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-957 , effective 2013.

362.2-1108. Filings required for merger — Effective date. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-958 , effective 2013.

362.2-1109. Effect of merger. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-959 , effective 2013.

362.2-111. Required information.

A limited partnership shall maintain at its designated office the following information:

  1. A current list showing the full name and last known street and mailing address of each partner, separately identifying the general partners, in alphabetical order, and the limited partners, in alphabetical order;
  2. A copy of the initial certificate of limited partnership and all amendments to and restatements of the certificate, together with signed copies of any powers of attorney under which any certificate, amendment, or restatement has been signed;
  3. A copy of any filed articles of conversion or merger;
  4. A copy of the limited partnership’s federal, state, and local income tax returns and reports, if any, for the three (3) most recent years;
  5. A copy of any partnership agreement made in record form and any amendment made in record form to any partnership agreement;
  6. A copy of any financial statement of the limited partnership for the three (3) most recent years;
  7. A copy of the three (3) most recent annual reports delivered by the limited partnership to the Secretary of State pursuant to KRS 14A.6-010 ;
  8. A copy of any record made by the limited partnership during the past three (3) years of any consent given by or vote taken of any partner pursuant to this subchapter or the partnership agreement; and
  9. Unless contained in a partnership agreement in record form, a record stating:
    1. The amount of cash, and a description and statement of the agreed value of the other benefits, contributed and agreed to be contributed by each partner;
    2. The times at which, or events on the happening of which, any additional contributions agreed to be made by each partner are to be made;
    3. For any person that is both a general partner and a limited partner, a specification of what transferable interest the person owns in each capacity; and
    4. Any events upon the happening of which the limited partnership is to be dissolved and its activities wound up.

History. Enact. Acts 2006, ch. 149, § 90, effective July 12, 2006; 2010, ch. 151, § 131, effective January 1, 2011.

362.2-1110. Restrictions on approval of conversions and mergers and on relinquishing LLLP status. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-960 , effective 2013.

362.2-1111. Liability of general partner after conversion or merger. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-961 , effective 2013.

362.2-1112. Power of general partners and persons dissociated as general partners to bind organization after conversion or merger. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-962 , effective 2013.

362.2-1113. Article not exclusive. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-963 , effective 2013.

362.2-112. Business transactions of partner with partnership.

A partner may lend money to, borrow money from, act as a surety, guarantor, or endorser for, guarantee or assume one (1) or more specific obligations of, provide collateral for, and transact other business with the limited partnership and, subject to other law, has the same rights and obligations with respect to the loan or other transaction as a person that is not a partner.

History. Enact. Acts 2006, ch. 149, § 91, effective July 12, 2006.

362.2-113. Dual capacity.

A person may be both a general partner and a limited partner. A person that is both a general and limited partner has the rights, powers, duties, and obligations provided by this subchapter and the partnership agreement in each of those capacities. When the person acts as a general partner, the person is subject to the obligations and restrictions under this subchapter and the partnership agreement for general partners. When the person acts as a limited partner, the person is subject to the obligations and restrictions under this subchapter and the partnership agreement for limited partners.

History. Enact. Acts 2006, ch. 149, § 92, effective July 12, 2006.

362.2-114. Office and agent for service of process.

  1. Each limited partnership shall designate and continuously maintain in this Commonwealth:
    1. A designated office, which need not be a place of its activity in this Commonwealth; and
    2. A registered office and agent for service of process at that office that comply with KRS 14A.4-010 .
  2. Each foreign limited partnership qualified to transact business in the Commonwealth of Kentucky shall designate and continuously maintain in this Commonwealth a registered office and agent for service of process that comply with KRS 14A.4-010 .

History. Enact. Acts 2006, ch. 149, § 93, effective July 12, 2006; 2010, ch. 151, § 101, effective January 1, 2011.

362.2-115. Change of designated office or agent for service of process.

  1. In order to change its designated office, a limited partnership or a foreign limited partnership shall comply with KRS 14A.5-010 .
  2. A limited partnership or foreign limited partnership may change its registered office or registered agent as provided in KRS 14A.4-020 .

History. Enact. Acts 2006, ch. 149, § 94, effective July 12, 2006; 2010, ch. 151, § 102, effective January 1, 2011.

362.2-116. Resignation of agent for service of process. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 95) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.4-030 .

362.2-117. Service of process. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 96) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.4-040 .

362.2-118. Consent and proxies of partners.

Action requiring the consent of partners under this subchapter may be taken without a meeting, and a partner may appoint a proxy to consent or otherwise act for the partner by signing an appointment record, either personally or by the partner’s attorney in fact.

History. Enact. Acts 2006, ch. 149, § 97, effective July 12, 2006.

362.2-119. Prescribed forms. [Repealed.]

Compiler’s Notes.

This section (Repealed and reenact., Acts 2010, ch. 51, § 153) was repealed by Acts 2011, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.2-050 .

362.2-120. Effective time and date of document. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 99) was repealed by Acts 2011, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.2-070 .

362.2-1201. Uniformity of application and construction. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-971 , effective 2013.

362.2-1202. Severability clause. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-972 , effective 2013.

362.2-1203. Electronic signatures. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-973 , effective 2013.

362.2-1204. Effect on limited partnerships formed prior to July 15, 1988. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-974 , effective 2013.

362.2-1205. Effective date. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-975 , effective 2013.

362.2-1206. Savings clause. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-976 , effective 2013.

362.2-1207. Short title for Subchapter 2 of KRS chapter 362. [Renumbered.]

Compiler’s Notes.

This section was renumbered as KRS 362.2-977 , effective 2013.

362.2-121. Requirements for documents to be filed with the Secretary of State.

Each document delivered by a domestic or foreign limited partnership to the Secretary of State for filing shall satisfy the requirements of KRS 14A.2-010 to 14A.2-150 .

History. Enact. Acts 2006, ch. 149, § 100, effective July 12, 2006; 2007, ch. 137, § 154, effective June 26, 2007, repealed and reenact., Acts 2010, ch. 51, § 154, effective July 15, 2010; 2010, ch. 151, § 103, effective January 1, 2011.

Legislative Research Commission Notes.

(1/1/2011). This section was repealed and reenacted without change to the existing language by 2010 Ky. Acts ch. 51, effective 7/15/10, and repealed and reenacted with the new language by 2010 Ky. Acts ch. 151, effective 1/1/2011. Pursuant to Section 184 of Acts ch. 51, it was the intent of the General Assembly that the repeal and reenactment by ch. 51 not serve to void amendments made by other bills, and these Acts do not appear to be in conflict, therefore, they have been codified together.

(7/15/2010). 2010 Ky. Acts ch. 51, sec. 183, provides, “The specific textual provisions of Sections 1 to 178 of this Act which reflect amendments made to those sections by 2007 Ky. Acts ch. 137 shall be deemed effective as of June 26, 2007, and those provisions are hereby made expressly retroactive to that date, with the remainder of the text of those sections being unaffected by the provisions of this section.”

362.2-122. Fees for filing documents with Secretary of State.

The Secretary of State shall collect the following fees when the following records in this subsection are delivered for filing:

  1. Certificate of limited partnership  . . . . . $40.00
  2. Amendment of certificate of limited partnership  . . . . . $40.00
  3. Restatement of certificate of limited partnership  . . . . . $40.00
  4. Amendment and restatement of certificate of limited partnership  . . . . . $80.00
  5. Certificate of dissolution with respect to a domestic limited partnership  . . . . . $40.00

History. Enact. Acts 2006, ch. 149, § 101, effective July 12, 2006; repealed, reenact., and amend., Acts 2010, ch. 151, § 104, effective January 1, 2011.

362.2-123. Registration of name of foreign limited partnership. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 102) was repealed by Acts 2011, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.3-040 .

362.2-124. Duty of Secretary of State to file document — Manner of filing — Effect of filing or refusal to file — Appeal of refusal of Secretary of State to file document. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 103) was repealed by Acts 2011, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.2-100 , 14A.2-110 , 14A.2-120 .

362.2-125. Effect of certificate of Secretary of State attached to copy of filed document. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 104) was repealed by Acts 2011, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.2-120 .

Formation Certificate of Limited Partnership and Other Filings

362.2-201. Formation of limited partnership — Certificate of limited partnership.

  1. In order to form a limited partnership, a certificate of limited partnership shall be delivered to the Secretary of State for filing. The certificate shall state:
    1. The name of the limited partnership, which shall comply with KRS 14A.3-010 ;
    2. The street address of the initial designated office;
    3. The limited partnership’s initial registered office and the name of its initial registered agent which shall comply with KRS 14A.4-010 ;
    4. The name and street address of each general partner; and
    5. Any additional information required by this subchapter.
  2. If the limited partnership elects to be a limited liability limited partnership, then the certificate shall contain a statement that the limited partnership elects to be a limited liability limited partnership.
  3. A certificate of limited partnership may also contain any other matters but shall not vary from the provisions specified in KRS 362.2-110 (2) in a manner inconsistent with that section.
  4. Subject to subsection (2) of this section, if any provision of a partnership agreement is inconsistent with the filed certificate of limited partnership or with a filed statement of dissociation, cancellation, or change, or filed articles of conversion or merger, then:
    1. The partnership agreement prevails as to partners and transferees; and
    2. The filed certificate of limited partnership, statement of dissociation, cancellation, or change, or articles of conversion or merger prevail as to persons, other than partners and transferees, that reasonably rely on the filed record to their detriment.

History. Enact. Acts 2006, ch. 149, § 105, effective July 12, 2006; 2010, ch. 151, § 105, effective January 1, 2011.

Research References and Practice Aids

Kentucky Bench & Bar.

Rutledge, Recent Amendments to Kentucky Business Entity Laws, Vol. 71, No. 5, Sept. 2007, Ky. Bench & Bar 25.

362.2-202. Amendment or restatement of certificate.

  1. In order to amend its certificate of limited partnership, a limited partnership shall deliver to the Secretary of State for filing an amendment that satisfies KRS 14A.2-010 to 14A.2-150 or, pursuant to KRS 362.2-951 to 362.2-963 , articles of merger, stating:
    1. The name of the limited partnership;
    2. The date of filing of its initial certificate; and
    3. The changes the amendment makes to the certificate as most recently amended or restated.
  2. A limited partnership shall promptly deliver to the Secretary of State for filing an amendment to a certificate of limited partnership to reflect:
    1. The admission of a new general partner;
    2. The dissociation of a person as a general partner; or
    3. The appointment of a person to wind up the limited partnership’s activities under KRS 362.2-803 (3) or (4).
  3. A general partner who knows that any information in a filed certificate of limited partnership was false when the certificate was filed or has become false due to changed circumstances shall promptly:
    1. Cause the certificate to be amended; or
    2. If appropriate, deliver to the Secretary of State for filing a statement of change pursuant to KRS 14A.5-010 or a statement of correction pursuant to KRS 14A2-090.
  4. A certificate of limited partnership may be amended at any time for any other proper purpose as determined by the limited partnership.
  5. A restated certificate of limited partnership may be delivered to the Secretary of State for filing in the same manner as an amendment.
  6. An amendment or restated certificate is effective as provided in KRS 14A2-070.

History. Enact. Acts 2006, ch. 149, § 106, effective July 12, 2006; 2010, ch. 151, § 106, effective January 1, 2011.

362.2-203. Statement of cancellation.

A dissolved limited partnership that has completed winding up shall deliver to the Secretary of State for filing a statement of cancellation that states:

  1. The name of the limited partnership;
  2. The date of filing of its initial certificate of limited partnership; and
  3. Any other information as determined by the general partners filing the statement or by a person appointed pursuant to KRS 362.2-803 (3) or (4).

History. Enact. Acts 2006, ch. 149, § 107, effective July 12, 2006.

Compiler’s Notes.

This section has been reprinted to indicate a change in the section heading made by the Reviser.

362.2-204. Signing of records.

  1. Each record delivered to the Secretary of State for filing pursuant to this subchapter shall be signed in the following manner:
    1. An initial certificate of limited partnership shall be signed by all general partners listed in the certificate.
    2. An amendment adding or deleting a statement that the limited partnership is a limited liability limited partnership shall be signed by all general partners listed in the certificate.
    3. An amendment designating as general partner a person admitted under KRS 362.2-803 (3)(b) following the dissociation of a limited partnership’s last general partner shall be signed by that person.
    4. An amendment required by KRS 362.2-803 (3) following the appointment of a person to wind up the dissolved limited partnership’s activities shall be signed by that person.
    5. Any other amendment shall be signed by:
      1. At least one (1) general partner listed in the certificate;
      2. Each other person designated in the amendment as a new general partner; and
      3. Each person that the amendment indicates has dissociated as a general partner, unless:
        1. The person is deceased, or a guardian or general conservator has been appointed for the person and the amendment so states; or
        2. The person has previously delivered to the Secretary of State for filing a statement of dissociation.
    6. A restated certificate of limited partnership shall be signed by at least one (1) general partner listed in the certificate, and, to the extent the restated certificate effects a change under any other paragraph of this subsection, the certificate shall be signed in a manner that satisfies that paragraph.
    7. A statement of cancellation shall be signed by all general partners listed in the certificate or, if the certificate of a dissolved limited partnership lists no general partners, then by the person appointed pursuant to KRS 362.2-803(3) or (4) to wind up the dissolved limited partnership’s activities.
    8. Articles of conversion shall be signed by each general partner listed in the certificate of limited partnership.
    9. Articles of merger shall be signed as provided in KRS 362.2-958 (1).
    10. Any other record delivered on behalf of a limited partnership to the Secretary of State for filing shall be signed by at least one (1) general partner listed in the certificate.
    11. A statement by a person pursuant to KRS 362.2-605 (4) stating that the person has dissociated as a general partner shall be signed by that person.
    12. A statement of withdrawal by a person pursuant to KRS 362.2-306 shall be signed by that person.
    13. A record delivered on behalf of a foreign limited partnership to the Secretary of State for filing shall be signed by at least one (1) general partner of the foreign limited partnership.
    14. Any other record delivered on behalf of any person to the Secretary of State for filing shall be signed by that person.
  2. Any person may sign by an attorney in fact any record to be filed pursuant to this subchapter.

History. Enact. Acts 2006, ch. 149, § 108, effective July 12, 2006.

Compiler’s Notes.

This section is set out above to reflect the renumbering of KRS 362.2-1108 to KRS 362.2-958 by the state reviser effective in 2013.

362.2-205. Signing and filing by judicial act.

  1. If a person required by this subchapter to sign a record or deliver a record to the Secretary of State for filing fails or refuses to do so, then any other person that is aggrieved by the failure or refusal may petition the Circuit Court in which the limited partnership maintains its registered office to order:
    1. The person to sign the record or deliver the record to the Secretary of State for filing; or
    2. The Secretary of State to file the record unsigned.
  2. If the person aggrieved under subsection (1) of this section is not the limited partnership or foreign limited partnership to which the record pertains, then the aggrieved person shall make that limited partnership or foreign limited partnership a party to the action. A person aggrieved under subsection (1) of this section may seek in the alternative all remedies provided in subsection (1)(a) of this section in the same action.
  3. A record filed unsigned pursuant to this section is effective without being signed.

History. Enact. Acts 2006, ch. 149, § 109, effective July 12, 2006.

362.2-206. Delivery to and filing of records by the Secretary of State.

  1. Unless the Secretary of State determines that a record fails to comply with the filing requirements of this subchapter, and if all filing fees have been paid, then the Secretary of State shall file the record and:
    1. For a statement of dissociation, send:
      1. A copy of the filed statement to the person which the statement indicates has dissociated as a general partner; and
      2. A copy of the filed statement to the limited partnership;
    2. For a statement of withdrawal, send:
      1. A copy of the filed statement to the person on whose behalf the record was filed; and
      2. If the statement refers to an existing limited partnership, a copy of the filed statement to the limited partnership; and
    3. For all other records, send a copy of the filed record to the person, or the duly authorized representative thereof, on whose behalf the record was filed.
  2. Upon request and payment of a fee, the Secretary of State shall send to the requester a certified copy of the requested record.
  3. Except as otherwise provided in KRS 14A.2-090 and 14A.4-030 , a record delivered to the Secretary of State for filing under this subchapter may specify an effective time and a delayed effective date.

History. Enact. Acts 2006, ch. 149, § 110, effective July 12, 2006; 2010, ch. 151, § 149, effective January 1, 2011.

362.2-207. Correcting filed record. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 111) was repealed by Acts 2011, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.2-090 .

362.2-208. Liability for false information in record.

  1. If a record delivered to the Secretary of State for filing under this subchapter and filed by the Secretary of State contains false information, a person that suffers loss by reliance on the information may recover damages for the loss from:
    1. A person that signed the record, or caused another to sign it on the person’s behalf, and knew the information to be false at the time the record was signed; and
    2. A general partner that has notice that the information was false when the record was filed or has become false due to changed circumstances, if the general partner has notice for a reasonably sufficient time before the information is relied upon to enable the general partner to effect an amendment under KRS 362.2-202 , file a petition pursuant to KRS 362.2-205 , or deliver to the Secretary of State for filing a statement of change pursuant to KRS 362.2-115 or a statement of correction pursuant to KRS 14A.2-090 .
  2. The provisions of this section are in addition to those in KRS 14A.2-030 .

History. Enact. Acts 2006, ch. 149, § 112, effective July 12, 2006; 2010, ch. 151, § 107, effective January 1, 2011.

362.2-209. Certificate of existence or authorization. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 113) was repealed by Acts 2011, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.2-130 .

362.2-210. Annual report for Secretary of State.

A limited partnership subject to this subchapter or a foreign limited partnership authorized to transact business in this Commonwealth shall deliver to the Secretary of State for filing an annual report as provided in KRS 14A.6-010 .

History. Enact. Acts 2006, ch. 149, § 114, effective July 12, 2006; 2007, ch. 137, § 155, effective June 26, 2007; repealed and reenact., Acts 2010, ch. 51, § 155, effective July 15, 2010; repealed, reenact., and amend., Acts 2010, ch. 151, § 108, effective January 1, 2011.

Legislative Research Commission Notes.

(1/1/2011). This section was repealed, reenacted, and amended by 2010 Ky. Acts ch. 151, and repealed and reenacted by 2010 Ky. Acts ch. 51. Pursuant to Section 184 of Acts ch. 51, it was the intent of the General Assembly that the repeal and reenactment not serve to void the amendment, and these Acts do not appear to be in conflict, therefore, they have been codified together.

(7/15/2010). 2010 Ky. Acts ch. 51, sec. 183, provides, “The specific textual provisions of Sections 1 to 178 of this Act which reflect amendments made to those sections by 2007 Ky. Acts ch. 137 shall be deemed effective as of June 26, 2007, and those provisions are hereby made expressly retroactive to that date, with the remainder of the text of those sections being unaffected by the provisions of this section.”

Research References and Practice Aids

Kentucky Law Journal.

Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 (2008).

Limited Partners

362.2-301. Admission of limited partner.

A person becomes a limited partner:

  1. As provided in the partnership agreement;
  2. As the result of a merger or conversion under KRS 362.2-951 to 362.2-963 ; or
  3. With the consent of all the partners.

History. Enact. Acts 2006, ch. 149, § 115, effective July 12, 2006.

Compiler’s Notes.

This section is set out above to reflect the renumbering of “KRS 362.2-1101 to 362.2-1113 ” to “KRS 362.2-951 to 362.2963” by the state reviser effective in 2013.

362.2-302. No right or power as limited partner to bind limited partnership.

A limited partner does not have the right or the power as a limited partner to act for or bind the limited partnership.

History. Enact. Acts 2006, ch. 149, § 116, effective July 12, 2006.

362.2-303. No liability as limited partner for limited partnership.

  1. An obligation of a limited partnership, whether arising in contract, tort, or otherwise, is not the obligation of any limited partner. A limited partner is not personally liable, directly or indirectly, by way of indemnification, contribution, assessment, or otherwise, for an obligation of the limited partnership solely by reason of being a limited partner, even if the limited partner participates in the management and control of the limited partnership.
  2. Subsection (1) of this section shall not affect the liability of a limited partner for his or her own negligence, wrongful acts, or misconduct.

History. Enact. Acts 2006, ch. 149, § 117, effective July 12, 2006; 2010, ch. 133, § 61, effective July 15, 2010.

Research References and Practice Aids

Northern Kentucky Law Review.

Kentucky Survey Issue: Article: The 2010 Amendments to Kentucky’s Business Entity Laws, 38 N. Ky. L. Rev. 383 (2011).

362.2-304. Right to information of limited partner and former limited partner.

  1. On ten (10) days’ demand, made in a record received by the limited partnership, a limited partner may inspect and copy during regular business hours in the limited partnership’s designated office the information required by KRS 362.2-111 . A limited partner making demand pursuant to this subsection need not demonstrate, state, or have any particular purpose for seeking the information.
  2. A limited partner, during regular business hours and at a reasonable location specified by the limited partnership, may obtain from the limited partnership and inspect and copy true and full information regarding the state of the activities and financial condition of the limited partnership and other information regarding the activities of the limited partnership as is just and reasonable if:
    1. The limited partner seeks the information for a purpose reasonably related to the partner’s interest as a limited partner;
    2. The limited partner makes a demand in a record received by the limited partnership, describing with reasonable particularity the information sought and the purpose for seeking the information; and
    3. The information sought is directly connected to the limited partner’s purpose.
  3. Within ten (10) days after receiving a demand pursuant to subsection (2) of this section, the limited partnership shall in a record inform the limited partner that made the demand:
    1. What information the limited partnership will provide in response to the demand;
    2. When and where the limited partnership will provide that information; and
    3. If the limited partnership declines to provide any demanded information, the limited partnership’s reasons for declining.
  4. Subject to subsection (6) of this section, a person dissociated as a limited partner may inspect and copy during regular business hours in the limited partnership’s designated office the information required by KRS 362.2-111 if:
    1. The information pertains to the period during which the person was a limited partner;
    2. The person seeks the information in good faith; and
    3. The person meets the requirements of subsection (2) of this section.
  5. The limited partnership shall respond to a demand made pursuant to subsection (4) of this section in the same manner as provided in subsection (3) of this section.
  6. If a limited partner dies, then KRS 362.2-704 applies.
  7. The limited partnership may impose reasonable limitations on the use of information obtained under this section. In a dispute concerning the reasonableness of a restriction under this subsection, the limited partnership has the burden of proving reasonableness.
  8. A limited partnership may charge a limited partner or person dissociated as a limited partner who makes a demand under this section reasonable costs of copying, limited to the costs of labor and material.
  9. Whenever this subchapter or a partnership agreement provides for a limited partner to give or withhold consent to a matter, before the consent is given or withheld, the limited partnership shall, without demand, provide the limited partner with all information that the limited partnership knows and is material to the limited partner’s decision.
  10. A limited partner or person dissociated as a limited partner may exercise the rights under this section through an attorney or other agent. In that event, any limitations on availability and use under subsection (7) of this section apply both to the limited partner or person and to the attorney or other agent.
  11. The rights stated in this section do not extend to a transferee, but:
    1. Subsection (4) of this section creates rights for a person dissociated as a limited partner;
    2. Subsection (6) of this section recognizes the rights of the executor or administrator of a deceased limited partner; and
    3. The rights under this section extend to the legal representative of an individual under legal disability who is a limited partner or person dissociated as a limited partner.

History. Enact. Acts 2006, ch. 149, § 118, effective July 12, 2006.

Research References and Practice Aids

Kentucky Bench & Bar.

Rutledge, Recent Amendments to Kentucky Business Entity Laws, Vol. 71, No. 5, Sept. 2007, Ky. Bench & Bar 25.

362.2-305. Limited duties of limited partners.

  1. A limited partner does not have any fiduciary duty to the limited partnership or to any other partner solely by reason of being a limited partner.
  2. A limited partner shall discharge the duties to the partnership and the other partners under this subchapter or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing.
  3. A limited partner does not violate a duty or obligation under this subchapter or under the partnership agreement merely because the limited partner’s conduct furthers the limited partner’s own interest.

History. Enact. Acts 2006, ch. 149, § 119, effective July 12, 2006.

362.2-306. Person erroneously believing self limited partner.

  1. Except as otherwise provided in subsection (2) of this section, a person that makes an investment in a business enterprise and erroneously but in good faith believes that the person has become a limited partner in the enterprise is not liable for the enterprise’s obligations by reason of making the investment, receiving distributions from the enterprise, or exercising any rights of or appropriate to a limited partner if, on ascertaining the mistake, the person:
    1. Causes an appropriate certificate of limited partnership, amendment, or statement of correction to be signed and delivered to the Secretary of State for filing; or
    2. Withdraws from future participation as an owner in the enterprise by signing and delivering to the Secretary of State for filing a statement of withdrawal under this section.
  2. A person that makes an investment described in subsection (1) of this section is liable to the same extent as a general partner to any third party that enters into a transaction with the enterprise, believing in good faith that the person is a general partner, before the Secretary of State files a statement of withdrawal, certificate of limited partnership, amendment, or statement of correction to show that the person is not a general partner.
  3. If a person makes a diligent effort in good faith to comply with subsection (1)(a) of this section and is unable to cause the appropriate certificate of limited partnership, amendment, or statement of correction to be signed and delivered to the Secretary of State for filing, then the person has the right to withdraw from the enterprise pursuant to subsection (1)(b) of this section even if otherwise the withdrawal would breach an agreement with others that are or have agreed to become co-owners of the enterprise.

History. Enact. Acts 2006, ch. 149, § 120, effective July 12, 2006.

Legislative Research Commission Note.

(7/12/2006). In 2006 Ky. Acts ch. 149, sec. 120, it is apparent from the context of the section and from the uniform act on which it is based, that the reference to subsection (1)(a) in subsection (3) of this section should have been to (1)(b). Under the authority of KRS 7.136 , the Statute Reviser has made this correction.

General Partners

362.2-401. Admission of general partner.

A person becomes a general partner:

  1. As provided in the partnership agreement;
  2. Under KRS 362.2-801 (3)(b) following the dissociation of a limited partnership’s last general partner;
  3. As the result of a conversion or merger under KRS 362.2-951 to 362.2-963 ; or
  4. With the consent of all the partners.

History. Enact. Acts 2006, ch. 149, § 121, effective July 12, 2006.

Compiler’s Notes.

This section is set out above to reflect the renumbering of “KRS 362.2-1101 to 362.2-1113 ” to “KRS 362.2-951 to 362.2963” by the state reviser effective in 2013.

362.2-402. General partner agent of limited partnership.

  1. Each general partner is an agent of the limited partnership for the purposes of its activities. An act of a general partner, including the signing of a record in the partnership’s name, for apparently carrying on in the ordinary course the limited partnership’s activities or activities of the kind carried on by the limited partnership, binds the limited partnership, unless the general partner did not have authority to act for the limited partnership in the particular matter and the person with which the general partner was dealing knew, had received a notification, or had notice under KRS 362.2-103 (4) that the general partner lacked authority.
  2. An act of a general partner which is not apparently for carrying on in the ordinary course the limited partnership’s activities or activities of the kind carried on by the limited partnership binds the limited partnership only if the act was authorized by all the other partners.

History. Enact. Acts 2006, ch. 149, § 122, effective July 12, 2006.

362.2-403. Limited partnership liable for general partner’s actionable conduct.

  1. A limited partnership is liable for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a general partner acting in the ordinary course of activities of the limited partnership or with authority of the limited partnership.
  2. If, in the course of the limited partnership’s activities or while acting with authority of the limited partnership, a general partner receives or causes the limited partnership to receive money or property of a person not a partner, and the money or property is misapplied by a general partner, the limited partnership is liable for the loss.

History. Enact. Acts 2006, ch. 149, § 123, effective July 12, 2006.

Legislative Research Commission Note.

(7/12/2006). In 2006 Ky. Acts ch. 149, sec. 123, it is apparent from the context of the section and from the uniform act on which it is based that the word “then” appearing in subsection (2) should have been “the.” Under the authority of KRS 7.136 , the Statute Reviser has made this correction.

362.2-404. General partner’s liability.

  1. Except as otherwise provided in subsections (2) and (3) of this section, all general partners are liable jointly and severally for all obligations of the limited partnership unless otherwise agreed by the claimant or provided by law.
  2. A person admitted as a general partner into an existing limited partnership is not personally liable for any limited partnership obligation incurred before the person’s admission as a general partner.
  3. An obligation of a limited partnership arising out of or related to circumstances or events occurring or incurred while the limited partnership is a limited liability limited partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the limited partnership. A general partner is not personally liable, directly or indirectly, by way of indemnification, contribution, assessment, or otherwise, for such an obligation solely by reason of being or acting as a general partner. This subsection applies despite anything inconsistent in the partnership agreement that existed immediately before the consent required to become a limited liability limited partnership under KRS 362.2-406 (2)(b).
  4. Subsection (3) of this section shall not affect the liability of a general partner for his or her own negligence, wrongful acts, or misconduct.

History. Enact. Acts 2006, ch. 149, § 124, effective July 12, 2006; 2010, ch. 133, § 62, effective July 15, 2010; 2012, ch. 81, § 121, effective July 12, 2012.

Research References and Practice Aids

Northern Kentucky Law Review.

Kentucky Survey Issue: Article: The 2010 Amendments to Kentucky’s Business Entity Laws, 38 N. Ky. L. Rev. 383 (2011).

362.2-405. Actions by and against partnership and partners.

  1. To the extent not inconsistent with KRS 362.2-404 , any of the general partners may be joined in an action against the limited partnership or named in separate actions.
  2. A judgment against a limited partnership is not by itself a judgment against a general partner. A judgment against a limited partnership may not be satisfied from a general partner’s assets unless there is also a judgment against the general partner.
  3. A judgment creditor of a general partner may not levy execution against the assets of the general partner to satisfy a judgment based on a claim against the limited partnership, unless the partner is personally liable for the claim under KRS 362.2-404 and:
    1. A judgment based on the same claim has been obtained against the limited partnership and a writ of execution on the judgment has been returned unsatisfied in whole or in part;
    2. The limited partnership is a debtor in bankruptcy;
    3. The general partner has agreed that the creditor need not exhaust limited partnership assets;
    4. A court grants permission to the judgment creditor to levy execution against the assets of a general partner based on a finding that limited partnership assets subject to execution are clearly insufficient to satisfy the judgment, that exhaustion of limited partnership assets is excessively burdensome, or that the grant of permission is an appropriate exercise of the court’s equitable powers; or
    5. Liability is imposed on the general partner by law or contract independent of the existence of the limited partnership.

History. Enact. Acts 2006, ch. 149, § 125, effective July 12, 2006.

362.2-406. Management rights of general partner.

  1. Each general partner has equal rights in the management and conduct of the limited partnership’s activities. Except as expressly provided in this subchapter, any matter relating to the activities of the limited partnership may be exclusively decided by the general partner or, if there is more than one (1) general partner, by a majority of the general partners.
  2. The consent of each partner is necessary to:
    1. Amend the partnership agreement;
    2. Amend the certificate of limited partnership to add or, subject to KRS 362.2-960 , delete a statement that the limited partnership is a limited liability limited partnership; or
    3. Sell, lease, exchange, or otherwise dispose of all or substantially all of the limited partnership’s property, with or without the good will, other than in the usual and regular course of the limited partnership’s activities.
  3. A limited partnership shall reimburse a general partner for payments made and indemnify a general partner for liabilities incurred by the general partner in the ordinary course of the activities of the partnership or for the preservation of its activities or property.
  4. A limited partnership shall reimburse a general partner for an advance to the limited partnership beyond the amount of capital the general partner agreed to contribute.
  5. A payment or advance made by a general partner which gives rise to an obligation of the limited partnership under subsection (3) or (4) of this section constitutes a loan to the limited partnership which accrues interest from the date of the payment or advance.
  6. A general partner is not entitled to remuneration for services performed for the partnership.

History. Enact. Acts 2006, ch. 149, § 126, effective July 12, 2006.

Compiler’s Notes.

This section is set out above to reflect the renumbering of KRS 362.2-1110 to KRS 362.2-960 by the state reviser effective in 2013.

362.2-407. Right to information of general partner and former general partner.

  1. Without having to demonstrate, state, or have any particular purpose for seeking the information, a general partner may during regular business hours inspect and copy:
    1. In the limited partnership’s designated office, the required information; and
    2. At a reasonable location specified by the limited partnership, any other records maintained by the limited partnership regarding the limited partnership’s activities and financial condition.
  2. Each general partner and the limited partnership shall furnish to a general partner:
    1. Without demand, any information concerning the limited partnership’s activities and activities reasonably required for the proper exercise of the general partner’s rights and duties under the partnership agreement or this subchapter; and
    2. On demand, any other information concerning the limited partnership’s activities, except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances.
  3. Subject to subsection (5) of this section, on ten (10) days’ demand made in a record received by the limited partnership, a person dissociated as a general partner may have access to the information and records described in subsection (1) of this section at the location specified in subsection (1) of this section if:
    1. The information or record pertains to the period during which the person was a general partner;
    2. The person seeks the information or record in good faith; and
    3. The person satisfies the requirements of KRS 362.2-304 (2).
  4. The limited partnership shall respond to a demand made pursuant to subsection (3) of this section in the same manner as provided in KRS 362.2-304 (3).
  5. If a general partner dies, then KRS 362.2-704 applies.
  6. The limited partnership may impose reasonable limitations on the use of information under this section. In any dispute concerning the reasonableness of a restriction under this subsection, the limited partnership has the burden of proving reasonableness.
  7. A limited partnership may charge a person dissociated as a general partner that makes a demand under this section reasonable costs of copying, limited to the costs of labor and material.
  8. A general partner or person dissociated as a general partner may exercise the rights under this section through an attorney or other agent. In that event, any limitation on availability and use under subsection (6) of this section applies to the attorney or other agent and the general partner or person dissociated as a general partner.
  9. The rights under this section do not extend to a transferee, but:
    1. Subsection (3) of this section creates rights for a person dissociated as a general partner, and those rights extend to the legal representative of an individual who dissociated as a general partner under KRS 362.2-603 (7)(b) or (c); and
    2. Subsection (5) of this section recognizes the rights of the executor or administrator of a deceased general partner.

History. Enact. Acts 2006, ch. 149, § 127, effective July 12, 2006.

362.2-408. General standards of general partner’s conduct.

  1. The fiduciary duties that a general partner has to the limited partnership and the other partners include the duties of loyalty and care under subsections (2) and (3) of this section.
  2. A general partner’s duty of loyalty to the limited partnership and the other partners includes, but it not limited to, the following:
    1. To account to the limited partnership and hold as trustee for it any property, profit, or benefit derived by the general partner in the conduct and winding up of the limited partnership’s activities or derived from a use by the general partner of limited partnership property, including the appropriation of a limited partnership opportunity;
    2. To refrain from dealing with the limited partnership in the conduct or winding up of the limited partnership’s activities as or on behalf of a party having an interest adverse to the limited partnership; and
    3. To refrain from competing with the limited partnership in the conduct or winding up of the limited partnership’s activities.
  3. A general partner’s duty of care to the limited partnership and the other partners in the conduct and winding up of the limited partnership’s activities includes, but it not limited to, acting with the care that a reasonable person in a like position would exercise under similar circumstances and in a manner that the partner believes to be in the best interests of the limited partnership.
  4. A general partner shall discharge the duties to the limited partnership and the other partners under this subchapter or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing.
  5. A general partner does not violate a duty or obligation under this subchapter or under the partnership agreement merely because the general partner’s conduct furthers the general partner’s own interest. That a transaction was fair to the limited partnership shall not constitute a defense to the breach of the obligation in subsection (2) of this section.

History. Enact. Acts 2006, ch. 149, § 128, effective July 12, 2006; 2012, ch. 81, § 122, effective July 12, 2012.

NOTES TO DECISIONS

1.Fiduciary Duty.

Restructuring of a limited partnership into a limited liability company without a limited partner’s approval was a breach of the general partners’ fiduciary duty to the limited partner, as was a transfer of the partnership’s assets to the limited liability company in violation of former KRS 362.490(2). Lach v. Man O' War, LLC, 256 S.W.3d 563, 2008 Ky. LEXIS 66 ( Ky. 2008 ).

Research References and Practice Aids

Kentucky Law Journal.

Campbell, Bumping Along the Bottom: Abandoned Principles and Failed Fiduciary Standards in Uniform Partnership and LLC Statutes, 96 Ky. L.J. 163 (2007).

Contributions and Distributions

362.2-501. Form of contribution.

A contribution of a partner may consist of tangible or intangible property or other benefit to the limited partnership, including money, services performed, promissory notes, other agreements to contribute cash or property, and contracts for services to be performed.

History. Enact. Acts 2006, ch. 149, § 129, effective July 12, 2006.

362.2-502. Liability for contribution.

  1. A partner’s obligation to contribute money, property, or other benefit to, or to perform services for, a limited partnership is not excused by the partner’s death, disability, or other inability to perform personally.
  2. If a partner does not make a promised contribution of property or services, then the partner is obligated at the option of the limited partnership to contribute money equal to that portion of the value, as stated in the required information, of the stated contribution which has not been made.
  3. The obligation of a partner to make a contribution or return money or other property paid or distributed in violation of this subchapter may be compromised only by consent of all partners. A creditor of a limited partnership which extends credit or otherwise acts in reliance on an obligation described in subsection (1) of this section, and without notice of any compromise under this subsection, may enforce the original obligation.

History. Enact. Acts 2006, ch. 149, § 130, effective July 12, 2006.

362.2-503. Sharing of distributions.

A distribution by a limited partnership shall be shared among the partners on the basis of the value, as stated in the required records when the limited partnership decides to make the distribution, of the contributions the limited partnership has received from each partner.

History. Enact. Acts 2006, ch. 149, § 131, effective July 12, 2006.

362.2-504. Interim distributions.

A partner does not have a right to any distribution before the dissolution and winding up of the limited partnership unless the limited partnership decides to make an interim distribution.

History. Enact. Acts 2006, ch. 149, § 132, effective July 12, 2006.

362.2-505. No distribution on account of dissociation.

A person does not have a right to receive a distribution on account of dissociation.

History. Enact. Acts 2006, ch. 149, § 133, effective July 12, 2006.

362.2-506. Distribution in kind.

  1. A partner, regardless of the nature of the partner’s contribution, has no right to demand or receive any distribution from a limited partnership in any form other than cash. A limited partnership may distribute an asset in kind only to the extent that each partner receives a percentage of the asset equal to the partner’s share of distributions.
  2. The property of a limited partnership subject to this subchapter shall not be subject to KRS 381.135(1)(a)1.

History. Enact. Acts 2006, ch. 149, § 134, effective July 12, 2006.

362.2-507. Right to distribution.

When a partner becomes entitled to receive a distribution, the partner has the status of, and is entitled to all remedies available to, a creditor of the limited partnership with respect to the distribution. However, the limited partnership’s obligation to make a distribution is subject to offset for any amount owed to the limited partnership by the partner or dissociated partner on whose account the distribution is made.

History. Enact. Acts 2006, ch. 149, § 135, effective July 12, 2006.

362.2-508. Limitations on distribution.

  1. A limited partnership shall not make a distribution in violation of the partnership agreement.
  2. A limited partnership shall not make a distribution if after the distribution:
    1. The limited partnership would not be able to pay its debts as they become due in the ordinary course of the limited partnership’s activities; or
    2. The limited partnership’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the limited partnership were to be dissolved, wound up, and terminated at the time of the distribution, to satisfy the preferential rights upon dissolution, winding up, and termination of partners whose preferential rights are superior to those of persons receiving the distribution.
  3. A limited partnership may base a determination that a distribution is not prohibited under subsection (2) of this section on financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances or on a fair valuation or other method that is reasonable in the circumstances.
  4. Except as otherwise provided in subsection (7) of this section, the effect of a distribution under subsection (2) of this section is measured:
    1. In the case of distribution by purchase, redemption, or other acquisition of a transferable interest in the limited partnership, as of the date money or other property is transferred or debt incurred by the limited partnership; and
    2. In all other cases, as of the date:
      1. The distribution is authorized, if the payment occurs within one hundred twenty (120) days after that date; or
      2. The payment is made, if payment occurs more than one hundred twenty (120) days after that date.
  5. A limited partnership’s indebtedness to a partner incurred by reason of a distribution made in accordance with this section is at parity with the limited partnership’s indebtedness to its general, unsecured creditors.
  6. A limited partnership’s indebtedness, including indebtedness issued in connection with or as part of a distribution, is not considered a liability for purposes of determinations under subsection (2) of this section if the terms of the indebtedness provide that payment of principal and interest are made only to the extent that a distribution could then be made to partners under this section.
  7. If indebtedness is issued as a distribution, each payment of principal or interest on the indebtedness is treated as a distribution, the effect of which is measured on the date the payment is made.
  8. For purposes of this section, the term “distribution” shall not include amounts constituting reasonable compensation for present or past services or reasonable payments made in the ordinary course of business pursuant to a bona fide retirement plan or other benefits program.

History. Enact. Acts 2006, ch. 149, § 136, effective July 12, 2006.

Research References and Practice Aids

Kentucky Bench & Bar.

Rutledge, Recent Amendments to Kentucky Business Entity Laws, Vol. 71, No. 5, Sept. 2007, Ky. Bench & Bar 25.

362.2-509. Liability for improper distributions.

  1. A general partner that consents to a distribution made in violation of KRS 362.2-508 is personally liable to the limited partnership for the amount of the distribution which exceeds the amount that could have been distributed without the violation if it is established that in consenting to the distribution the general partner failed to comply with KRS 362.2-408 .
  2. A partner or transferee that knew a distribution was made in violation of KRS 362.2-508 is personally liable to the limited partnership but only to the extent that the distribution received by the partner or transferee exceeded the amount that could have been properly paid under KRS 362.2-508 .
  3. A general partner against which an action is brought under subsection (1) of this section may:
    1. Implead in the action any other person that as a general partner consented to the distribution in violation of subsection (1) of this section and compel contribution from that person; and
    2. Implead in the action any person that received a distribution in violation of subsection (2) of this section and compel contribution from that person in the amount that person received in violation of subsection (2) of this section.
  4. A proceeding under this section is barred if it is not commenced within two (2) years after the distribution.

History. Enact. Acts 2006, ch. 149, § 137, effective July 12, 2006.

Dissociation

362.2-601. Dissociation as limited partner.

  1. A person does not have a right to dissociate as a limited partner before the termination of the limited partnership.
  2. A person is dissociated from a limited partnership as a limited partner upon the occurrence of any of the following events:
    1. The limited partnership’s having notice of the person’s express will to withdraw as a limited partner or on a later date specified by the person;
    2. An event agreed to in the partnership agreement as causing the person’s dissociation as a limited partner;
    3. The person’s expulsion as a limited partner pursuant to the partnership agreement;
    4. The person’s expulsion as a limited partner by the unanimous consent of the other partners if:
      1. It is unlawful to carry on the limited partnership’s activities with that person as a limited partner;
      2. There has been a transfer of all of the person’s transferable interest in the limited partnership, other than a transfer for security purposes, or a court order charging the person’s interest, which has not been foreclosed;
      3. The person is a corporation and, within ninety (90) days after the limited partnership notifies the person that it will be expelled as a limited partner because it has filed a certificate of dissolution or the equivalent, its charter has been revoked, or its right to conduct business has been suspended by the jurisdiction of its incorporation, there is no revocation of the certificate of dissolution or no reinstatement of its charter or its right to conduct business; or
      4. The person is a limited liability company or partnership that has been dissolved and whose business is being wound up;
    5. On application by the limited partnership, the person’s expulsion as a limited partner by judicial determination because:
      1. The person engaged in wrongful conduct that adversely and materially affected the limited partnership’s activities;
      2. The person willfully or persistently committed a material breach of the partnership agreement or of the obligation of good faith and fair dealing under KRS 362.2-305 (2); or
      3. The person engaged in conduct relating to the limited partnership’s activities which makes it not reasonably practicable to carry on the activities with the person as limited partner;
    6. In the case of a person who is an individual, the person’s death;
    7. In the case of a person that is a trust or is acting as a limited partner by virtue of being a trustee of a trust, distribution of the trust’s entire transferable interest in the limited partnership, but not merely by reason of the substitution of a successor trustee;
    8. In the case of a person that is an estate or is acting as a limited partner by virtue of being a personal representative of an estate, distribution of the estate’s entire transferable interest in the limited partnership, but not merely by reason of the substitution of a successor personal representative;
    9. Termination of a limited partner that is not an individual, partnership, limited liability company, corporation, trust, or estate;
    10. The limited partnership’s participation in a merger or conversion under KRS 362.2-951 to 362.2-963 , if the limited partnership:
      1. Is not the converted or surviving entity; or
      2. Is the converted or surviving entity but, as a result of the conversion or merger, the person ceases to be a limited partner.

History. Enact. Acts 2006, ch. 149, § 138, effective July 12, 2006.

Compiler’s Notes.

This section is set out above to reflect the renumbering of “KRS 362.2-1101 to 362.2-1113 ” to “KRS 362.2-951 to 362.93” by the state reviser effective in 2013.

362.2-602. Effect of dissociation as limited partner.

Upon a person’s dissociation as a limited partner:

  1. Subject to KRS 362.2-704 , the person does not have further rights as a limited partner;
  2. The person’s obligation of good faith and fair dealing as a limited partner under KRS 362.2-305 (2) continues only as to matters arising and events occurring before the dissociation;
  3. Subject to KRS 362.2-704 and 362.2-951 to 362.2-963 , any transferable interest owned by the person in the person’s capacity as a limited partner immediately before dissociation is owned by the person as a mere transferee; and
  4. The dissociation does not of itself discharge the person from any obligation to the limited partnership or the other partners which the person incurred while a limited partner.

History. Enact. Acts 2006, ch. 149, § 139, effective July 12, 2006.

Compiler’s Notes.

This section is set out above to reflect the renumbering of “KRS 362.2-1101 to 362.2-1113 ” to “KRS 362.2-951 to 362.93” by the state reviser effective in 2013.

362.2-603. Dissociation as general partner.

A person is dissociated from a limited partnership as a general partner upon the occurrence of any of the following events:

  1. The limited partnership’s having notice of the person’s express will to withdraw as a general partner or on a later date specified by the person;
  2. An event agreed to in the partnership agreement as causing the person’s dissociation as a general partner;
  3. The person’s expulsion as a general partner pursuant to the partnership agreement;
  4. The person’s expulsion as a general partner by the unanimous consent of the other partners if:
    1. It is unlawful to carry on the limited partnership’s activities with that person as a general partner;
    2. There has been a transfer of all or substantially all of the person’s transferable interest in the limited partnership, other than a transfer for security purposes, or a court order charging the person’s interest, which has not been foreclosed;
    3. The person is a corporation and, within ninety (90) days after the limited partnership notifies the person that it will be expelled as a general partner because it has filed articles of dissolution or the equivalent, its articles of incorporation have been revoked, or its right to conduct business has been suspended by the jurisdiction of its incorporation, there is no revocation of the articles of dissolution or no reinstatement of its articles of incorporation or its right to conduct business; or
    4. The person is a limited liability company or partnership that has been dissolved and whose business is being wound up;
  5. On application by the limited partnership, the person’s expulsion as a general partner by judicial determination because:
    1. The person engaged in wrongful conduct that adversely and materially affected the limited partnership activities;
    2. The person willfully or persistently committed a material breach of the partnership agreement or of a duty owed to the partnership or the other partners under KRS 362.2-408 ; or
    3. The person engaged in conduct relating to the limited partnership’s activities which makes it not reasonably practicable to carry on the activities of the limited partnership with the person as a general partner;
  6. The person’s:
    1. Becoming a debtor in bankruptcy;
    2. Execution of an assignment for the benefit of creditors;
    3. Seeking, consenting to, or acquiescing in the appointment of a trustee, receiver, or liquidator of that person or of all or substantially all of that person’s property; or
    4. Failure, within ninety (90) days after the appointment, to have vacated or stayed the appointment of a trustee, receiver, or liquidator of the general partner or of all or substantially all of the person’s property obtained without the person’s consent or acquiescence or failing, within ninety (90) days after the expiration of a stay, to have the appointment vacated;
  7. In the case of a person who is an individual:
    1. The person’s death;
    2. The appointment of a guardian or general conservator for the person; or
    3. A judicial determination that the person has otherwise become incapable of performing the person’s duties as a general partner under the partnership agreement;
  8. In the case of a person that is a trust or is acting as a general partner by virtue of being a trustee of a trust, distribution of the trust’s entire transferable interest in the limited partnership, but not merely by reason of the substitution of a successor trustee;
  9. In the case of a person that is an estate or is acting as a general partner by virtue of being a personal representative of an estate, distribution of the estate’s entire transferable interest in the limited partnership, but not merely by reason of the substitution of a successor personal representative;
  10. Termination of a general partner that is not an individual, partnership, limited liability company, corporation, trust, or estate;
  11. The limited partnership’s participation in a merger or conversion under KRS 362.2-951 to 362.2-963 , if the limited partnership:
    1. Is not the converted or surviving entity; or
    2. Is the converted or surviving entity but, as a result of the conversion or merger, the person ceases to be a general partner.

History. Enact. Acts 2006, ch. 149, § 140, effective July 12, 2006.

Compiler’s Notes.

This section is set out above to reflect the renumbering of “KRS 362.2-1101 to 362.2-1113 ” to “KRS 362.2-951 to 362.93” by the state reviser effective in 2013.

362.2-604. Person’s power to dissociate as general partner — Wrongful dissociation.

  1. A person has the power to dissociate as a general partner at any time, rightfully or wrongfully, by express will pursuant to KRS 362.2-603 (1).
  2. A person’s dissociation as a general partner is wrongful only if:
    1. It is in breach of an express provision of the partnership agreement; or
    2. It occurs before the termination of the limited partnership and:
      1. The person withdraws as a general partner by express will;
      2. The person is expelled as a general partner by judicial determination under KRS 362.2-603 (5);
      3. The person is dissociated as a general partner by becoming a debtor in bankruptcy; or
      4. In the case of a person that is not an individual, trust other than a business trust, or estate, the person is expelled or otherwise dissociated as a general partner because it willfully dissolved or terminated.
  3. A person that wrongfully dissociates as a general partner is liable to the limited partnership and, subject to KRS 362.2-931 , to the other partners for damages caused by the dissociation. The liability is in addition to any other obligation of the general partner to the limited partnership or to the other partners.

History. Enact. Acts 2006, ch. 149, § 141, effective July 12, 2006.

Compiler’s Notes.

This section is set out above to reflect the renumbering of “KRS 362.2-1001 to KRS 362.2-931 ” by the state reviser effective in 2013.

362.2-605. Effect of dissociation as general partner.

Upon a person’s dissociation as a general partner:

  1. The person’s right to participate as a general partner in the management and conduct of the partnership’s activities terminates;
  2. The person’s duty of loyalty as a general partner under KRS 362.2-408 (2)(c) terminates;
  3. The person’s duty of loyalty as a general partner under KRS 362.2-408 (2)(a) and (2)(b) and duty of care under KRS 362.2-408 (3) continue only with regard to matters arising and events occurring before the person’s dissociation as a general partner;
  4. The person may sign and deliver to the Secretary of State for filing a statement of dissociation pertaining to the person and, at the request of the limited partnership, shall sign an amendment to the certificate of limited partnership which states that the person has dissociated;
  5. Subject to KRS 362.2-704 and 362.2-951 to 362.2-963 , any transferable interest owned by the person immediately before dissociation in the person’s capacity as a general partner is owned by the person as a mere transferee; and
  6. The dissociation does not of itself discharge the person from any obligation to the limited partnership or the other partners which the person incurred while a general partner.

History. Enact. Acts 2006, ch. 149, § 142, effective July 12, 2006.

Compiler’s Notes.

This section is set out above to reflect the renumbering of “KRS 362.2-1101 to 362.2-1113 ” to “KRS 362.2-951 to 362.2-963 ” by the state reviser effective in 2013.

362.2-606. Power to bind and liability to partnership before dissolution of person dissociated as general partner.

  1. After a person is dissociated as a general partner and before the limited partnership is dissolved, converted under KRS 362.2-951 to 362.2-963 , or merged out of existence under KRS 362.2-951 to 362.2-963 , the limited partnership is bound by an act of the person only if:
    1. The act would have bound the limited partnership under KRS 362.2-402 before the dissociation; and
    2. At the time the other party enters into the transaction:
      1. Less than two (2) years has passed since the dissociation; and
      2. The other party does not have notice of the dissociation and reasonably believes that the person is a general partner.
  2. If a limited partnership is bound under subsection (1) of this section, then the person dissociated as a general partner is liable:
    1. To the limited partnership for any damage caused to the limited partnership arising from that obligation; and
    2. If a general partner or another person dissociated as a general partner is liable for that obligation, to that general partner or other person for any damage caused to that general partner or other person arising from that liability.

History. Enact. Acts 2006, ch. 149, § 143, effective July 12, 2006.

Compiler’s Notes.

This section is set out above to reflect the renumbering of “KRS 362.2-1101 to 362.2-1113 ” to “KRS 362.2-951 to 362.2-963 ” by the state reviser effective in 2013.

362.2-607. Liability to other persons of person dissociated as general partner.

  1. A person’s dissociation as a general partner does not of itself discharge the person’s liability as a general partner for a limited partnership’s obligation incurred before dissociation. Except as otherwise provided in subsections (2) and (3) of this section, the person is not liable for a limited partnership’s obligation incurred after dissociation.
  2. A person whose dissociation as a general partner resulted in a dissolution and winding up of the limited partnership’s activities is liable to the same extent as a general partner under KRS 362.2-404 on an obligation incurred by the limited partnership under KRS 362.2-804 .
  3. A person that has dissociated as a general partner but whose dissociation did not result in a dissolution and winding up of the limited partnership’s activities is liable on a transaction entered into by the limited partnership after the dissociation, only if:
    1. A general partner would be liable on the transaction; and
    2. At the time the other party enters into the transaction:
      1. Less than two (2) years have passed since the dissociation; and
      2. The other party does not have notice of the dissociation and reasonably believes that the person is a general partner.
  4. By agreement with the limited partnership’s creditor and the limited partnership, a person dissociated as a general partner may be released from liability for a limited partnership’s obligation.
  5. A person dissociated as a general partner is released from liability for a limited partnership’s obligation if a limited partnership’s creditor, with notice of the person’s dissociation as a general partner but without the person’s consent, agrees to a material alteration in the nature or time of payment of the limited partnership’s obligation.

History. Enact. Acts 2006, ch. 149, § 144, effective July 12, 2006.

Transferable Interests and Rights of Transferees and Creditors

362.2-701. Partner’s transferable interest.

The only transferable interest of a partner is the partner’s right to receive distributions. The interest is personal property.

History. Enact. Acts 2006, ch. 149, § 145, effective July 12, 2006.

362.2-702. Transfer of partner’s transferable interest.

  1. A transfer, in whole or in part, of a partner’s transferable interest in the limited partnership:
    1. Is permissible;
    2. Does not by itself cause the partner’s dissociation or a dissolution and winding up of the limited partnership’s activities; and
    3. Does not, as against the other partners or the limited partnership, entitle the transferee to participate in the management or conduct of the limited partnership’s activities, to require access to information concerning the limited partnership’s transactions except as provided in subsection (3) of this section, or to inspect or copy the required information or the limited partnership’s other records.
  2. A transferee has a right to receive, in accordance with the transfer:
    1. Distributions to which the transferor would otherwise be entitled; and
    2. Upon the dissolution and winding up of the limited partnership’s activities the net amount otherwise distributable to the transferor.
  3. In a dissolution and winding up, a transferee is entitled to an account of the limited partnership’s transactions only from the date of dissolution.
  4. Upon transfer, the transferor retains the rights of a partner other than the interest in distributions transferred and retains all duties and obligations of a partner.
  5. A limited partnership need not give effect to a transferee’s rights under this section until the limited partnership has notice of the transfer.
  6. A transfer of a partner’s transferable interest in the limited partnership in violation of a restriction on transfer contained in the partnership agreement is ineffective as to a person having notice of the restriction at the time of transfer.
  7. A transferee that becomes a partner with respect to a transferable interest is liable for the transferor’s obligations under KRS 362.2-502 and 362.2-509 . However, the transferee is not obligated for liabilities unknown to the transferee at the time the transferee became a partner.
  8. Limitations upon transfer set forth in KRS 362.2-701 to 362.2-704 or adopted by the partners in accordance with this subchapter are enforceable notwithstanding KRS 355.9-406 and 355.9-408 .

History. Enact. Acts 2006, ch. 149, § 146, effective July 12, 2006.

362.2-703. Partner’s transferable interest subject to charging order.

  1. This section provides the exclusive remedy by which the judgment creditor of a partner or the transferee of a partner may satisfy a judgment out of the judgment debtor’s transferable interest.
  2. On application to a court of competent jurisdiction by any judgment creditor of a partner or a partner’s transferee, the court may charge the transferable interest of the judgment debtor with payment of the unsatisfied amount of the judgment. To the extent so charged, the judgment creditor has only the rights of a transferee, and shall have no right to participate in the management or to cause the dissolution of the partnership. The court may appoint a receiver of the share of the distributions due or to become due to the judgment debtor in respect of the partnership and make all other orders, directions, accounts, and inquiries the judgment debtor might have made or which the circumstances of the case may require to give effect to the charging order.
  3. A charging order constitutes a lien on and the right to receive distributions made with respect to the judgment debtor’s transferable interest. A charging order does not of itself constitute an assignment of the transferable interest.
  4. The court may order a foreclosure upon the transferable interest subject to the charging order at any time. The purchaser at the foreclosure sale has the rights of a transferee.
  5. At any time before foreclosure, an interest charged may be redeemed:
    1. By the judgment debtor;
    2. With property other than limited partnership property, by one (1) or more of the other partners; or
    3. With limited partnership property, by the limited partnership with the consent of all partners whose interests are not so charged.
  6. This subchapter does not deprive any partner or a partner’s transferee of the benefit of any exemption laws applicable to the partner’s or transferee’s transferable interest.
  7. The partnership is not a necessary party to an application for a charging order. Service of the charging order on a partnership may be made by the court granting the charging order or as the court may otherwise direct.
  8. This section shall not apply to the enforcement of a judgment by a limited partnership against a partner of that partnership.
  9. This section shall apply to the issuance of a charging order against the interest of a partner or transferee of a partner of a foreign partnership.

HISTORY: Enact. Acts 2006, ch. 149, § 147, effective July 12, 2006; 2007, ch. 137, § 156, effective June 26, 2007; repealed and reenact., Acts 2010, ch. 51, § 156, effective July 15, 2010; 2010, ch. 133, § 63, effective July 15, 2010; 2017 ch. 193, § 19, effective June 29, 2017.

Research References and Practice Aids

Kentucky Bench & Bar.

Rutledge, Recent Amendments to Kentucky Business Entity Laws, Vol. 71, No. 5, Sept. 2007, Ky. Bench & Bar 25.

Kentucky Law Journal.

Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 (2008).

362.2-704. Power of estate of deceased partner.

If a partner dies, then the deceased partner’s executor, administrator, or other legal representative may exercise the rights of a transferee as provided in KRS 362.2-702 and, for the purposes of settling the estate, may exercise the rights of a current limited partner under KRS 362.2-304 .

History. Enact. Acts 2006, ch. 149, § 148, effective July 12, 2006.

Dissolution

362.2-801. Nonjudicial dissolution.

Except as otherwise provided in KRS 362.2-802 , a limited partnership is dissolved, and its activities shall be wound up, only upon the occurrence of any of the following:

  1. The happening of an event specified in the partnership agreement;
  2. The consent of all general partners and of all limited partners;
  3. After the dissociation of a person as a general partner:
    1. If the limited partnership has at least one (1) remaining general partner, the consent to dissolve the limited partnership given within ninety (90) days after the dissociation by partners owning a majority of the rights to receive distributions as partners at the time the consent is to be effective; or
    2. If the limited partnership does not have a remaining general partner, the passage of ninety (90) days after the dissociation, unless before the end of that period:
      1. Consent to continue the activities of the limited partnership and admit at least one (1) general partner is given by limited partners owning a majority of the rights to receive distributions as limited partners at the time the consent is to be effective; and
      2. At least one (1) person is admitted as a general partner in accordance with that consent;
  4. The passage of ninety (90) days after the dissociation of the limited partnership’s last limited partner, unless before the end of that period the limited partnership admits at least one (1) limited partner;
  5. The administrative dissolution of the limited partnership by the Secretary of State under KRS 14A.7-010 or predecessor law; or
  6. Except as provided in subsection (3) or (4) of this section, the same person shall not be both the only general partner and the only limited partner.

History. Enact. Acts 2006, ch. 149, § 149, effective July 12, 2006; 2010, ch. 151, § 109, effective January 1, 2011; 2015 ch. 34, § 58, effective June 24, 2015.

Research References and Practice Aids

Kentucky Bench & Bar.

Rutledge, Recent Amendments to Kentucky Business Entity Laws, Vol. 71, No. 5, Sept. 2007, Ky. Bench & Bar 25.

362.2-802. Judicial dissolution.

  1. On application by a partner, the Circuit Court of the county in which the limited partnership maintains its registered agent may decree dissolution of a limited partnership if it is not reasonably practicable to carry on the activities of the limited partnership in conformity with the partnership agreement.
  2. If after a hearing the court determines that one (1) or more grounds for judicial dissolution exist, it may enter a decree dissolving the limited partnership and the clerk of the court shall deliver a certified copy of the decree to the Secretary of State, who shall file it. The dissolution shall be effective upon the filing of the decree by the Secretary of State or such later date as is specified in the decree.

History. Enact. Acts 2006, ch. 149, § 150, effective July 12, 2006; 2012, ch. 81, § 123, effective July 12, 2012.

362.2-803. Winding up.

  1. A limited partnership continues after dissolution only for the purpose of winding up its activities.
  2. In winding up its business, the limited partnership:
    1. May amend its certificate of limited partnership to state that the limited partnership is dissolved, preserve the limited partnership business or property as a going concern for a reasonable time, prosecute and defend actions and proceedings, whether civil, criminal, or administrative, transfer the limited partnership’s property, settle disputes by mediation or arbitration, file a statement of cancellation as provided in KRS 362.2-203 , and perform other necessary acts; and
    2. Shall discharge the limited partnership’s liabilities, settle and close the limited partnership’s activities, and marshal and distribute the assets of the partnership.
  3. If a dissolved limited partnership does not have a general partner, a person to wind up the dissolved limited partnership’s activities may be appointed by the consent of limited partners owning a majority of the rights to receive distributions as limited partners at the time the consent is to be effective. A person appointed under this subsection:
    1. Has the powers of a general partner under KRS 362.2-804 ; and
    2. Shall promptly amend the certificate of limited partnership to:
      1. State that the limited partnership does not have a general partner and that the person has been appointed to wind up the limited partnership; and
      2. State the street and mailing address of the person.
  4. On the application of any partner, the Circuit Court of the county in which the limited partnership maintains its registered agent may order judicial supervision of the winding up, including the appointment of a person to wind up the dissolved limited partnership’s activities, if:
    1. A limited partnership does not have a general partner and, within a reasonable time following the dissolution, no person has been appointed pursuant to subsection (3) of this section; or
    2. The applicant establishes other good cause.
  5. The dissolution of a limited partnership shall not abate or suspend KRS 362.2-303 , and the dissolution of a limited partnership that is a limited liability limited partnership shall not abate or suspend KRS 362.2-404 (3).

History. Enact. Acts 2006, ch. 149, § 151, effective July 12, 2006; 2007, ch. 137, § 157, effective June 26, 2007; repealed and reenact., Acts 2010, ch. 51, § 157, effective July 15, 2010.

Legislative Research Commission Notes.

(7/15/2010). 2010 Ky. Acts ch. 51, sec. 183, provides, “The specific textual provisions of Sections 1 to 178 of this Act which reflect amendments made to those sections by 2007 Ky. Acts ch. 137 shall be deemed effective as of June 26, 2007, and those provisions are hereby made expressly retroactive to that date, with the remainder of the text of those sections being unaffected by the provisions of this section.”

Research References and Practice Aids

Kentucky Law Journal.

Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 (2008).

362.2-804. Power of general partner and person dissociated as general partner to bind partnership after dissolution.

  1. A limited partnership is bound by a general partner’s act after dissolution which:
    1. Is appropriate for winding up the limited partnership’s activities; or
    2. Would have bound the limited partnership under KRS 362.2-402 before dissolution if, at the time the other party enters into the transaction, the other party does not have notice of the dissolution.
  2. A person dissociated as a general partner binds a limited partnership through an act occurring after dissolution if:
    1. At the time the other party enters into the transaction:
      1. Less than two (2) years has passed since the dissociation; and
      2. The other party does not have notice of the dissociation and reasonably believes that the person is a general partner; and
    2. The act:
      1. Is appropriate for winding up the limited partnership’s activities; or
      2. Would have bound the limited partnership under KRS 362.2-402 before dissolution and, at the time the other party enters into the transaction, the other party does not have notice of the dissolution.

History. Enact. Acts 2006, ch. 149, § 152, effective July 12, 2006.

362.2-805. Liability after dissolution of general partner and person dissociated as general partner to limited partnership, other general partners, and persons dissociated as general partner.

  1. If a general partner having knowledge of the dissolution causes a limited partnership to incur an obligation under KRS 362.2-804 (1) by an act that is not appropriate for winding up the partnership’s activities, then the general partner is liable:
    1. To the limited partnership for any damage caused to the limited partnership arising from the obligation; and
    2. If another general partner or a person dissociated as a general partner is liable for the obligation, to that other general partner or person for any damage caused to that other general partner or person arising from that liability.
  2. If a person dissociated as a general partner causes a limited partnership to incur an obligation under KRS 362.2-804 (2), then the person is liable:
    1. To the limited partnership for any damage caused to the limited partnership arising from the obligation; and
    2. If a general partner or another person dissociated as a general partner is liable for that obligation, then to that general partner or other person for any damage caused to that general partner or other person arising from that liability.

History. Enact. Acts 2006, ch. 149, § 153, effective July 12, 2006.

362.2-806. Known claims against dissolved limited partnership.

  1. A dissolved limited partnership may dispose of the known claims against it by following the procedure described in subsection (2) of this section.
  2. A dissolved limited partnership may in a record notify its known claimants of the dissolution. The notice shall:
    1. Specify the information required to be included in a claim;
    2. Provide a mailing address to which the claim is to be sent;
    3. State the deadline for receipt of the claim, which shall not be less than one hundred twenty (120) days after the date the notice in a record is received by the claimant;
    4. State that the claim will be barred if not received by the deadline; and
    5. Unless the limited partnership has been throughout its existence a limited liability limited partnership, state that the barring of a claim against the limited partnership will also bar any corresponding claim against any present or dissociated general partner which is based on KRS 362.2-404 .
  3. A claim against a dissolved limited partnership is barred if the requirements of subsection (2) of this section are met and:
    1. The claim is not received by the specified deadline; or
    2. In the case of a claim that is timely received but rejected by the dissolved limited partnership, the claimant does not commence a proceeding to enforce the claim against the limited partnership within ninety (90) days after the receipt of the notice of the rejection.
  4. This section does not apply to a contingent liability or a claim based on an event occurring after the effective date of dissolution.

History. Enact. Acts 2006, ch. 149, § 154, effective July 12, 2006.

362.2-807. Other claims against dissolved limited partnership.

  1. A dissolved limited partnership may publish notice of its dissolution and request persons having claims against the limited partnership to present them in accordance with the notice.
  2. The notice shall:
    1. Be published at least once in a newspaper of general circulation in the county in which the dissolved limited partnership’s principal office is located or, if it has none in this Commonwealth, then in the county in which the limited partnership’s registered office is or was last located;
    2. Describe the information required to be contained in a claim and provide a mailing address to which the claim is to be sent;
    3. State that a claim against the limited partnership is barred unless a proceeding to enforce the claim is commenced within five (5) years after publication of the notice; and
    4. Unless the limited partnership has been throughout its existence a limited liability limited partnership, state that the barring of a claim against the limited partnership will also bar any corresponding claim against any present or dissociated general partner which is based on KRS 362.2-404 .
  3. If a dissolved limited partnership publishes a notice in accordance with subsection (2) of this section, the claim of each of the following claimants is barred unless the claimant commences a proceeding to enforce the claim against the dissolved limited partnership within five (5) years after the publication date of the notice:
    1. A claimant that did not receive notice in a record under KRS 362.2-806 ;
    2. A claimant whose claim was timely sent to the dissolved limited partnership but not acted on; and
    3. A claimant whose claim is contingent or based on an event occurring after the effective date of dissolution.
  4. A claim not barred under this section may be enforced:
    1. Against the dissolved limited partnership, to the extent of its undistributed assets;
    2. If the assets have been distributed in liquidation, against a partner or transferee to the extent of that person’s proportionate share of the claim or the limited partnership’s assets distributed to the partner or transferee in liquidation, whichever is less, but a person’s total liability for all claims under this paragraph does not exceed the total amount of assets distributed to the person as part of the winding up of the dissolved limited partnership; or
    3. Against any person liable on the claim under KRS 362.2-404 .

History. Enact. Acts 2006, ch. 149, § 155, effective July 12, 2006.

362.2-808. Liability of general partner and person dissociated as general partner when claim against limited partnership barred.

If a claim against a dissolved limited partnership is barred under KRS 362.2-806 or 362.2-807 , then any corresponding claim under KRS 362.2-404 is also barred.

History. Enact. Acts 2006, ch. 149, § 156, effective July 12, 2006.

362.2-809. Administrative dissolution. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 157; 2010, ch. 133, § 64) was repealed by Acts 2011, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.7-010 , 14A.7-020 .

362.2-810. Reinstatement following administrative dissolution. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 158; 2010, ch. 133, § 65) was repealed by Acts 2011, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.7-030 .

362.2-811. Appeal from denial of reinstatement. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 159; 2010, ch. 133, § 66) was repealed by Acts 2011, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.7-040 .

362.2-812. Disposition of assets — When contributions required.

  1. In winding up a limited partnership’s activities, the assets of the limited partnership, including the contributions required by this section, shall be applied to satisfy the limited partnership’s obligations to creditors, including, to the extent permitted by law, partners that are creditors.
  2. Any surplus remaining after the limited partnership complies with subsection (1) of this section may be distributed in cash or, subject to KRS 362.2-506 (1), in kind.
  3. If the limited partnership’s assets are insufficient to satisfy all of its obligations under subsection (1) of this section, with respect to each unsatisfied obligation incurred when the limited partnership was not a limited liability limited partnership, then the following rules apply:
    1. Each person that was a general partner when the obligation was incurred and that has not been released from that obligation under KRS 362.2-607 shall contribute to the limited partnership for the purpose of enabling the limited partnership to satisfy that obligation. The contribution due from each of those persons is in proportion to the right to receive distributions in the capacity of general partner in effect for each of those persons when the obligation was incurred.
    2. If a person fails to contribute the full amount required under subsection (3)(a) of this section with respect to an unsatisfied obligation of the limited partnership, then the other persons required to contribute by subsection (3)(a) of this section on account of that obligation shall contribute the additional amount necessary to discharge the obligation. The additional contribution due from each of those other persons is in proportion to the right to receive distributions in the capacity of general partner in effect for each of those other persons when the obligation was incurred.
    3. If a person fails to make the additional contribution required by subsection (3)(b) of this section, further additional contributions are determined and due in the same manner as provided in that subsection.
  4. A person that makes an additional contribution under subsection (3)(b) or (c) of this section may recover from any person whose failure to contribute under subsection (3)(a) or (b) of this section necessitated the additional contribution. A person shall not recover under this subsection more than the amount additionally contributed. A person’s liability under this subsection shall not exceed the amount the person failed to contribute.
  5. The estate of a deceased individual is liable for the person’s obligations under this section.
  6. An assignee for the benefit of creditors of a limited partnership or a partner, or a person appointed by a court to represent creditors of a limited partnership or a partner, may enforce a person’s obligation to contribute under subsection (3) of this section.

History. Enact. Acts 2006, ch. 149, § 160, effective July 12, 2006.

Foreign Limited Partnerships

362.2-901. Governing law.

  1. The laws of the state or other jurisdiction under which a foreign limited partnership is organized govern its organization and internal affairs, including the inspection of books, records, and documents, and the liability of its partners as partners.
  2. A foreign limited partnership shall not be denied a certificate of authority by reason of any difference between the laws of the jurisdiction under which the foreign limited partnership is organized and the laws of this Commonwealth.
  3. A certificate of authority does not authorize a foreign limited partnership to engage in any business or exercise any power that a limited partnership may not engage in or exercise in this Commonwealth.

History. Enact. Acts 2006, ch. 149, § 161, effective July 12, 2006; 2007, ch. 137, § 158, effective June 26, 2007; repeal and reenact., Acts 2010, ch. 51, § 158, effective July 15, 2010.

Legislative Research Commission Notes.

(7/15/2010). 2010 Ky. Acts ch. 51, sec. 183, provides, “The specific textual provisions of Sections 1 to 178 of this Act which reflect amendments made to those sections by 2007 Ky. Acts ch. 137 shall be deemed effective as of June 26, 2007, and those provisions are hereby made expressly retroactive to that date, with the remainder of the text of those sections being unaffected by the provisions of this section.”

Research References and Practice Aids

Kentucky Bench & Bar.

Rutledge, Recent Amendments to Kentucky Business Entity Laws, Vol. 71, No. 5, Sept. 2007, Ky. Bench & Bar 25.

Kentucky Law Journal.

Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 (2008).

362.2-902. Application for certificate of authority. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 162) was repealed by Acts 2011, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.9-030 .

362.2-903. Activities not constituting transacting business. [Repealed.]

Compiler’s Notes.

This section (Repealed and reenact., Acts 2010, ch. 51, § 159) was repealed by Acts 2011, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.9-010 .

362.2-904. Filing of certificate of authority. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 164) was repealed by Acts 2011, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.9-030 .

362.2-905. Noncomplying name of foreign limited partnership. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 165) was repealed by Acts 2011, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.3-040 .

362.2-906. Revocation of certificate of authority. [Repealed.]

Compiler’s Notes.

This section (Repealed and reenact., Acts 2010, ch. 51, § 160; 2010, ch. 133, § 67) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.9-070 .

362.2-907. Cancellation of certificate of authority — Effect of failure to have certificate. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 167; 2010, ch. 133, § 68) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.9-070 , 9-080.

362.2-908. Changes and amendment to application for certificate of authority. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 168) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.9-040 .

362.2-909. Cancellation of certificate of authority by foreign limited partnership. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2006, ch. 149, § 169) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.9-060 .

362.2-910. Action by Attorney General.

The Attorney General may maintain an action to restrain a foreign limited partnership from transacting business in this Commonwealth in violation of this subchapter.

History. Enact. Acts 2006, ch. 149, § 170, effective July 12, 2006.

362.2-911. Consequence of transacting business without authority. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2010, ch. 133, § 6) was repealed by Acts 2010, ch. 151, § 151, effective January 1, 2011. See now KRS 14A.9-020 .

Actions by Partners

362.2-931. Direct actions by partner.

  1. Subject to subsection (2) of this section, a partner may maintain a direct action against the partnership or another partner for legal or equitable relief, with or without an accounting as to partnership’s activities, to enforce the rights and otherwise protect the interests of the partner, including rights and interests under the partnership agreement or this subchapter or arising independently of the partnership relationship.
  2. A partner bringing a direct action under this section is required to plead and prove an actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the limited partnership.
  3. The accrual of, and any time limitation on, a right of action for a remedy under this section is governed by other law. A right to an accounting upon a dissolution and winding up does not revive a claim barred by law.

History. Enact. Acts 2006, ch. 149, § 171, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1001 .

362.2-932. Derivative action.

A partner may bring a derivative action to enforce a right of a limited partnership if the partner first makes a demand on the general partners, requesting that they cause the limited partnership to bring an action to enforce the right, and the general partners do not bring the action within a reasonable time.

History. Enact. Acts 2006, ch. 149, § 172, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1002 .

362.2-933. Proper plaintiff.

  1. A derivative action may be maintained only by a person that is a partner at the time the action is commenced and:
    1. That was a partner when the conduct giving rise to action occurred; or
    2. Whose status as a partner devolved upon the person by operation of law or pursuant to the terms of the partnership agreement from a person that was a partner at the time of that conduct.
  2. The derivative proceeding shall not be maintained if:
    1. It appears that the person commencing the proceeding does not fairly and adequately represent the interests of the partners in enforcing the rights of the limited partnership; or
    2. The person commencing the proceeding ceases to be a partner in the limited partnership.

HISTORY: Enact. Acts 2006, ch. 149, § 173, effective July 12, 2006; 2017 ch. 193, § 20, effective June 29, 2017.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1003 .

362.2-934. Pleading.

In a derivative action, the complaint shall state with particularity the date and content of the plaintiff’s demand and the general partners’ response to the demand.

History. Enact. Acts 2006, ch. 149, § 174, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1004 .

362.2-935. Proceeds and expenses.

  1. Except as otherwise provided in subsection (2) of this section:
    1. Any proceeds or other benefits of a derivative action, whether by judgment, compromise, or settlement, belong to the limited partnership and not to the derivative plaintiff;
    2. If the derivative plaintiff receives any of those proceeds, then the derivative plaintiff shall immediately remit them to the limited partnership.
  2. If a derivative action is successful in whole or in part, then the court may award the plaintiff reasonable expenses, including reasonable attorney’s fees, from the recovery of the limited partnership.
  3. On termination of the proceeding brought pursuant to this section, the court may require the plaintiff to pay any defendant’s reasonable expenses, including counsel fees, incurred in defending the proceeding to the extent it finds that the proceeding or any portion thereof was commenced without reasonable cause or for an improper purpose.

History. Enact. Acts 2006, ch. 149, § 175, effective July 12, 2006; 2015 ch. 34, § 64, effective June 24, 2015.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1005 .

Conversion and Merger

362.2-951. Definitions for KRS 362.2-951 to 362.2-963.

As used in KRS 362.2-951 to 362.2-963 , unless the context otherwise requires:

  1. “Constituent limited partnership” means a constituent organization that is a limited partnership;
  2. “Constituent organization” means an organization that is party to a merger;
  3. “Converted limited partnership” means the limited partnership into which a converting organization converts pursuant to KRS 362.2-952 , 362.2-953 , 362.2-954 , and 362.2-955 ;
  4. “Converted organization” means an organization into which another organization has been converted;
  5. “Converting limited partnership” means a converting organization that is a limited partnership;
  6. “Converting organization” means an organization that converts into another organization pursuant to KRS 362.2-952 ;
  7. “General partner” means a general partner of a limited partnership;
  8. “Governing statute” of an organization means the statute that governs the organization’s internal affairs;
  9. “Organization” means a general partnership, including a limited liability partnership; limited partnership, including a limited liability limited partnership; limited liability company; business trust; corporation; or any other entity having a governing statute. The term includes domestic and foreign entities regardless of whether organized for profit;
  10. “Organizational documents” means:
    1. For a domestic or foreign general partnership, its partnership agreement;
    2. For a limited partnership or foreign limited partnership, its certificate of limited partnership and partnership agreement; and
    3. For a domestic or foreign limited liability company, its articles of organization and operating agreement, or comparable records as provided in its governing statute;
  11. “Person dissociated as a general partner” means a person dissociated as a general partner of a limited partnership;
  12. “Personal liability” means personal liability for a debt, liability, or other obligation of an organization which is imposed on a person that co-owns, has an interest in, or is a member of the organization:
    1. By the organization’s governing statute solely by reason of the person co-owning, having an interest in, or being a member of the organization; or
    2. By the organization’s organizational documents under a provision of the organization’s governing statute authorizing those documents to make one (1) or more specified persons liable for all or specified debts, liabilities, and obligations of the organization solely by reason of the person or persons co-owning, having an interest in, or being a member of the organization; and
  13. “Surviving organization” means an organization into which one (1) or more other organizations are merged. A surviving organization may preexist the merger or be created by the merger.

History. Enact. Acts 2006, ch. 149, § 176, effective July 12, 2006; 2011, ch. 29, § 19, effective June 8, 2011.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1101 .

362.2-952. Conversion.

  1. Subject to KRS 362.2-960 , a partnership may be converted to a limited partnership as provided in KRS 362.1-902 .
  2. Subject to KRS 362.2-960 , a limited partnership may be converted to a partnership as provided in KRS 362.1-903 .
  3. Subject to KRS 362.2-960 , a limited partnership may be converted to a limited liability company as provided in KRS 275.370 .
  4. A limited liability company may be converted to a limited partnership pursuant to this section and KRS 362.2-953 , 362.2-954 , and 362.2-955 and a plan of conversion, if:
    1. The limited liability companies’ governing statute authorizes the conversion;
    2. The conversion is not prohibited by the law of the jurisdiction that enacted that governing statute; and
    3. The limited liability company complies with its governing statute in effecting the conversion.
  5. A plan of conversion of a limited liability company into a limited partnership shall be in a record and shall include:
    1. The name of the limited liability company before conversion;
    2. The name of the converted limited partnership;
    3. The terms and conditions of the conversion, including the manner and basis for converting interests in the converting organization into any combination of money, interests in the converted limited partnership, and other consideration; and
    4. The organizational documents of the converted limited partnership.

History. Enact. Acts 2006, ch. 149, § 177, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1102 .

NOTES TO DECISIONS

Cited:

Lach v. Man O’ War, LLC, 256 S.W.3d 563, 2008 Ky. LEXIS 66 ( Ky. 2008 ).

Research References and Practice Aids

Kentucky Bench & Bar.

Rutledge, Recent Amendments to Kentucky Business Entity Laws, Vol. 71, No. 5, Sept. 2007, Ky. Bench & Bar 25.

362.2-953. Action on plan of conversion by converting limited partnership.

  1. Subject to KRS 362.2-960 , a plan of conversion shall be approved by all the partners of a converting limited partnership.
  2. Subject to KRS 362.2-960 and any contractual rights, after a conversion is approved, and at any time before a filing is made under KRS 362.2-954 , a converting limited partnership may amend the plan or abandon the planned conversion:
    1. As provided in the plan; and
    2. Except as prohibited by the plan, by the same consent as was required to approve the plan.
  3. Unless otherwise provided in the partnership agreement, a partner has no right to dissent from a conversion.

History. Enact. Acts 2006, ch. 149, § 178, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1103 .

362.2-954. Filings required for conversion — Effective date.

  1. After a plan of conversion of a limited liability company into a limited partnership is approved, a converting limited liability company shall deliver to the Secretary of State for filing a certificate of limited partnership which satisfies the requirements of KRS 362.2-201 and includes:
    1. A statement that the limited liability company has been converted into a limited partnership;
    2. The name of that limited liability company and its jurisdiction;
    3. A statement that the conversion was approved as required by this subchapter;
    4. A statement that the conversion was approved as required by the governing statute of the converted limited liability company; and
    5. If the converted limited liability company is a foreign limited liability company not authorized to transact business in this Commonwealth, the street and mailing address of an office which the Secretary of State may use for the purposes of KRS 362.2-955 (3).
  2. A conversion of a limited liability company into a limited partnership becomes effective when the certificate of limited partnership takes effect.

History. Enact. Acts 2006, ch. 149, § 179, effective July 12, 2006; 2007, ch. 137, § 161, effective June 26, 2007; repealed and reenact., Acts 2010, ch. 51, § 161, effective July 15, 2010; 2010, ch. 133, § 69, effective July 15, 2010.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1104 .

Legislative Research Commission Notes.

(7/15/2010). 2010 Ky. Acts ch. 51, sec. 183, provides, “The specific textual provisions of Sections 1 to 178 of this Act which reflect amendments made to those sections by 2007 Ky. Acts ch. 137 shall be deemed effective as of June 26, 2007, and those provisions are hereby made expressly retroactive to that date, with the remainder of the text of those sections being unaffected by the provisions of this section.”

(7/15/2010). This section was amended by 2010 Ky. Acts ch. 133, and repealed and reenacted by 2010 Ky. Acts ch. 51. Pursuant to Section 184 of Acts ch. 51, it was the intent of the General Assembly that the repeal and reenactment not serve to void the amendment, and these Acts do not appear to be in conflict; therefore, they have been codified together.

Research References and Practice Aids

Kentucky Law Journal.

Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 (2008).

362.2-955. Effect of conversion.

  1. An organization that has been converted pursuant to KRS 362.2-951 to 362.2-963 is for all purposes the same entity that existed before the conversion.
  2. When a conversion takes effect:
    1. All property and contract rights owned by, and all rights, privileges, and immunities of, the converting organization shall remain vested in the converted organization without assignment, reversion, or impairment;
    2. All obligations of the converting organization shall continue as obligations of the converted organization;
    3. An action or proceeding pending against the converting organization may be continued as if the conversion had not occurred, and the name of the converted organization may be substituted in any pending action or proceeding for the name of the converting organization; and
    4. Any written organization documents of the converted organization shall be binding upon each person who becomes a partner or member in the converted organization.
  3. A converted organization that is a foreign entity consents to the jurisdiction of the courts of this Commonwealth to enforce any obligation owed by the converting organization if, before the conversion, the converting organization was subject to suit in this Commonwealth on that obligation. A converted organization that is a foreign entity and not authorized to transact business in this Commonwealth appoints the Secretary of State as its agent for service of process for purposes of enforcing an obligation under this subsection. Service on the Secretary of State under this subsection is made in the same manner and with the same consequences as in KRS 14A.9-060 (4).
  4. A person who becomes a general partner in a limited partnership that is not a limited liability limited partnership as a result of a conversion shall be personally liable as a general partner for only those obligations incurred by the limited partnership after the conversion takes effect.

History. Enact. Acts 2006, ch. 149, § 180, effective July 12, 2006; 2010, ch. 151, § 150, effective January 1, 2011; 2011, ch. 29, § 20, effective June 8, 2011.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1105 .

362.2-956. Merger.

  1. One (1) or more domestic limited partnerships may merge pursuant to a written plan of merger described in subsection (2) of this section with one (1) or more domestic or foreign partnerships, limited partnerships, limited liability companies, or corporations if:
    1. The merger is not prohibited by the partnership agreement of any domestic limited partnership that is a party to the merger, and each domestic limited partnership that is a party to the merger approves the plan of merger in accordance with this subchapter and complies with the applicable terms of its partnership agreement in effecting the merger;
    2. Each domestic partnership, as a party to the merger, complies with the applicable merger provisions of Subchapter 1 of this chapter;
    3. Each domestic limited liability company, as a party to the merger, complies with the applicable merger provisions of KRS Chapter 275;
    4. Each domestic corporation, as a party to the merger, complies with the applicable merger provisions of KRS Chapter 271B; and
    5. The merger is permitted by the laws of the jurisdiction under which each foreign partnership, limited partnership, foreign limited liability company, or foreign corporation party to the merger is formed, organized, or incorporated, and each foreign partnership, limited partnership, limited liability company, or corporation complies with those laws in effecting the merger.
  2. The written plan of merger shall set forth:
    1. The name of each constituent business entity that is a party to the merger and the name of the surviving business entity into which each constituent business entity proposes to merge;
    2. The terms and conditions of the proposed merger, including but not limited to a statement which sets forth whether limited liability is retained by the surviving business entity;
    3. The manner and basis of converting the partnership interests in each limited partnership and the interests in each business entity that is a party to the merger into interests, shares, or other securities or obligations, as the case may be, of the surviving entity, or of any other business entity, or, in whole or in part, into cash or other property;
    4. The amendments to the articles of organization of a limited liability company, or articles of incorporation of a corporation or certificate of limited partnership, as the case may be, of the surviving business entity as are desired to be effected by the merger, or that no changes are desired; and
    5. Other provisions relating to the proposed merger that are deemed necessary or desirable.

History. Enact. Acts 2006, ch. 149, § 181, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1106 .

362.2-957. Action on plan of merger by constituent limited partnership.

  1. Each domestic limited partnership that is to be a party to a proposed merger shall approve the proposed merger, unless the partnership agreement of that limited partnership provides otherwise, by the unanimous vote of the partners of the partnership.
  2. A plan of merger may provide for the manner, if any, in which the plan may be amended at any time before the filing of the articles of merger with the Secretary of State.
  3. Unless the domestic limited partnership’s partnership agreement or the plan of merger, once authorized, provides otherwise, the merger may be abandoned at any time before the filing of the articles of merger with the Secretary of State by the affirmative vote of all partners of the domestic limited partnership, subject to any contractual rights, in accordance with the procedure set forth in the plan of merger, if any.
  4. Unless otherwise provided in the partnership agreement, a partner has no right to dissent from a merger.

History. Enact. Acts 2006, ch. 149, § 182, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1107 .

362.2-958. Filings required for merger — Effective date.

  1. After a plan of merger is approved by each domestic or foreign partnership, limited partnership, limited liability company, or corporation that is a party to the merger, the surviving domestic or foreign partnership, limited partnership, limited liability company, or corporation shall deliver to the Secretary of State for filing articles of merger duly executed by each party to the merger setting forth:
    1. The name and jurisdiction of formation or organization of each constituent business entity which is to merge;
    2. The plan of merger;
    3. The name of the surviving business entity;
    4. A statement that the plan of merger was duly authorized and approved by each constituent business entity in accordance with the laws applicable to such business entity; and
    5. If the surviving entity is not a business entity organized under the laws of this Commonwealth, a statement that the surviving business entity:
      1. Agrees that it may be served with process in this Commonwealth in any proceeding for enforcement of any obligation of any constituent business entity party to the merger that was organized under the laws of this Commonwealth, as well as for enforcement of any obligation of the surviving business entity arising from the merger; and
      2. Appoints the Secretary of State as its agent for service of process in any such proceedings. The surviving entity shall specify the address to which a copy of process shall be mailed to it by the Secretary of State.
  2. The merger shall take effect on the later of the date of the filing of the articles of merger or the date set forth in the articles of merger, in which case it shall not be later than ninety (90) days after the date on which the articles of merger were filed.
  3. Upon the merger taking effect, if the surviving entity in the merger is a foreign partnership, limited partnership, or limited liability company, the entity shall be deemed:
    1. To appoint the Secretary of State as its agent for service of process in a proceeding to enforce any obligation or rights of dissenting shareholders of each domestic corporation party to the merger; and
    2. To agree that it will promptly pay to the dissenting shareholders of each domestic corporation party to the merger the amount, if any, to which they are entitled under Subtitle 13 of KRS Chapter 271B.
  4. The articles of merger filed by the surviving entity in accordance with this section shall also be deemed to have been filed for any domestic limited liability company party to the merger in accordance with the applicable provisions of KRS Chapter 275 and for any domestic corporation party to the merger in accordance with KRS Chapter 271B.
  5. The filing of articles of merger shall act to cancel the certificate of limited partnership for a domestic limited partnership that is not the surviving entity of the merger and that partnership’s certificate of limited partnership shall be canceled upon the effective date of the articles of merger.

History. Enact. Acts 2006, ch. 149, § 183, effective July 12, 2006; 2007, ch. 137, § 162, effective June 26, 2007; repealed and reenact., Acts 2010, ch. 51, § 162, effective July 15, 2010.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1108 .

Legislative Research Commission Notes.

(7/15/2010). 2010 Ky. Acts ch. 51, sec. 183, provides, “The specific textual provisions of Sections 1 to 178 of this Act which reflect amendments made to those sections by 2007 Ky. Acts ch. 137 shall be deemed effective as of June 26, 2007, and those provisions are hereby made expressly retroactive to that date, with the remainder of the text of those sections being unaffected by the provisions of this section.”

362.2-959. Effect of merger.

When a merger takes effect:

  1. The separate existence of every domestic limited partnership that is a party to the merger except the surviving domestic limited partnership, if any, shall cease;
  2. The title to all real estate and other property owned by each domestic limited partnership that is a party to the merger shall be vested in the surviving entity without reversion or impairment;
  3. The surviving entity shall be responsible for all liabilities of each domestic limited partnership that is a party to the merger;
  4. A proceeding pending by or against any domestic limited partnership party to the merger may be continued as if the merger had not occurred, or the surviving entity may be substituted in the proceeding for the domestic limited partnership whose existence ceased;
  5. If a domestic limited partnership is the surviving entity of the merger, then the certificate of limited partnership and partnership agreement of that limited partnership shall be amended to the extent provided in the plan of merger;
  6. The partnership interests of every domestic limited partnership that is a party to the merger that are to be converted into partnership interests, membership interests, shares, or other securities or obligations of the surviving limited partnership, limited liability company, or corporation or into cash or other property, in whole or in part, shall be so converted and the former holders of such partnership interests shall be entitled only to the rights provided in the plan of merger;
  7. If the surviving business entity is a limited partnership, such amendments to the certificate of limited partnership thereof as are set forth in the plan of merger shall be effective; and
  8. If the surviving business entity is a limited partnership, the written partnership agreement provided for in the plan of merger, if any, shall be binding upon each partner in that limited partnership.

History. Enact. Acts 2006, ch. 149, § 184, effective July 12, 2006; 2010, ch. 133, § 70, effective July 15, 2010.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1109 .

362.2-960. Restrictions on approval of conversions and mergers and on relinquishing LLLP status.

  1. If a partner of a converting or constituent limited partnership will have personal liability with respect to a converted or surviving organization, then approval and amendment of a plan of conversion or merger are ineffective without the consent of that partner, unless:
    1. The limited partnership’s partnership agreement provides for the approval of the conversion or merger with the consent of less than all the partners; and
    2. That partner has consented to that provision of the partnership agreement.
  2. An amendment to a certificate of limited partnership which deletes a statement that the limited partnership is a limited liability limited partnership is ineffective without the consent of each general partner unless:
    1. The limited partnership’s partnership agreement provides for that amendment with the consent of less than all the general partners; and
    2. Each general partner that does not consent to the amendment has consented to that provision of the partnership agreement.
  3. A partner does not give the consent required by subsection (1) or (2) of this section merely by consenting to a provision of the partnership agreement which permits the partnership agreement to be amended with the consent of less than all the partners.

History. Enact. Acts 2006, ch. 149, § 185, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1110 .

362.2-961. Liability of general partner after conversion or merger.

  1. A conversion or merger under KRS 362.2-951 to 362.2-963 does not discharge any liability under KRS 362.2-404 and 362.2-607 of a person that was a general partner in or dissociated as a general partner from a converting or constituent limited partnership, but:
    1. The provisions of this subchapter pertaining to the collection or discharge of that liability continue to apply to that liability;
    2. For the purposes of applying those provisions, the converted or surviving organization is deemed to be the converting or constituent limited partnership; and
    3. If a person is required to pay any amount under this subsection, then:
      1. The person has a right of contribution from each other person that was liable as a general partner under KRS 362.2-404 when the obligation was incurred and has not been released from that obligation under KRS 362.2-607 ; and
      2. The contribution due from each of those persons is in proportion to the right to receive distributions in the capacity of general partner in effect for each of those persons when the obligation was incurred.
  2. In addition to any other liability provided by law:
    1. A person who immediately before a conversion or merger became effective was a general partner in a converting or constituent limited partnership that was not a limited liability limited partnership is personally liable for each obligation of the converted or surviving organization arising from a transaction with a third party after the conversion or merger becomes effective if, at the time the third party enters into the transaction, the third party:
      1. Does not have notice of the conversion or merger; and
      2. Reasonably believes that:
        1. The converted or surviving business is the converting or constituent limited partnership;
        2. The converting or constituent limited partnership is not a limited liability limited partnership; and
        3. The person is a general partner in the converting or constituent limited partnership; and
    2. A person who was dissociated as a general partner from a converting or constituent limited partnership before the conversion or merger became effective is personally liable for each obligation of the converted or surviving organization arising from a transaction with a third party after the conversion or merger becomes effective if:
      1. Immediately before the conversion or merger became effective, the converting or surviving limited partnership was a not a limited liability limited partnership; and
      2. At the time the third party enters into the transaction, less than two (2) years have passed since the person dissociated as a general partner and the third party:
        1. Does not have notice of the dissociation;
        2. Does not have notice of the conversion or merger; and
        3. Reasonably believes that the converted or surviving organization is the converting or constituent limited partnership, the converting or constituent limited partnership is not a limited liability limited partnership, and the person is a general partner in the converting or constituent limited partnership.

History. Enact. Acts 2006, ch. 149, § 186, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1111 .

362.2-962. Power of general partners and persons dissociated as general partners to bind organization after conversion or merger.

  1. An act of a person who immediately before a conversion or merger became effective was a general partner in a converting or constituent limited partnership binds the converted or surviving organization after the conversion or merger becomes effective if:
    1. Before the conversion or merger became effective, the act would have bound the converting or constituent limited partnership under KRS 362.2-402 ; and
    2. At the time the third party enters into the transaction, the third party:
      1. Does not have notice of the conversion or merger; and
      2. Reasonably believes that the converted or surviving business is the converting or constituent limited partnership and that the person is a general partner in the converting or constituent limited partnership.
  2. An act of a person who before a conversion or merger became effective was dissociated as a general partner from a converting or constituent limited partnership binds the converted or surviving organization after the conversion or merger becomes effective if:
    1. Before the conversion or merger became effective, the act would have bound the converting or constituent limited partnership under KRS 362.2-402 if the person had been a general partner; and
    2. At the time the third party enters into the transaction, less than two (2) years have passed since the person dissociated as a general partner and the third party:
      1. Does not have notice of the dissociation;
      2. Does not have notice of the conversion or merger; and
      3. Reasonably believes that the converted or surviving organization is the converting or constituent limited partnership and that the person is a general partner in the converting or constituent limited partnership.
  3. If a person having knowledge of the conversion or merger causes a converted or surviving organization to incur an obligation under subsection (1) or (2) of this section, then the person is liable:
    1. To the converted or surviving organization for any damage caused to the organization arising from the obligation; and
    2. If another person is liable for the obligation, to that other person for any damage caused to that other person arising from that liability.

History. Enact. Acts 2006, ch. 149, § 187, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1112 .

362.2-963. Article not exclusive.

KRS 362.2-951 to 362.2-963 do not preclude an entity from being converted or merged under other law.

History. Enact. Acts 2006, ch. 149, § 188, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1113 .

Miscellaneous Provisions

362.2-971. Uniformity of application and construction.

In applying and construing this uniform act, consideration shall be given to the need to promote uniformity of the law with respect to its subject matter among states that enact it.

History. Enact. Acts 2006, ch. 149, § 189, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1201 .

NOTES TO DECISIONS

Cited:

Lach v. Man O’ War, LLC, 256 S.W.3d 563, 2008 Ky. LEXIS 66 ( Ky. 2008 ).

362.2-972. Severability clause.

If any provision of this subchapter or its application to any person or circumstance is held invalid, then the invalidity shall not affect other provisions or applications of this subchapter which can be given effect without the invalid provision or application, and, to this end, the provisions of this subchapter are severable.

History. Enact. Acts 2006, ch. 149, § 190, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1202 .

362.2-973. Electronic signatures.

The provisions of this subchapter governing the legal effect, validity, or enforceability of electronic records or signatures, and of contracts formed or performed with the use of such records or signatures, conform to the requirements of Section 102 of the Electronic Signatures in Global and National Commerce Act, Pub. L. No. 106-229, and supersede, modify, and limit the Electronic Signatures in Global and National Commerce Act.

History. Enact. Acts 2006, ch. 149, § 191, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1203 .

362.2-974. Effect on limited partnerships formed prior to July 15, 1988.

  1. A limited partnership formed under any statute of this Commonwealth prior to July 15, 1988, until or unless it becomes a limited partnership under this subchapter, shall continue to be governed by the provisions of the statute under which it was formed.
  2. A limited partnership formed under any statute of this Commonwealth prior to July 15, 1988, may elect to become subject to this subchapter upon the filing of an amended and restated certificate of limited partnership which complies with the provisions of KRS 362.2-201 .
  3. Upon the occurrence of any event which would require the filing of a certificate of amendment by a limited partnership under the Kentucky Revised Uniform Limited Partnership Act, KRS 362.401 to 362.525 , as it exists on July 12, 2006, or under the statute under which the limited partnership was formed, the limited partnership shall file an amended and restated certificate of limited partnership which complies with the provisions of KRS 362.2-201 .
  4. A limited partnership formed under any statute of this Commonwealth prior to July 15, 1988, shall not be required to change its name to include the word “Limited” or the abbreviation “Ltd.” until such time as it becomes subject to this subchapter.
  5. The enactment of this subchapter shall not impair, or otherwise affect, the organization or the continued existence of a limited partnership existing on July 15, 1988, nor does any repeal of any statutory provision by 1988 Ky. Acts ch. 284, sec. 65, impair any contract or affect any right accrued before July 15, 1988.

History. Enact. Acts 2006, ch. 149, § 192, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1204 .

362.2-975. Effective date.

  1. This subchapter governs only:
    1. A limited partnership formed on or after July 12, 2006; and
    2. Except as otherwise provided in subsection (2)(c) and (d) of this section, a limited partnership formed before the July 12, 2006, which elects, in the manner provided in its partnership agreement or by law for amending the partnership agreement, to be subject to this subchapter. The filing of an amended or an amended and restated certificate of limited partnership electing limited liability limited partnership status shall constitute an election to be governed by KRS 362.2-102 to 362.2-977 .
  2. With respect to a limited partnership formed before July 12, 2006, that elects to be governed by KRS 362.2-102 to 362.2-977 , the following rules apply, except as the partners otherwise elect in the manner provided in the partnership agreement or by law for amending the partnership agreement:
    1. KRS 362.2-104 (3) does not apply and the limited partnership has whatever duration it had under the law applicable immediately before July 12, 2006;
    2. KRS 362.2-601 and 362.2-602 do not apply and a limited partner has the same right and power to dissociate from the limited partnership, with the same consequences, as existed immediately before July 12, 2006;
    3. KRS 362.2-603 (4) does not apply;
    4. KRS 362.2-603 (4) does not apply and a court has the same power to expel a general partner as the court had before July 12, 2006; and
    5. KRS 362.2-801 (3) does not apply and the connection between a general partner’s dissociation and the dissolution of the limited partnership is the same as existed before July 12, 2006.
  3. With respect to a limited partnership that elects, pursuant to subsection (1)(b) of this section, to be subject to this subchapter, after the election takes effect, the provisions of this subchapter relating to the liability of the limited partnership’s general partners to third parties apply:
    1. Before January 1, 2009, to:
      1. A third party that had not done business with the limited partnership in the year before the election took effect; and
      2. A third party that had done business with the limited partnership in the year before the election took effect only if the third party knows or has received a notification of the election; and
    2. On or after January 1, 2009, to all third parties.

History. Enact. Acts 2006, ch. 149, § 193, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1205 .

362.2-976. Savings clause.

This subchapter does not affect an action or proceeding commenced or right accrued before this subchapter takes effect.

History. Enact. Acts 2006, ch. 149, § 194, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1206 .

362.2-977. Short title for Subchapter 2 of KRS chapter 362.

This subchapter may be cited as the Kentucky Uniform Limited Partnership Act (2006).

History. Enact. Acts 2006, ch. 149, § 195, effective July 12, 2006.

Compiler’s Notes.

This section was formerly compiled as KRS 362.2-1207 .

Research References and Practice Aids

Kentucky Law Journal.

Vestal & Rutledge, Modern Partnership Law Comes to Kentucky: Comparing the Kentucky Revised Uniform Partnership Act and the Uniform Act from Which it was Derived., 95 Ky. L.J. 715 (2006/2007).

Northern Kentucky Law Review.

Vestal and Rutledge, The Uniform Limited Partnership Act (2001) Comes to Kentucky: An Owner’s Manual, 34 N. Ky. L. Rev. 411 (2007).

CHAPTER 363 Weights, Measures and Millers’ Tolls

363.010. Federal standards of weight and measure adopted. [Repealed.]

Compiler’s Notes.

This section (4815) was repealed by Acts 1950, ch. 9, § 16.

363.020. Duplicates of standards may be furnished counties. [Repealed.]

Compiler’s Notes.

This section (4816) was repealed by Acts 1950, ch. 9, § 16.

363.030. Hundredweight; ton. [Repealed.]

Compiler’s Notes.

This section (4820) was repealed by Acts 1970, ch. 264, § 43.

363.040. Bushel, what weight constitutes. [Repealed.]

Compiler’s Notes.

This section (4821) was repealed by Acts 1970, ch. 264, § 43.

363.050. Irish potatoes, pounds to barrel. [Repealed.]

Compiler’s Notes.

This section (4822) was repealed by Acts 1970, ch. 264, § 43.

363.060. Wheat, procedure and apparatus to be used for determining test weight per bushel. [Repealed.]

Compiler’s Notes.

This section (4819a-1: amend. Acts 1948, ch. 74) was repealed by Acts 1970, ch. 264, § 43.

363.070. Wheat flour, standard measures of; labeling of packages; exceptions. [Repealed.]

Compiler’s Notes.

This section (4819a-2 to 4819a-5: amend. Acts 1944, ch. 158; 1950, ch. 176, § 9) was repealed by Acts 1970, ch. 264, § 43.

363.080. Corn meal, grits, hominy and corn flour, standard weight and measures of; labeling of packages. [Repealed.]

Compiler’s Notes.

This section (4823b-1, 4823b-2) was repealed by Acts 1970, ch. 264, § 43.

363.090. Coal, unscreened not to be sold for screened. [Repealed.]

Compiler’s Notes.

This section (4823) was repealed by Acts 1970, ch. 264, § 43.

363.100. Millers, regulations and tolls. [Repealed.]

Compiler’s Notes.

This section (2721) was repealed by Acts 1970, ch. 264, § 43.

363.110. Definition of terms used in KRS 363.120 to 363.140. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1942, ch. 103, § 1) was repealed by Acts 1950, ch. 9, § 16.

363.120. Tolerances allowed on pumps dispensing gasoline or kerosene. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1942, ch. 103, § 2) was repealed by Acts 1950, ch. 9, § 16.

363.130. Testing and sealing of pumps and measuring devices used in dispensing gasoline, kerosene and lubricating oils; adjustments. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1942, ch. 103, § 3) was repealed by Acts 1950, ch. 9, § 16.

363.140. Powers of cities not affected. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1942, ch. 103, § 4) was repealed by Acts 1950, ch. 9, § 16.

363.150. Periodic inspection of weighing and measuring devices at stockyards, tobacco warehouses and grain warehouses; notice of inaccuracy; correction of defects. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1944, ch. 130, § 1) was repealed by Acts 1950, ch. 9, § 16.

363.160. Department of Agriculture to assign inspectors for duties under KRS 363.150. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1944, ch. 130, § 2) was repealed by Acts 1950, ch. 9, § 16.

363.170. Definitions for KRS 363.180 to 363.290. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1950, ch. 9, § 1) was repealed by Acts 1970, ch. 264, § 43.

363.175. “Commodities” defined. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1956, ch. 124, § 1) was repealed by Acts 1970, ch. 264, § 43.

363.180. Enforcement; Division of Weights and Measures. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1950, ch. 9, § 2) was repealed by Acts 1970, ch. 264, § 43.

363.190. State standards of weights and measures. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1950, ch. 9, § 3) was repealed by Acts 1970, ch. 264, § 43.

363.200. Office standards and working standards. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1950, ch. 9, § 4) was repealed by Acts 1970, ch. 264, § 43.

363.210. Custody of state standards; periodic certification; records. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1950, ch. 9, § 5) was repealed by Acts 1970, ch. 264, § 43.

363.220. Regulations; specifications, tolerances and variances. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1950, ch. 9, § 6) was repealed by Acts 1970, ch. 264, § 43.

363.230. City sealers; city working standards; supervision by Department of Agriculture. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1950, ch. 9, § 7) was repealed by Acts 1970, ch. 264, § 43.

363.240. Powers of department. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1950, ch. 9, § 8; 1956, ch. 124, § 2; 1966, ch. 144, § 1) was repealed by Acts 1970, ch. 264, § 43.

363.250. Sealing of correct devices; condemnation for repair or destruction of others. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1950, ch. 9, § 9) was repealed by Acts 1970, ch. 264, § 43.

363.260. Arrests and seizures. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1950, ch. 9, § 10) was repealed by Acts 1970, ch. 264, § 43.

363.270. Weight tickets for coal, coke or charcoal. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1950, ch. 9, § 11) was repealed by Acts 1970, ch. 264, § 43.

363.280. Prohibited practices. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1950, ch. 9, § 12; 1960, ch. 161, § 1) was repealed by Acts 1970, ch. 264, § 43.

363.285. Manner of selling commodity. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1956, ch. 124, §§ 3 to 5; 1960, ch. 161, § 2) was repealed by Acts 1970, ch. 264, § 43.

363.290. City ordinances. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1950, ch. 9, § 14) was repealed by Acts 1970, ch. 264, § 43.

363.300. Commodity price requirements. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1950, ch. 161, § 3) was repealed by Acts 1970, ch. 264, § 43.

363.310. Commodity weight requirements; variations. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1960, ch. 161, § 4) was repealed by Acts 1970, ch. 264, § 43.

363.320. Exemption of prescribed drugs from provision of chapter. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1960, ch. 161, § 5) was repealed by Acts 1970, ch. 264, § 43.

363.330. Registration requirement for commercial weighing and measuring device repairmen and service agencies — Administrative hearing — Administrative regulations.

  1. As used in this section, unless the context requires otherwise:
    1. “Commercial weighing and measuring device” means any weight or measure or weighing or measuring device commercially used or employed in establishing the size, quantity, extent, area, or measurement of quantities, things, produce, or articles for distribution or consumption, purchased, offered, or submitted for sale, hire, or award, or in computing any basis of weight or measure, and also includes any accessory attached to or used in connection with a commercial weighing or measuring device when the accessory is so designed or installed that its operation affects, or may affect, the accuracy of the device;
    2. “Director” means the director of the Division of Regulation and Inspection;
    3. “Registered serviceman” means any individual who for hire, award, commission, or any other payment of any kind, installs, services, repairs, or reconditions a commercial weighing or measuring device, and who registers with the director; and
    4. “Registered service agency” means any agency, firm, company, or corporation which for hire, award, commission, or any other payment of any kind, installs, services, repairs, or reconditions a commercial weighing or measuring device, and which registers with the director. Under agency registration, identification of individual servicemen shall be required.
  2. The director shall require the registration of an individual or agency and shall require the individual or agency to provide acceptable evidence that he or it is fully qualified to install, service, repair, or recondition a commercial weighing or measuring device; has a thorough working knowledge of all appropriate weights and measures laws, orders, and administrative regulations; and has possession of, or available for use, weights and measures standards and testing equipment appropriate in design and adequate in amount. An employee of government shall not be eligible for registration.
  3. The director may enter into an informal reciprocal agreement with any other state that has similar registration policies. Under a reciprocal agreement, registered servicemen and registered service agencies of the states party to the reciprocal agreement shall be granted full reciprocal authority, including reciprocal recognition of certification of standards and testing equipment, in all states party to the agreement.
  4. There shall be an annual fee of twenty dollars ($20) per registered serviceman and fifty dollars ($50) per registered service agency to be applied toward the costs of administering the plan. The fee shall be paid to the director at the time application for registration is made, and annually, during the month of January, thereafter.
  5. An individual or agency shall apply for registration to service weighing devices or measuring devices on an application form supplied by the director. The form, duly signed and witnessed, shall include certification by the applicant that the individual or agency is fully qualified to install, service, repair, or recondition whatever devices for the service of which competence is being registered; has in possession, or available for use, all necessary testing equipment and standards; and has full knowledge of all appropriate weights and measures laws, orders, and administrative regulations. An applicant also shall submit appropriate evidence or references as to qualifications. The director may require competency testing of service individuals as the director deems necessary.
  6. Upon receipt and acceptance of a properly executed application form, and with proof of competency, the director shall issue to the applicant a “certificate of registration,” including an assigned registration number, which shall remain effective until either returned by the applicant or withdrawn by the director.
  7. Only a bearer of a certificate of registration shall have the authority to remove an official rejection tag or mark placed on a weighing or measuring device by the authority of the director; place in service, until an official examination can be made, a weighing or measuring device that has been officially rejected; or place in service, until an official examination can be made, a new or used weighing or measuring device.
  8. The director shall furnish each registered serviceman and registered service agency with a supply of report forms to be known as “Placed in Service Reports.” This form shall be executed in triplicate, shall include the assigned registration number, and shall be signed by a registered serviceman or by a serviceman representing a registered agency for each rejected device restored to service and for each newly installed device placed in service. Within twenty-four (24) hours after a device is restored to service, or placed in service, the original of the properly executed “Placed in Service Report,” together with any official rejection tag removed from the device, shall be mailed to the director at Frankfort, Kentucky. The duplicate copy of the report shall be handed to the owner or operator of the device, and the triplicate copy of the report shall be retained by the registered serviceman or agency.
  9. A registered serviceman and a registered service agency shall submit, at least biennially to the director, for his examination and certification, any standards and testing equipment that are used, or are to be used, in the performance of the service and testing functions with respect to weighing and measuring devices for which competence is registered. A registered serviceman or agency shall not use in servicing commercial weighing or measuring devices any standards of testing equipment that have not been certified by the director.
  10. The director may, for good cause, after careful investigation and consideration, and after the registrant has been afforded the opportunity for an administrative hearing conducted in accordance with KRS Chapter 13B, suspend or revoke a “certificate of registration.”
  11. The director shall publish from time to time as he deems appropriate, and may supply upon request, lists of registered servicemen and registered service agencies.
  12. The director may promulgate administrative regulations to carry out the provisions of this section.

History. Enact. Acts 1970, ch. 25; 1990, ch. 93, § 1, effective July 13, 1990; 1996, ch. 318, § 345, effective July 15, 1996; 2002, ch. 49, § 21, effective July 15, 2002; 2008, ch. 34, § 1, effective July 15, 2008.

Research References and Practice Aids

Cross-References.

Public utility meters, testing of, KRS 278.210 .

Stockyards, scales,KRS 261.270 and 261.280 .

Tobacco warehouses, weighing and grading, KRS 248.280 .

Grain Moisture Testing

363.410. Department’s powers and duties with respect to grain moisture testing.

The Kentucky Department of Agriculture shall make or cause to be made all inspections and shall have authority to establish tolerances and specifications for grain moisture measuring devices, similar to the tolerances and specifications recommended or used by the grain branch of the United States Department of Agriculture, which shall have for their object the establishment of more accurate grain, small grain, corn and soybeans moisture measuring in the Commonwealth of Kentucky.

History. Enact. Acts 1970, ch. 30, § 1.

Research References and Practice Aids

Cross-References.

Department of agriculture, KRS Ch. 246.

363.420. Inspectors.

The inspectors of the Kentucky Department of Agriculture shall have the power and it shall be their duty to inspect, make comparative tests of, and ascertain if correct, every grain moisture measuring device used or employed in this state by any proprietor, agent or lessee or employee in proving or ascertaining the moisture of agricultural commodities offered for sale, sold, purchased or in the process of being purchased. Such inspector shall use as a standard for making such comparative test a grain moisture measuring device meeting the tolerances and specifications established pursuant to the provisions of KRS 363.410 .

History. Enact. Acts 1970, ch. 30, § 2.

363.430. Sealing or marking testing devices.

Whenever the inspector for the Kentucky Department of Agriculture compares grain moisture tests of the device being tested with the standard grain moisture measuring device and finds that they correspond or causes them to correspond with the standard he shall seal or mark such grain moisture measuring testing device with appropriate seals or marks. Any such grain moisture measuring testing device which upon such inspection shall be found to be defective and which defect cannot be immediately corrected shall be sealed or marked with an appropriate seal indicating such device to be defective and the owner or user of such device shall be notified of such defective condition on an appropriate inspection form on the date of such inspection.

History. Enact. Acts 1970, ch. 30, § 3.

363.440. Dealer’s duties and liabilities.

Any person, firm, or corporation engaged in the business of grain buying, custom grain storage and/or grain banking, resale of grain, and grain used for feed manufacturing and who purchases or makes sales based on moisture content must show moisture contents of these commodities as determined on an approved moisture measuring testing device. In the case of grain storage and/or grain banking, moisture content must be determined both when the grain is put in storage and when it is taken out and the same discount schedule used when grain is put into storage must be used when grain is taken out. When small grain, corn and soybeans is bought and the seller is discounted according to the moisture content, this moisture content must be determined by a moisture measuring device approved by the Department of Agriculture. Any person who, by himself or by his agent or as agent of another person, uses in determining moisture content any grain moisture measuring device which has not been tested and approved for use by the Kentucky Department of Agriculture shall be guilty of a misdemeanor; except that the use of a newly purchased grain moisture measuring device prior to regular inspection and approval shall not be considered a misdemeanor if the user of such device has given notice to the Kentucky Department of Agriculture of the purchase and intended use of such new device. Such notice shall be given by either certified or registered mail not later than ten (10) days prior to the date of such intended use. In an emergency situation, a person may substitute an untested moisture measuring device in place of an approved device for a period of not more than twenty-four (24) hours before notifying the department of its emergency use and making arrangements for its inspection.

History. Enact. Acts 1970, ch. 30, § 4.

363.510. Definitions for KRS 363.510 to 363.850.

When used in KRS 363.510 to 363.850 :

  1. “Department” means the Kentucky Department of Agriculture;
  2. “Commissioner” means the Commissioner of Agriculture;
  3. “Division” means the Division of Regulation and Inspection;
    1. “Weights and measures” means all weights and measures of every kind, instruments and devices for weighing and measuring, and any appliances and accessories associated with any of the instruments and devices. (4) (a) “Weights and measures” means all weights and measures of every kind, instruments and devices for weighing and measuring, and any appliances and accessories associated with any of the instruments and devices.
    2. The term shall include instruments and devices used to measure internal moisture or density levels in unprocessed bulk tobacco if that moisture or density determination is used as a condition of sale or as part of a contractual sales agreement.
    3. The term shall not include meters for the measurement of electricity, gas (natural or manufactured), or water when they are operated in a public utility system. Electricity, gas, and water meters are specifically excluded from the purview of KRS 363.510 to 363.850 , and none of the provisions of KRS 363.510 to 363.850 shall apply to those meters or to any appliances or accessories associated with those meters;
  4. “Sell” and “sale” mean barter and exchange;
  5. “Director” means the state director of the Division of Regulation and Inspection;
  6. “Inspector” means a state inspector of weights and measures;
  7. “Intrastate commerce” means all commerce or trade that is begun, carried on, and completed wholly within the limits of the State of Kentucky, and the phrase “introduced into intrastate commerce” defines the time and place at which the first sale and delivery of a commodity is made within the state, the delivery being made either directly to the purchaser or to a common carrier for shipment to the purchaser;
  8. “Commodity in package form” means a commodity put up or packaged in any manner in advance of sale in units suitable for either wholesale or retail sale, exclusive of any auxiliary shipping container enclosing packages that individually conform to the requirements of KRS 363.510 to 363.850 . An individual item or lot of any commodity not in package form as defined in this section, but on which there is marked a selling price based on an established price per unit of weight or of measure, shall be considered a commodity in package form;
  9. “Consumer package” or “package of consumer commodity” means a commodity in package form that is customarily produced or distributed for sale through retail sales agencies or instrumentalities for consumption by individuals or use by individuals for the purposes of personal care or in the performance of services ordinarily rendered in or about the household or in connection with personal possessions;
  10. “Nonconsumer package” or “package of nonconsumer commodity” means any commodity in package form other than a consumer package, and particularly a package designed solely for industrial or institutional use or for wholesale distribution only;
    1. “Barrel,” when used in connection with fermented liquor, means a unit of thirty-one (31) gallons. (12) (a) “Barrel,” when used in connection with fermented liquor, means a unit of thirty-one (31) gallons.
    2. “Ton” means a unit of two thousand (2,000) pounds avoirdupois weight.
    3. “Cord,” when used in connection with wood intended for fuel purposes, means the amount of wood that is contained in a space of one hundred twenty-eight (128) cubic feet when the wood is ranked and well stowed; and
  11. “Weight,” as used in connection with any commodity, means net weight. If any commodity is sold on the basis of weight, the net weight of the commodity shall be used, and all contracts concerning commodities shall use net weight as their basis of weight.

History. Enact. Acts 1970, ch. 264, §§ 1, 3, 27; 2002, ch. 49, § 22, effective July 15, 2002; 2011, ch. 18, § 2, effective June 8, 2011; 2014, ch. 92, § 303, effective January 1, 2015.

Legislative Research Commission Notes.

(6/8/2011). During codification, the Reviser of Statutes has altered the internal numbering of subsection (4) of this section from the way it appeared in 2011 Ky. Acts ch. 18, sec. 2.

Opinions of Attorney General.

Although KRS 363.010 to 363.990 was repealed by the new weights and measures act, a person could be prosecuted after its repeal for a violation of the old act occurring before the repeal. OAG 70-529 .

Research References and Practice Aids

Cross-References.

Department of agriculture, KRS Ch. 246.

363.520. Recognition of customary and metric systems of weights and measures.

The system of weights and measures in customary use in the United States and the metric system of weights and measures are jointly recognized, and either one (1) or both of these systems shall be used for all commercial purposes in the State of Kentucky. The definitions of basic units of weight and measure, the tables of weight and measure, and weights and measures equivalents as published by the National Institute of Standards and Technology are recognized and shall govern weighing and measuring equipment and transactions in the state.

History. Enact. Acts 1970, ch. 264, § 2; 2008, ch. 34, § 2, effective July 15, 2008.

363.530. Fractional units of weight and measure.

Fractional parts of any unit of weight or measure shall mean like fractional parts of the value of the unit as prescribed or defined in KRS 363.520 and subsection (13) of KRS 363.510 , and all contracts concerning the sale of commodities and services shall be construed in accordance with this requirement.

History. Enact. Acts 1970, ch. 264, § 33; 2002, ch. 49, § 23, effective July 15, 2002.

363.540. State standards of weights and measures.

The state shall have weights and measures that conform with the standards of the United States and that have been approved as being satisfactory for use by the National Institute of Standards and Technology. These weights and measures shall be the state standards of weight and measure. The state standards shall be kept in a safe and suitable place in the laboratory of the State Division of Regulation and Inspection, and shall not be removed from the laboratory except for repairs or for calibration and approval.

History. Enact. Acts 1970, ch. 364, § 4; 2002, ch. 49, § 24, effective July 15, 2002.

363.550. Field standards.

In addition to the state standards provided for in KRS 363.540 , there shall be supplied by the state such “field standards” and such equipment as may be found necessary to carry out the provisions of KRS 363.510 to 363.850 . The field standards shall be verified upon their initial receipt and, thereafter, as often as deemed necessary by the director by comparison with the state standards.

History. Enact. Acts 1970, ch. 264, § 5.

363.555. Administrative regulations — Unprocessed bulk tobacco.

The Commissioner may promulgate administrative regulations relating to servicing or inspecting instruments and devices used to measure internal moisture or density levels in unprocessed bulk tobacco as described in KRS 363.510 .

History. Enact. Acts 2011, ch. 18, § 1, effective June 8, 2011.

363.560. Administration of law.

The power and duty to administer and enforce KRS 363.510 to 363.850 is vested in the Department of Agriculture, and shall be exercised under the supervision of the Office for Consumer and Environmental Protection through the Division of Regulation and Inspection. The division shall be headed by a director appointed by the Commissioner of Agriculture and shall have personnel as determined and appointed by the Commissioner.

History. Enact. Acts 1970, ch. 264, § 6; 1990, ch. 393, § 5, effective July 13, 1990; 2002, ch. 49, § 25, effective July 15, 2002; 2004, ch. 88, § 8, effective July 13, 2004.

363.570. Director’s bond.

A bond, with sureties, to be approved by the Secretary of State, and conditioned upon the faithful performance of his duties and the safekeeping of any standards or equipment entrusted to his care, shall forthwith, upon his appointment, be given by the director in the penal sum of $5,000.

History. Enact. Acts 1970, ch. 264, § 7.

363.580. Director’s duties.

The director shall have the custody of the state standards of weight and measure and of the other standards and equipment provided for by KRS 363.510 to 363.850 , and shall keep accurate records of the same. The director shall enforce the provisions of KRS 363.510 to 363.850 . He shall have and keep a general supervision over the weights and measures offered for sale, sold, or in use in the state. He shall annually, in the month of July, make to the commissioner a report on all of the activities of his office.

History. Enact. Acts 1970, ch. 264, § 8.

363.590. Regulations of director — Specifications for commercial devices.

  1. The director shall issue from time to time reasonable regulations for the enforcement of KRS 363.510 to 363.850 , which regulations shall have the force and effect of law. These regulations may include:
    1. Standards of net weight, measure, or count, and reasonable standards of fill for any commodity in package form;
    2. Rules governing the technical and reporting procedures to be followed and the report and record forms and marks of approval and rejection to be used by inspectors of weights and measures in the discharge of their official duties;
    3. Exemptions from the sealing or marking requirements of KRS 363.650 with respect to weights and measures of the character or size that the sealing or marking would be inappropriate, impracticable, or damaging to the apparatus in question;
    4. Rules governing the registration of servicemen and service agencies; and
    5. Rules governing the examination procedure for price verification.
  2. These regulations shall include specifications, tolerances, and other technical requirements for weights and measures of the character of those specified in KRS 363.610 , designed to eliminate from use without prejudice to apparatus that conforms as closely as practicable to the official standards, those:
    1. That are not accurate;
    2. That are of such construction that they are faulty (that is, that are not reasonably permanent in their adjustment or will not repeat their indications correctly); or
    3. That facilitate the perpetration of fraud.
  3. The specifications, tolerances, and other technical requirements for commercial weighing and measuring devices, together with amendments to those requirements, as recommended by the National Institute of Standards and Technology and published in the most recent editions of the National Institute of Standards and Technology handbooks and supplements to the handbooks, or in any publication revising or superseding the handbooks or supplements to the handbooks, shall be the specifications, tolerances, and other technical requirements for commercial weighing and measuring devices of the State of Kentucky, unless modified, amended, or rejected by a regulation issued by the director. For the purposes of KRS 363.510 to 363.850 , apparatus shall be deemed to be “correct” when it conforms to all applicable requirements promulgated as specified in this section. Other apparatus shall be deemed to be “incorrect.”

HISTORY: Enact. Acts 1970, ch. 264, § 9; 2008, ch. 34, § 3, effective July 15, 2008; 2018 ch. 25, § 1, effective July 14, 2018.

363.600. Periodic testing of standards.

The director shall from time to time test all weights and measures used in checking the receipt or disbursement of supplies in every institution for the maintenance of which moneys are appropriated by the legislature, reporting his findings, in writing, to the supervisory board and the executive officer of the institution concerned.

History. Enact. Acts 1970, ch. 264, § 10; 2014, ch. 92, § 304, effective January 1, 2015.

Compiler’s Notes.

For this section as effective until January 1, 2015, see the preceding section also numbered KRS 363.600 .

363.610. Testing devices for sale and in use.

When not otherwise provided by law, the director shall have the power to inspect and test, to ascertain if they are correct, all weights and measures kept, offered, or exposed for sale. It shall be the duty of the director, within a twelve-month period, or less frequently if in accordance with a schedule issued by him, and as much oftener as he may deem necessary, to inspect and test to ascertain if they are correct, all weights and measures commercially used:

  1. In determining the weight, measurement, or count of commodities or things sold, or offered or exposed for sale, on the basis of weight, measure, or of count, or
  2. In computing the basic charge or payment for services rendered on the basis of weight, measure, or of count.

Provided, that with respect to single-service devices (that is, devices designed to be used commercially only once and to be then discarded) and with respect to devices uniformly mass-produced, as by means of a mold or die, and not susceptible of individual adjustment, tests may be made on representative samples of such devices; and the lots of which such samples are representative shall be held to be correct or incorrect upon the basis of the results of the inspections and tests on such samples.

History. Enact. Acts 1970, ch. 264, § 11.

363.620. Director’s investigations.

The director shall investigate complaints made to him concerning violations of the provisions of KRS 363.510 to 363.850 , and shall, upon his own initiative, conduct such investigations as he deems appropriate and advisable to develop information on prevailing procedures in commercial quantity determination and on possible violations of the provisions of KRS 363.510 to 363.850 and to promote the general objective of accuracy in the determination and representation of quantity in commercial transactions.

History. Enact. Acts 1970, ch. 264, § 12.

363.630. Spot checks of commodities offered for sale.

The director shall, from time to time, weigh or measure and inspect packages or amounts of commodities kept, offered, or exposed for sale, sold, or in the process of delivery, to determine whether the same contain the amounts represented and whether they be kept, offered, or exposed for sale or sold in accordance with law. When such packages or amounts of commodities are found not to contain the amounts represented, or are found to be kept, offered, or exposed for sale in violation of law, the director may order them off sale and may so mark or tag them as to show them to be illegal. In carrying out the provisions of this section, the director may employ recognized sampling procedures under which the compliance of a given lot of packages will be determined on the basis of the result obtained on a sample selected from and representative of such lot. No person shall:

  1. Sell, or keep, offer, or expose for sale, in intrastate commerce, any package or amount of commodity that has been ordered off sale or marked or tagged as provided in this section unless and until such package or amount of commodity has been brought into full compliance with all legal requirements, or
  2. Dispose of any package or amount of commodity that has been ordered off sale or marked or tagged as provided in this section and that has not been brought into compliance with legal requirements, in any manner, except with the specific approval of the director.

History. Enact. Acts 1970, ch. 264, § 13.

363.640. Stop-use, stop-removal and removal orders.

The director shall have the power to issue stop-use orders, stop-removal orders, and removal orders with respect to weights and measures being, or susceptible of being, commercially used, and to issue stop-removal orders and removal orders with respect to packages or amounts of commodities kept, offered, or exposed for sale, sold, or in process of delivery, whenever in the course of his enforcement of the provisions of KRS 363.510 to 363.850 he deems it necessary or expedient to issue such orders, and no person shall use, remove from the premises specified, or fail to remove from the premises specified, any weight, measure, or package or amount of commodity contrary to the terms of a stop-use order, stop-removal order, or removal order issued under the authority of this section.

History. Enact. Acts 1970, ch. 264, § 14.

363.650. Approval or rejection of tested weights and measures.

The director shall approve for use, and seal or mark with appropriate devices, such weights and measures as he finds upon inspection and test to be correct as defined in KRS 363.590 , and shall reject and mark or tag as “rejected” such weights and measures as he finds, upon inspection or test, to be incorrect as defined in KRS 363.590 , but which in his best judgment are susceptible of satisfactory repair: provided, that such sealing or marking shall not be required with respect to such weights and measures as may be exempted therefrom by a regulation of the director issued under the authority of KRS 363.590. The director shall condemn, and may seize and destroy, weights and measures found to be incorrect that, in his best judgment, are not susceptible of satisfactory repair. Weights and measures that have been rejected may be confiscated and may be destroyed by the director if not correct as required by KRS 363.700 , or if used or disposed of contrary to the requirements of KRS 363.700 .

History. Enact. Acts 1970, ch. 264, § 15.

363.660. Police powers of director.

With respect to the enforcement of KRS 363.510 to 363.850 and any other law dealing with weights and measures that he is or may be empowered to enforce, the director is hereby vested with special police powers, and is authorized to arrest, without formal warrant, any violator of the said law, and to seize for use as evidence, without formal warrant, incorrect or unsealed weights and measures or amounts or packages of commodity found to be used, retained, offered, or exposed for sale or sold in violation of law. In the performance of his official duties, the director is authorized to enter and go into or upon, without formal warrant, any structure or premises, and to stop any person whatsoever and to require him to proceed, with or without any vehicle of which he may be in charge, to some place which the director may specify.

History. Enact. Acts 1970, ch. 264, § 16.

Research References and Practice Aids

Cross-References.

Public service commission, utilities regulated thereby, KRS Ch. 278.

Sheriffs, constables, patrols and guards, KRS Ch. 70.

363.670. Director’s powers extend to deputy, inspectors.

The powers and duties given to and imposed upon the director by KRS 363.600 to 363.660 and KRS 363.810 are hereby given to and imposed upon the deputy director and inspectors also when acting under the instructions and at the direction of the director.

History. Enact. Acts 1970, ch. 264, § 17; 2014, ch. 92, § 312, effective January 1, 2015.

Compiler’s Notes.

For this section as effective until January 1, 2015, see the preceding section also numbered KRS 363.670 .

363.680. City sealer of weights and measures in cities of first three classes. [Repealed.]

Any city of the first, second or third class shall have power, by ordinance, to provide for a city sealer of weights and measures, with necessary assistants. When any such city establishes the position of city sealer, it shall procure from the department, at the expense of the city, a set of working standards of weights and measures certified by the department as a correct copy of the office standard of the department, and sealed by the department in the same manner as the working standards of the department. The city sealer shall have the same powers within the city as are conferred upon the department by KRS 363.410 to 363.430 , such powers to be exercised under the general control or supervision of the department. The city working standards shall be submitted to the department for verification at least once each five (5) years. The department shall have power to inspect the standards and other weighing and measuring apparatus used by city sealers and to inspect the work of the city sealers. The department may prescribe regulations for the guidance of the city sealers, which regulations shall govern the procedure to be followed by city sealers in the discharge of their duties.

History. Enact. Acts 1970, ch. 264, § 18; 1980, ch. 188, § 280, effective July 15, 1980.

Research References and Practice Aids

Cross-References.

City classification, KRS Ch. 81.

363.690. Powers of city sealer and deputies — Concurrent powers of director. [Repealed.]

  1. The sealer of a city, and his deputy sealers when acting under his instructions and at his direction, shall have the same powers and shall perform the same duties within the city for which appointed as are granted to and imposed upon the director by KRS 363.610 to 363.660 , and KRS 363.810 .
  2. In cities for which sealers of weights and measures have been appointed as provided for in KRS 363.680 , the director shall have concurrent authority to enforce the provisions of KRS 363.510 to 363.850 .

History. Enact. Acts 1970, ch. 264, §§ 19, 20.

363.700. Provisions as to rejected weights and measures.

Weights and measures that have been rejected under the authority of the director or of a sealer shall remain subject to the control of the rejecting authority until such time as suitable repair or disposition thereof has been made as required by this section. The owners of such rejected weights and measures shall cause the same to be made correct within thirty (30) days or such shorter period as may be authorized by the rejecting authority; or, in lieu of this, may dispose of the same, but only in such manner as is specifically authorized by the rejecting authority. Weights and measures that have been rejected shall not again be used commercially until they have been officially reexamined and found to be correct, or until specific written permission for such use is issued by the rejecting authority, or until the rejection tag has been removed and the rejected device repaired and placed in service by a person duly registered to perform such acts under a regulation issued by the director for the registration of weights and measures servicemen and service agencies.

History. Enact. Acts 1970, ch. 264, § 21.

363.710. Provisions for weights and measures for liquid, solid form.

  1. Commodities in liquid form shall be sold only by liquid measure or by weight, and, except as otherwise provided in KRS 363.510 to 363.850 , commodities not in liquid form shall be sold only by weight, by measure of length or area, or by count: provided, that liquid commodities may be sold by weight, and commodities not in liquid form may be sold by count only if such methods give accurate information as to the quantity of commodity sold; and provided further, that the provisions of this section shall not apply:
    1. To commodities when sold for immediate consumption on the premises where sold,
    2. To vegetables when sold by head or bunch,
    3. To commodities in containers standardized by a law of this state or by federal law,
    4. To commodities in package form when there exists a general consumer usage to express the quantity in some other manner,
    5. To concrete aggregates, concrete mixtures, and loose solid materials such as earth, soil, gravel, crushed stone, and the like, when sold by cubic measure, or
    6. To unprocessed vegetable and animal fertilizer when sold by cubic measure.
  2. The director may issue such reasonable regulations as are necessary to assure that amounts of commodity sold are determined in accordance with good commercial practice and are so determined and represented as to be accurate and informative to all parties at interest.

History. Enact. Acts 1970, ch. 264, § 22.

363.720. Provisions as to packaged commodities.

Except as otherwise provided in KRS 363.510 to 363.850 , any commodity in package form introduced or delivered for introduction into or received in intrastate commerce, kept for the purpose of sale, or offered or exposed for sale in intrastate commerce, shall bear on the outside of the package such definite, plain, and conspicuous declarations of:

  1. The identity of the commodity in the package unless the same can easily be identified through the wrapper or container,
  2. The net quantity of the contents in terms of weight, measure, or count, and
  3. In the case of any package kept, offered, or exposed for sale, or sold in any place other than on the premises where packed, the name and place of business of the manufacturer, packer, or distributor, as may be prescribed by regulation issued by the director.

Provided, that in connection with the declaration required under subsection (2) of this section, neither the qualifying term “when packed” or any words of similar import, nor any term qualifying a unit of weight, measure, or count (for example, “jumbo,” “giant,” “full,” and the like) that tends to exaggerate the amount of commodity in a package shall be used; and provided further, that under subsection (2) of this section the director shall, by regulation, establish reasonable variations to be allowed, which may include variations below the declared weight or measure caused by ordinary and customary exposure, only after the commodity is introduced into intrastate commerce, to conditions that normally occur in good distribution practice and that unavoidably result in decreased weight or measure, exemptions as to small packages, and exemptions as to commodities put up in variable weights or sizes for sale intact and either customarily not sold as individual units or customarily weighed or measured at time of sale to the consumer.

History. Enact. Acts 1970, ch. 264, § 23.

363.730. Package in random lot to show price per unit.

In addition to the declarations required by KRS 363.720 , any commodity in package form, the package being one (1) of a lot containing random weights, measures, or counts of the same commodity and bearing the total selling price of the package, shall bear on the outside of the package a plain and conspicuous declaration of the price per single unit of weight, measure, or count.

History. Enact. Acts 1970, ch. 264, § 24.

363.740. Commodity package to be full.

No commodity in package form shall be so wrapped, nor shall it be in a container so made, formed, or filled as to mislead the purchaser as to the quantity of the contents of the package, and the contents of a container shall not fall below such reasonable standard of fill as may have been prescribed for the commodity in question by the director.

History. Enact. Acts 1970, ch. 264, § 25.

363.750. Advertisement containing price also to contain quantity.

Whenever a commodity in package form is advertised in any manner and the retail price of the package is stated in the advertisement, there shall be closely and conspicuously associated with such statement of price a declaration of the basic quantity of contents of the package as is required by law or regulation to appear on the package: provided, that, where the law or regulation requires a dual declaration of net quantity to appear on the package, only the declaration that sets forth the quantity in terms of the smaller unit of weight or measure (the declaration that is required to appear first and without parentheses on the package) need appear in the advertisement; and provided further, that there shall not be included as part of the declaration required under this section such qualifying terms as “when packed,” “minimum,” “not less than,” or any other terms of similar import, nor any term qualifying a unit of weight, measure, or count (for example, “jumbo,” “giant,” “full,” and the like) that tends to exaggerate the amount of commodity in the package.

History. Enact. Acts 1970, ch. 264, § 26.

363.760. Misrepresentation of price prohibited — Handling of fractions of cent.

Whenever any commodity or service is sold, or is offered, exposed, or advertised for sale, by weight, measure, or count, the price shall not be misrepresented, nor shall the price be represented in any manner calculated or tending to mislead or deceive an actual or prospective purchaser. Whenever an advertised, posted, or labeled price per unit of weight, measure, or count includes a fraction of a cent, all elements of the fraction shall be prominently displayed and the numeral or numerals expressing the fraction shall be immediately adjacent to, of the same general design and style as, and at least one-half (1/2) the height and width of the numerals representing the whole cents.

History. Enact. Acts 1970, ch. 264, § 28.

363.770. Meat, poultry, seafood to be sold by weight only.

Except for immediate consumption on the premises where sold, or as one (1) of several elements comprising a ready-to-eat meat sold as a unit for consumption elsewhere than on the premises where sold, all meat, meat products, poultry (whole or parts), and all seafood except shellfish, offered or exposed for sale or sold as food shall be offered or exposed for sale and sold by weight. When meat, poultry, or seafood is combined with or associated with some other food element or elements to form either a distinctive food product or a food combination, such food product or combination shall be offered or exposed for sale and sold by weight, and the quantity representation may be the total weight of the product or combination, and a quantity representation need not be made for each of the several elements of the product or combination: provided, that, for ready-to-cook, whole carcass, stuffed poultry, ready-to-cook stuffed poultry roasts, rolls, bars, and logs, and ready-to-cook stuffed poultry products designated by terms of similar import, the label must show the total net weight of the poultry product and, in proximity thereto, a statement specifying the minimum weight of poultry in the product.

History. Enact. Acts 1970, ch. 264, § 29.

NOTES TO DECISIONS

1.Unit Price.

A food market did not violate this section by selling its whole barbecued chicken at a unit price. Louisville v. Melton Food Marts, Inc., 564 S.W.2d 849, 1978 Ky. App. LEXIS 503 (Ky. Ct. App. 1978).

363.780. Rules for delivery of bulk commodity sold by weight.

When a vehicle delivers to an individual purchaser a commodity in bulk, and the commodity is sold in terms of weight units, the delivery shall be accompanied by a duplicate delivery ticket with the following information clearly stated, in ink or by means of other indelible marking equipment and, in clarity, equal to type or printing:

  1. The name and address of the vendor,
  2. The name and address of the purchaser, and
  3. The net weight of the delivery expressed in pounds, and, if the net weight is derived from determinations of gross and tare weights, such gross and tare weights also shall be stated in terms of pounds.

One of these tickets shall be retained by the vendor, and the other shall be delivered to the purchaser at the time of delivery of the commodity, or shall be surrendered, on demand, to the director, or the deputy director or the inspector, or the sealer or deputy sealer, who, if he desires to retain it as evidence shall issue a weight slip in lieu thereof for delivery to the purchaser; provided, that if the purchaser, himself, carries away his purchase, the vendor shall be required only to give to the purchaser at the time of sale a delivery ticket stating the number of pounds of commodity delivered to him.

History. Enact. Acts 1970, ch. 264, § 30.

363.790. Rules for sale of fuel oil.

All furnace and stove oil shall be sold by liquid measure or by net weight in accordance with the provisions of KRS 363.710 . In the case of each delivery of such liquid fuel not in package form and in an amount greater than ten (10) gallons in the case of sale by liquid measure or 100 pounds in the case of sale by weight, there shall be rendered to the purchaser, either at the time of delivery or within a period mutually agreed upon in writing or otherwise between the vendor and the purchaser, a delivery ticket or a written statement on which, in ink or by means of other indelible marking equipment and, in clarity, equal to type or printing, there shall be clearly stated:

  1. The name and address of the vendor,
  2. The name and address of the purchaser,
  3. The identity of the type of fuel comprising the delivery,
  4. The unit price (that is, the price per gallon or per pound, as the case may be) of the fuel delivered,
  5. In the case of sale by liquid measure, the liquid volume of the delivery, together with any meter readings from which such liquid volume has been computed, expressed in terms of the gallon and its binary or decimal subdivisions, and
  6. In the case of sale by weight, the net weight of the delivery, together with any weighing scale readings from which such net weight has been computed, expressed in terms of tons or pounds avoirdupois.

History. Enact. Acts 1970, ch. 264, § 31.

363.800. Sale of berries, small fruits.

Berries and small fruits shall be offered and exposed for sale and sold by weight, or by measure in open containers having capacities of one-half (1/2) dry pint, one (1) dry pint, or one (1) dry quart; provided, that the marking provisions of KRS 363.720 shall not apply to such containers.

History. Enact. Acts 1970, ch. 264, § 32.

363.810. Injunctions.

The director is authorized to apply to any court of competent jurisdiction for, and such court upon hearing and for cause shown may grant, a temporary or permanent injunction restraining any person from violating any provision of KRS 363.510 to 363.850 .

History. Enact. Acts 1970, ch. 264, § 37.

363.820. Presumption as to weight or measure found in or about sale area.

For the purposes of KRS 363.510 to 363.850 , proof of the existence of a weight or measure or a weighing or measuring device in or about any building, enclosure, stand, or vehicle in which or from which it is shown that buying or selling is commonly carried on, shall, in the absence of conclusive evidence to the contrary, be presumptive proof of the regular use of such weight or measure or weighing or measuring device for commercial purposes and of such use by the person in charge of such building, enclosure, stand, or vehicle.

History. Enact. Acts 1970, ch. 264, § 38.

363.830. Existence of other law does not prevent prosecution under KRS 363.510 to 363.850.

Prosecutions for violation of any provision of KRS 363.510 to 363.850 are declared to be valid and proper, notwithstanding the existence of any other valid general or specific law of this state dealing with matters that may be the same as or similar to those covered by KRS 363.510 to 363.850 .

History. Enact. Acts 1970, ch. 264, § 39.

363.840. State food and drug law not affected.

Nothing contained in KRS 363.510 to 363.850 shall be construed as amending, repealing, or superseding any provision of KRS 217.005 to 217.215 (the Kentucky Food, Drug and Cosmetic Act) or the regulations adopted thereunder by the secretary for health and family services.

History. Enact. Acts 1970, ch. 264, § 41; 1998, ch. 426, § 571, effective July 15, 1998; 2005, ch. 99, § 616, effective June 20, 2005.

363.850. Citation.

KRS 363.510 to 363.850 may be cited as the “Weights and Measures Act of Kentucky.”

History. Enact. Acts 1970, ch. 264, § 42.

Motor Fuels Inspection and Testing

363.900. Definitions for KRS 363.900 to 363.908.

As used in KRS 363.900 to 363.908 , unless the context clearly requires otherwise:

  1. “ASTM standard” means the latest standards and specifications as set forth by the American Society for Testing and Materials in accordance with the most recent version of ASTM specifications for automotive gasoline, or ASTM specifications for diesel fuel oils;
  2. “Commissioner” means the Commissioner of Agriculture or a departmental employee designated by the Commissioner to act on his behalf for the purposes of KRS 363.900 to 363.908 ;
  3. “Department” means the Kentucky Department of Agriculture;
  4. “Diesel fuel” means refined oil commonly used in internal combustion engines and defined as diesel fuel under the ASTM standard classification of diesel fuel oils;
  5. “Division” means the Division of Regulation and Inspection in the Kentucky Department of Agriculture;
  6. “Gasoline” means gasoline as defined in KRS 138.210 ;
  7. “Motor fuel” means any product used for the generation of power in an internal combustion or turbine engine and includes gasoline, diesel fuel, or gasoline-alcohol blend fuels; and
  8. “Retail facility” means a facility that sells motor fuels to the general public.

History. Enact. Acts 1994, ch. 88, § 1, effective July 15, 1994; 2002, ch. 49, § 26, effective July 15, 2002.

363.902. Motor fuels inspection and testing program — Applicability of American Society for Testing and Materials standards — Administrative regulations.

  1. The Commissioner or his authorized agent shall implement and administer an inspection and testing program for motor fuels to ensure compliance with KRS 363.900 to 363.908 .
  2. For the purposes of administering and giving effect to the provisions of KRS 363.900 to 363.908 , the standards set forth in the annual book of ASTM standards, supplements, and revisions shall be applied.
  3. In administering KRS 363.900 to 363.908 , the department shall conform to any provisions of federal law or regulations which impose requirements in conflict with the ASTM standard.
  4. The department may promulgate administrative regulations to implement and enforce KRS 363.900 to 363.908 .

History. Enact. Acts 1994, ch. 88, § 2, effective July 15, 1994.

363.904. Requirements for sale and use of articles and commodities as motor fuel in Kentucky — Labeling and testing of shipments of motor fuels.

  1. No article or commodity shall be sold or offered for sale and use in Kentucky as motor fuel unless it conforms to the following:
    1. The motor fuel shall be labeled and posted in accordance with applicable federal and state laws; and
    2. The motor fuel shall conform to the latest ASTM specifications for that particular type, class, and grade of motor fuel, except when one (1) or more of the following circumstances exists:
      1. When a federal law or a federal administrative regulation imposes requirements in conflict with the ASTM standard, as provided by KRS 363.902(3); or
      2. When the Governor determines that circumstances present, or are likely to present, a disruption in motor fuel supply, the Governor or the Commissioner or the secretary of the Energy and Environment Cabinet, as designated by the Governor, may issue a temporary waiver of ASTM specifications for motor fuel. The temporary waiver shall be effective for a defined period of time and shall be the shortest practicable time period necessary to permit the correction of the disruption in motor fuel supplies.
  2. For gasoline containing up to fifteen percent (15%) ethanol, in which case the vapor pressure limit for each class shall be increased by one (1) pound per square inch, and the ASTM V/L (vapor to liquid ratio) specification shall be waived. Additionally, the department shall adopt a minimum temperature for fifty percent (50%) distillation of gasoline containing up to fifteen percent (15%) ethanol through the promulgation of an administrative regulation in accordance with KRS Chapter 13A.
  3. The motor fuel compliance with ASTM shall be determined in accordance with the test methods prescribed in the latest ASTM publications.
  4. All shipments of motor fuel shall state on either the bill of lading or invoice the destination of the shipment and that the shipment meets the standards and specifications required in this section. The division may obtain a sample of any shipment of motor fuel for testing. Motor fuel blending components shall be exempt from this section until they are offered for sale as motor fuel by the refiner or manufacturer.

History. Enact. Acts 1994, ch. 88, § 3, effective July 15, 1994; 2018 ch. 25, § 2, effective July 14, 2018; 2020 ch. 4, § 1, effective July 15, 2020.

363.9051. Legislative findings.

The General Assembly finds that the fuel additive methyl tertiary butyl ether, known as MTBE, as a result of leaks in underground storage tanks, has contaminated groundwater in California and other states to such an extent that it has been banned in those states. The legislature further finds that, because Kentuckians rely on groundwater to a great extent both for drinking water and for industrial and agricultural purposes, the continued use of MTBE poses an unacceptable threat to public health.

History. Enact. Acts 2002, ch. 344, § 10, effective July 15, 2002.

363.9053. Use of methyl tertiary butyl ether as fuel additive.

  1. Beginning on January 1, 2006, the use of methyl tertiary butyl ether, known as MTBE, as a fuel additive shall be illegal in the Commonwealth of Kentucky. Importation, sale, or storage of fuel containing MTBE shall be unlawful after that date.
  2. Beginning on January 1, 2004, the General Assembly strongly encourages that all reformulated gasoline sold or offered for sale in the Commonwealth utilize domestically produced ethanol in place of MTBE or other gasoline additives.
  3. In order to allow for an orderly transition, trace amounts of MTBE, not to exceed one-half of one percent (0.5%) by volume, will be allowed in gasoline.

History. Enact. Acts 2002, ch. 344, § 11, effective July 15, 2002.

363.9055. Use of biodiesel fuel blends encouraged.

  1. As used in this section, “biodiesel fuel” means a biodegradable, combustible liquid fuel derived from renewable fats and vegetable oils that meets ASTM specification PS 121-99 and is suitable for blending with petroleum-based diesel fuel for use in diesel engines.
  2. The General Assembly strongly encourages that, beginning on January 1, 2006, all diesel fuel sold or offered for sale in the Commonwealth and reformulated to achieve federally mandated sulfur reduction requirements use biodiesel in a blend not less than two percent (2%) by volume to meet those requirements.

History. Enact. Acts 2002, ch. 344, § 12, effective July 15, 2002; 2010, ch. 135, § 11, effective July 15, 2010.

363.906. Annual fee — Account in State Treasury for fees — Nonlapsing of unexpended money.

The department shall levy and collect annual fees in the amount of fifty dollars ($50) per facility from the owner or operator of a retail facility for the purpose of funding the administration of the motor fuels quality program. The fees shall be deposited into an interest-bearing account in the State Treasury. Money unexpended at the close of a fiscal year shall not lapse but shall be carried forward to the next fiscal year for future use. The annual fees shall be paid to the department by January 31.

HISTORY: Enact. Acts 1994, ch. 88, § 4, effective March 22, 1994; 2018 ch. 25, § 3, effective July 14, 2018.

363.908. Civil penalty for violation of KRS 363.900 to 363.906 and administrative regulations — Actions to recover civil penalties and for injunctive relief.

  1. Any person who violates any provisions of KRS 363.900 to 363.906 or any administrative regulation promulgated pursuant to KRS 363.900 to 363.906 may be required to pay a civil penalty of not more than five thousand dollars ($5,000).
  2. It shall be the duty of the department or, upon the request of the Commissioner, the Attorney General to bring an action for the recovery of the penalties provided for in this section and to bring an action for an injunction against any person violating or threatening to violate any provision of KRS 363.900 to 363.908 or violating or threatening to violate any administrative regulation or order of the department promulgated pursuant to KRS 363.900 to 363.908 . In that action, any previous fine or finding of the department shall be prima facie evidence of the facts found therein.

History. Enact. Acts 1994, ch. 88, § 5, effective July 15, 1994; 1996, ch. 94, § 1, effective July 15, 1996.

Penalties

363.990. Penalties. [Repealed.]

Compiler’s Notes.

This section (2721, 4819a-1, 4819a-6, 4823, 4823a-1, 4823b-3: amend. Acts 1942, ch. 103, § 5; 1944, ch. 130, §§ 3, 4; 1950, ch. 9, §§ 13, 16; 1960, ch. 161, § 6) was repealed by Acts 1970, ch. 264, § 43.

363.991. Penalties.

  1. Any person who violates the provisions of KRS 363.420 , 363.430 and 363.440 shall be fined not less than fifty dollars ($50) nor more than two hundred dollars ($200) for the first offense; he or she shall be fined not less than five hundred dollars ($500) nor more than one thousand dollars ($1,000), and/or be confined in the county jail for not less than sixty (60) days nor more than one hundred twenty (120) days, for each subsequent offense.
  2. Any person who shall hinder or obstruct in any way the director, the deputy director, or any one (1) of the inspectors, or a sealer or deputy sealer, in the performance of his official duties shall be guilty of a misdemeanor, and upon conviction thereof shall be punished by a fine of not less than one hundred dollars ($100) nor more than five hundred dollars ($500) or by imprisonment for not more than three (3) months, or by both such fine and imprisonment.
  3. Any person who shall impersonate in any way the director, the deputy director, or any one (1) of the inspectors, or a sealer or deputy sealer, by the use of his seal or a counterfeit of his seal, or in any other manner, shall be guilty of a misdemeanor, and upon conviction thereof shall be punished by a fine of not less than one hundred dollars ($100) nor more than five hundred dollars ($500), or by imprisonment for not more than one (1) year, or by both such fine and imprisonment.
  4. Any person who, by himself or by his servant or agent, or as the servant or agent of another person, performs any one (1) of the acts enumerated in paragraphs (a) through (i) of this subsection shall, for each offense, be fined not less than one hundred dollars ($100) nor more than five hundred dollars ($500), or imprisoned for not less than three (3) months nor more than twelve (12) months, or both.
    1. Use or have in possession for the purpose of using for any commercial purpose specified in KRS 363.610 , sell, offer, or expose for sale or hire, or have in possession for the purpose of selling or hiring, an incorrect weight or measure or any device or instrument used to or calculated to falsify any weight or measure.
    2. Use, or have in possession for the purpose of current use for any commercial purpose specified in KRS 363.610 , a weight or measure that does not bear a seal or mark such as is specified in KRS 363.650 , unless such weight or measure has been exempted from testing by the provisions of KRS 363.610 or by a regulation of the director issued under the authority of KRS 363.590 , or unless the device has been placed in service as provided by a regulation of the director issued under the authority of KRS 363.590 .
    3. Dispose of any rejected or condemned weight or measure in a manner contrary to law or regulation.
    4. Remove from any weight or measure, contrary to law or regulation, any tag, seal, or mark placed thereon by the appropriate authority.
    5. Sell, or offer or expose for sale, less than the quantity he or she represents of any commodity, thing, or service.
    6. Take more than the quantity he or she represents of any commodity, thing, or service, when, as buyer, agent, or receiver, he or she furnishes the weight or measure by means of which the amount of the commodity, thing, or service is determined.
    7. Keep for the purpose of sale, advertise, or offer or expose for sale, or sell any commodity, thing, or service in a condition or manner contrary to law or regulation.
    8. Use in retail trade, except in the preparation of packages put up in advance of sale and of medical prescriptions, a weight or measure that is not so positioned that its indications may be accurately read and the weighing or measuring operation observed from some position which may reasonably be assumed by a customer.
    9. Violate any provision of KRS 363.510 to 363.850 or of the regulations promulgated under the provisions of KRS 363.510 to 363.850 for which a specific penalty has not been prescribed.
  5. Any person who fails to pay a fine or penalty assessed by the department, or fails to remediate a violation identified by the department, in compliance with a deadline for payment or remediation set forth by the department, shall be subject to a stop operation order or a stop sale order from the department with respect to the equipment, device, or motor fuel grade that is the subject of the fine, penalty, or remediation.

HISTORY: Enact. Acts 1970, ch. 30, § 5; 1970, ch. 264, §§ 34 to 36; 2018 ch. 25, § 4, effective July 14, 2018.

NOTES TO DECISIONS

1.One Commodity.

In the case of the “offering for sale” of goods generally considered to be in one recognized commodity class, it would seem reasonable to consider that at the “offering” stage the goods constituted only one commodity, whether offered in a lump or in separate packages and the total quantity of the same class of goods passed to one purchaser in one “sale” would be one commodity regardless of the number of packages involved so the offering for sale at one time of 416 underweight packages of meat to one purchaser constituted only one offense of “offering for sale” under the law. (decided under prior law) Commonwealth v. Colonial Stores, 350 S.W.2d 465, 1961 Ky. LEXIS 96 ( Ky. 1961 ).

Opinions of Attorney General.

Although KRS 363.010 to 363.320 and 363.990 were repealed by the new Weights and Measures Act, a person could be prosecuted after its repeal for a violation of the old act occurring before the repeal. OAG 70-529 .

Research References and Practice Aids

Cross-References.

Deceptive business practices, Penal Code, KRS 517.020 .

CHAPTER 364 Drifts, Logs and Timber

364.010. Definitions.

As used in this chapter, unless the context otherwise requires:

  1. “Timber” includes trees, whether standing, down or prepared for sale, sawlogs and other logs, cross ties, railroad ties, boards, planks, staves and headings, and other wood cut or prepared for market.
  2. To “take up” drifts, logs or timber means to take up drifts, logs or timber found adrift in the waters of this state where there is no boom or other arrangement provided by the owner for the preservation of drifts, logs or timber below the point at which they are found.

History. 1409-1, 1409-6.

Research References and Practice Aids

Cross-References.

Contract for sale of standing timber must be in writing, KRS 371.010 , 371.100 .

Forest fire prevention, KRS Ch. 149.

Obstruction of stream navigable for floating timber, KRS 182.010 .

Perpetuation of evidence concerning timber, KRS 422.160 to 422.190 .

364.020. Fees for taking up drifts, logs and timber — Lien — Sale.

  1. Whenever any boat, raft or platform, or any timber prepared for market, whether branded or unbranded, is taken up by a person not the owner thereof, the person who takes it up and secures it and delivers it to the owner shall have a claim against the owner for the following fees:
  2. The taker-up shall have a lien upon the property taken up by him for the fees and charges provided for by this chapter. If the owner of any such property taken up fails to pay the sum charged thereon within sixty (60) days from the day it was taken up, the property shall, at the instance of the person to whom the charges are due, be sold by a constable, sheriff or other officer of the county in which the property was taken up. The sale shall be made by public auction, at the courthouse door to the highest bidder, upon thirty (30) days’ written or printed notice, posted at the front door of the courthouse of the county in which the sale is to be made and at two (2) other public places in the county, giving the time and place of sale and a description of the property and any marks or brands thereon.
  3. The constable or other officer making the sale shall pay to the taker-up his legal fees and charges, after deducting his own commission, which shall be the same as though he had sold the property under execution; and if the proceeds of the sale exceed the charges, fees and commission, he shall deposit the excess with the county clerk of the county in which the sale is made, and take his receipt therefor. If the owner, within one (1) year from the date of the sale, appears before the county judge/executive of the county where the money is deposited with the clerk, and establishes to the satisfaction of the court his right to the money, the clerk shall, upon the order of the county judge/executive, pay the money over to the owner; otherwise it shall be paid into the State Treasury.

Each freight boat or other heavy boat $ 1.00 Each jack boat, skiff or canoe .25 Each fleet of timber 10.00 Each raft of not less than forty (40) logs 4.00 Each platform of not less than ten (10) logs 1.00 Each sawlog or other log or tree prepared for sale .25 Each cross or railroad tie .03 Boards or planks caught in rafts or large body, per 1,000 feet board measure: For 20,000 board feet or less .50 For over 20,000 board feet .25 Boards or planks, loose and scattered, per 1,000 board feet measure 2.50 Staves and heading, for each 1,000 merchantable pieces 3.00

Click to view

History. 1409-1.

Research References and Practice Aids

Cross-References.

Fees of constables, KRS 64.190 .

Fees of sheriffs, KRS 64.090 .

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Logs and Timber, § 352.00.

364.030. Charges for keeping fleets, rafts and platforms.

Any person who takes up any fleet, raft or platform shall, in addition to the fees provided for by KRS 364.020 , have a claim against the owner for a reasonable compensation for keeping and caring for the property taken up by him, not to exceed the following rates for each day:

For each fleet $2.00 For each raft .50 For each platform .25

Click to view

History. 1409-2.

364.040. Charges for keeping other timber more than thirty days.

Any person who takes up any logs, or any tree prepared for sale, where the log or tree is not part of a fleet, raft or platform, and keeps it in his possession for more than thirty (30) days before the owner thereof offers to pay the fees provided for by KRS 364.020 shall have a claim against the owner for twenty-five cents ($0.25) for every such log or tree, in addition to the fees provided for by KRS 364.020 .

History. 1409-3.

364.050. Unbranded timber, compensation for taking up.

  1. Any person who takes up unbranded timber prepared for market shall receive as compensation for his services only the fees provided for in KRS 364.020 and no charges for keeping or caring for the timber.
  2. No person who takes up unbranded timber shall unlawfully sell, or in any way appropriate to his own use, or shall place any brand upon the timber, without first having it sold as provided in KRS 364.020 .

History. 1409-16.

364.060. Property not to be secreted or grounded — Liability.

If any person who takes up any drift, log or timber secretes it or allows it to be so grounded that he cannot immediately, upon the demand of the owner or his agent, put it afloat, or if he fails to put it afloat upon such demand, he shall not receive any compensation for taking up or caring for the drift, log or timber, and shall, in addition, be responsible to the owner thereof as if it were afloat.

History. 1409-4.

364.070. Brand, adoption by timber dealer.

  1. Any timber dealer may adopt a brand.
  2. Every timber dealer desiring to adopt a brand may do so by executing a writing in substantially the following form:

    “Notice is hereby given that I (or we) have adopted the following brand in my (or our) business as timber dealer (or dealers), to-wit: [here insert the words, letters, and figures constituting the brand, or the facsimile of any device other than words, letters or figures].

    “Dated this . . . . . day of . . . . . , 19 . . . . . ”

  3. The writing shall be acknowledged or proved for record in the same manner as deeds, and shall be recorded in the office of the county clerk of the county in which the principal office or place of business of the timber dealer is located. A copy shall be posted at the principal place of business, one (1) at the courthouse door in the county where the business is carried on, and one (1) at each of three (3) other public places in the county.

History. 1409-5, 1409-7.

NOTES TO DECISIONS

1.Proper Official to Execute Writing.

The manager of a corporation dealing in timber is a proper official to execute the writing, called for in this section, on behalf of the corporation. Bennett v. Commonwealth, 133 Ky. 452 , 118 S.W. 332, 1909 Ky. LEXIS 195 ( Ky. 1909 ).

Research References and Practice Aids

Cross-References.

Fees of clerk, KRS 64.010 .

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Adoption of Brand, Form 352.01.

Caldwell’s Kentucky Form Book, 5th Ed., Indictment for Defacing Brands, Form 352.03.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Logs and Timber, § 352.00.

364.080. Brand to be exclusive trade-mark; infringement forbidden.

  1. Every brand adopted under KRS 364.070 shall, from the date of its adoption, be the exclusive trade-mark of the person adopting it.
  2. No person shall knowingly use or attempt to use any such brand without the written consent of the owner.

History. 1409-8.

NOTES TO DECISIONS

1.Standing Timber.

Where standing timber of a certain kind or dimension is sold, neither party, to the exclusion or prejudice of the other, can arbitrarily brand it, but the purchaser, or owner of the brand, and the seller should or may act jointly in placing the brand. Murray v. Boyd, 165 Ky. 625 , 177 S.W. 468, 1915 Ky. LEXIS 577 ( Ky. 1915 ).

Where standing timber was sold by written agreement with the right of removal except as to trees of designated dimensions and the timber sold was to be branded within a two (2) year contract period, assurances of seller that buyer need not brand the trees estopped seller from denying the right to brand after the expiration of the two (2) year contract period. Murray v. Boyd, 165 Ky. 625 , 177 S.W. 468, 1915 Ky. LEXIS 577 ( Ky. 1915 ).

364.090. Branding of timber.

  1. The owner, in using his brand, shall cause it to be plainly stamped or otherwise impressed upon each separate piece of timber intended to be branded.
  2. No person shall fraudulently place any brand on timber not his own.

History. 1409-9, 1409-10.

364.100. Defacing brand.

No person shall unlawfully cut out, cancel, obliterate or deface any brand recorded as provided in KRS 364.070 and placed upon the timber of another.

History. 1409-11.

NOTES TO DECISIONS

1.Criminal Liability.

Where a defendant sawed off the ends of railroad ties on which the brand was placed, such was sufficient to render him criminally liable under this section. Bennett v. Commonwealth, 133 Ky. 452 , 118 S.W. 332, 1909 Ky. LEXIS 195 ( Ky. 1909 ).

Research References and Practice Aids

Cross-References.

Altering or defacing livestock brands, penalty for, KRS 253.990 .

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Indictment for Defacing Brands, Form 352.03.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Logs and Timber, § 352.00.

364.110. Conversion of branded timber.

No person shall unlawfully take, secrete, cut, saw, split up or destroy any timber branded as provided in this chapter, or remove it from the main stream on which it was taken up, with the intention of preventing the owner from finding it, or in any way convert it to his own use without the consent of the owner.

History. 1409-12.

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Logs and Timber, § 352.00.

364.120. Branding of timber, effect as to third persons.

  1. When a valid sale of standing timber has been made as provided in KRS 371.100 and the timber has been branded by the seller, or by another with his consent, with the brand of the purchaser, the sale shall have the same effect as to creditors and innocent purchasers as a recorded sale of land.
  2. When a valid sale of timber other than standing timber has been made and the timber has been branded by the seller, or by another with his consent, with the brand of the purchaser, the sale shall have the same effect as a lodging for record of a conveyance of or charge upon personal property.

History. 1409-14.

NOTES TO DECISIONS

1.Standing Timber.

X purchased standing timber and branded it and then sold it to Y, who neither rebranded nor recorded the conveyance. Later X sold it to Z, an innocent purchaser without notice, who immediately sought to claim the trees. Z prevailed over Y. V. Bowerman & Co. v. Taylor, 127 Ky. 812 , 106 S.W. 846, 32 Ky. L. Rptr. 671 , 1908 Ky. LEXIS 23 ( Ky. 1908 ).

Under KRS 371.100 , a contract for the sale of standing timber must be written and a parol contract is invalid but the buyer is liable for any timber cut and removed, even though the contract is invalid. Sears v. Ohler, 144 Ky. 473 , 139 S.W. 759, 1911 Ky. LEXIS 653 ( Ky. 1911 ).

Where there was a parol sale of standing timber, the mere branding of it by the purchaser with the seller’s consent would not serve to pass title, since this section does not modify KRS 371.100 requiring sale of standing timber to be written. Burris v. Stepp, 162 Ky. 269 , 172 S.W. 526, 1915 Ky. LEXIS 55 ( Ky. 1915 ).

2.Notice of Prior Sale.

Where the subsequent purchaser had notice of the prior sale, the prior sale was as to him completely valid. Cheatham v. Head, 203 Ky. 489 , 262 S.W. 622, 1924 Ky. LEXIS 940 ( Ky. 1924 ).

Cited:

Vanbever v. Evans, 296 Ky. 378 , 177 S.W.2d 148, 1944 Ky. LEXIS 543 ( Ky. 1944 ); Baldwin v. Baker, 276 S.W.2d 435, 1955 Ky. LEXIS 415 ( Ky. 1955 ).

Research References and Practice Aids

Kentucky Law Journal.

Thompson, Oral Contracts for the Sale of Standing Timber in Kentucky, 38 Ky. L.J. 175 (1949).

Whiteside, Uniform Commercial Code — Major Changes in Sales Law, 49 Ky. L.J. 165 (1960).

364.130. Liability of person entering upon and cutting timber growing upon land of another — Measure of damages — Exceptions with limitations on liability.

  1. Except as provided in subsections (2) and (4) of this section, any person, regardless of state of mind or whether the person believes to be authorized or not, who cuts or saws down, or causes to be cut or sawed down to convert to his own use timber growing upon the land of another without legal right or without color of title in himself to the timber or to the land upon which the timber was growing shall pay to the rightful owner of the timber three (3) times the stumpage value of the timber and shall pay to the rightful owner of the property three (3) times the cost of any damages to the property as well as any legal costs incurred by the owner of the timber.
    1. If a defendant can certify that prior to cutting: (2) (a) If a defendant can certify that prior to cutting:
      1. A signed statement was obtained from the person whom the defendant believed to be the owner of all trees scheduled to be cut that:
        1. All of the trees to be cut were on his property and that none were on the property of another; and
        2. He has given his permission, in writing, for the trees on his property to be cut; and
      2. Either:
        1. A written agreement was made with owners of the land adjacent to the cut that the trees to be cut were not on their property; or
        2. Owners of the land adjacent to the cut were notified in writing, delivered by certified mail, restricted delivery, and return receipt requested, of the pending cut and they raised no objection, the court may render a judgment for no more than the reasonable value of the timber, actual damages caused to the property, and any legal costs incurred by the owner of the timber.
    2. With respect to paragraph (2)(a)2.b. of this subsection, if no written objection was received from the persons notified within seven (7) days from the date of signed receipt of mail, it shall be presumed, for the purposes of setting penalties only, that the notified owner had no objection to the proposed cut.
  2. This section shall not be construed as repealing any of the provisions of KRS 514.030 of the Kentucky Revised Statutes and any penalties provided by this chapter shall be considered as additional thereto.
  3. A residential property owner or farmland owner maintaining his or her fence row who unintentionally cuts, saws down, or otherwise removes the timber of an adjoining property owner as the result of a good-faith mistake in the location of an unmarked boundary line between the properties shall only be liable to the adjoining property owner for the reasonable value of the timber, the actual damages caused to the property, and any legal costs incurred by the adjoining property owner if the cutting of the timber is later found to be unauthorized by a court of competent jurisdiction.

HISTORY: Enact. Acts 1956, ch. 26, effective May 18, 1956; 1980, ch. 188, § 281, effective July 15, 1980; 1994, ch. 386, § 1, effective July 15, 1994; 2017 ch. 66, § 1, effective June 29, 2017.

NOTES TO DECISIONS

1.Evidence.

In an action for wrongful cutting and removal of certain timber from disputed boundary area where plaintiff relied on certain survey and there was no competent evidence to show that the survey did locate definite landmarks requiring adjustment of distance, the accuracy of survey was not proved except that it was made, plaintiffs failed to meet the burden of proof, and any factual determination based on this survey was erroneous. West v. Keckley, 474 S.W.2d 87, 1971 Ky. LEXIS 89 ( Ky. 1971 ).

2.Instructions.

An instruction in an action brought under this section should require a jury to conclude whether a defendant entered upon another’s land “unlawfully,” and the court should further define that term because whether certain conduct is lawful or unlawful is a question of law and an instruction using those or similar terms without defining them in relation to the evidence is erroneous. Gum v. Coyle, 665 S.W.2d 929, 1984 Ky. App. LEXIS 478 (Ky. Ct. App. 1984).

3.Remedies.

It was proper for the trial court not to allow the jury to perform the trebling function or to consider whether attorneys’ fees should be awarded, as these were functions for the court to perform as a matter of law, but it was error to allow them to consider, and award, punitive damages, since, by bringing a statutory action for which treble damages were recoverable, the plaintiffs had elected their remedy. King v. Grecco, 111 S.W.3d 877, 2002 Ky. App. LEXIS 2026 (Ky. Ct. App. 2002).

Alleged trespasser who entered the claimant’s land and sawed down the trees on it after twice being told that the claimant owned the land did not act with the required objective belief that the alleged trespasser had “color of title” to enter and remove those trees. As a result, the alleged trespasser was not limited to paying actual damages for the trees removed, but, instead, had to pay the triple damages set forth in KRS 364.130(1) because the trespass was not “innocent.” Meece v. Feldman Lumber Co., 290 S.W.3d 631, 2009 Ky. LEXIS 93 ( Ky. 2009 ).

Landowner was not subject to treble damages because while there may have been negligence by an agent of the landlord in establishing for a logger the boundary line with a neighbor's property, there was insufficient evidence to impute to the landowner the intent to convert timber on the neighbor's property by having the logger, who was hired as an independent contractor, trespass and cut timber on the neighbor's property. Penix v. Delong, 473 S.W.3d 609, 2015 Ky. LEXIS 1948 ( Ky. 2015 ).

Research References and Practice Aids

Kentucky Law Journal.

Matthews, Dower, Principal and Income, Perpetuities, and Intestate Succession, 45 Ky. L.J. 111 (1956).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Intentional Trespass and Cutting of Timber Under KRS 364.130 , Form 304.02.

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Timber that was Unlawfully Harvested and Removed; Damages Remedy, Form 352.04.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Logs and Timber, § 352.00.

Caldwell’s Kentucky Form Book, 5th Ed., Synopsis to Chapter 304 TRESPASS, § 304.syn.

Kentucky Instructions To Juries (Civil), 5th Ed., Trespass, §§ 32.01 – 32.03.

364.990. Penalties.

  1. Any person who violates any of the provisions of subsection (2) of KRS 364.050 shall be guilty of a Class D felony.
  2. Any person who violates any of the provisions of subsection (2) of KRS 364.080 shall be guilty of a violation, and shall be liable to the owner of the brand for all damage caused by the use of the brand.
  3. Any person who violates any of the provisions of subsection (2) of KRS 364.090 shall, for each offense, be guilty of a Class A misdemeanor.
  4. Any person who violates any of the provisions of KRS 364.100 shall, for each offense, be guilty of a Class D felony.
  5. Any person who violates any of the provisions of KRS 364.110 shall be guilty of a Class D felony.

History. 1409-8, 1409-10 to 1409-12, 1409-16: amend. Acts 1992, ch. 463, § 41, effective July 14, 1992.

CHAPTER 365 Trade Practices

Assumed Business Names

365.010. Doing business under assumed name — Certificate to be filed — Clerk’s fee. [Repealed.]

Compiler’s Notes.

This section (199b-1, 199b-3, 199b-4: amend. Acts 1972, ch. 258, § 1; 1972, ch. 319, § 2) was repealed by Acts 1974, ch. 287, § 2.

365.015. Certificate of assumed name — Filing with state and county — Certificate of withdrawal — Filing fees.

    1. The real name of an individual shall include his or her surname at birth, or his or her name as changed by a court of competent jurisdiction, or the surname of a married woman. (1) (a) The real name of an individual shall include his or her surname at birth, or his or her name as changed by a court of competent jurisdiction, or the surname of a married woman.
    2. The real name of a domestic:
      1. General partnership that is not a limited liability partnership and that has not filed a statement of partnership authority is that name which includes the real name of each of the partners;
      2. General partnership that is not a limited liability partnership and that has filed a statement of partnership authority is the name set forth on the statement of partnership authority;
      3. General partnership that is a limited liability partnership is the name stated on the statement of qualification filed pursuant to KRS 362.1-931 or predecessor law;
      4. Limited partnership is that name stated in its certificate of limited partnership filed pursuant to KRS 362.2-201 or predecessor law;
      5. Business trust or statutory trust is the name set forth in the declaration of trust;
      6. Corporation is the name set forth in its articles of incorporation;
      7. Limited liability company is the name set forth in its articles of organization;
      8. Limited cooperative association is the name set forth in its articles of association; and
      9. Unincorporated nonprofit association that has filed a certificate of association is the name set forth in the certificate of association and, if no certificate of association has been filed, the name under which the unincorporated nonprofit association generally acts.
    3. The real name of a foreign:
      1. General partnership is the name recognized by the laws of the jurisdiction under which it is formed as being the real name;
      2. Limited liability partnership is the name stated in its statement of foreign qualification filed pursuant to KRS 362.1-952 or predecessor law;
      3. Limited partnership is the name set forth in its certificate of limited partnership or the fictitious name adopted for use in this Commonwealth under KRS 14A.3-010 to 14A.3-050 or predecessor law;
      4. Business trust or statutory trust is the name recognized by the laws of the jurisdiction under which it is formed as being the real name of the business trust or statutory trust or the fictitious name adopted for use in this Commonwealth under Subchapter 3 of KRS Chapter 14A;
      5. Corporation, including a cooperative or association that is incorporated, is the name set forth in its articles of incorporation or the fictitious name adopted for use in this Commonwealth under KRS 14A.3-010 to 14A.3-050 or predecessor law;
      6. Limited liability company is the name set forth in its articles of organization or the fictitious name adopted for use in this Commonwealth under KRS 14A.3-010 to 14A.3-050 or predecessor law;
      7. Limited cooperative association is the name set forth in its articles of association or the fictitious name adopted for use in this Commonwealth under KRS 14A.3-010 to 14A.3-050 or predecessor law; and
      8. Unincorporated nonprofit association is the name recognized by the laws of the jurisdiction under which it is organized as being the real name.
    1. No individual, general partnership, limited partnership, business or statutory trust, corporation, limited liability company, limited cooperative association, or unincorporated nonprofit association that has filed a certificate of association shall conduct or transact business in this Commonwealth under an assumed name or any style other than his, her, or its real name, as defined in subsection (1) of this section, unless such individual, general partnership, limited partnership, business or statutory trust, corporation, limited liability company, limited cooperative association, or unincorporated nonprofit association that has filed a certificate of association has filed a certificate of assumed name; (2) (a) No individual, general partnership, limited partnership, business or statutory trust, corporation, limited liability company, limited cooperative association, or unincorporated nonprofit association that has filed a certificate of association shall conduct or transact business in this Commonwealth under an assumed name or any style other than his, her, or its real name, as defined in subsection (1) of this section, unless such individual, general partnership, limited partnership, business or statutory trust, corporation, limited liability company, limited cooperative association, or unincorporated nonprofit association that has filed a certificate of association has filed a certificate of assumed name;
    2. The certificate shall state the assumed name under which the business will be conducted or transacted, the real name of the individual, general partnership, limited partnership, business or statutory trust, corporation, limited liability company, limited cooperative association, or unincorporated nonprofit association that has filed a certificate of association and his, her, or its address, including street and number, if any;
    3. A separate certificate shall be filed for each assumed name;
    4. No certificate to be filed with the Secretary of State shall set forth an assumed name which is not distinguishable upon the records of the Secretary of State from any other name previously filed and on record with the Secretary of State;
    5. The certificate shall be executed for an individual, by the individual, and otherwise as provided by KRS 14A.2-020 .
  1. Each certificate of assumed name for an individual shall be filed with the county clerk where the person maintains his or her principal place of business. Each certificate of assumed name for a general partnership, limited partnership, business or statutory trust, corporation, limited liability company, or limited cooperative association shall be delivered to the Secretary of State for filing, accompanied by one (1) exact or conformed copy. One (1) of the exact or conformed copies stamped as “filed” by the Secretary of State shall be filed with the county clerk of the county where the entity maintains its registered agent for service of process or, if no registered agent for service of process is required, then with the county clerk of the county where the entity maintains its principal office. If the entity does not maintain a registered agent for service of process and does not maintain a principal office in this Commonwealth, then the certificate of assumed name shall be filed only with the Secretary of State.
  2. An assumed name shall be effective for a term of five (5) years from the date of filing and may be renewed for successive terms upon filing a renewal certificate within six (6) months prior to the expiration of the term, in the same manner of filing the original certificate as set out in subsection (3) of this section. Any certificate in effect on July 15, 1998, shall continue in effect for five (5) years and may be renewed by filing a renewal certificate with the Secretary of State.
  3. Upon discontinuing the use of an assumed name, the certificate shall be withdrawn by filing a certificate in the office wherein the original certificate of assumed name was filed. The certificate of withdrawal shall state the assumed name, the real name and address of the party formerly transacting business under the assumed name and the date upon which the original certificate was filed. The certificate of withdrawal shall be signed for an individual by the individual or his or her agent and otherwise as provided in KRS 14A.2-020 .
  4. A general partnership, except a limited liability partnership, shall amend an assumed name certificate to reflect a change in the identity of partners. The amendment shall set forth:
    1. The assumed name and date of original filing;
    2. A statement setting out the changes in identity of the partners; and
    3. Shall be signed by at least one (1) partner authorized to do so by the partners.
  5. The filing of a certificate of assumed name shall not automatically prevent the use of that name or protect that name from use by other persons.
  6. In the event of the merger or conversion of a partnership, limited partnership, business or statutory trust, corporation, limited liability company, or limited cooperative association, any certificate of assumed name filed by a party to a merger or conversion shall remain in full force and effect, as provided in subsection (4) of this section, as if originally filed by the business organization which survives the merger or conversion.
  7. A certificate of assumed name may be amended to revise the real name or the address of the person or business organization holding the certificate of assumed name.
  8. A certificate of assumed name, or its amendment or cancellation, shall be effective on the date it is filed, as evidenced by the Secretary of State’s date and time endorsement on the original document, or at a time specified in the document as its effective time on the date it is filed. The document may specify a delayed effective time and date and, if it does so, the document shall become effective at the time and date specified. If a delayed effective date but no time is specified, the document shall be effective at the close of business on that date. A delayed effective date for a document shall not be later than the ninetieth day after the date it is filed.
  9. The county clerk shall receive a fee pursuant to KRS 64.012 for filing each certificate, and the Secretary of State shall receive a fee of twenty dollars ($20) for filing each certificate, amendment, and renewal certificate.
  10. A series entity, as defined in KRS 14A.1-070 , may, on behalf of any series thereof, file a certificate of assumed name. The certificate shall provide that the assumed name is adopted on behalf of a series of the series entity and not on behalf of the series entity itself, but the certificate of assumed name shall be recorded on the records of the Secretary of State as being that of the series entity.

History. Enact. Acts 1974, ch. 287, § 1; 1976, ch. 27, § 17; 1978, ch. 84, § 12, effective June 17, 1978; 1978, ch. 384, § 492, effective June 17, 1978; 1980, ch. 294, § 10, effective July 15, 1980; 1986, ch. 204, § 11, effective July 15, 1986; 1986, ch. 522, § 1, effective July 15, 1986; 1988, ch. 23, § 189, effective January 1, 1989; 1988, ch. 187, § 4, effective July 15, 1988; 1988, ch. 284, § 64, effective July 15, 1988; 1998, ch. 341, § 56, effective July 15, 1998; 2001, ch. 119, § 16, effective July 1, 2001; 2006, ch. 149, § 236, effective July 12, 2006; 2007, ch. 137, § 163, effective June 26, 2007; repealed and reenact., Acts 2010, ch. 51, § 163, effective July 15, 2010; 2010, ch. 133, § 71, effective July 15, 2010; 2010, ch. 151, § 134, effective January 1, 2011; 2012, ch. 81, § 125, effective July 12, 2012; 2012, ch. 160, § 131, effective July 12, 2012; 2015 ch. 34, § 59, effective June 24, 2015.

Legislative Research Commission Notes.

(7/12/2012). This statute was amended by 2012 Ky. Acts chs. 81 and 160. Where these Acts are not in conflict, they have been codified together. Where a conflict exists, Acts ch. 160, which was last enacted by the General Assembly, prevails under KRS 446.250 .

(7/15/2010). 2010 Ky. Acts ch. 51, sec. 183, provides, “The specific textual provisions of Sections 1 to 178 of this Act which reflect amendments made to those sections by 2007 Ky. Acts ch. 137 shall be deemed effective as of July 26, 2007, and those provisions are hereby made expressly retroactive to that date, with the remainder of the text of those sections being unaffected by the provisions of this section.”

(7/15/2010). This section was amended by 2010 Ky. Acts chs. 133, and 151, and repealed and reenacted by 2010 Ky. Acts ch. 51. Pursuant to Section 184 of Acts ch. 51, it was the intent of the General Assembly that the repeal and reenactment not serve to void the amendments, and these Acts do not appear to be in conflict; therefore, they have been codified together.

(7/15/2010). There is a reference in subsection 1(c)4. of this section to “KRS 386.4432 ” and a reference in subsection 1(c)5. of this section to “KRS 275.364,” Both of those statutes will be repealed effective January 1, 2011. The drafter of 2010 Ky. Acts ch. 133 indicates that the appropriate citation to replace those references is “KRS 14A.3-010 to 14A.3-050 ,” but the Reviser of Statutes lacks the authority to make those changes in the text of the statute.

NOTES TO DECISIONS

1.Failure to Comply.

Where a person failed to comply with former law regarding doing business under an assumed name, a contract made in carrying on his business could not be enforced in the courts even though in some instances it worked a hardship by permitting one person to get the benefit of another person’s labor, service or property without compensation. (decided under prior law) Hunter v. Big Four Auto Co., 162 Ky. 778 , 173 S.W. 120, 1915 Ky. LEXIS 150 , L.R.A. (n.s.) 1915D987 ( Ky. 1915 ), overruled, Hayes v. Providence Citizens' Bank & Trust Co., 218 Ky. 128 , 290 S.W. 1028, 1927 Ky. LEXIS 83 ( Ky. 1927 ). But see Hayes v. Providence Citizens' Bank & Trust Co., 218 Ky. 128 , 290 S.W. 1028, 1927 Ky. LEXIS 83 ( Ky. 1927 ).

A corporation which acquired its interest in an oil and gas lease from a partnership by assignment was charged with knowledge that the concern was a partnership and was operating under a fictitious name and had not complied with former law regulating doing business under an assumed name. (decided under prior law) Warren Oil & Gas Co. v. Gardner, 184 Ky. 411 , 212 S.W. 456, 1919 Ky. LEXIS 99 ( Ky. 1919 ), overruled in part, Hayes v. Providence Citizens' Bank & Trust Co., 218 Ky. 128 , 290 S.W. 1028, 1927 Ky. LEXIS 83 ( Ky. 1927 ).

That a person, in doing business under an assumed name without filing a certificate was guilty of a violation of this section and was subject to punishment under KRS 365.990 did not render the contract or transaction void, voidable or unenforceable as between the parties. (decided under prior law) Hayes v. Providence Citizens' Bank & Trust Co., 218 Ky. 128 , 290 S.W. 1028, 1927 Ky. LEXIS 83 ( Ky. 1927 ); Bentley v. Regal Block Coal Co., 218 Ky. 258 , 291 S.W. 28, 1927 Ky. LEXIS 125 ( Ky. 1927 ); Traut v. Carter, 218 Ky. 210 , 291 S.W. 36, 1927 Ky. LEXIS 128 (Ky. 1927); Williams v. Dearborn Truck Co., 218 Ky. 271 , 291 S.W. 388, 1927 Ky. LEXIS 159 (Ky. 1927); Fowler v. Elliott, 218 Ky. 323 , 291 S.W. 391, 1927 Ky. LEXIS 160 (Ky. 1927); Mammoth Garage v. Taylor, 220 Ky. 499 , 295 S.W. 429, 1927 Ky. LEXIS 551 (Ky. 1927); Hunt v. Stafford, 224 Ky. 237 , 5 S.W.2d 1079, 1928 Ky. LEXIS 574 ( Ky. 1928 ).

The failure of vendor to comply with former law regulating doing business under an assumed name did not estop him from defending action by purchaser to rescind contract for purchase of realty and recover purchase money paid. (decided under prior law) Carter v. Scott, 283 Ky. 269 , 140 S.W.2d 1039, 1940 Ky. LEXIS 312 ( Ky. 1940 ).

Medical negligence action was brought against diagnostic laboratory which was partnership doing business under assumed name. Failure of partners doing business under assumed name to comply with statute requiring filing certificate of assumed name was sufficient to create estoppel under tolling statute, thereby tolling statute of limitations during period of noncompliance. Munday v. Mayfair Diagnostic Laboratory, 831 S.W.2d 912, 1992 Ky. LEXIS 74 ( Ky. 1992 ).

2.Real Name.

A firm name showing the surname or surnames only of the member or members was not an assumed name. (decided under prior law) Commonwealth v. Richey, 171 Ky. 330 , 188 S.W. 397, 1916 Ky. LEXIS 351 ( Ky. 1916 ) ( Ky. 1916 ). See Commonwealth v. Bassett, 171 Ky. 385 , 188 S.W. 459, 1916 Ky. LEXIS 365 (Ky. 1916); Commonwealth v. Siler, 176 Ky. 802 , 197 S.W. 453, 1917 Ky. LEXIS 129 ( Ky. 1917 ); Louisville Planing Mill Co. v. Weir Sheet Iron Works, 199 Ky. 361 , 251 S.W. 176, 1923 Ky. LEXIS 839 ( Ky. 1923 ).

Where R. L. Weir conducted a business under the trade name of “Weir Sheet Iron Works” and, in the signing of contracts, etc., added to this title “R. L. Weir, Proprietor,” there was sufficient compliance with former law regulating doing business under an assumed name so that no certificate needed to be filed. (decided under prior law) Louisville Planing Mill Co. v. Weir Sheet Iron Works, 199 Ky. 361 , 251 S.W. 176, 1923 Ky. LEXIS 839 ( Ky. 1923 ).

3.Certificate Failing to Set Forth Full Name.

Where “Anthony J. Steffan” was customarily referred to as “Tony” and habitually signed his name “Tony J. Steffan” or “T. J. Steffan,” a certificate signed by “T. J. Steffan,” reciting that he was doing business as the “Liberty Blowpipe Works,” was sufficient. (decided under prior law) Louisville Planing Mill Co. v. Liberty Blowpipe Works, 201 Ky. 724 , 258 S.W. 304, 1924 Ky. LEXIS 633 ( Ky. 1924 ).

4.Partnerships.

Where J. H. Richey and F. O. Richey, his son, conducted a business under the firm name of “Richey & Son,” there was no violation of former law regulating doing business under any assumed name, such not being an assumed name. (decided under prior law) Commonwealth v. Richey, 171 Ky. 330 , 188 S.W. 397, 1916 Ky. LEXIS 351 ( Ky. 1916 ) ( Ky. 1916 ).

Where J. S. Richey and two other men with different surnames conducted a business under the firm name of “Richey Mercantile Co.,” there was no violation of former law regulating doing business under an assumed name. (decided under prior law) Commonwealth v. Richey, 171 Ky. 330 , 188 S.W. 397, 1916 Ky. LEXIS 351 ( Ky. 1916 ) ( Ky. 1916 ).

Where George Bassett and Howell Bassett conducted a partnership business under the firm name of “Bassett Hardwood Manufacturing Company,” there was no violation of former law regulating doing business under an assumed name. (decided under prior law) Commonwealth v. Bassett, 171 Ky. 385 , 188 S.W. 459, 1916 Ky. LEXIS 365 ( Ky. 1916 ).

Where W. B. Siler and J. P. Mahan were doing a partnership business under the firm name of “Mahan & Company,” there was no need to file a certificate. (decided under prior law) Commonwealth v. Siler, 176 Ky. 802 , 197 S.W. 453, 1917 Ky. LEXIS 129 ( Ky. 1917 ).

Where a partnership had an assumed firm name but always conducted its business by adding the name of one of the partners (e. g., its checks were signed “R. C. Davis, Manager of the Kozy Theater Co.”), such was sufficient to satisfy former law regulating doing business under an assumed name. (decided under prior law) Kozy Theater Co. v. Love, 191 Ky. 595 , 231 S.W. 249, 1921 Ky. LEXIS 380 ( Ky. 1921 ).

Where a partnership, doing business under firm name, had filed a certificate complying with the law in the county in which a contract was entered into, such contract was not voidable because the performance under such contract was to be carried out in another county in which no certificate had been filed. (decided under prior law) Acme Drilling Co. v. Gorman Oil Syndicate, 198 Ky. 576 , 249 S.W. 1003, 1923 Ky. LEXIS 528 ( Ky. 1923 ).

Where articles of partnership provided “It is agreed to keep the public from knowing the first party is a member of the firm,” such language was presumed to create an agreement not to mention the first party’s membership in the ordinary manner of so doing, e. g., letterhead, advertisements and conversations, and not an agreement to violate former law regulating doing business under an assumed name. (decided under prior law) Morrison v. McDavid, 223 Ky. 413 , 3 S.W.2d 1088, 1927 Ky. LEXIS 962 ( Ky. 1927 ).

5.Confusion Between Names.

It may reasonably be concluded that there was a confusion between trade name and corporate name of “U-Drive-It” and the assumed fictitious trade or operative name of “You Drive It.” (decided under prior law) U-Drive-It Co. v. Wright & Taylor, 270 Ky. 610 , 110 S.W.2d 449, 1937 Ky. LEXIS 139 ( Ky. 1937 ).

6.Pleading.

It was not necessary for a party doing business under an assumed name to aver in his petition that he has complied with former law regulating doing business under an assumed name, but his failure to comply with it was a defensive plea which the defendant might or might not rely on as he pleased. (decided under prior law) Kentucky Mortg. Sec. Co. v. Hammond, 187 Ky. 234 , 218 S.W. 714, 1920 Ky. LEXIS 109 ( Ky. 1920 ).

Where suit is brought against a partnership, the petition should make the partners defendant to the action as the names of such partners are readily available to the plaintiff by virtue of former law regulating doing business under an assumed name. (decided under prior law) Charleston Electrical Supply Co. v. Keyser Coal Co., 213 Ky. 389 , 281 S.W. 185, 1926 Ky. LEXIS 524 ( Ky. 1926 ).

7.Certificate as Evidence.

Evidence sustained finding that insured was sole owner of property where, together with other evidence, it was shown that statement was filed in county clerk’s office as required by former law regulating doing business under an assumed name, showing individual as sole owner. (decided under prior law) Voils v. Newark Fire Ins. Co., 113 F. Supp. 946, 1953 U.S. Dist. LEXIS 2693 (D. Ky. 1953 ).

A certificate, which had been filed pursuant to this section, was competent, but not conclusive, evidence as to the ownership of the firm referred to in the certificate. (decided under prior law) Callahan v. Dine's Furniture House, 260 Ky. 631 , 86 S.W.2d 530, 1935 Ky. LEXIS 528 ( Ky. 1935 ).

8.Statute of Limitations.

Where partnership had executed and filed in the county clerk’s office a statement under former law regulating doing business under an assumed name that it was doing business under the name of a corporation that had been dissolved and an employe, without actual notice of the dissolution of the corporation, brought suit against the corporation for injuries sustained after the dissolution of the corporation but within the one-year statutory period and, on learning of the dissolution, filed an action against the partnership after the one-year period, the partnership was not estopped from pleading the one-year statute of limitations, since one may not omit to avail himself of readily accessible sources of information concerning particular facts and thereafter plead as an estoppel the silence of another who has been guilty of no act calculated to induce the person claiming ignorance to refrain from investigating. (decided under prior law) Lingar v. Harlan Fuel Co., 298 Ky. 216 , 182 S.W.2d 657, 1944 Ky. LEXIS 875 ( Ky. 1944 ).

Opinions of Attorney General.

The use by a bank of a sign at a branch bank designating that branch as the bank of the town where it was located, with smaller letters underneath describing it as a branch of the parent bank, does not constitute transacting business under an assumed name or false advertising. OAG 75-83 .

A domestic general partnership or limited partnership which is operating under the name of a deceased general partner is not operating under an assumed name and is not required to file a certificate of assumed name. OAG 75-223 .

Both domestic general partnerships and domestic limited partnerships must include the real name of at least one of the general partners. OAG 75-223 .

It is not necessary that the name of a partnership include both the given name and the surname of a partner to be the real name of the partnership. OAG 75-223 .

The name of a limited partnership which includes the name of a limited partner remains the real name of the limited partnership and is not automatically changed despite the death of a general partner. OAG 75-223 .

In view of the rule against the repeal of statutes by implication, the enactment of this section, which simultaneously repealed KRS 365.010 and substantially reenacted its requirements and procedures for filing a certificate of assumed name, did not repeal that portion of KRS 274.075 (now repealed) permitting professional service corporations to do business under an assumed name. OAG 75-270 .

Several nonrelated business entities falling within the definition of “person” in KRS 446.010 must each file an assumed name certificate under this section in order to do business under a common assumed name. OAG 75-275 .

The purpose of this section is to permit persons a means of discovering the true identity of the parties with whom they are doing business and, accordingly, to prevent fraud and deception by business entities which seek to sail under false colors. OAG 78-322 .

This section does not require a local address to be listed in a certificate of assumed name. OAG 78-322 .

A certificate of assumed name for a foreign corporation should only be filed when the corporation has previously been issued a certificate of authority under the provisions of KRS 271A.520 to 271A.555 . OAG 84-155 .

A foreign corporation is not allowed to register under an assumed name unless the corporation has also filed as a foreign corporation doing business in Kentucky. OAG 84-155 .

The payment of the filing fee is a condition precedent for filing documents with the Secretary of State, and the Secretary of State may void the filing and return a document after it has been received, stamped, and filed, if the check for payment of that fee has been dishonored. OAG 89-94 .

Research References and Practice Aids

Kentucky Bench & Bar.

Allen and Rutledge, 2006 Amendments to the Assumed Name Statute: The Ongoing Task of Modernization and Clarification, Vol. 70, No. 3, May 2006, Ky. Bench & Bar 62.

Kentucky Law Journal.

Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 (2008).

Northern Kentucky Law Review.

Bartlett, Civil Procedure, 20 N. Ky. L. Rev. 605 (1993).

Kentucky Survey Issue: Article: The 2010 Amendments to Kentucky’s Business Entity Laws, 38 N. Ky. L. Rev. 383 (2011).

Unfair Trade Practices

365.020. Price discrimination between localities prohibited — Exceptions.

  1. No person doing business in this state and engaged in the production, manufacture, distribution or sale of any commodity or product, or service or output of a service trade, of general use or consumption, or the product or service of any public utility, with the intent to destroy the competition of any regular established dealer in such commodity, product or service, or to prevent the competition of any person who in good faith intends and attempts to become such dealer, shall discriminate between different sections, communities or cities, or portions thereof or locations therein, in this state, by selling or furnishing such commodity, product or service at a lower rate in one section, community or city, or any portion thereof or location therein, than in another, after making allowance for difference, if any, in the grade or quality, and in the actual cost of transportation from the point of production, if a raw product or commodity, or from the point of manufacture, if a manufactured product or commodity. The inhibition against locality discrimination shall embrace any scheme of special rebates, collateral contracts or any device of any nature whereby such discrimination is, in substance or fact, effected in violation of the spirit and intent of this section.
  2. Motion picture films when delivered and under a lease to motion picture houses shall not be deemed a commodity or product of general use or consumption under this section. This section is not intended to prohibit the meeting in good faith of a competitive rate, or to prevent a reasonable classification of service by public utilities for the purpose of establishing rates.

History. 4748h-1.

NOTES TO DECISIONS

1.Constitutionality.

This act, insofar as it applies to transactions under contracts entered into before its effective date, is unconstitutional under Ky. Const., § 19, and United States Const., Art. 1, § 10. Kentucky Utilities Co. v. Carlisle Ice Co., 279 Ky. 585 , 131 S.W.2d 499, 1939 Ky. LEXIS 320 ( Ky. 1939 ).

The exemption of motion picture films, being based on reasonable distinctions, is valid and nondiscriminatory. Moore v. Northern Kentucky Independent Food Dealers Ass'n, 286 Ky. 24 , 149 S.W.2d 755, 1941 Ky. LEXIS 211 ( Ky. 1941 ).

The legislature may, under Ky. Const., § 1 (35), and United States Const., Amend. 14, at least fix minimum prices for all commodities and services dealt in, rendered, produced or furnished, whether the particular business is or is not one affected with a public interest. Moore v. Northern Kentucky Independent Food Dealers Ass'n, 286 Ky. 24 , 149 S.W.2d 755, 1941 Ky. LEXIS 211 ( Ky. 1941 ).

The provisions of KRS 365.020 through 365.090 (KRS 365.080 , 365.090 now repealed) are sufficiently definite. Moore v. Northern Kentucky Independent Food Dealers Ass'n, 286 Ky. 24 , 149 S.W.2d 755, 1941 Ky. LEXIS 211 ( Ky. 1941 ).

2.Construction.

Each case of unfair competition must be adjudged on its own particular facts. Yellow Cab Transit Co. v. Louisville Taxicab & Transfer Co., 147 F.2d 407, 1945 U.S. App. LEXIS 4553 (6th Cir. Ky. 1945 ).

3.Applicability.

Under this section aggression need not be directed toward an actual competitor in the same field; it protects persons against anyone whom the seller of the commodity — whatever the reason — might wish to hurt. Belfry Coal Corp. v. East Kentucky Beverage Co., 294 S.W.2d 539, 1956 Ky. LEXIS 133 ( Ky. 1956 ).

4.Intent to Destroy Competition.

Liability under this section exists only if the prohibited acts were done with the intent to destroy the competition of any regular established dealer in the commodity. Kentucky Utilities Co. v. Carlisle Ice Co., 279 Ky. 585 , 131 S.W.2d 499, 1939 Ky. LEXIS 320 ( Ky. 1939 ).

Plaintiff and defendant were engaged in manufacturing and manufacturing and selling ice in the same territory and defendant’s usual price was $4.00 per ton wholesale and 50¢ per cwt. retail and, in order to meet competition of another manufacturer, defendant entered into contract with dealer to sell him ice at $2.50 per ton. Dealer, to meet competition with other dealers, reduced retail price to 30¢ per cwt. The court held that contract with dealer was one of sale and not of agency, that defendant was not liable for acts of dealer, that contract price, if below production cost, was made to meet and not to destroy competition, and that differential in wholesale price between dealer and others was to meet and not to destroy competition. Kentucky Utilities Co. v. Carlisle Ice Co., 279 Ky. 585 , 131 S.W.2d 499, 1939 Ky. LEXIS 320 ( Ky. 1939 ).

The intent to destroy competition is the gist of the offense. Kentucky Utilities Co. v. Carlisle Ice Co., 279 Ky. 585 , 131 S.W.2d 499, 1939 Ky. LEXIS 320 ( Ky. 1939 ).

It was not the intention of this section to penalize distributors in cases where mala fides was not involved. Belfry Coal Corp. v. East Kentucky Beverage Co., 294 S.W.2d 539, 1956 Ky. LEXIS 133 ( Ky. 1956 ).

Where a beverage distributor had lowered the price to an entire county merely for the purpose of meeting competition and, when his competitors increased their price in part of the county, he likewise increased his price in the same part of the county but continued the lowered price in the remainder of the county, a retailer in the section of the county where he increased his price was not entitled to injunctive relief and damages under this section where the record failed to disclose, even in the slightest, ill feeling or ill intentions toward the retailer. Belfry Coal Corp. v. East Kentucky Beverage Co., 294 S.W.2d 539, 1956 Ky. LEXIS 133 ( Ky. 1956 ).

5.Indictment.

Indictment for selling ice in one city for less than price charged to same customer in other cities for purpose of destroying competition was defective in failing to negative statutory exception of reduction of price to meet competitive rates. Kentucky Utilities Co. v. Commonwealth, 274 Ky. 151 , 118 S.W.2d 158, 1938 Ky. LEXIS 232 ( Ky. 1938 ).

Cited:

Jefferson Ice & Fuel Co. v. Grocers Ice & Gold Storage Co., 286 S.W.2d 80, 1955 Ky. LEXIS 91 , 54 A.L.R.2d 1181 ( Ky. 1955 ); Warfield Tobacco, Inc. v. R.J. Reynolds Tobacco Co., 34 F. Supp. 2d 1050, 1999 U.S. Dist. LEXIS 43 (E.D. Ky. 1999 ).

Research References and Practice Aids

Kentucky Law Journal.

Ray, Resale Price Maintenance, 27 Ky. L.J. 218 (1939).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

365.030. Sale at less than cost or gift of commodity to destroy competition prohibited.

  1. Except as provided in KRS 365.040 , no person engaged in business within this state shall sell, offer for sale or advertise for sale any article or product, or service or output of a service trade, at less than the cost thereof to such vendor, or give, offer to give or advertise the intent to give away any article or product, or service or output of a service trade, for the purpose of injuring competitors and destroying competition.
  2. In establishing the cost of a given article or product to the distributor and vendor, the invoice cost of the article or product purchased at a forced, bankrupt or close-out sale, or other sale outside of the ordinary channels of trade, may not be used as a basis for justifying a price lower than one based upon the replacement cost as of the date of the sale of the article or product replaced through the ordinary channels of trade, unless the article or product is kept separate from goods purchased in the ordinary channels of trade and unless the article or product is advertised and sold as merchandise purchased at a forced, bankrupt or close-out sale or by means other than through the ordinary channels of trade, and the advertising states the conditions under which the goods were so purchased, and the quantity of the merchandise to be sold or offered for sale.
  3. As applied to production, “cost” includes the cost of raw materials, labor and all overhead expenses of the producer. As applied to distribution, “cost” means the invoice or replacement cost, whichever is lower, of the article or product to the distributor and vendor plus the cost of doing business by the distributor and vendor. The “cost of doing business” or “overhead expense” means all costs of doing business incurred in the conduct of the business and must include without limitation the following items of expense: Labor (including salaries of executives and officers), rent, interest on borrowed capital, depreciation, selling cost, maintenance of equipment, delivery cost, credit losses, all types of licenses, taxes, insurance and advertising. “Vendor” includes any person who performs work upon, renovates, alters or improves any personal property belonging to another person.
  4. Where a person complained of as violating any of the provisions of this section is a member of a particular trade or industry that has an established cost survey for the locality and vicinity in which the offense is committed, the cost survey shall be competent evidence to be used in proving the costs of such person.

History. 4748h-3 to 4748h-6.

NOTES TO DECISIONS

1.Constitutionality.

This section is a minimum mark-up law, and it is facially unconstitutional as being violative of Const., § 2. Remote Services, Inc. v. FDR Corp., 764 S.W.2d 80, 1989 Ky. LEXIS 2 ( Ky. 1989 ).

2.Free Service.

Where laundry and dry cleaning company offered two weeks’ free service to the customers of another laundry and dry cleaning establishment and, as a result, the second company lost certain customers, the giving of the free service constituted a clear violation of this section, notwithstanding there was no express proof of an intent to injure a particular company. Laundry Operating Co. v. Spalding Laundry & Dry Cleaning Co., 383 S.W.2d 364, 1964 Ky. LEXIS 40 ( Ky. 1964 ).

3.Intent to Destroy Competition.

Liability under this section exists only if the prohibited acts were done with the intent to destroy the competition of any regular established dealer in the commodity. Kentucky Utilities Co. v. Carlisle Ice Co., 279 Ky. 585 , 131 S.W.2d 499, 1939 Ky. LEXIS 320 ( Ky. 1939 ).

The intent to destroy competition cannot be presumed, and the burden does not rest on the defendant to disprove such intent. Kentucky Utilities Co. v. Carlisle Ice Co., 279 Ky. 585 , 131 S.W.2d 499, 1939 Ky. LEXIS 320 ( Ky. 1939 ).

The intent to destroy competition is the gist of the offense. Kentucky Utilities Co. v. Carlisle Ice Co., 279 Ky. 585 , 131 S.W.2d 499, 1939 Ky. LEXIS 320 ( Ky. 1939 ).

The expressions “injuring competition” and “destroying competition” were intended to describe one (1) thing rather than two (2), that is, a reduction of competition at the expense of a competitor. Laundry Operating Co. v. Spalding Laundry & Dry Cleaning Co., 383 S.W.2d 364, 1964 Ky. LEXIS 40 ( Ky. 1964 ).

4.Pleading.

Where defendant was charged with violation of this section, his demurrer to the petition admitted violation as charged. Moore v. Northern Kentucky Independent Food Dealers Ass'n, 286 Ky. 24 , 149 S.W.2d 755, 1941 Ky. LEXIS 211 ( Ky. 1941 ).

5.Temporary Injunction.

Plaintiff failed to demonstrate any sort of emergency situation which would justify temporary injunction pending a final decision of alleged violation of this section by selling milk below cost. Oscar Ewing, Inc. v. Melton, 309 S.W.2d 760, 1958 Ky. LEXIS 360 ( Ky. 1958 ).

Cited:

Belfry Coal Corp. v. East Kentucky Beverage Co., 294 S.W.2d 539, 1956 Ky. LEXIS 133 ( Ky. 1956 ).

Opinions of Attorney General.

Any licensee selling malt beverages to customers at a price which does not match, if not exceed, his “cost,” as defined in subsection (3) of this section, is in violation of subsection (1) of this section, assuming sales below cost are for the purpose of injuring competitors or destroying competition. Assuming the retail price does not reflect the cost factors specified by statute, two remedies are available: first, the violator will be subject to a fine and/or imprisonment pursuant to KRS 365.990(2); second, the violator’s license may be revoked pursuant to KRS 243.490 . OAG 82-479 .

Before a licensee will be found in violation of subsection (1) of this section, the board must establish that the sale below cost was done with the purpose to injure competitors or destroy competition. Purpose or intent is essential and it cannot be presumed that the defendant’s acts were done with such purpose; the burden does not rest upon the defendant to disprove intent. OAG 82-479 .

Sale below “costs,” as defined in subsection (3) of this section, is not the equivalent of giving away alcoholic beverages for less than a “full monetary consideration” as prohibited by KRS 244.050 ; so long as the retail sales price to the customer matches or exceeds the replacement price on the date of sale (i.e., fair market value) or his original purchase price, whichever is lower, the retailer receives “full monetary consideration.” Had the legislature intended that “full monetary consideration” include the retailer’s costs, it would have explicitly provided for such requirement in KRS 244.050 , as it did in KRS Chapter 365. OAG 82-479 .

Research References and Practice Aids

Northern Kentucky Law Review.

Kazee, The Sherman Act and the Arbitrary Power Section of the Kentucky Constitution As Applied to Kentucky Fair Trade Laws, 20 N. Ky. L. Rev. 297 (1993).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Damages Caused by Unfair Competition, Form 199.05.

365.040. Exceptions to KRS 365.030.

The provisions of KRS 365.030 do not apply to any sale made:

  1. In closing out in good faith the owner’s stock or any part thereof for the purpose of discontinuing his trade in any such stock or commodity, or in disposing of seasonable goods to prevent loss to the vendor by depreciation, or in disposing of perishable goods to prevent loss to the vendor by spoilage, if notice is given to the public thereof.
  2. When the goods are damaged or deteriorated in quality and notice is given to the public thereof.
  3. By an officer acting under the orders of any court.
  4. In an endeavor made in good faith to meet the legal prices of a competitor selling the same article or product, or service or output of a service trade, in the same locality or trade area.

History. 4748h-6.

NOTES TO DECISIONS

Cited:

Moore v. Northern Kentucky Independent Food Dealers Ass’n, 286 Ky. 24 , 149 S.W.2d 755, 1941 Ky. LEXIS 211 ( Ky. 1941 ); Laundry Operating Co. v. Spalding Laundry & Dry Cleaning Co., 383 S.W.2d 364, 1964 Ky. LEXIS 40 ( Ky. 1964 ).

365.050. Unfair trade practices.

The secret payment or allowance of rebates, refunds, commissions or unearned discounts, whether in the form of money or otherwise, or secretly extending to certain purchasers special services or privileges not extended to all purchasers purchasing upon like terms and conditions, to the injury of a competitor, and where such payment or allowance tends to destroy competition, is an unfair trade practice, and no person shall resort to such trade practice.

History. 4748h-7.

NOTES TO DECISIONS

1.Applicability.

The Kentucky Unfair Trade Practices Act is inapplicable to commercial lending institutions. George v. United Kentucky Bank, Inc., 753 F.2d 50, 1985 U.S. App. LEXIS 27897 (6th Cir. Ky.), cert. denied, 474 U.S. 821, 106 S. Ct. 70, 88 L. Ed. 2d 58, 1985 U.S. LEXIS 3248 (U.S. 1985), cert. denied, 471 U.S. 1018, 105 S. Ct. 2024, 85 L. Ed. 2d 306, 1985 U.S. LEXIS 2629 (U.S. 1985).

2.Intent to Destroy Competition.

This section has been violated if a rebate which is not uniform is secretly made to the injury of a competitor and tends to destroy competition and it is not necessary that the rebate be made with the intent to destroy competition. Jefferson Ice & Fuel Co. v. Grocers Ice & Gold Storage Co., 286 S.W.2d 80, 1955 Ky. LEXIS 91 ( Ky. 1955 ).

Where there was no evidence that any gift to an employee was likely to destroy competition, plaintiff’s Unfair Trade Practice claim failed. Louisa Coca-Cola Bottling Co. v. Pepsi-Cola Metro. Bottling Co., 94 F. Supp. 2d 804, 1999 U.S. Dist. LEXIS 21663 (E.D. Ky. 1999 ).

3.Damages.

Treble damages were allowed where ice peddlers changed their patronage because of anticipated rebates. Grocers Ice & Cold Storage Co. v. Jefferson Ice & Fuel Co., 311 S.W.2d 186, 1958 Ky. LEXIS 178 ( Ky. 1958 ).

Cited:

General Electric Co. v. American Buyers Cooperative, Inc., 316 S.W.2d 354, 1958 Ky. LEXIS 42 ( Ky. 1958 ); Warfield Tobacco, Inc. v. R.J. Reynolds Tobacco Co., 34 F. Supp. 2d 1050, 1999 U.S. Dist. LEXIS 43 (E.D. Ky. 1999 ).

Opinions of Attorney General.

Since this section is directed at regulating the conduct of sellers of goods and services, it does not apply to a city which was the consumer of the product involved rather than the seller. OAG 72-685 .

Where a malt beverage distributor licensee sells a quantity of a brand of malt beverages to retail licensee “A” at $25.00 per half barrel and the same product and quantity to retail licensee “B” at $29.00 per half barrel, if the rebate or discount is secretly made “to the injury of a competitor and tends to destroy competition” the distributor licensee is in violation of this section. If the board deems a violation of this section to be a sufficient cause for revocation of a license, a show cause hearing may be held to determine if such violation has in fact occurred. OAG 82-479 .

Research References and Practice Aids

Northern Kentucky Law Review.

Cox, Lender Liability in the Bluegrass: Are New Theories Emerging Under Kentucky Law?, 16 N. Ky. L. Rev. 43 (1988).

Kazee, The Sherman Act and the Arbitrary Power Section of the Kentucky Constitution As Applied to Kentucky Fair Trade Laws, 20 N. Ky. L. Rev. 297 (1993).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Unfair Trade Practices under KRS 365.050 , Form 143.07.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

Caldwell’s Kentucky Form Book, 5th Ed., Synopsis to Chapter 143 BUSINESS TORTS, § 143.syn.

365.055. Use of mailed document purporting to inform of winning a prize.

  1. The use of a document mailed to members of the general public, the purpose of which is to market a product, when the document purports to inform the recipient that he has won a prize, without prominently and conspicuously communicating by clear and understandable language in the document the exclusions or conditions to receiving the prize, shall constitute an unfair trade practice and is prohibited.
  2. Remedies for violation of the provisions of subsection (1) of this section shall be available as provided in KRS 365.070 .

History. Enact. Acts 1992, ch. 30, § 1, effective July 14, 1992.

365.060. Contracts violating KRS 365.020 to 365.050 are void.

Any contract, express or implied, made in violation of any of the provisions of KRS 365.020 to 365.050 is an illegal contract and no recovery shall be had thereon.

History. 4748h-9.

NOTES TO DECISIONS

1.Estoppel to Plead Violation.

Where amusement company operating theater leased the only other theater in the city and closed it, to avoid competition, and agent of company fraudulently caused forfeiture of lease and leased theater himself, he could not set up defense that company’s lease was invalid because in restraint of trade. Schwartz Amusement Co. v. Independent Order of Odd Fellows, Howard Lodge, 278 Ky. 563 , 128 S.W.2d 965, 1939 Ky. LEXIS 460 ( Ky. 1939 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

365.070. Injunction and damages for violation of KRS 365.020 to 365.050.

  1. Any person may maintain an action to enjoin a continuance of any act in violation of any of the provisions of KRS 365.020 to 365.050 , and if injured thereby for the recovery of damages. If, in such action, the court finds that the defendant is violating or has violated any of the provisions of KRS 365.020 to 365.050 , it shall enjoin the defendant from a continuance thereof. It shall not be necessary that actual damages to the plaintiff be alleged or proved. In addition to such injunctive relief, the plaintiff in the action shall be entitled to recover from the defendant three (3) times the amount of any actual damages sustained. Any defendant in an action brought under this section may be required to testify, and his books and records may be brought into court and introduced, by reference, into evidence, but no information so obtained shall be used against the defendant as a basis for a prosecution under the provisions of subsection (2) of KRS 365.990 .
  2. Any person who, as agent of any person or as director, officer or agent of any corporation, assists or aids in a violation of any of the provisions of KRS 365.020 to 365.050 by the person or corporation for which he is agent, director or officer, shall be responsible therefor equally with such person or corporation, and in any proceeding brought against him under subsection (1) of this section it shall be sufficient to allege and prove the unlawful intent of the person or corporation for whom he acts.
  3. The remedies prescribed by this section are cumulative.

History. 4748h-2, 4748h-5, 4748h-10, 4748h-12.

NOTES TO DECISIONS

1.Damages.

In an action by one laundry company against another for triple damages resulting from the alleged violation of KRS 365.030 by giving two (2) weeks free service to customers, on the issue of damages, testimony that the plaintiff had no cost accounting system but that the fixed costs were not affected by the loss of these few accounts and his variable costs amounted to 50 percent or less of gross sales so his damages amounted to at least 50 percent of the gross sales constituted sufficient evidence of actual damages for submission to the jury. Laundry Operating Co. v. Spalding Laundry & Dry Cleaning Co., 383 S.W.2d 364, 1964 Ky. LEXIS 40 ( Ky. 1964 ).

2.Injunction.

An injunction is an extraordinary remedy. It cannot be employed except in cases of urgent necessity, and the right to relief and the necessity must be clearly shown. Kentucky Utilities Co. v. Carlisle Ice Co., 279 Ky. 585 , 131 S.W.2d 499, 1939 Ky. LEXIS 320 ( Ky. 1939 ).

The fact that a cause of action for damages may exist against an agent would not prevent the issuance of an injunction against the principal, where the agent is financially irresponsible. Kentucky Utilities Co. v. Carlisle Ice Co., 279 Ky. 585 , 131 S.W.2d 499, 1939 Ky. LEXIS 320 ( Ky. 1939 ).

3.— Temporary.

This section makes no provision for a temporary injunction, and an application therefor must be governed by basic equitable principles. Oscar Ewing, Inc. v. Melton, 309 S.W.2d 760, 1958 Ky. LEXIS 360 ( Ky. 1958 ).

4.— Violation of KRS 365.030.

Liability under KRS 365.030 exists only if the prohibited acts were done with the intent to destroy the competition of any regular established dealer in the community and, in the absence of such intent, there can be no damages or injunction under this section. Kentucky Utilities Co. v. Carlisle Ice Co., 279 Ky. 585 , 131 S.W.2d 499, 1939 Ky. LEXIS 320 ( Ky. 1939 ).

Cited:

Moore v. Northern Kentucky Independent Food Dealers Ass’n, 286 Ky. 24 , 149 S.W.2d 755, 1941 Ky. LEXIS 211 ( Ky. 1941 ); Jefferson Ice & Fuel Co. v. Grocers Ice & Gold Storage Co., 286 S.W.2d 80, 1955 Ky. LEXIS 91 , 54 A.L.R.2d 1181 ( Ky. 1955 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Damages Caused by Unfair Competition, Form 199.05.

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Unfair Trade Practices under KRS 365.050 , Form 143.07.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

365.080. Resale price of commodities may be regulated by contract; conditions implied. [Repealed.]

Compiler’s Notes.

This section (4748i-1, 4748-3) was repealed by Acts 1976, ch. 330, § 4.

365.090. Effect of sale of commodity at less than contract price. [Repealed.]

Compiler’s Notes.

This section (4748i-2) was repealed by Acts 1976, ch. 330, § 4.

Brands and Labels

365.100. Use of false brand to deceive.

No person shall use a false brand on anything sold, or to be sold or offered for sale, with intent to deceive the purchaser.

History. 1280.

Research References and Practice Aids

Cross-References.

Branding of agricultural seeds and fertilizers, KRS Ch. 250.

Branding of timber, KRS 364.070 to 364.110 .

Misbranding of foods, drugs, and poisons, KRS Ch. 217.

Deceptive business practices, Penal Code, KRS 517.020 .

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

365.110. Unauthorized use of manufacturer’s brand or name.

No dealer or merchant shall make or apply or cause to be made or applied to any parcel or package any kind or character of label bearing the brand or name of any manufacturer without the written authority of the manufacturer.

History. 1280a-1.

Research References and Practice Aids

Cross-References.

Branding of timber, KRS 364.070 to 364.110 .

Deceptive business practices, Penal Code, KRS 517.020 .

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

365.120. Union label or brand to be recorded; not assignable. [Repealed.]

Compiler’s Notes.

This section (4749, 4752) was repealed by Acts 1966, ch. 230, § 15.

365.130. Counterfeiting or unauthorized use of union label or brand prohibited. [Repealed.]

Compiler’s Notes.

This section (4753 to 4755) was repealed by Acts 1966, ch. 230, § 15.

365.140. Counterfeiting or unauthorized use of union label or brand may be enjoined; damages. [Repealed.]

Compiler’s Notes.

This section (4750, 4751) was repealed by Acts 1966, ch. 230, § 15.

365.150. Definitions of terms used in KRS 365.160 to 365.200; application. [Repealed.]

Compiler’s Notes.

This section (1279, 1279a-2 to 1279a-6, 1283a-4 to 1283a-10) was repealed by Acts 1966, ch. 230, § 15.

365.160. Brands used on packaged products may be recorded. [Repealed.]

Compiler’s Notes.

This section (1279, 1279a-6, 1283a-4, 1283a-9) was repealed by Acts 1966, ch. 230, § 15.

365.170. Branded packages not to be refilled or trafficked in, or brand removed, without consent of owner. [Repealed.]

Compiler’s Notes.

This section (1279a-2, 1283a-5) was repealed by Acts 1966, ch. 230, § 15.

365.180. Presumptions as to unlawful use, purchase or traffic in branded packages. [Repealed.]

Compiler’s Notes.

This section (1279a-3, 1283a-6) was repealed by Acts 1966, ch. 230, § 15.

365.190. Search warrant to discover and obtain branded packages unlawfully used or possessed; proceedings on return. [Repealed.]

Compiler’s Notes.

This section (1279a-4, 1283a-7) was repealed by Acts 1966, ch. 230, § 15.

365.200. Deposit on package does not constitute sale. [Repealed.]

Compiler’s Notes.

This section (1279a-5, 1282a-8) was repealed by Acts 1970, ch. 92, § 96.

Miscellaneous

365.205. Definitions — Printing requirements for personal checks.

  1. As used in this section the following terms shall have the following respective meanings:
    1. “Check” means any check, draft, or similar order for the withdrawal or payment of money, but such term does not include any counter check or similar draft or order, nor does it include any check, draft or order provided upon the opening of any account for use by the customer until printed checks for such account have been prepared;
    2. “Federal or state financial institution” means any financial institution and any bank, savings and loan association, or credit union organized under the laws of the United States and operated in this state;
    3. “Personal checking account” means any demand or similar deposit account that is opened or established in the name of one (1) or more natural persons with a federal or state financial institution subsequent to July 15, 1986, and from which signatories on the account can withdraw or order the payment of funds by using a check.
  2. All checks provided directly or indirectly by a federal or state financial institution for use in connection with a particular personal checking account shall have the numerical month and year in which the account was opened legibly printed on the faces of the checks.
  3. In the case of a personal checking account that is closed and a new account opened simultaneously upon the advice of the bank, the checks in the new account shall have the numerical month and year in which the closed account was opened legibly printed on the faces of the checks. If the closed account was opened prior to July 15, 1986, no date shall be required to be imprinted on the checks.

History. Enact. Acts 1986, ch. 105, § 1, effective July 15, 1986.

365.210. Foreign corporations collecting and distributing news must furnish services to all newspapers without discrimination.

As a condition to carrying on any part of its business in this state, every foreign corporation formed for the purpose or engaged in the business of buying, gathering, accumulating, vending, supplying, distributing or publishing information or news shall at all times vend, supply, distribute and publish the news and information bought, gathered or accumulated by it to any person carrying on in this state the business of conducting or publishing a newspaper who desires to buy or be supplied with such news and information, and in vending, supplying, distributing and publishing such news and information no discrimination in charges or prices shall be made by the foreign corporation between any of such persons who desire to purchase or be supplied with the information and news.

History. 883a-1.

365.220. Request for news and offer to pay charges; no business to be done after refusal.

  1. Any person carrying on in this state the business of conducting or publishing a newspaper may notify any foreign corporation of the kind referred to in KRS 365.210 , or any agent of such corporation upon whom process can be served under the laws of this state, that he desires to purchase or be supplied with the news or information bought, gathered or accumulated by such corporation, and offer to pay the same charges or prices therefor that are exacted by such corporation from other persons carrying on in this state the business of conducting or publishing a newspaper.
  2. No such corporation, and no agent or employee thereof, or other person, shall carry on, transact or cause to be conducted any of the business of the corporation in this state after the corporation has refused to vend, supply, distribute or publish the information or news bought, gathered or accumulated by it to any person who has given the notice and made the offer provided for in subsection (1) of this section.

History. 883a-2.

365.230. Telegraph and telephone companies to furnish services to newspapers without discrimination.

Every telegraph company, telephone company, or other company engaged in buying, gathering or transmitting dispatches shall afford the same and equal facilities to all publishers of newspapers, and shall furnish all news or information collected by them for publication to all newspapers published in any one county or locality on the same conditions as to terms, payment and delivery.

History. 883a-4.

365.240. Prison-made goods — Sale prohibited — Exceptions. [Repealed.]

Compiler’s Notes.

This section (524-1: amend. Acts 1968, ch. 152, § 151; 1978, ch. 70, § 1) was repealed by Acts 1980, ch. 293, § 4, effective July 15, 1980.

365.241. Counterfeiting intellectual property — Penalties — Disposition of property.

  1. As used in this section:
    1. “Counterfeit mark” means:
      1. Any unauthorized reproduction or copy of intellectual property; or
      2. Intellectual property knowingly affixed to any item without the authority of the owner of the intellectual property.
    2. “Intellectual property” means any trademark, service mark, trade name, label, term, device, design, or word adopted or used by a person to identify the person’s goods or services.
    3. “Person” includes, in addition to its meaning under KRS 446.010 , any association, organization, or entity amenable to suit in a court of law.
    4. “Retail value” means the counterfeiter’s regular selling price for the item or service bearing or identified by the counterfeit mark. In the case of items bearing a counterfeit mark which are components of a finished product, the retail value shall be the counterfeiter’s regular selling price of the finished product on or in which the component would be utilized.
  2. Any person who willfully manufactures, uses, displays, advertises, distributes, offers for sale, sells, or possesses with intent to sell or distribute any item or service that the person knows bears or is identified by a counterfeit mark shall be guilty of counterfeiting.
  3. A person having possession, custody, or control of more than twenty-five (25) items that the person knows bear or are identified by a counterfeit mark shall be presumed to possess the items with the intent to sell or distribute.
  4. Any person who violates the provisions of this section shall be guilty of a Class A misdemeanor, except where the person has been previously convicted of a violation of this section or the violation involves more than one hundred (100) items bearing a counterfeit mark or the total retail value of all items bearing, or services identified by, a counterfeit mark is more than one thousand dollars ($1,000), in which case the person shall be guilty of a Class D felony. Unless reduced by the court for extenuating circumstances and notwithstanding KRS Chapter 534, upon conviction the offender shall, in addition to any other allowable disposition, be fined an amount equal to the greater of:
    1. Three (3) times the retail value of the items bearing, or services identified by, the counterfeit mark;
    2. Double the amount of the defendant’s gain from commission of the offense; or
    3. As otherwise allowed in KRS Chapter 534 for felonies and misdemeanors.
  5. For purposes of this section, the quantity or retail value of items or services shall include the aggregate quantity or retail value of all items bearing, or services identified by, every counterfeit mark the defendant manufactures, uses, displays, advertises, distributes, offers for sale, sells, or possesses.
  6. Except for items in the possession of a person not in violation of this section, any items bearing a counterfeit mark, and all personal property, including but not limited to, any items, objects, tools, machines, equipment, instrumentalities, or vehicles of any kind, employed or used in connection with a violation of this section shall be seized by any law enforcement officer.
    1. Except as otherwise provided in this subsection, all personal property seized under this subsection shall be forfeited in accordance with KRS 431.100 .
    2. Upon request of the intellectual property owner, all seized items bearing a counterfeit mark shall be released to the intellectual property owner.
    3. If the intellectual property owner does not request release of seized items bearing a counterfeit mark, the items shall be destroyed unless the intellectual property owner consents to another disposition.
  7. Any state or federal certificate of registration of any intellectual property shall be prima facie evidence of the facts stated in the certificate.
  8. The remedies provided in this section shall be cumulative to other civil and criminal remedies provided by law.
  9. Notwithstanding any statute to the contrary, fines imposed under this section shall be paid into the crime victims’ compensation fund established in KRS 49.480 .

HISTORY: Enact. Acts 2000, ch. 356, § 1, effective July 14, 2000; 2017 ch. 74, § 98, effective June 29, 2017.

Research References and Practice Aids

Kentucky Law Journal.

Article: Overcoming the “Impossible Issue” of Nonobviousness in Design Patents, 99 Ky. L.J. 419 (2010/2011).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

365.245. Protection from Financial Exploitation Act.

  1. As used in this section:
    1. “Authorized agencies” means the Cabinet for Health and Family Services and the Department of Financial Institutions;
    2. “Financial exploitation” means:
      1. The wrongful or unauthorized taking, withholding, appropriation, or use of a specified adult’s funds or securities; or
      2. Any act or omission by a person, including through the use of a power of attorney, guardianship, or any other authority regarding a specified adult, to:
        1. Obtain control, through deception, intimidation, or undue influence, over a specified adult’s money, assets, or property; or
        2. Convert a specified adult’s money, assets, or property;
    3. “Financial institution” means any person doing business under the laws of any state or commonwealth or the United States relating to banks, bank holding companies, savings banks, savings and loan associations, trust companies, or credit unions;
    4. “Qualified person” means a:
      1. Broker-dealer as defined in KRS 292.310 ;
      2. Investment adviser as defined in KRS 292.310 ; or
      3. Financial institution; and
    5. “Specified adult” means:
      1. A natural person age sixty-five (65) or older; or
      2. A natural person age eighteen (18) or older who a qualified person reasonably believes has a mental or physical impairment that renders that natural person unable to protect his or her own interests. A qualified person’s reasonable belief may be based on facts and circumstances observed in the qualified person’s business relationship with the natural person.
    1. If a qualified person reasonably believes that financial exploitation has occurred, is occurring, has been attempted, or will be attempted, the qualified person may notify the following: (2) (a) If a qualified person reasonably believes that financial exploitation has occurred, is occurring, has been attempted, or will be attempted, the qualified person may notify the following:
      1. Authorized agencies; and
      2. Any third party that is:
        1. Reasonably associated with the specified adult; or
        2. Otherwise permitted by law.
    2. Any report or disclosure made to authorized agencies pursuant to this subsection shall be confidential and shall not be subject to disclosure pursuant to the Kentucky Open Records Act, KRS 61.870 to 61.884 . The name of the notifying qualified person shall not be revealed to any person outside of the authorized agencies without the permission of the notifying qualified person.
    1. A qualified person may place a temporary hold on a transaction on or a disbursement from an account of a specified adult, or an account on which a specified adult is a beneficiary, if: (3) (a) A qualified person may place a temporary hold on a transaction on or a disbursement from an account of a specified adult, or an account on which a specified adult is a beneficiary, if:
      1. The qualified person fulfills any reporting obligations under KRS 209.030 . Nothing in this subsection shall be read to expand any of the requirements of KRS 209.030 ;
      2. The qualified person reasonably believes that financial exploitation of a specified adult has occurred, is occurring, has been attempted, or will be attempted; and
      3. Not later than two (2) business days after the date the temporary hold was first placed, oral or written notification, which may be electronic, of the temporary hold and the reason for the temporary hold is made to:
        1. All parties authorized to transact business on the account; and
        2. Any person age eighteen (18) or older authorized by the specified adult or their legal representative, in writing, to be contacted about the specified adult’s account.
      1. Unless otherwise provided in subparagraph 2. of this paragraph, any temporary hold authorized by this subsection shall expire upon the sooner of: (b) 1. Unless otherwise provided in subparagraph 2. of this paragraph, any temporary hold authorized by this subsection shall expire upon the sooner of:
        1. A determination by the qualified person that the disbursement or transaction will not result in financial exploitation of the specified adult; or
        2. Not later than fifteen (15) business days after the date the qualified person first placed the temporary hold, unless the qualified person’s internal review of the facts and circumstances supports its reasonable belief that financial exploitation of the specified adult has occurred, is occurring, has been attempted, or will be attempted, in which case the qualified person may extend the expiration to not later than twenty-five (25) business days after the date the qualified person first placed the temporary hold.
      2. At any time, an agency of competent jurisdiction, including but not limited to the authorized agencies, or a court of competent jurisdiction may terminate or extend a temporary hold authorized by this subsection.
  2. Notwithstanding subsection (2) or (3) of this section, a notification permitted or required by this section shall not be made to any person who is suspected of financial exploitation or other abuse.
    1. A qualified person shall provide access to or copies of records that are relevant to the suspected or attempted financial exploitation of a specified adult to agencies charged with administering state adult protective services laws and to law enforcement, either as part of a referral to the agency or to law enforcement, or upon request of the agency or law enforcement pursuant to an investigation. (5) (a) A qualified person shall provide access to or copies of records that are relevant to the suspected or attempted financial exploitation of a specified adult to agencies charged with administering state adult protective services laws and to law enforcement, either as part of a referral to the agency or to law enforcement, or upon request of the agency or law enforcement pursuant to an investigation.
    2. The records may include historical records as well as records relating to the most recent disbursements or disbursements that may comprise financial exploitation of a specified adult.
    3. All records made available to agencies pursuant to this subsection shall be confidential and shall not be subject to disclosure pursuant to the Kentucky Open Records Act, KRS 61.870 to 61.884 .
    4. Nothing in this subsection shall limit or otherwise impede the authority of the commissioner of the Department of Financial Institutions to access or examine the books and records of a qualified person as otherwise provided by law.
  3. Notwithstanding any provision of law to the contrary, the authorized agencies may disclose to any notifying qualified person the general status or final disposition of any investigation that arose from a report made by the qualified person.
  4. A qualified person that exercises good faith in making disclosures, placing a temporary hold, or providing access to records pursuant to this section shall be immune from any administrative or civil liability that might otherwise arise from such activities.
  5. This section may be cited as the “Protection from Financial Exploitation Act.”

HISTORY: 2018 ch. 127, § 1, effective July 14, 2018.

365.250. Register containing name of person from whom copper metal, copper wire, or copper cable is purchased required of dealers, vendors, and collectors of junk, metals, and used articles — Contents of register — Inspection of register — Reports to sheriff and police department. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1956, ch. 131, § 1; 1968, ch. 152, § 152; 1980, ch. 188, § 282, effective July 15, 1980; 2007, ch. 81, § 1, effective June 26, 2007) was repealed by Acts 2008, ch. 106, § 12, effective July 15, 2008. For comparable provisions, see KRS 433.890 et seq.

365.251. Junk dealers to keep register of copper wire purchases; evidence. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 192, §§ 1, 3) was repealed by Acts 1968, ch. 152, § 168.

Unfair Cigarette Sales Law

365.260. Short title for KRS 365.260 to 365.380.

KRS 365.260 to 365.380 shall be known and may be cited as the “Act to Prevent Unfair Cigarette Sales in Kentucky.”

History. Enact. Acts 1956, ch. 243, § 1, effective May 18, 1956.

365.265. Legislative findings.

  1. The General Assembly hereby finds and declares as follows:
    1. Cigarettes, because of their standardized character, their great popularity, their widespread and varied types of markets and methods of distribution and the sensitivity of their distribution to price fluctuations, possess a distinct marketing character and, the economic facts and circumstances peculiar to their distribution, require special and individualized treatment of the problems created by the sale of cigarettes below cost.
    2. The sale of cigarettes below cost for the purpose of destroying or substantially lessening competition is inimical to the orderly and efficient collection by the Commonwealth of excise taxes on cigarettes and taxes from the licensing of persons engaged in the sale of cigarettes at wholesale and retail.
    3. The sale of cigarettes below cost for the purpose of destroying or substantially lessening competition is an unfair business practice, which tends to be disorganizing in the sale and distribution of cigarettes, and ultimately fosters monopoly and high prices by tending to force independent wholesalers and retailers out of business.
  2. The General Assembly hereby declares it to be the policy of this Commonwealth to promote the public welfare by prohibiting the sale of cigarettes below cost, and it is the purpose of KRS 365.280 to carry out that policy in the public interest.

History. Enact. Acts 1990, ch. 280, § 1, effective July 13, 1990.

Opinions of Attorney General.

Despite the 1990 amendment, this Act is a minimum markup law and is unconstitutional under Ky. Const., § 2 because the “cost of doing cigarette business” under subdivision (12)(a) of KRS 365.280 is still determined with reference to the seller’s total operational expense. OAG 93-74 .

Research References and Practice Aids

Northern Kentucky Law Review.

Kazee, The Sherman Act and the Arbitrary Power Section of the Kentucky Constitution As Applied to Kentucky Fair Trade Laws, 20 N. Ky. L. Rev. 297 (1993).

365.270. Definitions for KRS 365.260 to 365.380.

As used in KRS 365.260 to 365.380 , unless the context otherwise requires:

  1. “Person” means and includes any individual, firm, association, company, partnership, corporation, joint stock company, club, agency, syndicate, the Commonwealth of Kentucky and any municipal corporation or other political subdivision of this state, trust, receiver, trustee, fiduciary, or conservator.
  2. “Commissioner” means the commissioner of the Department of Revenue of the Commonwealth of Kentucky.
  3. “Department” means the Department of Revenue.
  4. “Cigarettes” means and includes any roll for smoking made wholly or in part of tobacco, irrespective of size or shape and whether or not the tobacco is flavored, adulterated, or mixed with any other ingredient, the wrapper or cover of which is made of paper or any other substance or material, excepting tobacco.
  5. “Wholesaler” means any person who sells cigarettes at wholesale or distributes cigarettes to be sold at retail, and includes any manufacturer, distributor, jobber, subjobber as defined in KRS 138.130 , broker, agent, or other person, whether or not enumerated in this subsection, who sells or distributes cigarettes.
  6. “Retailer” means and includes any person who sells cigarettes in this state to a consumer or to any person for any purpose other than resale.
  7. “Sale” or “sell” means any transfer for consideration or gift.
  8. “Sell at wholesale,” “sale at wholesale,” and “wholesale sales” means and includes any sale made in the ordinary course of trade or usual conduct of the wholesaler’s business to a retailer for the purpose of resale.
  9. “Sell at retail,” “sale at retail,” or “retail sales” means and includes any sale for consumption or use made in the ordinary course of trade or usual conduct of the seller’s business.
  10. “Basic cost of cigarettes” means the invoice cost of cigarettes to the wholesaler or retailer, as the case may be, less all trade discounts, except customary cash discounts, plus the full face value of any stamps or any tax which may be required by any cigarette tax act of this state or political subdivision thereof, now in effect or hereafter enacted, if not already included in the invoice cost of the cigarettes to the wholesaler or retailer, as the case may be.
    1. “Cost to wholesaler” means the basic cost of the cigarettes involved to the wholesaler plus the cost of doing cigarette business by the wholesaler. In determining the cost of doing cigarette business by the wholesaler, the cost of doing business by the wholesaler shall first be determined by applying the standards and methods of accounting regularly employed by him, and includes labor costs, including salaries of executives and officers, rent, depreciation, selling costs, maintenance of equipment, delivery costs, all types of licenses, taxes, insurance, and advertising. The cost of doing business by the wholesaler shall then be multiplied by the fraction obtained through dividing the wholesaler’s cigarette sales for the preceding six (6) months by the wholesaler’s total sales for the same period and the product thereof shall be the cost of doing cigarette business. (11) (a) “Cost to wholesaler” means the basic cost of the cigarettes involved to the wholesaler plus the cost of doing cigarette business by the wholesaler. In determining the cost of doing cigarette business by the wholesaler, the cost of doing business by the wholesaler shall first be determined by applying the standards and methods of accounting regularly employed by him, and includes labor costs, including salaries of executives and officers, rent, depreciation, selling costs, maintenance of equipment, delivery costs, all types of licenses, taxes, insurance, and advertising. The cost of doing business by the wholesaler shall then be multiplied by the fraction obtained through dividing the wholesaler’s cigarette sales for the preceding six (6) months by the wholesaler’s total sales for the same period and the product thereof shall be the cost of doing cigarette business.
    2. In the absence of proof of a lesser or higher cost of doing cigarette business by the wholesaler making the sale, the cost of doing cigarette business by the wholesaler shall be presumed to be two percent (2%) of the basic cost of the cigarettes to the wholesale dealer, plus cartage to the retail outlet, if performed or paid for by the wholesale dealer. Cartage cost, in the absence of proof of a lesser or higher cost, shall be presumed to be three-fourths of one percent (0.75%) of the basic cost of the cigarettes to the wholesaler.
    1. “Cost to the retailer” means the basic cost of cigarettes involved to the retailer plus the cost of doing cigarette business by the retailer. In determining the cost of doing cigarette business by the retailer, the cost of doing business by the retailer shall first be determined by applying the standards and methods of accounting regularly employed by him and includes labor, including salaries of executives and officers, rent, depreciation, selling costs, maintenance of equipment, delivery costs, all types of licenses, taxes, insurance, and advertising. The cost of doing business by the retailer shall then be multiplied by the fraction obtained through dividing the retailer’s cigarette sales for the preceding six (6) months by the retailer’s total sales for the same period and the product thereof shall be the cost of doing cigarette business. (12) (a) “Cost to the retailer” means the basic cost of cigarettes involved to the retailer plus the cost of doing cigarette business by the retailer. In determining the cost of doing cigarette business by the retailer, the cost of doing business by the retailer shall first be determined by applying the standards and methods of accounting regularly employed by him and includes labor, including salaries of executives and officers, rent, depreciation, selling costs, maintenance of equipment, delivery costs, all types of licenses, taxes, insurance, and advertising. The cost of doing business by the retailer shall then be multiplied by the fraction obtained through dividing the retailer’s cigarette sales for the preceding six (6) months by the retailer’s total sales for the same period and the product thereof shall be the cost of doing cigarette business.
    2. In the absence of proof of a lesser or higher cost of doing cigarette business by the retailer making the sale, the cost of doing cigarette business by the retailer shall be presumed to be eight percent (8%) of the basic cost of cigarettes to the retailer.

History. Enact. Acts 1956, ch. 243, § 2, effective May 18, 1956; 1990, ch. 280, § 2, effective July 13, 1990; 2005, ch. 85, § 687, effective June 20, 2005; 2007, ch. 84, § 2, effective July 1, 2007; 2018 ch. 171, § 35, effective April 14, 2018; 2018 ch. 207, § 35, effective April 27, 2018.

Legislative Research Commission Notes.

(4/27/2018). This statute was amended by 2018 Ky. Acts chs. 171 and 207, which do not appear to be in conflict and have been codified together.

Opinions of Attorney General.

Despite the 1990 amendment, the Unfair Cigarette Sales Act is a minimum markup law and is unconstitutional under Ky. Const., § 2 because the “cost of doing cigarette business” under subdivision (12)(a) of this section is still determined with reference to the seller’s total operational expense. OAG 93-74 .

365.280. Sale at less than cost prohibited — Fine.

  1. It shall be unlawful for any wholesaler or retailer to sell, at wholesale or retail, cigarettes at less than cost to the wholesaler or retailer, as the case may be, as defined in KRS 365.260 to 365.380 , for the purpose of destroying competition or substantially lessening competition.
  2. Any wholesaler or retailer who violates the provisions of this section shall be fined not more than one thousand dollars ($1,000). Each sale or purchase by a wholesaler or retailer, as the case may be, at less than cost, shall be treated as a separate violation.
  3. Sale of cigarettes by any wholesaler or retailer at less than cost to him shall be prima facie evidence of intent to destroy or substantially lessen competition.

History. Enact. Acts 1956, ch. 243, § 3, effective May 18, 1956; 1990, ch. 280, § 3, effective July 13, 1990.

Opinions of Attorney General.

There would be no conflict with this section nor with KRS 365.270 if prices are reduced in order to comply with the federal economic stabilization program. OAG 72-464 .

Since the prohibition of this section applies to wholesalers or retailers, a customer who receives a rebate would not violate the law. OAG 77-640 .

In a legal action brought against a retailer under this section, proof that the retailer had accepted a rebate from a wholesaler would raise a rebuttable presumption that the retailer was guilty of violating this section and the burden of proof would shift to the retailer to offer evidence that he did not solicit or in any other manner actively seek to obtain that rebate. OAG 80-173 .

365.290. Combination sales.

In all sales involving two (2) or more items, at least one (1) of which items is cigarettes, at a combined price, and in all sales involving the giving of any gift or concession of any kind, whether it be coupons or otherwise, the wholesaler’s or retailer’s combined selling price shall not be below the cost to the wholesaler or the cost to the retailer, respectively, of the total of all articles, products, commodities, gifts, and concessions included in the transactions, except that if any articles, products, commodities, gifts, or concessions, are not cigarettes, the basic cost thereof shall be determined in like manner as provided in KRS 365.270(10).

History. Enact. Acts 1956, ch. 243, § 4; 1990, ch. 280, § 4, effective July 13, 1990.

365.300. Sales by wholesaler to any other wholesaler.

When one (1) wholesaler sells cigarettes to any other wholesaler, the former shall not be required to include in his selling price to the latter, “cost to the wholesaler,” as provided by KRS 365.270(11), but the latter wholesaler, upon resale to a retailer, shall be subject to the provisions of KRS 365.270(11).

History. Enact. Acts 1956, ch. 243, § 5, effective May 18, 1956; 1990, ch. 280, § 5, effective July 13, 1990.

365.310. Sales excluded from provisions of KRS 365.260 to 365.380.

The provisions of KRS 365.260 to 365.380 shall not apply to a sale at wholesale or a sale at retail made:

  1. In an isolated transaction and not in the usual course of business;
  2. Where cigarettes are sold in a bona fide clearance sale for the purpose of discontinuing trade in the cigarettes;
  3. Where cigarettes are sold as imperfect or damaged;
  4. Where cigarettes are sold upon the final liquidation of a business; or
  5. Where cigarettes are sold by any fiduciary or other officer acting under the order or direction of any court.

History. Enact. Acts 1956, ch. 243, § 6, effective May 18, 1956; 1990, ch. 280, § 6, effective July 13, 1990.

365.320. Transactions permitted to meet lawful competition.

  1. Any wholesaler may sell cigarettes to a regular customer at a price made in good faith to meet the legal price of a competitor selling to the same customer. Any retailer may sell cigarettes at a price made in good faith to meet the legal price of a competitor. The price of cigarettes sold under the exceptions specified in KRS 365.310 shall not be considered the price of a competitor and shall not be used as a basis for establishing prices below cost, nor shall the price established at a bankruptcy sale be considered the price of a competitor within the purview of this section.
  2. In the absence of proof of the actual cost to the competing wholesaler or to the competing retailer, as the case may be, the cost may be presumed to be the lowest cost to the wholesaler or the lowest cost to the retailer, as the case may be, within the same trading area as determined by a cost survey made pursuant to KRS 365.360(2).

History. Enact. Acts 1956, ch. 243, § 7, effective May 18, 1956; 1990, ch. 280, § 7, effective July 13, 1990.

365.330. Sales contract made in violation of KRS 365.260 to 365.380 void.

Any contract, express or implied, made by any person in violation of any of the provisions of KRS 365.260 to 365.380 , shall be void and no recovery shall be had thereon.

History. Enact. Acts 1956, ch. 243, § 8, effective May 18, 1956; 1984, ch. 111, § 147, effective July 13, 1984; 1990, ch. 280, § 8, effective July 13, 1990.

365.340. Sales outside ordinary channels of business not to be used in establishing basic cost.

In establishing the basic cost of cigarettes to a wholesaler or a retailer it shall not be permissible to use the invoice cost or the actual cost of any cigarettes purchased at a forced, bankrupt, or closeout sale, or other sale outside of the ordinary channels of trade.

History. Enact. Acts 1956, ch. 243, § 10, effective May 18, 1956; 1984, ch. 111, § 148, effective July 13, 1984.

365.350. Actions for violations or threatened violations — Remedies — Actual damages need not be alleged or proved — Costs.

  1. The department, or any person injured by any violation, or who may suffer injury from any threatened violation of KRS 365.260 to 365.380 , may maintain an action in any court of equitable jurisdiction to prevent, restrain, or enjoin the violation or threatened violation. If a violation or threatened violation of KRS 365.260 to 365.380 shall be established, the court shall enjoin and restrain, or otherwise prohibit, the violations or threatened violation. In addition, the court shall assess in favor of the plaintiff and against the defendant the cost of the suit, including reasonable attorney’s fees. It shall not be necessary that actual damages to the plaintiff be alleged or proved, but if alleged and proved, the plaintiff in the action, in addition to injunctive relief, the costs of the suit, and reasonable attorney’s fees, shall be entitled to recover from the defendant the actual damages sustained by him.
  2. If no injunctive relief is sought or required, any person injured by a violation of KRS 365.260 to 365.380 may maintain an action for damages and the costs of suit in any court of general jurisdiction.

History. Enact. Acts 1956, ch. 243, § 11, effective May 18, 1956; 1990, ch. 280, § 9, effective July 13, 1990; 2005, ch. 85, § 688, effective June 20, 2005.

365.360. Evidence admissible in determining cost to wholesaler and retailer — Cost survey.

  1. In determining cost to the wholesaler and cost to the retailer, the court shall receive and consider as bearing on the bona fides of the cost, evidence tending to show that any person complained against under any of the provisions of KRS 365.260 to 365.380 purchased the cigarettes involved in the complaint, at a fictitious price, or upon the terms, or in a manner, or under such invoices, as to conceal the true cost, discounts or terms of the purchase, and shall also receive and consider as bearing on the bona fides of the cost, evidence of the normal, customary, and prevailing terms and discounts in connection with other sales of a similar nature in the trade area or state.
  2. If a cost survey pursuant to recognized statistical and cost accounting practices has been made for the trading area in which a violation of KRS 365.260 to 365.380 is committed or charged to determine and establish on the basis of actual existing conditions the lowest cost to wholesalers or the lowest cost to retailers within the area, the cost survey shall be deemed competent evidence in any action or proceeding under KRS 365.260 to 365.380 as tending to prove actual cost to the wholesaler or actual cost to the retailer complained against. Any party against whom any cost survey may be introduced in evidence shall have the right to offer evidence tending to prove any inaccuracy of the cost survey or any facts which may impair its probative value.

History. Enact. Acts 1956, ch. 243, § 9, effective May 18, 1956; 1990, ch. 280, § 10, effective July 13, 1990.

365.370. Powers and duties of department — Appeals.

  1. The department shall promulgate administrative regulations for the enforcement of KRS 365.260 to 365.380 and may from time to time undertake and make or cause to be made one (1) or more cost surveys for the state or trading area or areas as it defines. When each survey is made by or approved by the department, it may use the cost survey as provided in subsection (2) of KRS 365.320 and subsection (2) of 365.360 .
  2. The department may, upon notice and after hearing, revoke or suspend any license issued under KRS 138.195 and the administrative regulations of the department promulgated thereunder, for failure of any person to comply with any provisions of KRS 365.260 to 365.380 or any administrative regulation adopted thereunder.
  3. All of the powers vested in the commissioner and Department of Revenue by the provisions of the cigarette tax law shall be available for the enforcement of KRS 365.260 to 365.380 .
  4. Any person aggrieved by any decision, order, or finding of the Department of Revenue, suspending or revoking any license, may appeal to the Board of Tax Appeals pursuant to KRS 49.220 .

HISTORY: Enact. Acts 1956, ch. 243, § 12; 1964, ch. 141, § 37; 1966, ch. 255, § 260; 1990, ch. 280, § 11, effective July 13, 1990; 2005, ch. 85, § 689, effective June 20, 2005; 2017 ch. 74, § 101, effective June 29, 2017; 2021 ch. 185, § 89, effective June 29, 2021.

Research References and Practice Aids

Cross-References.

Revenue Cabinet, organization of, KRS 131.020 .

Kentucky tax commissioner:Membership, KRS 131.020 .Appeals to, KRS 131.110 .Licensing, KRS 138.195 .Tax, excise, on cigarettes, KRS 138.140 .

365.380. License.

  1. No person shall engage in or conduct the business of purchasing for resale or selling cigarettes without having first obtained the appropriate license.
  2. No person licensed only as a wholesaler shall operate as a retailer unless the appropriate license is first secured.
  3. No person licensed only as a retailer shall operate as a wholesaler unless the appropriate license is first secured.

History. Enact. Acts 1956, ch. 243, § 13; 1990, ch. 280, § 12, effective July 13, 1990.

365.390. Payment of enforcement and administration fee by cigarette wholesaler — Special account — Fee deemed an additional cost.

  1. To provide for the enforcement of KRS 138.146 and KRS 365.260 to 365.380 , every cigarette wholesaler licensed under KRS 138.195 shall pay an enforcement and administration fee to the Department of Revenue on a monthly basis for each package of twenty (20) cigarettes to which evidence of Kentucky cigarette tax was affixed during the month as required by KRS 138.146 . The enforcement and administration fee to recover applicable costs shall be calculated annually by the commissioner of revenue who shall give notice thereof to licensed wholesalers who shall be liable for its payment. Payments to the Department of Revenue shall be made according to provisions of KRS 138.195 and shall be subject to the same penalties and interest as levied on Kentucky cigarette tax not paid on or before the due date.
  2. There is hereby created within the Department of Revenue a cigarette enforcement and administration account, which will be subject to the provisions of the restricted fund group, as provided in KRS 45.305 , and all funds collected under subsection (1) of this section shall be credited thereto with only the expenses of the Department of Revenue related to the administration and enforcement of KRS 138.146 and KRS 365.260 to 365.380 to be paid therefrom.
  3. The enforcement and administration fee levied in subsection (1) of this section shall be deemed to be an additional cost to be included in the basic cost of cigarettes as defined in KRS 365.270 .

History. Enact. Acts 1982, ch. 386, § 1, effective July 15, 1982; 1984, ch. 111, § 149, effective July 13, 1984; 2005, ch. 85, § 690, effective June 20, 2005.

Research References and Practice Aids

2020-2022 Budget Reference.

See State/Executive Branch Budget, 2021 Ky. Acts ch. 169, Pt. I, F, 8, (1) at 1089.

365.395. Distribution of tobacco products to persons under age 18 prohibited — Penalty. [Repealed, reenacted and amended.]

Compiler’s Notes.

This section (Enact. Acts 1992, ch. 164, § 1, effective July 14, 1992) was repealed, reenacted and amended as KRS 438.313 by Acts 1994, ch. 480, § 10, effective July 15, 1994.

Fire, Removal and Other Sales of Merchandise

365.410. Definitions.

As used in KRS 365.410 to 365.480 and 365.992 :

  1. “Going out of business sale” means any sale, whether described by such name or by any other name such as, but not limited to, “closing out sale,” “liquidation sale,” “lost our lease sale,” “forced to vacate sale,” held in such a manner as to induce a belief that upon disposal of the stock of goods on hand, the business will cease and discontinue at the premises where the sale is conducted.
  2. “Sale” means a transfer of goods from the seller to the buyer for a price less than that for which the goods were originally offered to the public by the person conducting a sale hereunder.
  3. “Fire sale” means any sale held in such a manner as to induce a belief that the goods are being sold at a reduction in price due to damage by fire, smoke, water or otherwise.
  4. “Cost” means that price which the seller actually paid for goods.
  5. “Goods” means all goods, wares, merchandise and other personal property, excepting choses in action and money.
  6. “Person” includes a person, firm, corporation, partnership, association or two (2) or more persons having a joint or common interest.
  7. “Removal sale” means any sale held in such a manner as to induce a belief that upon disposal of the stock of goods on hand, the business will cease and discontinue at the premises where the sale is conducted, and thereafter will be moved to and occupy another location.

History. Enact. Acts 1966, ch. 60, § 1.

Opinions of Attorney General.

Use of the term “fire sale” without complying with the licensing provisions of KRS 365.415 to 365.480 is a violation of this section even though a disclaimer or explanation might appear immediately in conjunction therewith. OAG 75-452 .

Most transient sellers will not be regulated by subsections (1) and (7) of this section which apply to “any sale . . . . . held in such a manner as to induce a belief that upon disposal of the stock of goods on hand, the business will cease and discontinue at the premises where the sale is conducted,” since although a transient seller does induce a belief that at the end of the sale it will cease and discontinue business at the temporary premises where the sale is conducted, there is generally no induced belief that the duration of the sale is dependent upon the then present stock of goods; the limiting factor is generally time only, and should the first days of the sale be unexpectedly successful so that the stock requires replenishing to meet the expected demands of the later sale days, the consumers would expect such replenishment be made; likewise the consumers generally are not induced by such sellers to believe that the advertised sale will continue past the stated closing date even if the seller continues to have a high inventory. OAG 79-110 .

The requirements of KRS 365.410 to KRS 365.480 apply whether the business has been established for a number of years or whether the business is a transient vendor simply setting up in a local motel for a sale of limited duration, as this section makes no differentiation between them. OAG 79-110 .

365.415. License requirement for fire, removal, and certain other sales.

No person shall advertise, represent or hold out to the public that any sale of goods is an insurance, bankruptcy, mortgage foreclosure, insolvent’s, assignee’s, executor’s, administrator’s, receiver’s, trustee’s, removal sale, going out of business sale or fire sale unless he first obtains a license to conduct the sale from the county clerk of the county in which he proposes to conduct the sale.

History. Enact. Acts 1966, ch. 60, § 2; 1978, ch. 384, § 493, effective June 17, 1978.

Compiler’s Notes.

No change was made in this section by the 1978 amendment.

365.420. Application for license — Bond.

Any person proposing to conduct any sale governed by KRS 365.410 to 365.480 and 365.992 shall file an application in writing and under oath with the county clerk setting out the following facts and information regarding the proposed sale:

  1. The name and address of the applicant for the license, who shall be the owner of the goods to be sold. If the applicant is a partnership, corporation, firm, or association, the name, position, and address of all partners or officers, the address of the principal office within the state, the date and place of incorporation or organization, and whether controlling interest in the firm or business was transferred within the twelve (12) months prior to the date of the filing of the application.
  2. The name and style in which the sale is to be conducted, and the address of the premises where the sale is to be conducted.
  3. The dates and period of time during which the sale is to be conducted.
  4. The name and address of the person who will be in charge and responsible for the conduct of the sale.
  5. The nature of the occupancy where the sale is to be held, whether by lease or otherwise, and the effective date of termination of the occupancy.
  6. A full explanation with regard to the condition or necessity which is the occasion for the sale, including a statement of the descriptive name of the sale and the reasons why the name is truthfully descriptive of the sale. If the application is for a license to conduct a removal sale, it shall also contain a statement setting forth the location of the premises to which the business is to be moved. If the application is for a license to conduct a fire sale, it shall contain a statement as to the time, location and cause of the damage.
  7. A full, detailed and complete inventory of the goods that are to be sold, which inventory shall:
    1. Itemize the goods to be sold and contain sufficient information concerning each item or class of items, to clearly identify them. That information shall include, but not be limited to, the quantity, make, brand name, model, and manufacturer’s number, if applicable. The itemization shall be set out in forms prescribed by the Attorney General pursuant to administrative regulation. The Attorney General may design a particularized form to be used for businesses that because of their nature or the type of merchandise offered or sold are better suited to the use of a specialized form.
    2. List separately any goods which were purchased during a ninety (90) day period immediately prior to the date of making application for the license.
    3. Show the cost of each item or class of items of goods and the total retail value of the inventory, together with the name and address of the seller or supplier of the items to the applicant, the date of the purchase, and the date of the delivery of each item to the applicant. The cost listed shall conform with the costs listed on the inventory used for the applicant’s most recent federal income tax return adjusted for sales and purchases; and
  8. Provide a good and sufficient bond, payable to the Commonwealth of Kentucky in the penal sum of one thousand dollars ($1,000), with sureties approved by the court judge, conditioned on compliance with KRS 365.410 to 365.480 and 365.992 and, attached to the bond, a verified statement by the owner or his duly authorized agent:
    1. That the sale is for the purpose designated in the advertising of the sale;
    2. That the inventory contains no goods on consignment or not purchased in the usual course of business for resale, on bona fide orders without cancellation or return privileges;
    3. That no goods will be added to the inventory after the application is made or during the sale;
    4. That the applicant or any person with whom the applicant is or has been associated in the business has not conducted a going out of business sale at the same location within two (2) years prior to the date of filing of the application;
    5. That no means have been established by the applicant for continuation of the business at the same location upon termination of the sale in the case of a going out of business sale; and the business described in such going out of business sale is to be discontinued upon termination of the sale and is not to be continued by the same person, directly or indirectly, by partnership, corporation, or otherwise, under the same name or under a different name at the same location for which the inventory for the sale was filed;
    6. That no goods listed in the inventory have been the subject of a licensed sale conducted within one (1) year prior to the date of the application, unless they were damaged by fire, smoke, or water while in the possession of the applicant.

History. Enact. Acts 1966, ch. 60, § 3; 1978, ch. 384, § 494, effective June 17, 1978; 1994, ch. 305, § 1, effective July 15, 1994.

365.425. Approval of Cabinet for Health and Family Services required.

No application for a going-out-of-business sale shall be accepted by the county clerk if the sale involves foods or drugs damaged by fire or other casualty unless the approval of the Cabinet for Health and Family Services has first been obtained.

History. Enact. Acts 1966, ch. 60, § 18; 1968, ch. 152, § 153; 1974, ch. 74, Art. VI, § 107 (1); 1978, ch. 384, § 495, effective June 17, 1978; 1998, ch. 426, § 572, effective July 15, 1998; 2005, ch. 99, § 617, effective June 20, 2005.

365.430. Issuance of license — Scope of authorization.

  1. The clerk, upon receipt of an application giving fully and completely the information under oath as required by KRS 365.420 and upon receipt of the fee provided for in KRS 365.445 , shall issue a license to the applicant, authorizing the applicant to advertise, represent, and sell the particular goods so inventoried at the time and place stated in the application and in true accordance with the provisions of KRS 365.410 to 365.480 and 365.992 . The license shall be issued in duplicate and shall bear a number and date of its expiration. A license issued under KRS 365.410 to 365.480 and 365.992 shall be granted and valid only for the sale of the inventoried goods which are the property of the licensee. The license shall apply only to the premises specified in the application, and it may not be transferred or assigned. If a licensee under KRS 365.410 to 365.480 and 365.992 is engaged in business in other locations, advertising or offering of goods on behalf of the other locations shall not represent or imply any participation in or cooperation with the sale on the premises specified in the license, nor shall any advertising or other offering of goods on behalf of the premises where the licensed sale is being conducted represent or imply any participation in or cooperation with the sale at other locations. No license under KRS 365.410 to 365.480 and 365.992 shall be issued to any person:
    1. To conduct a sale in the trade name or style of a person in whose goods the applicant for the license has acquired a right or title thereto within twelve (12) months prior to the time of making application for the license.
    2. To continue a sale in the name of a licensee under KRS 365.410 to 365.480 and 365.992 whose goods the applicant acquired a right or title while the sale is in progress.
  2. Paragraphs (a) and (b) of subsection (1) shall not apply to any person who has acquired a right, title, or interest in goods as an heir, devisee, or legatee or pursuant to an order or process of a court of competent jurisdiction.

History. Enact. Acts 1966, ch. 60, § 4; 1994, ch. 305, § 3, effective July 15, 1994.

365.435. Record of licenses — Refusal of license, appeal.

Every clerk to whom application is made, shall indorse upon the application the date of its filing, shall preserve the same as a record of his office, and shall make an abstract of the facts set forth in the application in a book kept for that purpose, properly indexed, containing the name of the person asking such license, the nature of the proposed sale, the place where the sale is to be conducted, its duration, the inventory of the goods to be sold and a general statement as to where the same came from and shall make in the book a notation as to the issuance or refusal of the license applied for together with the date of the same. The clerk shall indorse on the application the date the license is granted or refused, and the application and abstract shall be prima facie evidence of all statements therein contained. If the county clerk refuses to issue the license, the applicant may apply to the county judge/executive for a hearing. The clerk shall notify the county attorney who shall appear in opposition to the issuance of the license.

History. Enact. Acts 1966, ch. 60, § 8; 1978, ch. 384, § 496, effective June 17, 1978.

Opinions of Attorney General.

Where the county clerk refuses to issue a “going out of business” license, the county judge/executive may issue such a license as an executive order to be filed in his executive order book, which is to be maintained by the county clerk. OAG 78-454 .

365.440. Bond held three years, surrendered when.

Every bond given in connection with any sale under KRS 365.410 to 365.480 and 365.992 shall be kept by the county clerk of the county in which the sale is conducted until the expiration of three (3) years from the final date of the sale as filed, and shall then be surrendered to the principal if he has so requested, otherwise to one (1) of the sureties. If at the expiration of three (3) years the clerk has reason to believe a pending court action relates to the bond, he shall retain the bond until final disposition of the action.

History. Enact. Acts 1966, ch. 60, § 15; 1978, ch. 384, § 497, effective June 17, 1978.

365.445. Duration of license — Renewal — Fee.

A license to conduct a sale issued pursuant to KRS 365.410 to 365.480 and 365.992 shall not be issued or valid for a period of more than thirty (30) days from the start of the sale, and the sale may be conducted only during the period set forth in the license. The license may be renewed not more than once for a period not to exceed thirty (30) days upon affidavit of the licensee that all of the goods listed in the inventory have not been disposed of and that no new goods have been or will be added to the inventory previously filed pursuant to KRS 365.410 to 365.480 and 365.992 , by purchase, acquisition on consignment or otherwise. The application for renewal of the license shall be made not more than thirteen (13) days prior to the time of the expiration of the license and shall contain a new inventory of goods remaining on hand at the time the application for renewal is made, which new inventory shall be prepared and furnished in the same manner and form as the original inventory. No renewal shall be granted if any goods have been added to the stock listed in the inventory since the date of the issuance of the license. A fee pursuant to KRS 64.012 shall accompany an application for the license and for each renewal of a license.

History. Enact. Acts 1966, ch. 60, § 6; 1978, ch. 77, § 1, effective June 17, 1978; 2006, ch. 255, § 28, effective January 1, 2007.

Opinions of Attorney General.

The 30-day period for which a license is valid includes Sundays. OAG 69-61 .

365.447. Limitation on acquisition of permits for going out of business sales.

An individual, partnership, corporation, association, or other firm shall not acquire more than two (2) going out of business sale permits during a four (4) year period, excluding renewals awarded pursuant to KRS 365.445 , unless the Attorney General determines after investigation that there is a legitimate business purpose for awarding the applicant a subsequent permit. The Attorney General may charge the applicant the cost of the investigation. The Attorney General shall promulgate administrative regulations setting out the application to be used, the procedures to be followed, and the charges to be assessed the applicant to initiate and conduct the investigation. The procedures to be used shall include a process that meets due process requirements, including an administrative hearing conducted in accordance with KRS Chapter 13B.

History. Enact. Acts 1994, ch. 305, § 4, effective July 15, 1994; 1996, ch. 318, § 346, effective July 15, 1996.

365.450. Federal and judicial requirements to be observed.

No person shall advertise or otherwise represent, for sale, or sell, any goods as a bankruptcy, executor’s, administrator’s, receiver’s, or trustee’s sale, except pursuant to, and in compliance with, federal or state statutory authority or judicial process, or as an assignee’s or insolvent sale except where there is a bona fide assignment for the benefit of creditors.

History. Enact. Acts 1966, ch. 60, § 5.

365.455. Posting of application for license — Advertising regulations.

A copy of the application for a license to conduct a sale under KRS 365.410 to 365.480 and 365.992 , including the inventory filed herewith, shall be posted in a conspicuous place in the sales room or place where the inventoried goods are to be sold, so that the public may be informed of the facts relating to the goods before purchasing same, but the copy need not show the cost price of the goods. The duplicate copy of a license shall be attached to the front door of the premises where the sale is conducted in such a manner that it be clearly visible from the street. All advertising relating to the sale shall prominently state the final date of the sale and the number of the license. All such advertising shall be confined to or refer only to the address and place of business specified in the inventory as to be discontinued.

History. Enact. Acts 1966, ch. 60, § 7.

365.460. Removal of goods from licensed premises — Effect.

Any removal of the goods included in an application from the place of sale mentioned in the application shall cause the goods to become disqualified for inclusion in a going out of business sale, removal sale or fire sale and no license thereafter shall be issued for the conducting of a sale of any of such removed goods at any other place or places.

History. Enact. Acts 1966, ch. 60, § 9.

365.465. Additions to stock for purpose of sale prohibited — Evidence.

No person proposing to conduct an insurance, bankruptcy, mortgage foreclosure, insolvent’s, assignee’s, executor’s, administrator’s, receiver’s, trustee’s, removal sale, going out of business sale, or fire sale under a license as provided in KRS 365.410 to 365.480 and 365.992 shall order any goods for the purpose of selling and disposing of the same at the sale. Any abnormal purchase and additions to the stock of goods within ninety (90) days prior to the filing of the application for a license to conduct the sale shall be presumptive evidence that the purchases and additions to stock were made in contemplation of the sale and for the purpose of selling the same at the sale.

History. Enact. Acts 1966, ch. 60, § 10; 1994, ch. 305, § 2, effective July 15, 1994.

365.470. Additions to stock during sale prohibited.

No person carrying on or conducting an insurance, bankruptcy, mortgage foreclosure, insolvent’s, assignee’s, executor’s, administrator’s, receiver’s, trustee’s, removal sale, going out of business sale, or fire sale under a license as provided in KRS 365.410 to 365.480 and 365.992 shall add, during the continuance of the sale any goods to the stock of goods included in his original application for the license or sell any such added goods. Every addition of goods to the inventory included in the original application and each sale of goods not so included in the application, shall constitute a separate offense under KRS 365.410 to 365.480 and 365.992 , and shall void any license issued to conduct a sale under KRS 365.410 to 365.480 and 365.992.

History. Enact. Acts 1966, ch. 60, § 11.

365.475. Law inapplicable to judicial or farm sales.

The provisions of KRS 365.410 to 365.480 and 365.992 shall not apply to sheriffs, constables, or other public or court officers, or to any other person or persons acting under the direction or authority of any court, state or federal, selling goods, wares or merchandise in the course of their official duties. Nor shall the provisions of KRS 365.410 to 365.480 and 365.992 apply to any bona fide farmer who holds any complete or partial dispersement sale of any land, farm machinery, livestock or any other farm implements or produce.

History. Enact. Acts 1966, ch. 60, § 16.

365.480. Injunctive relief — Civil penalty.

  1. The Attorney General may enforce the provisions of KRS 365.410 to 365.480 and 365.992 by civil action for injunctive relief in any court of competent jurisdiction. In such action to obtain said injunction it shall be sufficient to allege and prove that a violation of KRS 365.410 to 365.480 and 365.992 has occurred or is about to occur, and it shall not be necessary to allege or prove that any person has been misled or deceived by any advertisement or sale, or that any person has been damaged or sustained any loss as a result of any violation of KRS 365.410 to 365.480 and 365.992.
  2. When KRS 365.410 to 365.480 and 365.992 are enforced by the Attorney General through civil action, he may ask for and the court may assess a civil penalty for the benefit of the Commonwealth, not to exceed the sum of two thousand dollars ($2,000), said civil penalty to be in lieu of all penalties set forth in KRS 365.992 .

History. Enact. Acts 1966, ch. 60, § 17.

Advertising of Sales at Wholesale

365.490. Definitions.

As used in KRS 365.490 to 365.510 and 365.993 :

  1. “Wholesale” means to sell in quantity or bulk for purpose of resale at retail.
  2. “Wholesale price” means the price fixed on goods, wares or merchandise by one who buys in large quantities of the producer or manufacturer, and who sells the same in quantity or bulk to retail dealers for purpose of resale.

History. Enact. Acts 1966, ch. 204, § 1.

Research References and Practice Aids

Kentucky Law Journal.

Hodge and Snyder, Can the Kentucky Consumer Ever Forget Caveat Emptor and Find True Happiness?, 58 Ky. L.J. 325 (1970).

365.495. Advertising of sales at wholesale regulated.

No seller or transferor of any goods, wares or merchandise shall advertise, claim or imply that any sale or other transfer of goods, wares or merchandise is a sale or transfer at wholesale or at a wholesale price unless the sale or transfer is made to a transferee for resale and unless the transferee has a seller’s permit to do business pursuant to KRS 139.240 . Nothing in KRS 365.490 to 365.510 and 365.993 shall prohibit a licensed wholesaler from making any sale to an individual.

History. Enact. Acts 1966, ch. 204, § 2.

Opinions of Attorney General.

The provisions of this section do apply to advertisements which are broadcasted in or into Kentucky on radio or television and advertisements purchased in newspapers circulated in Kentucky by a foreign corporation whose sales location or showroom is located in a foreign state; this section is not an unconstitutional burden on interstate commerce and the advertising activities fall within the provisions of the Kentucky long-arm statute, KRS 454.210(2)(a). OAG 80-397 .

Research References and Practice Aids

Cross-References.

False advertising, Penal Code, KRS 517.030 .

365.500. Use of word wholesaler in business name, regulations.

No person engaged in selling goods, wares or merchandise to individual consumers, shall incorporate in his business name or otherwise use in describing his business, the word wholesaler or any synonym therefor unless the person is in fact engaged in the wholesale business in addition to his business of selling goods, wares or merchandise to individual consumers. Where a person is engaged in wholesaling, and is in addition engaged in making sales to individual consumers, he shall not advertise, represent or imply, directly or indirectly, in connection with sales to individual consumers, that the selling price is other than a retail price unless the sale is for resale.

History. Enact. Acts 1966, ch. 204, § 3.

Opinions of Attorney General.

No person may use the word “wholesale” or “wholesaler” in his advertisements even if the words are part of the trade name or corporate name unless he is in fact engaged in sales in quantity or bulk for purposes of resale at retail; if a person is engaged in wholesaling as well as retail sales to individual customers, his advertisements must clearly indicate that the selling price to individual consumers is a retail price. OAG 80-397 .

365.505. Attorney General to enforce — Injunctive relief — Civil penalty.

  1. The Attorney General may enforce the provisions of KRS 365.490 to 365.510 and 365.993 by civil action for injunctive relief in any court of competent jurisdiction. In such action to obtain said injunction it shall be sufficient to allege and prove that a violation of KRS 365.490 to 365.510 and 365.993 has occurred, and it shall not be necessary to allege or prove that any person has been misled or deceived by said advertisement, claim or implication or that any person has been damaged or sustained any loss as a result of any violation of KRS 365.490 to 365.510 and 365.993.
  2. When KRS 365.490 to 365.510 and 365.993 are enforced by the Attorney General through civil action, he may ask for and the court may assess a civil penalty for the benefit of the Commonwealth, not to exceed the sum of $2,000, said civil penalty to be in lieu of all penalties set forth in KRS 365.993 .
  3. Nothing contained herein shall prevent any person who is threatened with loss or who has been damaged by reason of a violation of KRS 365.490 to 365.510 and 365.993 , to sue for injunctive relief to prevent damages, or to recover damages sustained as a result of said violation. In order to obtain injunctive relief, it shall not be necessary to allege or prove that an adequate remedy at law does not exist.

History. Enact. Acts 1966, ch. 204, § 6.

365.510. Applicability of law.

KRS 365.490 to 365.510 and 365.993 does not apply to persons engaged in selling goods, wares or merchandise to persons engaged in the construction business.

History. Enact. Acts 1966, ch. 204, § 4.

Trademarks and Service Marks

365.560. Definitions. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 230, § 1) was repealed by Acts 1994, ch. 468, § 18, effective July 15, 1994.

Section 19 of Acts 1994, ch. 468 provided that: “Any application, suit, proceeding, or appeal arising before July 15, 1994 shall be governed by KRS 365.560 to 365.625 which is repealed pursuant to Section 18 of this Act. For the purpose of a pending application, suit, proceeding or appeal, only, KRS 365.560 to 365.625 shall be deemed to be effective until a final decision is made on that application, suit, proceeding, or appeal.”

365.561. Legislative intent.

The General Assembly in enacting KRS 365.561 to 365.613 intends to provide a system of state trademark registration and protection substantially consistent with the federal system of trademark registration and protection under the Trademark Act of 1946, as amended. The construction given the federal act shall be examined as persuasive authority for interpreting and constructing KRS 365.561 to 365.613 .

History. Enact. Acts 1994, ch. 468, § 17, effective July 15, 1994.

Research References and Practice Aids

Northern Kentucky Law Review.

General Law Issue: Article: On Nontraditional Trademarks, 38 N. Ky. L. Rev. 1 (2011).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Trademarks and Trade names, § 199.00.

365.563. Definitions for KRS 365.561 to 365.613.

As used in KRS 365.561 to 365.613 , unless the context otherwise requires:

  1. “Trademark” means any word, name, symbol or device including, but not limited to, a distinctive package or container of any kind, or any combination of these, used by a person to identify and distinguish the goods of that person, including a unique product, from those manufactured or sold by others, and to indicate the source of the goods, even if that source is unknown.
  2. “Service mark” means any word, name, symbol or device or any combination of these, used by a person to identify and distinguish the services of one (1) person, including a unique service, from the services of others, and to indicate the source of the services, even if that source is unknown. Titles, character names used by a person, and other distinctive features of radio or television programs may be registered as service marks notwithstanding that they, or the programs, advertise the goods of the sponsor.
  3. “Mark” includes any trademark or service mark entitled to registration under KRS 365.561 to 365.613 , whether registered or not.
  4. “Trade name” means any name used by a person to identify his business or vocation.
  5. “Person” and any other word or term used to designate the applicant or other party entitled to a benefit or privilege or rendered liable under the provisions of KRS 365.561 to 365.613 means a juristic person as well as a natural person. The term “juristic person” includes a firm, partnership, corporation, union, association, or other organization capable of suing and being sued in a court of law.
  6. “Applicant” means the person filing an application for registration of a mark under KRS 365.561 to 365.613 , and the legal representatives, successors, or assigns of that person.
  7. “Registrant” means the person to whom the registration of a mark under KRS 365.561 to 365.613 is issued, and the legal representatives, successors, or assigns of that person.
  8. “Use” means the bona fide use of a mark in the ordinary course of trade, and not made merely to reserve a right in a mark. For the purposes of KRS 365.561 to 365.613 , a mark shall be deemed to be in use:
    1. On goods when it is placed in any manner on the goods or on containers or displays associated with the goods or on tags or labels affixed to the goods, or if the nature of the goods makes placement on the goods impracticable, then on documents associated with the goods or their sale, and the goods are sold or transported in commerce in this state; and
    2. When it is used or displayed in the sale or advertising of services and the services are rendered in this state.
  9. A mark shall be deemed to be “abandoned” when:
    1. Its use has been discontinued with intent not to be resumed. Intent not to resume may be inferred from circumstances. Nonuse for two (2) consecutive years shall constitute a rebuttable presumption of abandonment; or
    2. Any course of conduct of the owner, including acts of omission and commission, causes the mark to lose its significance as a mark.
  10. “Secretary” means the Secretary of State or the designee charged by him with the administration of KRS 365.561 to 365.613 .

History. Enact. Acts 1994, ch. 468, § 1, effective July 15, 1994.

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Trademarks and Trade names, § 199.00.

365.565. Application for registration of mark — Filing fee. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 230, § 3) was repealed by Acts 1994, ch. 468, § 18, effective July 15, 1994.

Section 19 of Acts 1994, ch. 468 provided that: “Any application, suit, proceeding, or appeal arising before July 15, 1994 shall be governed by KRS 365.560 to 365.625 which is repealed pursuant to Section 18 of this Act. For the purpose of a pending application, suit, proceeding or appeal, only, KRS 365.560 to 365.625 shall be deemed to be effective until a final decision is made on that application, suit, proceeding, or appeal.”

365.567. Registrability.

A mark by which the goods or services of any applicant for registration may be distinguished from the goods or services of others shall not be registered pursuant to KRS 365.567 to 365.581 if it:

  1. Consists of or comprises immoral, deceptive, or scandalous matter;
  2. Consists of or comprises matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt or disrepute;
  3. Consists of or comprises the flag or coat of arms or other insignia of the United States, any state or municipality, any foreign nation, or any simulation of the insignia;
  4. Consists of or comprises the name, signature, or portrait of a particular living individual, except by the individual’s written consent; or
  5. Consists of a mark which when used on or in connection with the goods or services of the applicant:
    1. Is merely descriptive or deceptively misdescriptive of them;
    2. Is primarily geographically descriptive or deceptively misdescriptive of the goods or services; or
    3. Is primarily merely a surname.

      However, nothing in this subsection shall prevent the registration of an applicant’s mark which has become distinctive of the applicant’s goods or services. The Secretary may accept proof of continuous use as evidence that the mark has become distinctive if the mark has been used by the applicant in this state for the five (5) years immediately preceding the date on which the claim of distinctiveness is made; or

  6. Consists of or comprises a mark so resembling a mark registered in this state or a mark or trade name previously used in this state by another that has not been abandoned, as to be likely, when used on or in connection with the goods or services of the applicant, to cause confusion or mistake or to deceive.

History. Enact. Acts 1994, ch. 468, § 2, effective July 15, 1994.

NOTES TO DECISIONS

1.Name In Use At Time of Registration.

Plaintiff was using the name in Kentucky at the time the defendant registered its name. Therefore, registration was improperly granted and had to be canceled. Advance Stores Co. v. Refinishing Specialities, Inc., 948 F. Supp. 643, 1996 U.S. Dist. LEXIS 18879 (W.D. Ky. 1996 ), aff’d, Advance Stores Co. v. Refinishing Specialties, Inc., 188 F.3d 408, 1999 FED App. 302P, 1999 FED App. 0302P, 51 U.S.P.Q.2d (BNA) 1785,,, 1999 U.S. App. LEXIS 18871 (6th Cir. Ky. 1999 ).

2.Mark Abandoned by Acquiescence.

Under former law (KRS 565.575(6)), similar to subsection (6) of this section, providing that a mark shall not be registered if it resembles a previously registered mark used in Kentucky, not abandoned, which will likely, when applied to the goods or service of the applicants, cause confusion or mistake, defendant and senior user’s acquiescence in plaintiff and junior user’s acquiring a service mark in certain geographic areas met the requirement that the senior trademark had been abandoned in those areas. (decided under prior law) King Bearings v. King, 882 F. Supp. 630, 1994 U.S. Dist. LEXIS 20173 (W.D. Ky. 1994 ).

365.570. Certificate of registration issued when — Effect. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 230, § 4) was repealed by Acts 1994, ch. 468, § 18, effective July 15, 1994.

Section 19 of Acts 1994, ch. 468 provided that: “Any application, suit, proceeding, or appeal arising before July 15, 1994 shall be governed by KRS 365.560 to 365.625 which is repealed pursuant to Section 18 of this Act. For the purpose of a pending application, suit, proceeding or appeal, only, KRS 365.560 to 365.625 shall be deemed to be effective until a final decision is made on that application, suit, proceeding, or appeal.”

365.571. Application for registration.

  1. Subject to the limitations set forth in KRS 365.561 to 365.613 , any person who uses a mark in this state may file an application for registration of that mark in the office of the Secretary, in a manner prescribed by the Secretary as set out in administrative regulations promulgated by the Secretary. The filing shall include, but not be limited to, the following:
    1. The name and business address of the person applying for the registration and, if a corporation, the state of incorporation, or if a partnership, the state in which the partnership is organized and the names of the general partners;
    2. The goods or services on or in connection with which the mark is used, the mode or manner in which the mark is used on or in connection with the goods or services, and the class comprising the goods or services;
    3. The date when the mark was first used anywhere and the date when it was first used in this state by the applicant or his predecessor-in-interest; and
    4. A statement that the applicant is the owner of the mark, that the mark is in use in this state, and that, to the knowledge of the person verifying the application, no other person has registered, either federally or in this state, or has the right to use the mark in this state in an identical form or in such near resemblance as to be likely, when used on or in connection with the goods or services of the other person, to cause confusion or mistake, or to deceive.
  2. The Secretary may require a statement as to whether any applications to register the mark or portions or a composite of it have been filed by the applicant or his predecessor-in-interest in the United States Patent and Trademark Office. The Secretary may require applicants who have or whose predecessors have filed with the United States Patent and Trademark Office to include the filing date and serial number of each application, the status of the application and, whether the application was finally refused registration or has otherwise not resulted in a registration and the reasons therefor.
  3. The Secretary may also require that a drawing of the mark, complying with requirements specified by the Secretary, accompany the application.
  4. The application shall be signed by the applicant or a person authorized to sign on behalf of the applicant. The application shall contain a statement, under oath, that the information provided is true, complete and correct. Any person who makes a material false statement which he does not believe to be true in the application shall be in violation of KRS 523.030 .
  5. The application shall be accompanied by three (3) specimens showing the mark as actually used.
  6. The application shall be accompanied by an application fee of ten dollars ($10), payable to the Secretary.

History. Enact. Acts 1994, ch. 468, § 3, effective July 15, 1994.

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Trademarks and Trade names, § 199.00.

365.573. Filing of applications.

  1. Upon the filing of an application for registration and payment of the application fee prescribed in KRS 365.571 , the Secretary may cause the application to be examined for conformity with KRS 365.561 to 365.613 .
  2. The applicant shall provide any additional pertinent information requested by the Secretary, including a description of the design mark, and may make, or authorize the Secretary to make any amendments to the application as are reasonably requested by the Secretary, or deemed advisable by the applicant to respond to any rejection or objection.
  3. The Secretary may require the applicant to disclaim exclusive rights in an unregistrable component of a mark otherwise registrable, and an applicant may voluntarily disclaim a component of a mark sought to be registered. No disclaimer shall prejudice or affect the applicant’s or registrant’s rights then existing or thereafter arising in the disclaimed matter, or the applicant’s or registrant’s rights of registration under another application if the disclaimed matter has become distinctive of the applicant’s or registrant’s goods or services.
  4. The Secretary may amend the application with the applicant’s agreement or may require a substitute application to be submitted.
  5. The Secretary shall advise the applicant if he is not entitled to registration and state the reasons for the decision. The applicant shall have a reasonable period of time as set out in administrative regulations promulgated by the Secretary, in which to reply to or amend the application, in which event the application shall then be reexamined. This procedure may be repeated until:
    1. The Secretary finally refuses registration of the mark; or
    2. The applicant fails to reply to or amend the application within the specified period, whereupon the application shall be deemed to have been withdrawn.
  6. If the Secretary finally refuses registration of the mark, the applicant may appeal the decision to the Franklin Circuit Court. The court may summarily order the Secretary to register the mark on proof that all the statements in the application are true and that the mark is otherwise entitled to registration. The Secretary of State shall not be liable for any court costs. The court’s final decision may be appealed as in other civil proceedings.
  7. If two (2) or more applications are concurrently being processed by the Secretary seeking registration of the same or confusingly similar marks for the same or related goods or services, the Secretary shall grant priority to the applications in the order of filing. If a prior-filed application is granted a registration, the other applications shall then be rejected. Any rejected applicant may bring an action for cancellation of the registration on grounds of prior or superior rights to the mark, in accordance with the provisions of KRS 365.591 .

History. Enact. Acts 1994, ch. 468, § 4, effective July 15, 1994.

365.575. Marks not to be registered. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 230, § 2) was repealed by Acts 1994, ch. 468, § 18, effective July 15, 1994.

Section 19 of Acts 1994, ch. 468 provided that: “Any application, suit, proceeding, or appeal arising before July 15, 1994 shall be governed by KRS 365.560 to 365.625 which is repealed pursuant to Section 18 of this Act. For the purpose of a pending application, suit, proceeding or appeal, only, KRS 365.560 to 365.625 shall be deemed to be effective until a final decision is made on that application, suit, proceeding, or appeal.”

365.577. Certificate of registration.

  1. Upon the applicant’s compliance with the requirements of KRS 365.561 to 365.613 , the Secretary shall cause a certificate of registration to be issued and delivered to the applicant. The certificate of registration shall be issued under the signature of the Secretary and the seal of the state, and it shall show the registrant’s name and business address and, if the registrant is a corporation, the state of incorporation, or if a partnership, the state in which the partnership is organized, the names of the general partners, the person claiming ownership of the mark, the date claimed for the first use of the mark anywhere, the date claimed for the first use of the mark in this state, the class of goods or services, a description of the goods or services on or in connection with which the mark is used, a reproduction of the mark, the registration date, and the term of the registration.
  2. Any certificate of registration issued pursuant to this section or a copy of the certificate duly certified by the Secretary shall be admissible in evidence as competent and sufficient proof of the registration of the mark in any actions or judicial proceedings in any court of this state.

History. Enact. Acts 1994, ch. 468, § 5, effective July 15, 1994.

365.580. Mark not to include different classes of goods. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 230, § 10) was repealed by Acts 1994, ch. 468, § 18, effective July 15, 1994.

Section 19 of Acts 1994, ch. 468 provided that: “Any application, suit, proceeding, or appeal arising before July 15, 1994 shall be governed by KRS 365.560 to 365.625 which is repealed pursuant to Section 18 of this Act. For the purpose of a pending application, suit, proceeding or appeal, only, KRS 365.560 to 365.625 shall be deemed to be effective until a final decision is made on that application, suit, proceeding, or appeal.”

365.581. Duration and renewal.

  1. A registration of a mark pursuant to KRS 365.561 to 365.613 shall be effective for a term of five (5) years from the date of registration and, may be renewed for a like term upon application filed within six (6) months prior to the expiration of the term, in a manner complying with the requirements of the Secretary as set out in administrative regulation. A renewal fee of five dollars ($5), payable to the Secretary, shall accompany the application for renewal of the registration.
  2. A registration may be renewed for successive periods of five (5) years in this manner.
  3. The Secretary of State shall notify registrants of the necessity of renewing their registrations at least six (6) months prior to their pending expiration by writing to the last known address of the registrants.
  4. Any registration in effect on July 15, 1994, shall continue in effect for the remainder of the unexpired term and may be renewed by filing an application for renewal with the Secretary, if the application for renewal complies with the requirements of the Secretary as set out in administrative regulations and is accompanied by the renewal fee prescribed in subsection (1) of this section and submitted within six (6) months prior to the expiration of the registration.
  5. All applications for renewal pursuant to this section, whether of registrations made under KRS 365.561 to 365.613 or of registrations effected under any prior state law, shall include a verified statement that the mark has been and is still in use, and include a specimen showing actual use of the mark on or in connection with the goods or services.

History. Enact. Acts 1994, ch. 468, § 6, effective July 15, 1994.

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Trademarks and Trade names, § 199.00.

365.583. Assignments, changes of name, and other instruments.

  1. Any mark and its registration or application pursuant to KRS 365.561 to 365.613 shall be assignable with the goodwill of the business in which the mark is used, or with that part of the goodwill of the business connected with the use of and symbolized by the mark. An assignment shall be in writing, duly executed, and may be recorded with the Secretary upon the payment to the Secretary of a recording fee of five dollars ($5). The Secretary shall issue in the name of the assignee of a registration a new certificate for the remainder of the term of the registration or renewal period. An assignment of any registration shall be void as against any subsequent purchaser for valuable consideration without notice, unless it is recorded with the Secretary within three (3) months after the date of the assignment or prior to the subsequent purchase.
  2. Any registrant or applicant may record a certificate of change of name of the registrant or applicant with the Secretary upon the payment of the recording fee prescribed in subsection (1) of this section. The Secretary may issue in the name of the assignee a certificate of registration of an assigned application or a new certificate or registration for the remainder of the term of the registration or last renewal.
  3. Other instruments relating to a registered mark or a pending application for registration, for example, licenses, security interests, or mortgages, may be recorded in the discretion of the Secretary, if the instrument is in writing and duly executed.
  4. Acknowledgement shall constitute a rebuttable presumption that an assignment or other instrument was executed and, when recorded by the Secretary, that record shall constitute a rebuttable presumption of execution.
  5. A photocopy of any instrument referred to in subsections (1), (2), or (3) of this section shall be accepted for recording if it is certified by any of the parties to the instrument or their successors as a true and correct copy of the original.

History. Enact. Acts 1994, ch. 468, § 7, effective July 15, 1994.

365.585. Duration of registration — Renewal — Fee. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 230, § 5) was repealed by Acts 1994, ch. 468, § 18, effective July 15, 1994.

Section 19 of Acts 1994, ch. 468 provided that: “Any application, suit, proceeding, or appeal arising before July 15, 1994 shall be governed by KRS 365.560 to 365.625 which is repealed pursuant to Section 18 of this Act. For the purpose of a pending application, suit, proceeding or appeal, only, KRS 365.560 to 365.625 shall be deemed to be effective until a final decision is made on that application, suit, proceeding, or appeal.”

365.587. Records.

The Secretary shall keep for public examination a record of all marks registered, renewed, or recorded under KRS 365.561 to 365.613 .

History. Enact. Acts 1994, ch. 468, § 8, effective July 15, 1994.

365.590. Assignment of marks — Fee — Recording, effect. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 230, § 6) was repealed by Acts 1994, ch. 468, § 18, effective July 15, 1994.

Section 19 of Acts 1994, ch. 468 provided that: “Any application, suit, proceeding, or appeal arising before July 15, 1994 shall be governed by KRS 365.560 to 365.625 which is repealed pursuant to Section 18 of this Act. For the purpose of a pending application, suit, proceeding or appeal, only, KRS 365.560 to 365.625 shall be deemed to be effective until a final decision is made on that application, suit, proceeding, or appeal.”

365.591. Cancellation.

The Secretary shall cancel from the register, in whole or in part:

  1. Any registration concerning which the Secretary receives a voluntary request for cancellation from the registrant or the assignee of record;
  2. All registrations granted under KRS 365.561 to 365.613 and not renewed in accordance with those provisions;
  3. Any registration concerning which a court of competent jurisdiction has found:
    1. That the registered mark has been abandoned;
    2. That the registrant is not the owner of the mark;
    3. That the registration was granted improperly;
    4. That the registration was obtained fraudulently;
    5. That the mark is or has become the generic name for the goods or services, or a portion of the goods or services for which it has been registered; or
    6. That the registered mark is so similar to a mark registered by another person in the United States Patent and Trademark Office prior to the date of the filing of the registrant’s application and not abandoned as to likely cause confusion or mistake, or to deceive. If the registrant proves that he is the owner of a concurrent registration of a mark in the United States Patent and Trademark Office covering an area including this state, the registration granted pursuant to KRS 365.561 to 365.613 shall not be canceled for that area of the state; or
  4. Any registration for which a court of competent jurisdiction orders cancellation on any ground.

History. Enact. Acts 1994, ch. 468, § 9, effective July 15, 1994.

NOTES TO DECISIONS

1.Similar Mark.

Defendant registered a mark so similar to one previously registered by plaintiffs with the U.S. Patent and Trademark Office so as to cause confusion and for that reason defendant’s state registration had to be canceled. Advance Stores Co. v. Refinishing Specialities, Inc., 948 F. Supp. 643, 1996 U.S. Dist. LEXIS 18879 (W.D. Ky. 1996 ), aff’d, Advance Stores Co. v. Refinishing Specialties, Inc., 188 F.3d 408, 1999 FED App. 302P, 1999 FED App. 0302P, 51 U.S.P.Q.2d (BNA) 1785,,, 1999 U.S. App. LEXIS 18871 (6th Cir. Ky. 1999 ).

365.593. Classification.

The Secretary shall promulgate administrative regulations establishing a system for classifying goods and services for purposes of administering KRS 365.561 to 365.613 . This system shall not limit or extend the applicant’s or registrant’s rights. An application for registration of a mark may include any or all goods upon which, or services with which, the mark is actually being used indicating the appropriate class or classes of goods or services. When a single application includes goods or services falling in multiple classes, the Secretary may require payment of the application fee of ten dollars ($10) for each class. To the extent practical, the classification of goods and services shall conform to the classification adopted by the United States Patent and Trademark Office.

History. Enact. Acts 1994, ch. 468, § 10, effective July 15, 1994.

365.595. Public record of marks. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 230, § 7) was repealed by Acts 1994, ch. 468, § 18, effective July 15, 1994.

Section 19 of Acts 1994, ch. 468 provided that: “Any application, suit, proceeding, or appeal arising before July 15, 1994 shall be governed by KRS 365.560 to 365.625 which is repealed pursuant to Section 18 of this Act. For the purpose of a pending application, suit, proceeding or appeal, only, KRS 365.560 to 365.625 shall be deemed to be effective until a final decision is made on that application, suit, proceeding, or appeal.”

365.597. Fraudulent registration.

Any person who on behalf of himself or any other person, procures the filing or registration of any mark in the office of the Secretary pursuant to KRS 365.561 to 365.613 by knowingly making any false or fraudulent representation or declaration, orally or in writing, or by any other fraudulent means, shall be liable to pay all damages sustained in consequence of such filing or registration, to be recovered by or on behalf of the party adjudged injured by any court of competent jurisdiction.

History. Enact. Acts 1994, ch. 468, § 11, effective July 15, 1994.

365.600. Cancellation of registrations, when authorized. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 230, § 9) was repealed by Acts 1994, ch. 468, § 18, effective July 15, 1994.

Section 19 of Acts 1994, ch. 468 provided that: “Any application, suit, proceeding, or appeal arising before July 15, 1994 shall be governed by KRS 365.560 to 365.625 which is repealed pursuant to Section 18 of this Act. For the purpose of a pending application, suit, proceeding or appeal, only, KRS 365.560 to 365.625 shall be deemed to be effective until a final decision is made on that application, suit, proceeding, or appeal.”

365.601. Infringement.

Subject to the provisions of KRS 365.611 , any person who:

  1. Uses, without the consent of the registrant, any reproduction, counterfeit, copy, or colorable imitation of a mark registered under KRS 365.561 to 365.613 , or under KRS 365.560 to 365.625 prior to their repeal, in connection with the sale, distribution, offering for sale, or advertising of any goods or services which is likely to cause confusion or mistake or to deceive as to the source or origin of the goods or services; or
  2. Reproduces, makes, counterfeits, copies or colorably imitates any mark and applies the reproduction, counterfeit, copy, or colorable imitation to labels, signs, prints, packages, wrappers, receptacles, or advertisements intended to be used upon or in connection with the sale or other distribution in this state of the goods or services;

shall be liable in a civil action by the registrant for any of the remedies provided in KRS 365.603 , except that under subsection (2) of this section, the registrant shall not be entitled to recover profits or damages unless the acts have been committed with the intent to cause confusion or mistake or to deceive.

History. Enact. Acts 1994, ch. 468, § 12, effective July 15, 1994.

Compiler’s Notes.

KRS 365.560 and 365.625 referred to in this section have been repealed.

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint to Enjoin Use of Trade Name and to Recover Damages, Form 199.01.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

365.603. Remedies.

  1. Any owner of a mark registered under KRS 365.561 to 365.613 , or under KRS 365.560 to 365.625 prior to their repeal, may seek to enjoin the manufacture, use, display, or sale of any counterfeits or imitations of the mark in any court of competent jurisdiction. The court may require the defendants to pay to that owner all profits derived from or all damages suffered by reason of the wrongful manufacture, use, display, or sale of the mark. The court may also order that any counterfeits or imitations in the possession or under the control of the defendant be delivered to an officer of the court or the complainant or be destroyed. The court may enter judgment for an amount not to exceed three (3) times the profits or damages, and may require reasonable attorney’s fees to be paid to the prevailing party if the court finds the other party committed the wrongful acts with knowledge or in bad faith or otherwise according to the circumstances of the case.
  2. Any right or remedy granted pursuant to KRS 365.561 to 365.613 shall not affect a registrant’s right to pursue any remedies available to him under any criminal laws of this state.

History. Enact. Acts 1994, ch. 468, § 13, effective July 15, 1994.

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint to Enjoin Use of Trade Name and to Recover Damages, Form 199.01.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

365.605. Revolving fund for fees. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 230, § 8) was repealed by Acts 1994, ch. 468, § 18, effective July 15, 1994.

Section 19 of Acts 1994, ch. 468 provided that: “Any application, suit, proceeding, or appeal arising before July 15, 1994 shall be governed by KRS 365.560 to 365.625 which is repealed pursuant to Section 18 of this Act. For the purpose of a pending application, suit, proceeding or appeal, only, KRS 365.560 to 365.625 shall be deemed to be effective until a final decision is made on that application, suit, proceeding, or appeal.”

365.607. Forum for actions regarding registration — Service on out-of-state registrants.

  1. Actions to require cancellation of a mark registered pursuant to KRS 365.561 to 365.613 or to compel registration of a mark pursuant to KRS 365.561 to 365.613 shall be brought in the Franklin Circuit Court. In an action to compel registration, the proceeding shall be based solely upon the record before the Secretary. In an action for cancellation, the Secretary shall not be made a party to the proceeding but shall be notified of the filing of the complaint by the clerk of the Franklin Circuit Court and shall be given the right to intervene in the action.
  2. In any action brought against a nonresident registrant, service may be effected upon the Secretary as agent for service of the registrant in accordance with the procedures established for service upon nonresident corporations and business entities under KRS 454.210(3).

History. Enact. Acts 1994, ch. 468, § 14, effective July 15, 1994.

365.610. Procuring registration by fraud, liability. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 230, § 11) was repealed by Acts 1994, ch. 468, § 18, effective July 15, 1994.

Section 19 of Acts 1994, ch. 468 provided that: “Any application, suit, proceeding, or appeal arising before July 15, 1994 shall be governed by KRS 365.560 to 365.625 which is repealed pursuant to Section 18 of this Act. For the purpose of a pending application, suit, proceeding or appeal, only, KRS 365.560 to 365.625 shall be deemed to be effective until a final decision is made on that application, suit, proceeding, or appeal.”

365.611. Common law rights.

Nothing set out in KRS 365.561 to 365.613 shall adversely affect the rights or the enforcement of rights in marks acquired in good faith at any time at common law.

History. Enact. Acts 1994, ch. 468, § 15, effective July 15, 1994.

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

365.613. Fees not refundable.

Unless otherwise specified in KRS 365.561 to 365.613 and regulations promulgated pursuant to those sections, the fees payable under KRS 365.561 to 365.613 are not refundable.

History. Enact. Acts 1994, ch. 468, § 16, effective July 15, 1994.

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Trademarks and Trade names, § 199.00.

365.615. Unauthorized use or counterfeiting of mark, liability. [Repealed.]

Compiler’s Notes.

This section (Enact Acts 1966, ch. 230, § 12) was repealed by Acts 1994, ch. 468, § 18, effective July 15, 1994.

Section 19 of Acts 1994, ch. 468 provided that: “Any application, suit, proceeding, or appeal arising before July 15, 1994 shall be governed by KRS 365.560 to 365.625 which is repealed pursuant to Section 18 of this Act. For the purpose of a pending application, suit, proceeding or appeal, only, KRS 365.560 to 365.625 shall be deemed to be effective until a final decision is made on that application, suit, proceeding, or appeal.”

365.620. Restraint of use or counterfeit of mark. [Repealed.]

Compiler’s Notes.

This section (Enact Acts 1966, ch. 230, § 13) was repealed by Acts 1994, ch. 468, § 18, effective July 15, 1994.

Section 19 of Acts 1994, ch. 468 provided that: “Any application, suit, proceeding, or appeal arising before July 15, 1994 shall be governed by KRS 365.560 to 365.625 which is repealed pursuant to Section 18 of this Act. For the purpose of a pending application, suit, proceeding or appeal, only, KRS 365.560 to 365.625 shall be deemed to be effective until a final decision is made on that application, suit, proceeding, or appeal.”

365.625. Common-law rights enforceable. [Repealed.]

Compiler’s Notes.

This section (Enact Acts 1966, ch. 230, § 14) was repealed by Acts 1994, ch. 468, § 18, effective July 15, 1994.

Section 19 of Acts 1994, ch. 468 provided that: “Any application, suit, proceeding, or appeal arising before July 15, 1994 shall be governed by KRS 365.560 to 365.625 which is repealed pursuant to Section 18 of this Act. For the purpose of a pending application, suit, proceeding or appeal, only, KRS 365.560 to 365.625 shall be deemed to be effective until a final decision is made on that application, suit, proceeding, or appeal.”

Transient Merchants

365.650. Definitions.

As used in KRS 365.655 to 365.695 unless the context requires otherwise:

  1. “Transient merchant” means any person, firm, corporation, partnership or other entity which engages in, does or transacts any temporary or transient business in the state, either in one (1) locality or in traveling from place to place in the state, offering for sale or selling goods, wares, merchandise or commodities of any kind, and includes those merchants who, for the purpose of carrying on such business, hire, lease, use or occupy any building, structure, motor vehicle or real estate; and
  2. “Temporary or transient business” means any business conducted for the sale or offer for sale of goods, wares or merchandise which is carried on in any building, structure, motor vehicle or real estate in one (1) locality for a period of less than six (6) months in each year.

History. Enact. Acts 1986, ch. 70, § 1, effective July 15, 1986.

365.655. Application of KRS 365.650 to 365.695.

The provisions of KRS 365.650 to 365.695 shall not apply to:

  1. Sales at wholesale to retail merchants by commercial selling agents in the usual course of business;
  2. Wholesale trade shows or conventions;
  3. Sales of goods, wares or merchandise by sample catalogue or brochure for future delivery;
  4. Participants in fairs and convention center activities when the participants’ businesses are conducted primarily for amusement or entertainment;
  5. Any general sale, fair, auction or bazaar sponsored by any religious, educational, public service or charitable organization;
  6. Garage sales held on premises devoted to residential use;
  7. Sales of crafts or items made by hand and sold or offered for sale by the person making such crafts or handmade items;
  8. Sales of locally grown agricultural products;
  9. Sales made by a seller at residential premises pursuant to an invitation issued by the owner or legal occupant of such premises;
  10. Sheriffs, constables, or other public or court officers, or any other person or persons acting under the direction or authority of any court, state or federal, selling goods, wares or merchandise in the course of their official duties;
  11. Flea market vendors who can demonstrate compliance with KRS 139.550 ;
  12. Professions and occupations licensed and regulated by the state when the activities are performed within the scope of their respective statutory and regulatory authority; and
  13. Temporary sales at another location by businesses with a permanent business location within the State of Kentucky.

History. Enact. Acts 1986, ch. 70, § 2, effective July 15, 1986.

365.660. Permit required.

It is unlawful for any transient merchant to transact business in any county of this state unless such merchant and the owners of any goods, wares or merchandise to be offered for sale or sold, if such are not owned by the merchant, shall have first secured a permit and shall have otherwise complied with the requirements of KRS 365.650 to 365.695 .

History. Enact. Acts 1986, ch. 70, § 3, effective July 15, 1986.

365.665. Application for permit.

Any transient merchant desiring to transact business in any county in this state shall make application for and obtain a permit in each county in which the merchant desires to transact business at least ten (10) days prior to transacting business in the county. The application for permit shall be designed and distributed by the Department of Revenue, shall be filed by the transient merchant with the county clerk, or the officer of an urban-county government having the responsibility for the issuance of business permits and licenses generally and shall include but not be limited to the following information:

  1. The name and permanent address of the transient merchant making the application, and if the applicant is a firm or corporation, the name and address of the members of the firm or the officers of the corporation;
  2. If the applicant is a corporation, there shall be stated on the application form the date of incorporation, the state of incorporation, and if the applicant is a corporation formed in a state other than Kentucky, the date on which such corporation qualified to transact business as a foreign corporation in this state;
  3. A statement showing the kind of business proposed to be conducted, the length of time for which the applicant desires to transact such business and the location of the proposed place of business;
  4. An estimate of the aggregate market value of any goods, wares or merchandise to be offered for sale during the permit period;
  5. A statement that the applicant has acquired all other required city, county and state permits and licenses;
  6. The applicant’s sales and use tax permit number or temporary vendor’s registration number, and the Social Security numbers, of all salesmen employed by the applicant, or representing the applicant, in the transaction of business in the Commonwealth of Kentucky;
  7. The name and permanent address of the transient merchant’s registered agent or office; and
  8. Evidence of security as outlined in KRS 365.680 . The absence of any of the above information shall result in the denial of the permit by the county clerk.

History. Enact. Acts 1986, ch. 70, § 4, effective July 15, 1986; 1990, ch. 102, § 2, effective July 13, 1990; 2005, ch. 85, § 691, effective June 20, 2005.

365.670. Duty of county clerk.

The county clerk shall forward a copy of each approved application to the Department of Revenue and to the office of the Attorney General within ten (10) days of approval.

History. Enact. Acts 1986, ch. 70, § 5, effective July 15, 1986; 2005, ch. 85, § 692, effective June 20, 2005.

365.675. Registered agent.

  1. Each registered agent designated by a transient merchant in the application for a permit shall be a resident of the state and shall be agent of the transient merchant upon whom any process, notice, or demand required or permitted by law to be served upon the transient merchant may be served. The registered agent shall agree in writing to act as such agent and a copy of the agreement to so act shall be filed with the application for a permit.
  2. If any transient merchant doing business or having done business in any county within the state shall fail to have or maintain a registered agent in the state or if such registered agent cannot be found at his permanent address, the Secretary of State shall be agent of such transient merchant for service of all process, notices or demands.

History. Enact. Acts 1986, ch. 70, § 6, effective July 15, 1986.

365.680. Permit fee — Bond.

  1. Each application for a transient merchant permit shall be accompanied by a permit fee pursuant to KRS 64.012 , to be retained by the office of the county clerk or the officer of an urban-county government having the responsibility for the issuance of business permits and licenses generally. In addition, any applicant who will be selling goods, wares or merchandise during the permit period which have an aggregate market value of one thousand five hundred dollars ($1,500) or more, shall secure and submit evidence of security, a cash bond or a surety bond in the amount of one thousand dollars ($1,000) or five percent (5%) of the retail value of any goods, wares or merchandise to be offered for sale, whichever sum is greater. Such evidence of security shall be held by the Attorney General and he shall issue a certificate of security to be used by the applicant as evidence of security.
  2. The surety bond required by this section shall be in favor of the Commonwealth of Kentucky and shall assure the payment by the applicant of all taxes that may be due from the applicant to the state or any political subdivision of the state, the payment of any fines that may be assessed against the applicant or its agents or employees for violation of the provisions of KRS 365.650 to 365.695 , and for the satisfaction of all judgments that may be rendered against the transient merchant or its agents or employees in any cause of action commenced by any purchaser of goods, wares or merchandise within one (1) year from the date of the sale by such transient merchant.
  3. The bond shall be maintained so long as the transient merchant conducts business in the Commonwealth of Kentucky and for a period of one (1) year after the termination of such business and shall be released only when the transient merchant furnishes satisfactory proof to the Attorney General that it has satisfied all claims of purchasers of goods, wares or merchandise from such merchant, and that all state and local sales taxes and other taxes have been paid.

History. Enact. Acts 1986, ch. 70, § 7, effective July 15, 1986; 2006, ch. 255, §§ 30, 33, effective January 1, 2007.

Legislative Research Commission Note.

(1/1/2007). This section was amended by 2006 Ky. Acts ch. 255, §§ 30 and 33, which are identical and have been codified together.

365.685. Use of permit — Limits — Display — District Court hearing in case of denial.

A transient business permit shall be used hereunder only when all requirements of KRS 365.650 to 365.695 have been met. Such permit shall not be transferable, shall be valid only within the territorial limits of the issuing county, and shall be valid only for a period of ninety (90) days. A permit so issued shall be valid for only one (1) person, unless such person shall be a member of a partnership or employee of a firm or corporation obtaining such permit. The permit shall at all times be conspicuously displayed at any place that the transient merchant is transacting business. If the county clerk refuses to issue the permit, the applicant may apply to the District Court for a hearing. The clerk shall notify the county attorney who shall appear in opposition to the issuance of the permit.

History. Enact. Acts 1986, ch. 70, § 8, effective July 15, 1986.

365.687. Buyer’s right of cancellation.

Any buyer who purchases from a transient merchant goods with a value in excess of fifty dollars ($50), shall acquire the right of cancellation and any other rights granted to a buyer by KRS 367.420 to 367.460 .

History. Enact. Acts 1990, ch. 102, § 1, effective July 13, 1990.

365.690. Enforcement by Attorney General or county attorney — Civil penalty.

  1. The Attorney General or county attorney may enforce the provisions of KRS 365.650 to 365.695 by civil action for injunctive relief in the Circuit Court of his county. In the action to obtain the injunction, it shall be sufficient to allege and prove that a violation of KRS 365.650 to 365.695 has occurred or is about to occur, and it shall not be necessary to allege or prove that any person has been damaged or sustained any loss as a result of any violation of KRS 365.650 to 365.695.
  2. When the provisions of KRS 365.650 to 365.695 are enforced through civil action, the Attorney General or county attorney may ask for and the court may assess a civil penalty for the benefit of the Commonwealth, not to exceed the sum of two thousand dollars ($2,000). The penalty shall be in lieu of all penalties set forth in KRS 365.990(8).
  3. Nothing in KRS 365.650 to 365.695 shall be construed to limit or restrict the exercise of powers or the performance of duties the Attorney General is authorized to exercise or perform under any provision of law.

History. Enact. Acts 1986, ch. 70, § 9, effective July 15, 1986; 1994, ch. 139, § 1, effective July 15, 1994; 2008, ch. 83, § 9, effective July 15, 2008.

365.695. Regulation by counties or cities.

Nothing in this chapter shall be construed to limit the authority of counties or cities to levy additional license fees and to require additional bonding for transient merchants engaging in business in such counties or cities and to otherwise regulate transient merchants engaging in business in such counties or cities.

History. Enact. Acts 1986, ch. 70, § 10, effective July 15, 1986.

Unsolicited Goods

365.710. Unsolicited goods deemed gift to recipient — Definition — Return of goods.

  1. Where unsolicited goods are delivered to a person, he has a right to refuse to accept delivery of the goods and is not bound to return such goods to the sender. Such unsolicited goods shall be deemed a gift to the recipient, who may use them or dispose of them in any manner without any obligation.
  2. The term “unsolicited” as used in subsection (1) of this section does not include merchandise requested by the recipient or merchandise which is addressed to or intended for another person and which the recipient received by mistake.
  3. Nothing in this section shall prohibit or prevent a person receiving unsolicited goods from returning such goods to the sender.

History. Enact. Acts 1970, ch. 195, § 1.

Research References and Practice Aids

Cross-References.

Theft of property lost, mislaid or delivered by mistake, KRS 514.050 .

Destruction of Records Containing Personally Identifiable Information

365.720. Definitions for KRS 365.720 to 365.730.

As used in KRS 365.720 to 365.730 , unless the context requires otherwise:

  1. “Business” means a sole proprietorship, partnership, corporation, limited liability company, association, or other entity, however organized and whether or not organized to operate at a profit. “Business” shall not mean a bank as defined in 12 U.S.C. sec. 1813(a) or Subtitles 1, 2, and 3 of KRS Chapter 286, a credit union as defined in 12 U.S.C. sec. 1752 or Subtitle 6 of KRS Chapter 286, a savings association as defined in 12 U.S.C. sec. 1813(b) , or an association as defined in Subtitle 5 of KRS Chapter 286. The term includes an entity that destroys records;
  2. “Customer” means an individual who provides personal information to a business for the purpose of purchasing or leasing a product or obtaining a service for business;
  3. “Individual” means a natural person;
  4. “Personally identifiable information” means data capable of being associated with a particular customer through one (1) or more identifiers, including but not limited to a customer’s name, address, telephone number, electronic mail address, fingerprints, photographs or computerized image, Social Security number, passport number, driver identification number, personal identification card number or code, date of birth, medical information, financial information, tax information, and disability information; and
  5. “Records” means any material, regardless of the physical form, on which information is recorded or preserved by any means, including in written or spoken words, graphically depicted, printed, or electromagnetically transmitted.

History. Enact. Acts 2006, ch. 42, § 4, effective July 12, 2006.

365.725. Destruction of customer’s records containing personally identifiable information.

When a business disposes of, other than by storage, any customer’s records that are not required to be retained, the business shall take reasonable steps to destroy, or arrange for the destruction of, that portion of the records containing personally identifiable information by shredding, erasing, or otherwise modifying the personal information in those records to make it unreadable or indecipherable through any means.

History. Enact. Acts 2006, ch. 42, § 5, effective July 12, 2006.

365.730. Civil action for damages or injunction for violation of KRS 365.725 — Rights and remedies.

  1. Any customer injured by a violation of KRS 365.725 may institute a civil action to recover damages.
  2. Any business that violates, proposes to violate, or has violated any provision of KRS 365.725 may be enjoined in a civil action.
  3. The rights and remedies available under this section shall be cumulative to each other and to any other rights and remedies available under law.

History. Enact. Acts 2006, ch. 42, § 6, effective July 12, 2006.

365.732. Notification to affected persons of computer security breach involving their unencrypted personally identifiable information.

  1. As used in this section, unless the context otherwise requires:
    1. “Breach of the security of the system” means unauthorized acquisition of unencrypted and unredacted computerized data that compromises the security, confidentiality, or integrity of personally identifiable information maintained by the information holder as part of a database regarding multiple individuals that actually causes, or leads the information holder to reasonably believe has caused or will cause, identity theft or fraud against any resident of the Commonwealth of Kentucky. Good-faith acquisition of personally identifiable information by an employee or agent of the information holder for the purposes of the information holder is not a breach of the security of the system if the personally identifiable information is not used or subject to further unauthorized disclosure;
    2. “Information holder” means any person or business entity that conducts business in this state; and
    3. “Personally identifiable information” means an individual’s first name or first initial and last name in combination with any one (1) or more of the following data elements, when the name or data element is not redacted:
      1. Social Security number;
      2. Driver’s license number; or
      3. Account number or credit or debit card number, in combination with any required security code, access code, or password to permit access to an individual’s financial account.
  2. Any information holder shall disclose any breach of the security of the system, following discovery or notification of the breach in the security of the data, to any resident of Kentucky whose unencrypted personal information was, or is reasonably believed to have been, acquired by an unauthorized person. The disclosure shall be made in the most expedient time possible and without unreasonable delay, consistent with the legitimate needs of law enforcement, as provided in subsection (4) of this section, or any measures necessary to determine the scope of the breach and restore the reasonable integrity of the data system.
  3. Any information holder that maintains computerized data that includes personally identifiable information that the information holder does not own shall notify the owner or licensee of the information of any breach of the security of the data as soon as reasonably practicable following discovery, if the personally identifiable information was, or is reasonably believed to have been, acquired by an unauthorized person.
  4. The notification required by this section may be delayed if a law enforcement agency determines that the notification will impede a criminal investigation. The notification required by this section shall be made promptly after the law enforcement agency determines that it will not compromise the investigation.
  5. For purposes of this section, notice may be provided by one (1) of the following methods:
    1. Written notice;
    2. Electronic notice, if the notice provided is consistent with the provisions regarding electronic records and signatures set forth in 15 U.S.C. sec. 7001 ; or
    3. Substitute notice, if the information holder demonstrates that the cost of providing notice would exceed two hundred fifty thousand dollars ($250,000), or that the affected class of subject persons to be notified exceeds five hundred thousand (500,000), or the information holder does not have sufficient contact information. Substitute notice shall consist of all of the following:
      1. E-mail notice, when the information holder has an e-mail address for the subject persons;
      2. Conspicuous posting of the notice on the information holder’s Internet Web site page, if the information holder maintains a Web site page; and
      3. Notification to major statewide media.
  6. Notwithstanding subsection (5) of this section, an information holder that maintains its own notification procedures as part of an information security policy for the treatment of personally identifiable information, and is otherwise consistent with the timing requirements of this section, shall be deemed to be in compliance with the notification requirements of this section, if it notifies subject persons in accordance with its policies in the event of a breach of security of the system.
  7. If a person discovers circumstances requiring notification pursuant to this section of more than one thousand (1,000) persons at one (1) time, the person shall also notify, without unreasonable delay, all consumer reporting agencies and credit bureaus that compile and maintain files on consumers on a nationwide basis, as defined by 15 U.S.C. sec. 1681 a, of the timing, distribution, and content of the notices.
  8. The provisions of this section and the requirements for nonaffiliated third parties in KRS Chapter 61 shall not apply to any person who is subject to the provisions of Title V of the Gramm-Leach-Bliley Act of 1999, Pub. L. No. 106-102, as amended, or the federal Health Insurance Portability and Accountability Act of 1996, Pub. L. No. 104-191, as amended, or any agency of the Commonwealth of Kentucky or any of its local governments or political subdivisions.

History. Enact. Acts 2014, ch. 84, § 1, effective July 15, 2014.

365.734. Prohibited uses of personally identifiable student information by cloud computing service provider — Administrative regulations.

  1. As used in this section:
    1. “Cloud computing service” means a service that provides, and that is marketed and designed to provide, an educational institution with account-based access to online computing resources;
    2. “Cloud computing service provider” means any person other than an educational institution that operates a cloud computing service;
    3. “Educational institution” means any public, private, or school administrative unit serving students in kindergarten to grade twelve (12);
    4. “Person” means an individual, partnership, corporation, association, company, or any other legal entity;
    5. “Process” means to use, access, collect, manipulate, scan, modify, analyze, transform, disclose, store, transmit, aggregate, or dispose of student data; and
    6. “Student data” means any information or material, in any medium or format, that concerns a student and is created or provided by the student in the course of the student’s use of cloud computing services, or by an agent or employee of the educational institution in connection with the cloud computing services. Student data includes the student’s name, e-mail address, e-mail messages, postal address, phone number, and any documents, photos, or unique identifiers relating to the student.
  2. A cloud computing service provider shall not process student data for any purpose other than providing, improving, developing, or maintaining the integrity of its cloud computing services, unless the provider receives express permission from the student’s parent. However, a cloud computing service provider may assist an educational institution to conduct educational research as permitted by the Family Educational Rights and Privacy Act of 1974, as amended, 20 U.S.C. sec. 1232 g. A cloud computing service provider shall not in any case process student data to advertise or facilitate advertising or to create or correct an individual or household profile for any advertisement purpose, and shall not sell, disclose, or otherwise process student data for any commercial purpose.
  3. A cloud computing service provider that enters into an agreement to provide cloud computing services to an educational institution shall certify in writing to the educational institution that it will comply with subsection (2) of this section.
  4. The Kentucky Board of Education may promulgate administrative regulations in accordance with KRS Chapter 13A as necessary to carry out the requirements of this section.

History. Enact. Acts 2014, ch. 84, § 2, effective July 15, 2014.

Motion Picture Distribution

365.750. Definitions.

As used in KRS 365.755 and 365.760 , unless the context requires otherwise:

  1. “Theater” means any establishment in which motion pictures are exhibited to the public regularly for a charge.
  2. “Distributor” means any person engaged in the business of distributing or supplying motion pictures to exhibitors by rental, sale, or licensing.
  3. “Exhibitor” means any person engaged in the business of operating one (1) or more theaters.
  4. “Exhibit” or “exhibition” means showing a motion picture to the public for a charge.
  5. “Invitation to bid” means a written or oral solicitation or invitation by a distributor to one (1) or more exhibitors to bid for the right to exhibit a motion picture.
  6. “Bid” means a written offer or proposal by an exhibitor to a distributor in response to an invitation to bid for the right to exhibit a motion picture, stating the terms under which the exhibitor will agree to exhibit a motion picture.
  7. “License agreement” means any contract, agreement, understanding or condition between a distributor and an exhibitor relating to the licensing or exhibition of a motion picture by the exhibitor.
  8. “Trade screening” means the showing of a motion picture by a distributor within the cities of Lexington and Paducah and any other location the distributor may wish to include which is open to any exhibitor from whom the distributor intends to solicit bids or with whom the distributor intends to negotiate for the right to exhibit the motion picture.
  9. “Blind bidding” means the bidding for, negotiating for, offering or agreeing to terms for the licensing or exhibition of a motion picture at any time before such motion picture has either been trade screened within the state or before such motion picture, at the option of the distributor, has been otherwise made available for viewing within the state by all exhibitors from whom the distributor is soliciting bids or with whom the distributor is negotiating for the right to exhibit such motion picture.
  10. “Run” means the continuous exhibition of a motion picture in a defined geographic area for a specified period of time. A “first run” is the first exhibition of a motion picture in the designated area; a “second run” is the second exhibition; and “subsequent runs” are subsequent exhibitions after the second run. “Exclusive run” is any run limited to a single theater in a defined geographical area, and a “nonexclusive run” is any run in more than one (1) theater in a defined geographical area.

History. Enact. Acts 1980, ch. 63, § 1, effective July 15, 1980.

365.755. Blind bidding prohibited — Restrictions on distributor’s conditions for license agreement.

  1. No distributor shall engage in blind bidding.
  2. No distributor shall condition the granting or execution of a license agreement on a guarantee of a minimum payment to the distributor, if the exhibitor is required by the license agreement to make any payment to the distributor that is based on the attendance or the box office receipts at a theater at which the motion picture is exhibited.
  3. No distributor shall condition the granting or execution of a license agreement on the exhibitor’s advancing, more than fourteen (14) days prior to his first exhibition of a motion picture, any money that is to be used as security for the exhibitor’s performance of the license agreement or is to be applied to any payments that the exhibitor is required by the agreement to make to the distributor.
  4. Any provision of a license agreement that waives any of the prohibitions of, or fails to comply with, this section or KRS 365.760 is void and unenforceable. Any license agreement that fails to comply with this section or KRS 365.760 is voidable by the exhibitor, if the exhibitor gives the distributor written notice, prior to the exhibitor’s first exhibition of the motion picture that is the subject of the agreement, of his intent to have the agreement voided.

History. Enact. Acts 1980, ch. 63, § 2, effective July 15, 1980.

365.760. Bid specifications — Notice of trade screening — Examination of bid by another exhibitor — Bid invitation prohibits other methods of license agreement.

  1. If bids are solicited from exhibitors for the purpose of entering into a license agreement, the invitation to bid shall specify:
    1. Whether the run for which the bid is solicited is a first, second or subsequent run; whether the run is an exclusive or nonexclusive run; and the geographic area for the run;
    2. The names of all exhibitors who are being solicited;
    3. The date and hour the invitation to bid expires; and
    4. The time, date and the location, including the address, where the bids will be opened, which shall be within the state.
  2. If the motion picture that is the subject of a bid has not already been trade screened within this state, the distributor soliciting the bid shall include in the invitation to bid the date, time and location of the trade screening of the motion picture that is the subject of the invitation to bid.
  3. Every distributor shall furnish to all exhibitors in this state reasonable and uniform notice of all trade screenings that are held within this state of motion pictures that he is distributing.
  4. All bids shall be submitted to the distributor in written form. The distributor or his agent shall open all bids at the same time and in the presence of at least one (1) of the exhibitors, or the agent of an exhibitor, who has submitted a bid.
  5. Any exhibitor, or the agent of an exhibitor, who submits a bid for a particular run of a motion picture may, at reasonable times within sixty (60) days after the bid is opened, examine any bid that is made for the same run of the motion picture by another exhibitor. The exhibitor may inspect the bids even if the distributor rejects all bids that are submitted. Within seven (7) business days after a bid for a particular run of a motion picture is accepted, the distributor shall notify in writing each exhibitor who submitted a bid for that run of the motion picture of the terms of the successful bidder. Any bid submitted is nonreturnable.
  6. If a distributor issues invitations to bid for a motion picture, he shall not enter into a license agreement for the exhibition of the motion picture except by means of the bidding process specified in this section. If the distributor rejects all bids submitted pursuant to an invitation to bid, he shall notify all exhibitors who submitted bids that he rejected all bids and shall issue a new invitation to bid.

History. Enact. Acts 1980, ch. 63, § 3, effective July 15, 1980.

365.765. Award of damages and attorney fees — Enforcement.

In any civil action for damages against a person for violation of the provisions of KRS 365.755 or 365.760 , the court may award damages and reasonable attorney fees to the prevailing party. The provisions of KRS 365.755 and 365.760 may be enforced by injunction or any other available equitable or legal remedy.

History. Enact. Acts 1980, ch. 63, § 4, effective July 15, 1980.

Retail Sales of Farm Equipment

365.800. Definitions for KRS 365.800 to 365.840.

As used in KRS 365.800 to 365.840 , unless the context requires otherwise:

  1. “Current net price on parts” means the price listed by a supplier in a price list or catalogue in effect at the time a retail agreement contract is terminated, less any applicable trade and cash discounts;
  2. “Retailer” means any person, firm, or corporation, including heirs, personal representatives, guardians, trustees, assignees, or receivers of the person, firm, or corporation, engaged in the business of selling and retailing inventory, but shall not include retailers of petroleum or motor vehicle and related automotive care and replacement products;
  3. “Inventory” means farm implements, tractors, farm machinery, consumer products, utility and industrial equipment, construction and excavating equipment, and any attachments, repair parts, or superseded parts for the equipment;
  4. “Net cost” means the price a retailer paid for the inventory to a supplier, less all discounts allowed;
  5. “Consumer products” means machines designed for or adapted and used for horticulture, floriculture, landscaping, grounds maintenance, or turf maintenance, including but not limited to lawnmowers, rototillers, trimmers, blowers, and other equipment used in both residential and commercial lawn, gardening, or turf maintenance, installation, or other applications;
  6. “Superseded parts” means any part that will provide the same function as a currently available part as of the date of termination of a retail agreement contract;
  7. “Supplier” means any wholesaler, manufacturer, or distributor of inventory, or any purchaser of assets or stock of any surviving corporation resulting from a merger or liquidation, or any receiver, assignee, or trustee of the original wholesaler, manufacturer, distributor, or corporation; and
  8. “Terminate” or “termination” means cancel, fail to renew, or otherwise terminate a retail agreement contract.

History. Enact. Acts 1986, ch. 32, § 1, effective February 28, 1986; 2004, ch. 144, § 1, effective April 21, 2004; 2013, ch. 125, § 1, effective June 25, 2013.

365.805. Repurchase of inventory from retailer by supplier.

If a retailer enters into a retail agreement contract, written or unwritten, with a supplier where the retailer agrees to maintain an inventory and the contract is terminated, the supplier shall repurchase the inventory as provided in KRS 365.800 to 365.840 . The retailer may keep the inventory if the retailer desires. If the retailer has any outstanding debts to the supplier, the repurchase amount may be credited to the retailer’s account.

History. Enact. Acts 1986, ch. 32, § 2, effective February 28, 1986; 2004, ch. 144, § 2, effective April 21, 2004.

NOTES TO DECISIONS

1.Applicability.

Trial court erred in finding that a franchise agreement existed between the parties and by entering an order requiring the seller, as the buyer’s alleged franchisor, to re-purchase dozer blades from buyer in the amount of $48,303.81 under KRS 365.805 ; the buyer: (1) never alleged it was required to directly or indirectly pay a franchise fee to the seller; (2) failed to establish that operation of its business was pursuant to a plan or system associated with the seller’s trademark, service mark, trade name, logo type, advertising, or other commercial symbol; and (3) failed to prove the existence that a franchisee’s business operated pursuant to a plan associated with franchisor’s trademark, or a direct or indirect payment of franchisee fee necessary for a franchise agreement to exist between the parties. Leon Mfg. Co. v. Wilson Kubota, LLC, 199 S.W.3d 759, 2006 Ky. App. LEXIS 49 (Ky. Ct. App. 2006).

365.810. Prices to be paid by supplier for repurchase of inventory and hardware, software, repair tools, signage and fixtures required by the supplier — Reimbursement for training.

    1. The supplier shall repurchase inventory previously purchased from the supplier and held by the retailer on the date of termination of the retail agreement contract. The supplier shall pay one hundred percent (100%) of the net cost, plus any freight charges paid, of all new, unsold, undamaged, and complete farm implements, tractors, farm machinery, utility and industrial equipment, construction and excavating equipment, consumer products, and any attachments for the equipment, and one hundred percent (100%) of the current net price of all new, unused, and undamaged repair parts or superseded parts. (1) (a) The supplier shall repurchase inventory previously purchased from the supplier and held by the retailer on the date of termination of the retail agreement contract. The supplier shall pay one hundred percent (100%) of the net cost, plus any freight charges paid, of all new, unsold, undamaged, and complete farm implements, tractors, farm machinery, utility and industrial equipment, construction and excavating equipment, consumer products, and any attachments for the equipment, and one hundred percent (100%) of the current net price of all new, unused, and undamaged repair parts or superseded parts.
    2. The supplier shall repurchase inventory used in demonstrations, including inventory leased or rented primarily for demonstration or lease purposes, at its agreed depreciated value, if the equipment is in like-new condition and has not been damaged.
  1. The supplier shall pay the retailer five percent (5%) of the current net price on all new, unused, and undamaged repair parts or superseded parts returned to cover the cost of handling, packing, and loading. The supplier may perform the handling, packing, and loading in lieu of paying the five percent (5%) of the current net price for these services.
    1. The supplier shall purchase from the retailer, at its amortized value, any specific data processing hardware and software and telecommunications equipment that the supplier required the retailer to purchase within five (5) years of the termination of the retail agreement contract. (3) (a) The supplier shall purchase from the retailer, at its amortized value, any specific data processing hardware and software and telecommunications equipment that the supplier required the retailer to purchase within five (5) years of the termination of the retail agreement contract.
    2. The supplier shall repurchase from the retailer, at seventy-five percent (75%) of the net cost, specialized repair tools purchased within three (3) years of the date of the termination of the retail agreement contract, and, at fifty percent (50%) of the net cost, specialized repair tools purchased more than three (3) but less than six (6) years of the date of the termination of the retail agreement contract if:
      1. The supplier required the purchase;
      2. The retailer held the tools on the date of the termination of the retail agreement contract;
      3. The tools were unique to the supplier’s product line; and
      4. The tools were in complete and resalable condition.
  2. The supplier shall purchase from the retailer, at its amortized value, any specific signage incorporating the supplier’s name, logo, tradename, trademark, or other information identifying the supplier or the products manufactured or distributed by the supplier which the supplier expressly required the retailer to purchase in connection with the retail agreement contract.
  3. If, in a retail agreement contract, the supplier requires the retailer’s employees to participate in training programs sponsored or promoted by the supplier, then the supplier shall reimburse the retailer for any out-of-pocket expenses incurred by the retailer. The reimbursement shall only be required if the training took place within one (1) year of the termination of the retail agreement contract.
  4. The supplier shall purchase from the retailer, at its amortized value, all trade fixtures and other improvements to the business premises of the retailer that the supplier expressly required the retailer to purchase or acquire in connection with the retail agreement contract.

History. Enact. Acts 1986, ch. 32, § 3, effective February 28, 1986; 2004, ch. 144, § 3, effective April 21, 2004.

365.815. Title to repurchased goods — Reserve accounts for recourse contracts.

Upon payment of the repurchase amount to the retailer, the title and right of possession to the repurchased inventory shall transfer to the supplier. Annually, at the end of each calendar year after the termination of a retail agreement contract, the retailer’s reserve accounts for recourse contracts shall not be debited by a supplier or lender for any deficiency unless the retailer has been given at least seven (7) business days notice by registered United States mail, return receipt requested, of any proposed sale of the equipment financed and has been given an opportunity to purchase the equipment. The former retailer shall be given quarterly status reports on any remaining outstanding recourse contracts. As the recourse contracts are reduced, any reserve account funds shall be returned to the retailer in direct proportion to the liabilities outstanding.

History. Enact. Acts 1986, ch. 32, § 4, effective February 28, 1986; 2004, ch. 144, § 4, effective April 21, 2004.

365.820. Items not required to be repurchased from retailer.

The provisions of KRS 365.800 to 365.840 shall not require the repurchase from a retailer of:

  1. Any repair part or superseded part which has a limited storage life or is otherwise subject to deterioration, such as rubber items, gaskets, or batteries;
  2. Any repair part or superseded part which is in a broken or damaged package;
  3. Any single repair part or superseded part which is priced as a set of two (2) or more items;
  4. Any inventory for which the retailer is unable to furnish evidence, satisfactory to the supplier, of clear title, free and clear of all claims, liens, and encumbrances;
  5. Any inventory which the retailer desires to keep, provided the retailer has a contractual right to do so;
  6. Any inventory which is not in a new, unused, and undamaged condition, except that inventory used in demonstrations or leased, as provided in KRS 365.810 , shall be considered new and unused;
  7. Any inventory which was ordered by the retailer on or after the date of notification of termination of the contract; or
  8. Any inventory which was acquired by the retailer from any source other than the supplier.

History. Enact. Acts 1986, ch. 32, § 5, effective February 28, 1986; 2004, ch. 144, § 5, effective April 21, 2004.

365.825. Liability for failure to repurchase.

If any supplier fails or refuses to repurchase any inventory covered under the provisions of KRS 365.800 to 365.840 within sixty (60) days after shipment of the inventory to the supplier, the supplier shall be liable in a civil action for one hundred percent (100%) of the current net price of the repair parts and superseded parts inventory plus five percent (5%) for handling, packing, and loading, if applicable, and one hundred percent (100%) of the net cost of all other inventory, plus any freight charges paid by the retailer, the retailer’s reasonable attorney’s fees, court costs, and interest on the current net price computed at the legal interest rate from the sixty-first day after shipment.

History. Enact. Acts 1986, ch. 32, § 6, effective February 28, 1986; 2004, ch. 144, § 6, effective April 21, 2004.

365.830. Repurchase of inventory upon death of retailer or majority owner — Option of heirs — Previous agreements of succession rights.

  1. In the event of the death of a retailer or the majority owner of the equity interests of the entity operating as a retailer, the supplier shall, at the option of the heirs of the retailer or the majority owner, repurchase the inventory from the heirs as if the supplier had terminated the retail agreement contract. The heirs shall have one (1) year from the date of the death of the retailer or majority owner to exercise their option regarding the repurchase. No repurchase of any inventory shall be required if the heirs and the supplier enter into a new retail agreement contract to operate the retail dealership. As used in this section, “heir” means a spouse, child, son-in-law, daughter-in-law, or lineal descendant of the retailer or majority owner of the dealership.
  2. A supplier shall have ninety (90) days in which to consider and make a determination on a request by an heir to enter into a new retail agreement contract to operate the retail dealership. In the event the supplier determines that the request is not acceptable, the supplier shall provide the heir with a written notice of its determination with the stated reasons for nonacceptance. This section does not entitle an heir to operate a dealership without the specific written consent of the supplier.
  3. If a supplier and a retailer or majority owner of the equity interests of the entity operating as a retailer have previously executed an agreement concerning succession rights prior to the retailer’s or majority owner’s death, and if the agreement had not been revoked, the agreement shall be observed even if it designates someone other than the surviving heirs of the decedent as the successor.

History. Enact. Acts 1986, ch. 32, § 7, effective February 28, 1986; 2004, ch. 144, § 7, effective April 21, 2004.

365.831. Termination or change of contract by supplier — Good cause requirement — When not permitted — Notice.

  1. No supplier, directly or through an officer, agent, or employee, shall terminate or substantially change the competitive circumstances of a retail agreement contract without good cause. As used in this subsection, “good cause” means the failure by a retailer to comply with requirements imposed upon the retailer by the retail agreement contract if the requirements are not different from those imposed on other retailers similarly situated in this state. In addition, good cause exists if:
    1. There has been a closeout or sale of a substantial part of the retailer’s assets related to the equipment business, or there has been a commencement of a dissolution or liquidation of the retailer;
    2. The retailer has changed its principal place of business or added additional locations without prior approval of the supplier, which shall not be unreasonably withheld;
    3. The retailer has substantially defaulted under a chattel mortgage or other security agreement between the retailer and the supplier, or there has been a revocation or discontinuance of a guarantee of a present or future obligation of the retailer to the supplier;
    4. The retailer has failed to operate in the normal course of business for seven (7) consecutive days or has otherwise abandoned the business;
    5. The retailer has pleaded guilty to or has been convicted of a felony affecting the relationship between the retailer and supplier; or
    6. The retailer transfers an interest in the dealership; or a person with a substantial interest in the ownership or control of the dealership, including an individual proprietor, partner, or major shareholder, withdraws from the dealership or dies; or a substantial reduction occurs in the interest of an individual proprietor, partner, or major shareholder in the dealership.
  2. Good cause does not exist if the supplier consents to an action described in subsection (1) of this section. Such consent exists if the retail agreement contract does not provide the supplier with a right to terminate or substantially change the competitive circumstances of the contract as a result of such action, or the supplier otherwise consents to such action.
  3. No supplier, directly or through an officer, agent, or employee, shall terminate or substantially change the competitive circumstances of a retail agreement contract based on high unemployment in the dealership market area, a labor dispute, the results of a natural disaster, including a sustained drought, or other circumstances beyond the retailer’s control.
  4. Except as provided in paragraphs (a) to (f) of subsection (1) of this section, a supplier shall provide a retailer with at least ninety (90) days written notice of termination of a retail agreement contract. The notice shall also contain a sixty (60) day written notice to cure the deficiency. The notice shall not be required if the termination is enacted for reasons included in paragraphs (a) to (f) of subsection (1) of this section. The notice shall state all reasons constituting good cause for action. In the case where termination is enacted due to market penetration, a reasonable period of time, not less than one (1) year, shall have existed where the supplier has worked with the retailer to gain the desired market share.

History. Enact. Acts 2004, ch. 144, § 10, effective April 21, 2004; 2013, ch. 125, § 2, effective June 25, 2013.

365.832. Coercion by supplier prohibited.

No supplier shall:

  1. Coerce any retailer to accept delivery of inventory which the retailer has not ordered voluntarily, except as required by any applicable law, or unless parts or attachments are safety parts or attachments required by a supplier;
  2. Condition the sale of additional inventory to a retailer on a requirement that the retailer also purchase other goods or services, except that a supplier may require the retailer to purchase those parts reasonably necessary to maintain the quality of operation of the inventory used in the retailer’s designated trade area; or
  3. Coerce a retailer into refusing to purchase inventory manufactured by another supplier.

History. Enact. Acts 2004, ch. 144, § 11, effective April 21, 2004.

365.833. Claims by retailers for payment under warranty agreements.

  1. Claims filed by a retailer for payment under warranty agreements shall be approved or disapproved within thirty (30) days of receipt by the supplier. All claims for payment shall be paid within thirty (30) days of their approval. If any claim is disapproved, the supplier shall notify the retailer within thirty (30) days stating the specific grounds upon which the disapproval is based. If a claim is not specifically disapproved within thirty (30) days of receipt, it shall be deemed approved and payment by the supplier shall be within thirty (30) days.
  2. If, after termination of a retail agreement contract, a retailer submits a claim to the supplier for warranty work performed prior to the effective date of the termination, the supplier shall accept or reject the claim within thirty (30) days of receipt. All claims for payment shall be paid within thirty (30) days of their acceptance. If any claim is rejected, the supplier shall notify the retailer within thirty (30) days stating the specific grounds upon which the rejection is based. If a claim is not specifically rejected within thirty (30) days of receipt, it shall be deemed accepted and payment by the supplier shall be within thirty (30) days.
  3. Warranty work performed by a retailer shall be compensated in accordance with the reasonable and customary amount of time required to complete the work, expressed in hours and fractions of hours, multiplied by the retailer’s established customer hourly retail labor rate, which shall have previously been made known to the supplier.
  4. Expenses expressly excluded under the supplier’s warranty to the customer shall not be included nor required to be paid on requests for compensation from a retailer for warranty work performed.
  5. Expenses for all parts used by a retailer in performing warranty work shall be paid to the retailer in the amount equal to the retailer’s net price for parts used, plus a minimum of fifteen percent (15%). The percentage additive is to reimburse the retailer for reasonable costs of doing business in performing warranty service on the supplier’s behalf, including but not limited to freight and handling costs incurred.
  6. The supplier has the right to adjust for errors discovered during audit and, if necessary, to adjust claims paid in error.
  7. A retailer may accept the manufacturer’s reimbursement terms and conditions in lieu of the other provisions provided by this section.

History. Enact. Acts 2004, ch. 144, § 12, effective April 21, 2004.

365.834. Provisions of KRS 365.800 to 365.840 not waivable.

The provisions of KRS 365.800 to 365.840 shall represent a public policy of this Commonwealth and shall not be waivable in any retail agreement contract, and any attempted waiver shall be void.

History. Enact. Acts 2004, ch. 144, § 13, effective April 21, 2004; 2013, ch. 125, § 3, effective June 25, 2013.

365.835. Construction of KRS 365.800 to 365.840 — Right of retailer and supplier to inspect inventory under repurchase arrangement.

The provisions of KRS 365.800 to 365.840 shall not be construed to affect in any way any security interest which the supplier may have in the inventory of the retailer, and any repurchase shall not be subject to the provisions of the bulk sales law. The retailer or supplier may, in person or through a representative, inspect all inventory and certify its acceptability when it is packed for shipment to the supplier under a repurchase arrangement. Failure of the supplier to provide a representative to inspect the inventory within sixty (60) days of the notice of termination shall result in automatic acceptance by the supplier of all returned items.

History. Enact. Acts 1986, ch. 32, § 8, effective February 28, 1986; 2004, ch. 144, § 8, effective April 21, 2004.

365.840. Applicability of KRS 365.800 to 365.840.

The provisions of KRS 365.800 to 365.840 shall apply to all retail agreement contracts entered into before June 25, 2013, which have no expiration date and are a continuing contract, and all other contracts entered into or renewed on or after June 25, 2013. Any contract in force before June 25, 2013, which by its own terms will terminate on a date after June 25, 2013, shall be governed by the law as it existed prior to June 25, 2013.

History. Enact. Acts 1986, ch. 32, § 9, effective February 28, 1986; 2004, ch. 144, § 9, effective April 21, 2004; 2013, ch. 125, § 4, effective June 25, 2013.

Consignment of Fine Art

365.850. Definitions.

As used in KRS 365.855 to 365.875 :

  1. “Artist” means the person who creates a work of fine art or, if such person is deceased, such person’s heir, legatee, or personal representative;
  2. “Fine art” shall include, but is not limited to, a painting, sculpture, drawing, work of graphic or photographic art, including an etching, lithograph, offset print, silk screen, or work of graphic art of like nature, a work of calligraphy, a work of folk art or craft, or a work in mixed media including a collage, assemblage, or any combination of the foregoing art media;
  3. “Art dealer” means a person engaged in the business of selling, as either a primary or supplemental source of income, works of fine art, other than a person exclusively engaged in the business of selling goods at public auction;
  4. “Person” means an individual partnership, corporation, association or other group, however organized; and
  5. “Consignment” means a delivery of a work of fine art under which no title to, estate in, or right to possession of, fine art, superior to that of the consignor shall vest in the consignee, notwithstanding the consignee’s power or authority to transfer and convey to a third person all of the right, title and interest of the consignor in and to such fine art.

History. Enact. Acts 1986, ch. 136, § 1, effective July 15, 1986.

365.855. Acts constituting consignment.

Notwithstanding any custom, practice or usage of the trade to the contrary, whenever an artist delivers or causes to be delivered a work of fine art of the artist’s own creation to an art dealer in the Commonwealth for the purpose of exhibition or sale, or both, on a commission, fee or other basis of compensation, the delivery to and acceptance of such work of fine art by the art dealer shall constitute a consignment, unless the delivery to the art dealer is pursuant to an outright sale for which the artist receives or has received full compensation for the work of fine art upon delivery, or will receive full compensation pursuant to an installment agreement executed prior to or upon delivery.

History. Enact. Acts 1986, ch. 136, § 2, effective July 15, 1986.

365.860. Rules constituting consignment.

The following provisions shall apply to consignment of a work of fine art:

  1. The art dealer, after delivery of the work of fine art, shall constitute an agent of the artist for the purpose of sale or exhibition of the consigned work of fine art;
  2. The work of fine art shall constitute property held in trust by the consignee for the benefit of the consignor, and shall not be subject to claim by a creditor of the consignee. Should the consignee initiate or be forced into bankruptcy proceedings, the consignor shall have the continuing authority to claim physical possession of the work of fine art;
  3. The consignee shall be responsible for the loss of, or damage to, the work of fine art; and
  4. The proceeds from the sale of the work of fine art shall constitute funds held in trust by the consignee for the benefit of the consignor. Such proceeds shall first be applied to pay any balance due the consignor, unless the consignor expressly agrees otherwise in writing.

History. Enact. Acts 1986, ch. 136, § 3, effective July 15, 1986.

365.865. Work of art consigned remains trust property until payment received by consignor.

A work of fine art received as a consignment shall remain trust property, notwithstanding the subsequent purchase thereof by the consignee directly or indirectly for the consignee’s own account until the price is paid in full to the consignor or upon agreement to an installment sales contract. If an installment sales contract has not been agreed to and such work is thereafter resold to a bona fide purchaser before the consignor has been paid in full, the proceeds of the resale received by the consignee shall constitute funds held in trust for the benefit of the consignor to the extent necessary to pay any balance still due to the consignor and such trusteeship shall continue until the fiduciary obligation of the consignee with respect to such transaction is discharged in full.

History. Enact. Acts 1986, ch. 136, § 4, effective July 15, 1986.

365.870. Waiver of provisions of KRS 365.855 to 365.875 prohibited.

Any provision of a contract or agreement whereby the consignor waives any provision of KRS 365.855 to 365.875 is void.

History. Enact. Acts 1986, ch. 136, § 5, effective July 15, 1986.

365.875. Application and effect of KRS 365.855 to 365.870.

  1. The provisions of KRS 365.855 to 365.870 shall not apply to a written contract executed prior to July 15, 1986, unless either the parties agree by mutual consent that the provisions of KRS 365.855 to 365.870 shall apply or such contract is extended or renewed after July 15, 1986.
  2. The provisions of KRS 365.855 to 365.870 shall not affect the remedies at law available to a party to a consignment contract upon breach of the contract, where such remedies are not in opposition to the provisions of KRS 365.855 to 365.870 .
  3. The provisions of KRS 365.855 to 365.870 shall prevail over any conflicting or inconsistent provisions of KRS Chapter 355.

History. Enact. Acts 1986, ch. 136, § 6, effective July 15, 1986.

Uniform Trade Secrets Act

365.880. Definitions.

As used in KRS 365.880 to 365.900 , unless the context requires otherwise:

  1. “Improper means” includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means;
  2. “Misappropriation” means:
    1. Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
    2. Disclosure or use of a trade secret of another without express or implied consent by a person who:
      1. Used improper means to acquire knowledge of the trade secret; or
      2. At the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was:
        1. Derived from or through a person who had utilized improper means to acquire it;
        2. Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
        3. Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
      3. Before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.
  3. “Person” means a natural person, corporation, business trust, estate, trust, partnership, association, joint venture, government, governmental subdivision or agency, or any other legal or commercial entity.
  4. “Trade secret” means information, including a formula, pattern, compilation, program, data, device, method, technique, or process, that:
    1. Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and
    2. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

History. Enact. Acts 1990, ch. 300, § 1, effective July 13, 1990.

NOTES TO DECISIONS

Analysis

1.Misappropriation.

Employer was unable to prove misappropriation because the employer could not establish that the employee misappropriated the information where the employee did not acquire the information by improper means as she took the boxes in response to the employer's instruction to clean out her office upon her termination. Van Winkle v. HM Ins. Group, Inc., 72 F. Supp. 3d 723, 2014 U.S. Dist. LEXIS 175786 (E.D. Ky. 2014 ).

Individual, while an employee of appellee and without authorization, accessed appellee's password-protected servers and emailed confidential bid documents, bid preparation tools, and pricing information to his personal email account; the jury could have found misappropriation. Alph C. Kaufman, Inc. v. Cornerstone Indus. Corp., 540 S.W.3d 803, 2017 Ky. App. LEXIS 46 (Ky. Ct. App. 2017).

2.— Consent.

Paper handling systems designer could not establish that a printer manufacturer misappropriated trade secrets because the many agreements between the parties concerning confidential information expressly permitted the manufacturer to use any information provided by the designer, which was the equivalent of express or implied consent; thus, the manufacturer did not knowingly use any trade secret of the designer’s in contravention of a duty to limit its use, pursuant to KRS 365.880(2)(b). BDT Prods., Inc. v. Lexmark Int'l, Inc., 274 F. Supp. 2d 880, 2003 U.S. Dist. LEXIS 13366 (E.D. Ky. 2003 ), aff'd, 124 Fed. Appx. 329, 2005 U.S. App. LEXIS 2602 (6th Cir. Ky. 2005 ).

3.Trading Secret.

Paper handling systems designer’s claim for misappropriation of trade secrets failed because the information did not qualify as a trade secret under KRS 365.880(4) where the designer did not take reasonable efforts under the circumstances to maintain the subject information’s secrecy by having the printer manufacturer sign confidentiality and non-disclosure agreements. BDT Prods., Inc. v. Lexmark Int'l, Inc., 274 F. Supp. 2d 880, 2003 U.S. Dist. LEXIS 13366 (E.D. Ky. 2003 ), aff'd, 124 Fed. Appx. 329, 2005 U.S. App. LEXIS 2602 (6th Cir. Ky. 2005 ).

By alleging misappropriation or conversion of its “trade secrets,” plaintiff meant to recover for defendants’ use of its customer lists, 30-60-90 day reports, and other related information. There was no evidence that plaintiff acquired its customer lists—or knowledge of a particular customer’s purchasing agent—through any sort of extraordinary effort, but the financial and pricing information had more obvious economic value and was available publicly only through much greater and more sustained effort; because the determination of what was or was not a trade secret depended so much on factual variables, and because the record was not clear in establishing the records’ economic value and or the difficulty of procuring them, the court reserved judgment on the issue of the financial records for possible determination by the jury. Aftermarket Tech. Corp. v. Whatever It Takes Transmissions, 2003 U.S. Dist. LEXIS 27933 (W.D. Ky. Aug. 12, 2003).

Summary judgment was denied with regard to the franchisor’s claims of trademark infringement under § 32(1) of the Lanham Act, 15 USCS § 1114(1), unfair competition and trademark dilution under § 43(a) and (c) of the Lanham Act, 15 USCS § 1125(a) and (g), copyright infringement under § 106 of the Copyright Act of 1976, 17 USCS § 106, and misappropriation of trade secrets in violation of KRS 365.880 , because the franchisor had not provided actual notice of termination to the franchisee and thus had not made the required contractual election to terminate the franchise agreement. Papa John's Int'l, Inc. v. Dynamic Pizza, Inc., 317 F. Supp. 2d 740, 2004 U.S. Dist. LEXIS 8216 (W.D. Ky. 2004 ).

Former employees were liable for misappropriating the employer’s trade secrets because the employer’s pricing and customer sales information was not readily ascertainable by proper means, the employees had access to the employer’s confidential information, the employees signed confidentiality agreements with the employer, and the employees used the employer’s confidential information when they targeted potential new customers for the employer’s competitor. Fastenal Co. v. Crawford, 609 F. Supp. 2d 650, 2009 U.S. Dist. LEXIS 14926 (E.D. Ky. 2009 ).

Where plaintiff former employer could point to no evidence that the identities of transmission parts customers contained on its customer list was obtained through great effort or expense, or that the names on the list were not discoverable from a telephone book or similar legitimate source, the customer lists were not trade secrets misappropriated by defendant former employee. ATC Distrib. Group, Inc. v. Whatever It Takes Transmissions & Parts, Inc., 402 F.3d 700, 2005 FED App. 0149P, 2005 U.S. App. LEXIS 5059 (6th Cir. Ky. 2005 ).

Trial court did not abuse its discretion in denying a vehicle repair company's motion to amend its complaint to add claim for a violation of the Kentucky Uniform Trade Secrets Act, Ky. Rev. Stat. Ann. § 365.880 et seq., where the company did not derive any independent economic value from its knowledge of a former customer's vehicles, the company profited simply because the customer chose to have its fleet maintained by the company, the customer had the right to share with any other vendor it chose for service the repair and maintenance histories, as well as the parts and price charged for them, and thus, the company failed to identify a trade secret under Ky. Rev. Stat. Ann. § 365.880 . Insight Ky. Partners II, L.P. v. Preferred Auto. Servs., 514 S.W.3d 537, 2016 Ky. App. LEXIS 98 (Ky. Ct. App. 2016).

Jury did not err in finding that appellees' bid documents, bid preparation tools, and pricing information were trade secrets; the information was valuable to appellee and contained commercially-sensitive information not available to the public at large, plus appellee made reasonable efforts to maintain the information's secrecy. Alph C. Kaufman, Inc. v. Cornerstone Indus. Corp., 540 S.W.3d 803, 2017 Ky. App. LEXIS 46 (Ky. Ct. App. 2017).

4.Jurisdiction.

A California partnership lacked minimum contacts with Kentucky under either the statutory requirements of KRS 454.210(2)(a)(4) or the similar due process “effects test.” The California partnership, as the would-be buyer of services, did not conduct regular solicitation of business in Kentucky, and the California partnership’s allegedly fraudulent assent to a confidentiality provision in a contract did not permit a conclusion that it purposefully availed itself of the privilege of causing a consequence in Kentucky. Spectrum Scan, LLC v. AGM California, 519 F. Supp. 2d 655, 2007 U.S. Dist. LEXIS 78210 (W.D. Ky. 2007 ).

5.Availability.

Allegedly confidential business information provided in connection with a potential joint venture pursuant to confidentiality agreements, which included the identities of wholesale distributors, was publicly available and thus did not qualify as trade secrets; moreover, financial information was provided before the agreements were executed. Smart & Assocs., LLC v. Indep. Liquor (NZ) Ltd., 226 F. Supp. 3d 828, 2016 U.S. Dist. LEXIS 180159 (W.D. Ky. 2016 ).

Cited:

Grange Mut. Ins. Co. v. Trude, 151 S.W.3d 803, 2004 Ky. LEXIS 242 ( Ky. 2004 ), review denied, — S.W.3d —, 2005 Ky. LEXIS 443 (Ky. Jan. 20, 2005).

Notes to Unpublished Decisions

Analysis

1.Misappropriation.

Unpublished decision: District court properly granted summary judgment in favor of a printer manufacturer in an action under the Kentucky Uniform Trade Secrets Act, KRS 365.880 et seq., by a paper handling systems designer alleging trade secret misappropriation; the information at issue did not constitute a legally cognizable trade secret because the designer did not take reasonable steps to maintain secrecy. Further, the multiple confidentiality agreements between the parties expressly permitted the manufacturer to use any information provided by the designer. BDT Prods. v. Lexmark Int'l, Inc., 124 Fed. Appx. 329, 2005 U.S. App. LEXIS 2602 (6th Cir. Ky.), cert. denied, 546 U.S. 875, 126 S. Ct. 384, 163 L. Ed. 2d 170, 2005 U.S. LEXIS 5805 (U.S. 2005).

Unpublished decision: Court’s finding regarding defendant’s use of plaintiff’s trade secrets was not clearly erroneous, as it offered the most sensible interpretation of the evidence; why else would a company, whose products inexplicably mirrored those of its competitor, pay its competitor’s employee thousands of dollars to leak the competitor’s product information if not to use that information? Brake Parts, Inc. v. Lewis, 443 Fed. Appx. 27, 2011 FED App. 0563N, 2011 U.S. App. LEXIS 16720 (6th Cir. Ky. 2011 ).

2.Trading Secret.

Unpublished decision: Plaintiff’s brake-pad formulations were archetypal trade secrets; plaintiff’s product development required extensive, costly research, plaintiff’s competitors could not reverse engineer its products, plaintiff’s formulations explained how to replicate its manufacturing processes, and plaintiff assiduously protected its formulations’ secrecy. Brake Parts, Inc. v. Lewis, 443 Fed. Appx. 27, 2011 FED App. 0563N, 2011 U.S. App. LEXIS 16720 (6th Cir. Ky. 2011 ).

3.Miscellaneous.

Unpublished decision: Where a former employer sued an employee and a new employer, alleging tortious interference, breach of contract, and violations of the Kentucky Uniform Trade Secrets Act, the new employer’s insurer owed no duty to defend or indemnify the new employer or its employee in the underlying lawsuit because the breach of contract exclusion in the commercial general liability policy excluded coverage for all of the underlying claims. Capitol Specialty Ins. v. Indus. Elecs., LLC, 407 Fed. Appx. 47, 2011 FED App. 0027N, 2011 U.S. App. LEXIS 659 (6th Cir. Ky. 2011 ).

Opinions of Attorney General.

Portions of Synthetic Gypsum Sales and Purchase Agreement between municipal utility and gypsum company which were deemed confidential and proprietary by gypsum company, and thereafter redacted from the agreement by municipal utility before it was released, were properly withheld pursuant to KRS 61.878(1)(l) and this Act, where the information was derived from independent research and a thorough evaluation of utility’s scrubber system which yielded a commercially valuable, and hitherto unknown, formula for using synthetic gypsum by-product. OAG 94-ORD-97.

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Misappropriation of Trade Secrets, Form 143.08.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

365.882. Injunctive relief.

  1. Actual or threatened misappropriation may be enjoined. Upon application to the court, an injunction shall be terminated when the trade secret has ceased to exist, but the injunction may be continued for an additional reasonable period of time in order to eliminate commercial advantage that otherwise would be derived from the misappropriation.
  2. In exceptional circumstances, an injunction may condition future use upon payment of a reasonable royalty for no longer than the period of time for which use could have been prohibited. Exceptional circumstances shall include, but not be limited to, a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable.
  3. In appropriate circumstances, affirmative acts to protect a trade secret may be compelled by court order.

History. Enact. Acts 1990, ch. 300, § 2, effective July 13, 1990.

Notes to Unpublished Decisions

1.Irreparable injury

Unpublished decision: District court’s finding that plaintiff would suffer irreparable injury (loss of goodwill, loss of competitive advantage, and loss of research incentives) absent an injunction was not clearly erroneous. Brake Parts, Inc. v. Lewis, 443 Fed. Appx. 27, 2011 FED App. 0563N, 2011 U.S. App. LEXIS 16720 (6th Cir. Ky. 2011 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

365.884. Damages.

  1. Except to the extent that a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation renders a monetary recovery inequitable, a complainant shall be entitled to recover damages for misappropriation. Damages may include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss. In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator’s unauthorized disclosure or use of a trade secret.
  2. If willful and malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice any award made under subsection (1).

History. Enact. Acts 1990, ch. 300, § 3, effective July 13, 1990.

NOTES TO DECISIONS

1.Damages Properly Awarded.

Although the licensing agreement between the parties was effectively terminated in the prior suit, the District Court’s award of damages to the developer on the basis of the Kentucky Uniform Trade Secrets Act, KRS 365.880 et seq., which provided civil remedies for the misappropriation of trade secrets outside of a contractual relationship, was proper. Amalgamated Indus. v. Tressa, Inc., 69 Fed. Appx. 255, 2003 U.S. App. LEXIS 11905 (6th Cir. Ky. 2003 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

365.886. Attorney’s fees.

If a claim of misappropriation is made in bad faith, a motion to terminate an injunction is made or resisted in bad faith, or willful and malicious misappropriation exists, the court may award reasonable attorney’s fees to the prevailing party.

History. Enact. Acts 1990, ch. 300, § 4, effective July 13, 1990.

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

365.888. Preservation of secrecy.

In an action under KRS 365.880 to 365.900 , a court shall preserve the secrecy of an alleged trade secret by reasonable means, which may include granting protective orders in connection with discovery proceedings, holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.

History. Enact. Acts 1990, ch. 300, § 5, effective July 13, 1990.

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

365.890. Statute of limitations.

An action for misappropriation must be brought within three (3) years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. For the purposes of this section, a continuing misappropriation constitutes a single claim.

History. Enact. Acts 1990, ch. 300, § 6, effective July 13, 1990.

NOTES TO DECISIONS

1.Multiple Claims.

Product developer’s current complaint of new acts of misappropriation by the manufacturer was viewed as part of a single claim that began with the manufacturer’s initial misappropriation of the developer’s trade secret litigated in a prior suit; therefore, the developer’s new claim was not barred by the three-year statute of limitations of KRS 365.890 , since it was timely filed in the prior suit and the new claim should have remained within the context of that suit, instead of being filed as a separate suit. Amalgamated Indus. v. Tressa, Inc., 69 Fed. Appx. 255, 2003 U.S. App. LEXIS 11905 (6th Cir. Ky. 2003 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Misappropriation of Trade Secrets, Form 143.08.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

365.892. Effect on other laws.

  1. Except as provided in subsection (2) of this section, KRS 365.880 to 365.900 replaces conflicting tort, restitutionary, and other law of this state providing civil remedies for misappropriation of a trade secret.
  2. KRS 365.880 to 365.900 shall not affect:
    1. Contractual remedies, whether or not based upon misappropriation of a trade secret;
    2. Other civil remedies that are not based upon misappropriation of a trade secret; or
    3. Criminal remedies, whether or not based upon misappropriation of a trade secret.

History. Enact. Acts 1990, ch. 300, § 7, effective July 13, 1990.

NOTES TO DECISIONS

Cited in

Smart & Assocs., LLC v. Indep. Liquor (NZ) Ltd., 226 F. Supp. 3d 828, 2016 U.S. Dist. LEXIS 180159 (W.D. Ky. 2016 ).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

365.894. Uniformity of application and construction.

KRS 365.880 to 365.900 shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of KRS 365.880 to 365.900 among states enacting it.

History. Enact. Acts 1990, ch. 300, § 8, effective July 13, 1990.

365.896. Short title.

KRS 365.880 to 365.900 may be cited as the Uniform Trade Secrets Act.

History. Enact. Acts 1990, ch. 300, § 9, effective July 13, 1990.

365.898. Severability.

If any provision of KRS 365.880 to 365.900 or its application to any person or circumstances is held invalid, the invalidity shall not affect other provisions or applications of KRS 365.880 to 365.900 which can be given effect without the invalid provision or application, and to this end the provisions of KRS 365.880 to 365.900 shall be severable.

History. Enact. Acts 1990, ch. 300, § 10, effective July 13, 1990.

365.900. Effective date — When applicable to misappropriation.

KRS 365.880 to 365.900 shall take effect on July 13, 1990, and shall not apply to misappropriation occurring prior to July 13, 1990. With respect to a continuing misappropriation that began prior to July 13, 1990, KRS 365.880 to 365.900 also shall not apply to the continuing misappropriation that occurs after July 13, 1990.

History. Enact. Acts 1990, ch. 300, § 11, effective July 13, 1990.

NOTES TO DECISIONS

Cited:

Grange Mut. Ins. Co. v. Trude, 151 S.W.3d 803, 2004 Ky. LEXIS 242 ( Ky. 2004 ), review denied, — S.W.3d —, 2005 Ky. LEXIS 443 (Ky. Jan. 20, 2005).

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Misappropriation of Trade Secrets, Form 143.08.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

Penalties

365.990. Penalties.

  1. Any person who violates any of the provisions of KRS 365.015 shall be fined not less than twenty-five dollars ($25) nor more than one hundred dollars ($100), or imprisoned for not less than ten (10) days nor more than thirty (30) days, or both, and each day that the violation continues shall constitute a separate offense.
  2. Any person who violates any of the provisions of KRS 365.020 to 365.050 shall, for each offense, be fined not less than one hundred dollars ($100) nor more than one thousand dollars ($1,000), or imprisoned for not more than six (6) months, or both. Any person who, as agent of any person or as director, officer, or agent of any corporation assists or aids in a violation of any of such provisions by the person or corporation for which he is director, officer, or agent, shall be responsible therefor equally with such person or corporation, and, in a prosecution brought by the local Commonwealth’s attorney against him under this subsection, it shall be sufficient to allege and prove the unlawful intent of the person or corporation for whom he acts.
  3. Any person who violates any of the provisions of KRS 365.100 shall be fined not less than two hundred dollars ($200) for each offense.
  4. Any person who violates any of the provisions of KRS 365.110 shall be fined not less than ten dollars ($10) nor more than fifty dollars ($50) for each offense.
  5. Any agent or employee of a corporation or any other person who violates any of the provisions of subsection (2) of KRS 365.220 shall be fined not less than one hundred dollars ($100) nor more than one thousand dollars ($1,000) for each offense, and each day’s continuance of the violation shall constitute a separate offense.
  6. A conviction of a corporation of violating any of the provisions of KRS 365.210 or 365.220 shall operate to forfeit its charter or right to do business in this state. Proceedings may be instituted by the Commonwealth’s attorney in any district in this state to forfeit the charter or right to do business in this state of any corporation violating any of the provisions of KRS 365.210 or 365.220 , and to subject the corporation charged, if found guilty, to the penalty imposed in subsection (7) of this section.
  7. Any company that violates any of the provisions of KRS 365.230 shall be fined not less than one hundred dollars ($100) nor more than one thousand dollars ($1,000), and if it is a corporation it shall, upon conviction, forfeit its charter.
  8. Any person or entity that transacts a transient business as defined in KRS 365.650 without first having obtained a permit in accordance with the provisions of KRS 365.660 , 365.665 , 365.680 or 365.685 or who knowingly advertises, offers for sale, or sells any goods, wares, or merchandise in violation of the provisions of KRS 365.650 to 365.695 , is guilty of a misdemeanor and shall, upon conviction, be fined not more than five hundred dollars ($500) or shall be imprisoned in the county jail for not more than six (6) months, or both.

History. 199b-5, 524-2, 883a-2 to 883a-4, 1279a-2, 1280, 1280a-2, 1283a-5, 4748h-2, 4748h-11, 4753 to 4755: amend. Acts 1956, ch. 131, § 2; 1966, ch. 230, § 15; 1968, ch. 152, § 154; 1976, ch. 27, § 18; 1980, ch. 188, § 283, effective July 15, 1980; 1980, ch. 293, § 3, effective July 15, 1980; 1986, ch. 70, § 11, effective July 15, 1986; 2007, ch. 81, § 2, effective June 26, 2007; 2008, ch. 83, § 8, effective July 15, 2008.

NOTES TO DECISIONS

1.Double Jeopardy.

Where, in an action under KRS 365.070 for an injunction and treble damages, appellees contended an award of treble damages would be a punishment with no degree of discretion possible which might be followed by prosecution under this section and, in the event criminal prosecution was instituted against them under this section, it would subject them to double jeopardy in direct contravention of Ky. Const., § 13, the court held the proper time to raise the question would be when appellees were prosecuted under the criminal provisions of the statute, although in a prior case a similar question had been decided adversely to the contention of the appellees. Jefferson Ice & Fuel Co. v. Grocers Ice & Gold Storage Co., 286 S.W.2d 80, 1955 Ky. LEXIS 91 ( Ky. 1955 ).

Opinions of Attorney General.

Any licensee selling malt beverages to customers at a price which does not match, if not exceed, his “cost,” as defined in KRS 365.030(3), is in violation of KRS 365.030(1), assuming sales below cost are for the purpose of injuring competitors or destroying competition. Assuming the retail price does not reflect the cost factors specified by statute, two (2) remedies are available: first, the violator will be subject to a fine and/or imprisonment pursuant to subsection (2) of this section; second, the violator’s license may be revoked pursuant to KRS 243.490 . OAG 82-479 .

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

365.991. Penalty. [Repealed by implication.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 192, § 2) provided the penalty for a violation of KRS 365.251 (Enact. Acts 1966, ch. 192, § 1) which was repealed by Acts 1968, ch. 152, § 168, and thus this section was considered repealed by implication.

365.992. Penalties.

  1. Any person making a false statement in the application provided for in KRS 365.410 to 365.480 is guilty of perjury and shall be imprisoned for not more than five (5) years.
  2. Any person who advertises, represents or holds out to the public any sale of goods to be an insurance, bankruptcy, mortgage foreclosure, insolvent’s, assignee’s, executor’s, administrator’s, receiver’s, trustee’s, removal sale, going out of business sale, or fire sale without having first complied with the provisions of KRS 365.410 to 365.480 , is guilty of a misdemeanor and shall be fined not more than $500 or shall be imprisoned in the county jail for not more than six (6) months, or both.
  3. Any person who holds, conducts, or carries on any sale of goods contrary to the provisions of KRS 365.410 to 365.480 , or who violates any of the provisions of KRS 365.410 to 365.480 is guilty of a misdemeanor, and shall be fined not more than $500 or shall be imprisoned in the county jail for not more than six (6) months, or both.

History. Enact. Acts 1966, ch. 60, §§ 12 to 14.

365.993. Penalties.

Any person violating KRS 365.490 to 365.510 shall be fined not less than $300 nor more than $500 or imprisoned not less than ten (10) nor more than thirty (30) days for the first offense. For the second offense he shall be fined not less than $500 nor more than $1,000 and imprisoned not less than thirty (30) nor more than ninety (90) days.

History. Enact. Acts 1966, ch. 204, § 5.

CHAPTER 366 Sale of Checks Law

366.010. Definitions. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 226, § 2; 1984, ch. 388, § 15, effective July 13, 1984) was repealed by Acts 2006, ch. 247, § 36, effective October 1, 2006. For comparable provisions, see KRS Chapter 286, Article 11.

366.020. License required for business of selling checks. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 226, § 3.) was repealed by Acts 2006, ch. 247, § 36, effective October 1, 2006. For comparable provisions, see KRS Chapter 286, Article 11.

366.023. Examination of licensees — Fees. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1992, ch. 77, § 19, effective July 14, 1992.) was repealed by Acts 2006, ch. 247, § 36, effective October 1, 2006. For comparable provisions, see KRS Chapter 286, Article 11.

366.030. Exemption of certain businesses. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 226, § 4; 1992, ch. 77, § 20, effective July 14, 1992) was repealed by Acts 2006, ch. 247, § 36, effective October 1, 2006. For comparable provisions, see KRS Chapter 286, Article 11.

366.040. Qualifications of licensee. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 226, § 5) was repealed by Acts 2006, ch. 247, § 36, effective October 1, 2006. For comparable provisions, see KRS Chapter 286, Article 11.

366.050. Application for license. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 226, § 6) was repealed by Acts 2006, ch. 247, § 36, effective October 1, 2006. For comparable provisions, see KRS Chapter 286, Article 11.

366.060. Investigation fees — Bond to be filed with application. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 226, § 7) was repealed by Acts 2006, ch. 247, § 36, effective October 1, 2006. For comparable provisions, see KRS Chapter 286, Article 11.

366.070. Investigation of applicant. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 226, § 8) was repealed by Acts 2006, ch. 247, § 36, effective October 1, 2006. For comparable provisions, see KRS Chapter 286, Article 11.

366.080. Bond to be maintained by licensee — New or supplemental bond. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 226, § 9) was repealed by Acts 2006, ch. 247, § 36, effective October 1, 2006. For comparable provisions, see KRS Chapter 286, Article 11.

366.090. Annual license fee. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 226, § 10) was repealed by Acts 2006, ch. 247, § 36, effective October 1, 2006. For comparable provisions, see KRS Chapter 286, Article 11.

366.100. Business, where conducted — Banks may sell checks through agents. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 226, § 11) was repealed by Acts 2006, ch. 247, § 36, effective October 1, 2006. For comparable provisions, see KRS Chapter 286, Article 11.

366.110. Liability of licensee on sale of checks. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 226, § 12) was repealed by Acts 2006, ch. 247, § 36, effective October 1, 2006. For comparable provisions, see KRS Chapter 286, Article 11.

366.120. Checks to bear name of licensee. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 226, § 13) was repealed by Acts 2006, ch. 247, § 36, effective October 1, 2006. For comparable provisions, see KRS Chapter 286, Article 11.

366.130. Revocation of licenses.

The commissioner may revoke a license on any ground on which he may refuse to grant a license or for violation of any provision of this chapter.

History. Enact. Acts 1966, ch. 226, § 14; 1992, ch. 77, § 21, effective July 14, 1992.

366.140. Hearing on denial or revocation of license. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 226, § 15; 1980, ch. 114, § 102, effective July 15, 1980; 1996, ch. 318, § 347, effective July 15, 1996) was repealed by Acts 2006, ch. 247, § 36, effective October 1, 2006. For comparable provisions, see KRS Chapter 286, Article 11.

366.150. Citation of law. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 226, § 1) was repealed by Acts 2006, ch. 247, § 36, effective October 1, 2006. For comparable provisions, see KRS Chapter 286, Article 11.

366.990. Penalties. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1966, ch. 226, § 16) was repealed by Acts 2006, ch. 247, § 36, effective October 1, 2006. For comparable provisions, see KRS Chapter 286, Article 11.

CHAPTER 367 Consumer Protection

367.010. Legislative findings — Citation. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 291, § 2) was repealed by Acts 1972, ch. 4, § 22.

367.020. Creation of commission — Membership. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 291, § 3) was repealed by Acts 1972, ch. 4, § 22.

367.030. Meeting, quorum of commission — Expenses of members. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 291, § 4) was repealed by Acts 1972, ch. 4, § 22.

367.040. Powers, duties of commission — Commission’s functions are unique to it. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 291, § 5) was repealed by Acts 1972, ch. 4, § 22.

367.050. Cooperation of other agencies — Commission’s duty as to confidential matters. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 291, § 6) was repealed by Acts 1972, ch. 4, § 22.

367.060. Director — Office space. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 291, § 7) was repealed by Acts 1972, ch. 4, § 22.

367.070. Prosecuting attorneys to enforce law, cooperate with commission. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1970, ch. 291, § 8) was repealed by Acts 1972, ch. 4, § 22.

Consumer Protection Act

367.110. Definitions.

As used in KRS 367.170 to 367.300 :

  1. “Person” means natural persons, corporations, trusts, partnerships, incorporated or unincorporated associations, and any other legal entity.
  2. “Trade” and “commerce” means the advertising, offering for sale, or distribution of any services and any property, tangible or intangible, real, personal or mixed, and any other article, commodity, or thing of value, and shall include any trade or commerce directly or indirectly affecting the people of this Commonwealth.
  3. “Documentary material” means the original or a copy of any book, record, report, memorandum, paper, communication, tabulation, map, chart, photograph, mechanical transcription, or other tangible document or recording.
  4. “Examination” of documentary material shall include the inspection, study, or copying of any such material, and the taking of testimony under oath or acknowledgment in respect of any such documentary material or copy thereof.

History. Enact. Acts 1972, ch. 4, § 6.

NOTES TO DECISIONS

Cited:

1.In General.

Where customers of check cashing company claimed that company disguised their consumer loan business as a check cashing operation, failed to disclose their interest rates and finance charges, and threatened criminal prosecution for writing bad checks when company had to have known customers could not have been prosecuted for failing to pay usurious loans, customers made out claims for fraud, deceit and misrepresentation and allegations were sufficient to state a claim under the Kentucky Consumer Protection Act. Hamilton v. York, 987 F. Supp. 953, 1997 U.S. Dist. LEXIS 19780 (E.D. Ky. 1997 ).

A consumer’s claim, however disguised, seeking relief for an injury allegedly caused by the payment of a rate on file with a regulatory commission, is viewed as an attack upon the rate approved by the regulatory commission, and all such claims are barred by the “filed rate doctrine.” Commonwealth ex rel. Chandler v. Anthem Ins. Cos., 8 S.W.3d 48, 1999 Ky. App. LEXIS 50 (Ky. Ct. App. 1999).

Trial court did not err in awarding the doctor summary judgment pursuant to injuries sustained by the patient in eye surgery; since eye surgery did not constitute a trade or commerce, the patient could not pursue a claim under the Consumer Protection Act, KRS 367.110 to 367.390 . Simmons v. Stephenson, 84 S.W.3d 926, 2002 Ky. App. LEXIS 1651 (Ky. Ct. App. 2002).

2.Constitutionality.

The Consumer Protection Act is not unconstitutional as it is neither overly broad nor vague. Telcom Directories, Inc. v. Commonwealth, 833 S.W.2d 848, 1991 Ky. App. LEXIS 159 (Ky. Ct. App. 1991).

3.Applicability.

In order for the Kentucky Consumer Protection Act to apply to the practice of medicine, there must be some allegations that the actions complained of were part of the business aspect of the practice, including: (1) advertising for a particular procedure or surgery then failing to advise the patient of the risks involved or of alternative treatment, (2) entering into a financial agreement that would increase profits to the possible detriment of patients, or (3) advertising services at a particular cost then charging at a different rate; negligently performing surgery or providing treatment that is below the standard of care and failing to inform a patient of such actions are not included in the business aspect of the practice of medicine. Barnett v. Mercy Health Partners-Lourdes, Inc., 233 S.W.3d 723, 2007 Ky. App. LEXIS 320 (Ky. Ct. App. 2007).

Kentucky Consumer Protection Act did not apply to a personal representative’s private right of action under KRS 367.220(1) and KRS 367.170 against a hospital as a result of a surgery performed on a decedent by an intoxicated doctor as: (1) the actions about which the plaintiff complained arose from the decedent’s surgery, (2) the plaintiff did not prove that the hospital promoted the services of the doctor to increase profits or patient volume, and then failed to adequately advise the decedent of the risks of the surgery, (3) the plaintiff did not prove that the hospital and the doctor had a financial arrangement of any sort, and (4) the only allegation made was that the hospital failed to advise him or the decedent of the problems that arose during surgery, which did not constitute part of the entrepreneurial aspect of the practice of medicine. Barnett v. Mercy Health Partners-Lourdes, Inc., 233 S.W.3d 723, 2007 Ky. App. LEXIS 320 (Ky. Ct. App. 2007).

Chapter 13 debtor’s claim against a real estate mortgage loan servicer brought under Kentucky’s Consumer Protection Act, KRS 367.110 , was dismissed because the Act did not apply to actions involving real estate mortgages. Tolliver v. U.S. Bank (In re Tolliver), 2012 Bankr. LEXIS 3333 (Bankr. E.D. Ky. July 19, 2012).

Trial court erred in granting a seller’s motion for summary judgment on the buyers’ claims of fraud and violation of the Kentucky Consumer Protection Act because, while the sales contract at issue contained an “as is” clause, the evidence of record showed there to be genuine and unresolved issues of material fact concerning the buyers’ claims regarding the “hidden mold contamination” inside the mobile home they had purchased. Elendt v. Green Tree Servicing, LLC, 443 S.W.3d 612, 2014 Ky. App. LEXIS 113 (Ky. Ct. App. 2014).

Giving counsel to, and indemnifying, an insured did not bar an insurer's bad faith liability because the liability was based on the Consumer Protection Act, Ky. Rev. Stat. Ann. § 367.110 et seq., the Unfair Claims Settlement Practices Act, Ky. Rev. Stat. Ann. § 304.12-010 et seq., and good faith and fair dealing, not breach of contract. Ind. Ins. Co. v. Demetre, 2015 Ky. App. LEXIS 10 (Ky. Ct. App. Jan. 30, 2015, sub. op., 2015 Ky. App. Unpub. LEXIS 846 (Ky. Ct. App. Jan. 30, 2015).

Where a university made changes to a clinical psychology Ph.D. program, students' claims under the Kentucky Consumer Protection Act failed because the students sought a degree for a business, as opposed, to personal purpose. Suhail v. Univ. of the Cumberlands, 107 F. Supp. 3d 748, 2015 U.S. Dist. LEXIS 68742 (E.D. Ky. 2015 ).

4.Extent of Attorney General’s Authority.

This act authorizes the Attorney General to proceed on behalf of the Commonwealth in his law-enforcement authority when (1) he has reason to believe that any person is using, has used or is about to use any method, act or practice declared to be unlawful, and (2) that said proceeding would be in the public interest; there are no other express restrictions to limit the nature of the activities against which he may proceed, nor is it implicit in the act that he proceed only against methods and practices used in the merchandising of goods or services intended for personal, family or household use. Commonwealth ex rel. Stephens v. North American Van Lines, Inc., 600 S.W.2d 459, 1979 Ky. App. LEXIS 532 (Ky. Ct. App. 1979).

KRS 367.801 to 367.819 in no way affects or alters the Attorney General’s right to proceed against methods, acts or practices declared unlawful by the Consumer Protection Act; the enactment of the Business Opportunities Act may well have indicated the desire of the legislature to remove all doubt that the Attorney General could rightly proceed against an alleged business opportunity scheme, pursuant to KRS 367.190 if KRS 367.170 had been violated. Commonwealth ex rel. Stephens v. North American Van Lines, Inc., 600 S.W.2d 459, 1979 Ky. App. LEXIS 532 (Ky. Ct. App. 1979).

The Kentucky Consumer Protection Act was broadly designed to curtail unfair, false, misleading or deceptive practices in the conduct of commerce and the Attorney General is therefore not limited to prosecuting only those selected types of illegal business acts or practices which are used in the merchandising of goods or services intended for personal, family or household use. Commonwealth ex rel. Stephens v. North American Van Lines, Inc., 600 S.W.2d 459, 1979 Ky. App. LEXIS 532 (Ky. Ct. App. 1979).

5.Remedies.

Where fraudulent representations were made by seller of pick-up truck, buyer had remedies under this act even though his acceptance and use of the vehicle had precluded his remedies under the UCC. Greene v. Waddell, 657 S.W.2d 589, 1983 Ky. App. LEXIS 321 (Ky. Ct. App. 1983).

Arbitration clauses in a mortgage and a note were unconscionable and unenforceable under KRS 417.050 of the Kentucky Uniform Arbitration Act, as they prevented the mortgagors from meaningfully pursuing any statutory claims for violations of the Home Ownership Equity Protection Act, 15 USCS § 1639, the Truth In Lending Act, 15 USCS § 1601, the Kentucky Consumer Protection Act, KRS 367.110 et seq., and usury; an arbitrator could not modify the contract or award anything other than actual damages. Mortg. Elec. Registration Sys. v. Abner, 260 S.W.3d 351, 2008 Ky. App. LEXIS 233 (Ky. Ct. App. 2008).

Jury was not instructed the jury could award punitive damages for breach of contract because the punitive damages instruction, while mentioning breach of contract, instructed the jury such damages were available for violations of the Consumer Protection Act, Ky. Rev. Stat. Ann. § 367.110 et seq., and the Unfair Claims Settlement Practices Act, Ky. Rev. Stat. Ann. § 304.12-010 et seq. Ind. Ins. Co. v. Demetre, 2015 Ky. App. LEXIS 10 (Ky. Ct. App. Jan. 30, 2015, sub. op., 2015 Ky. App. Unpub. LEXIS 846 (Ky. Ct. App. Jan. 30, 2015).

6.Proof Required.

The Kentucky Consumer Protection Act does not require proof of actual deception of some person in order to find a violation thereof. Telcom Directories, Inc. v. Commonwealth, 833 S.W.2d 848, 1991 Ky. App. LEXIS 159 (Ky. Ct. App. 1991).

7.Third Parties.

Granting of the insurer’s partial motion for summary judgment was proper where the passenger was not the insured under the policy; thus, he was not permitted to make a claim under the Kentucky Consumer Protection Act, KRS 367.110 et seq. Allen v. Safe Auto Ins. Co., 332 F. Supp. 2d 1044, 2004 U.S. Dist. LEXIS 17990 (W.D. Ky. 2004 ).

Where the owner filed suit for violations of Kentucky’s Consumer Protection Act, KRS 367.110 et seq., based on improper construction work on his property, the subcontractor was entitled to dismissal. The owner not a party to the contract between the general contractor and the subcontractor; nor was he an intended third-party beneficiary. Holcomb v. Womack, 2005 U.S. Dist. LEXIS 22667 (E.D. Ky. Oct. 4, 2005).

Cited:

Cummings v. Thomas Industries, Inc., 812 F. Supp. 99, 1993 U.S. Dist. LEXIS 1248 (W.D. Ky. 1993 ); Cincinnati Ins. Co. v. Taylor, — F. Supp. 2d —, 2003 U.S. Dist. LEXIS 4608 (W.D. Ky. 2003 ).

Opinions of Attorney General.

If use of the term “fire sale” is made in such a manner as to lead consumers to believe that goods are being sold at a reduction in price due to damage by fire, smoke, water or otherwise, when such is not the case, the Consumer Protection Act is violated thereby. OAG 75-434 .

Research References and Practice Aids

Kentucky Bench & Bar.

Stamm, The Attorney General Goes to Market, Vol. 41, No. 2, April 1977, Ky. Bench & Bar 14.

Baxter, Private Right of Action Under the Consumer Protection Act — New Avenues for Recovery, Vol. 43, No. 4, October 1979, Ky. Bench & Bar 8.

Kentucky Law Journal.

Boone, The Kentucky Consumer Act — True Happiness?, 61 Ky. L.J. 793 (1973).

Comments, Precomplaint Investigations Under the Kentucky Consumer Protection Act: Validity and Scope of the Civil Investigation Demand, 65 Ky. L.J. 169 (1976-77).

Kentucky Law Survey, Roeder, Commercial Law, 69 Ky. L.J. 517 (1980-81).

Kentucky Law Survey, Bondurant and Arvin, Real Property, 69 Ky. L.J. 625 (1980-81).

Northern Kentucky Law Review.

Notes, U.C.C. — Consumer Protection Act — Limited Warranties — Automobile Manufacturer’s Refusal to Recognize Buyers’ Rights Under the U.C.C. When a Limited Warranty Fails of Its Essential Purpose Constitutes an Unfair Trade Practice Under the Consumer Protection Act, 6 N. Ky. L. Rev. 403 (1979).

McGrath & Edmonds, A Survey of Kentucky Insurance Law: A Look at the Bad Faith Cause of Action., 31 N. Ky. L. Rev. 139 (2004).

General Law Issue: Article: Spot Delivery: Why It Is Illegal and Why Car Dealers Have Been Getting Away With Theft For So Long, 38 N. Ky. L. Rev. 221 (2011).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Antitrust Actions, § 63.00.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Consumer Protection, § 192.00.

367.120. Legislative intent — Title.

  1. The General Assembly finds that the public health, welfare and interest require a strong and effective consumer protection program to protect the public interest and the well-being of both the consumer public and the ethical sellers of goods and services; toward this end, a Consumers’ Advisory Council and a Division of Consumer Protection of the Department of Law are hereby created for the purpose of aiding in the development of preventive and remedial consumer protection programs and enforcing consumer protection statutes.
  2. KRS 367.110 to 367.300 may be cited as the “Consumer Protection Act.”

History. Enact. Acts 1972, ch. 4, § 1.

NOTES TO DECISIONS

1.In General.

Where customers of check cashing company claimed that company disguised their consumer loan business as a check cashing operation, failed to disclose their interest rates and finance charges, and threatened criminal prosecution for writing bad checks when company had to have known customers could not have been prosecuted for failing to pay usurious loans, customers made out claims for fraud, deceit and misrepresentation and allegations were sufficient to state a claim under the Kentucky Consumer Protection Act. Hamilton v. York, 987 F. Supp. 953, 1997 U.S. Dist. LEXIS 19780 (E.D. Ky. 1997 ).

2.Enforcement.

The state Attorney General’s interpretation that the Consumer Protection Act does not authorize him to represent in federal consolidated class actions those Kentucky citizens defrauded by deceptive pyramid sales practices was proper and particularly appropriate where the interpretation was adverse to his best interests in the litigation. In re Glenn W. Turner Enterprises Litigation, 521 F.2d 775, 1975 U.S. App. LEXIS 13311 (3d Cir. Pa. 1975).

Where a university made changes to a clinical psychology Ph.D. program, students' claims under the Kentucky Consumer Protection Act failed because the students sought a degree for a business, as opposed, to personal purpose. Suhail v. Univ. of the Cumberlands, 107 F. Supp. 3d 748, 2015 U.S. Dist. LEXIS 68742 (E.D. Ky. 2015 ).

3.Similarity to Federal Law.

The Kentucky Consumer Protection Act is virtually identical to the Sherman Antitrust Act and has been interpreted as such; therefore, upon such agreement by the parties, where plaintiffs failed to establish a conspiracy necessary to support a restraint of trade claim under § 1 of the Sherman Act and the defendant was entitled to summary judgment on the Sherman Antitrust Act claim, it was also entitled to summary judgment on the Kentucky Consumer Protection Act claim. Borg-Warner Protective Servs. Corp. v. Guardsmark, Inc., 946 F. Supp. 495, 1996 U.S. Dist. LEXIS 18001 (E.D. Ky. 1996 ), aff'd, 156 F.3d 1228 (6th Cir. Ky. 1998 ).

Cited:

Commonwealth ex rel. Hancock v. Pineur, 533 S.W.2d 527, 1976 Ky. LEXIS 112 ( Ky. 1976 ); Ford Motor Co. v. Mayes, 575 S.W.2d 480, 1978 Ky. App. LEXIS 649 (Ky. Ct. App. 1978); Commonwealth ex rel. Beshear v. ABAC Pest Control, Inc., 621 S.W.2d 705, 1981 Ky. App. LEXIS 290 (Ky. Ct. App. 1981); Keeton v. Lexington Truck Sales, 275 S.W.3d 723, 2008 Ky. App. LEXIS 226 (Ky. Ct. App. 2008).

Research References and Practice Aids

Kentucky Bench & Bar.

Stamm, The Attorney General Goes to Market, Vol. 41, No. 2, April 1977, Ky. Bench & Bar 14.

Baxter, Private Right of Action Under the Consumer Protection Act — New Avenues for Recovery, Vol. 43, No. 4, October 1979, Ky. Bench & Bar 8.

Kentucky Law Journal.

Comments, Precomplaint Investigations Under the Kentucky Consumer Protection Act: Validity and Scope of the Civil Investigation Demand, 65 Ky. L.J. 169 (1976-77).

Northern Kentucky Law Review.

Notes, U.C.C. — Consumer Protection Act — Limited Warranties — Automobile Manufacturer’s Refusal to Recognize Buyers’ Rights Under the U.C.C. When a Limited Warranty Fails of Its Essential Purpose Constitutes an Unfair Trade Practice Under the Consumer Protection Act, 6 N. Ky. L. Rev. 403 (1979).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Consumer Protection, § 192.00.

367.130. Consumers’ Advisory Council — Members — Appointment.

  1. The members of the Consumers’ Advisory Council shall be sixteen (16) in number and shall be appointed by the Governor and shall include citizens of Kentucky generally knowledgeable in consumer affairs.
  2. In addition to the members appointed by the Governor, the Attorney General shall be an ex officio member and shall serve as the chairman of the Consumers’ Advisory Council.
  3. The members of the council other than the Attorney General shall be appointed or reappointed by the Governor within sixty (60) days after July 1, 2000. Each member shall serve for a three (3) year term, except that of the members first appointed or reappointed after July 1, 2000, six (6) shall be appointed for a term of one (1) year, five (5) shall be appointed for a term of two (2) years, and five (5) shall be appointed for a term of three (3) years. Members of the council shall be eligible for reappointment by the Governor.
  4. Each member of the Consumers’ Advisory Council shall be a resident of Kentucky, and except for the Attorney General, shall not be in the employ of the Commonwealth, except as a faculty member or on the staff of a school.

History. Enact. Acts 1972, ch. 4, § 2; 2000, ch. 40, § 1, effective July 14, 2000.

367.140. Consumers’ Advisory Council — Meetings — Quorum — Compensation.

  1. The Consumers’ Advisory Council shall be attached for administrative purposes to the Department of Law, with such duties and responsibilities to act in an advisory capacity on consumer affairs as the council deems necessary and as directed by the Governor, the Attorney General or the legislative branch of government.
  2. The Consumers’ Advisory Council shall meet at least four (4) times each year at such times and places as shall be designated by its chairman, and shall hold such other meetings as shall be called by the chairman. Seven (7) members of the council shall constitute a quorum. The members of the council shall receive twenty-five dollars ($25) per day for attending each meeting and shall receive their reasonable and necessary expenses in connection with the performance of their duties, to be paid out of sums appropriated to the Department of Law.
  3. The Consumers’ Advisory Council shall prepare and publish annually a report on the state of consumer affairs in Kentucky.

History. Enact. Acts 1972, ch. 4, § 3; 1978, ch. 154, § 40, effective June 17, 1978.

367.150. Functions, powers and duties of Department of Law.

The Department of Law shall have the following functions, powers and duties:

  1. To promote the coordination of consumer protection activities of all departments, divisions and branches of state, county and city government, concerned with activities involving consumer interests;
  2. To assist, advise and cooperate with federal, state and local agencies and officials to protect and promote the interests of the consumer public; to advise the Governor and the legislature in all matters concerning consumer affairs;
  3. To conduct investigations, research, studies and analysis of matters affecting health, safety, the human environment, the marketplace and all other consumer affairs, and take appropriate action; to communicate the view of the consumer to state, county, and city agencies and officials;
  4. To study the operation of all laws, rules, regulations, orders, and state policies affecting consumers and to recommend to the Governor and to the Legislature, new legislation, rules, regulations, orders, and policies in the consumers’ interest;
  5. To organize and hold conferences on problems affecting consumers; to undertake activities to encourage business, industry, the professions, and others offering goods or services to maintain high standards of honesty, fair business practices, and public responsibility in the production, promotion and sale of consumer goods and services;
  6. To provide a central clearing house of information for all citizens of the Commonwealth by collecting and compiling consumer complaints and inquiries, and forwarding them to the proper governmental agencies if appropriate; it shall be the further responsibility of the department to maintain records indicating the final disposition by the agency of any matter so referred;
  7. To organize, promote and conduct consumer education programs within the Commonwealth; to cooperate with and establish necessary liaison with consumer organizations;
    1. To appear before any federal, state or local governmental branch, commission, department, rate-making or regulatory body or agency, to represent and be heard on behalf of consumers’ interests; and (8) (a) To appear before any federal, state or local governmental branch, commission, department, rate-making or regulatory body or agency, to represent and be heard on behalf of consumers’ interests; and
    2. To be made a real party in interest to any action on behalf of consumer interests involving a quasijudicial or rate-making proceeding of any state or local governmental branch, commission, department, agency, or rate-making body whenever deemed necessary and advisable in the consumers’ interest by the Attorney General.
  8. To perform such other acts as may be incidental to the exercise of the functions, powers and duties set forth in KRS 367.120 to 367.300 .

History. Enact. Acts 1972, ch. 4, § 4; 1986, ch. 406, § 4, effective July 15, 1986.

Opinions of Attorney General.

The field of consumer protection is a permissible area for regulation by a fiscal court, provided such regulation is consistent with state law or administrative regulation. OAG 79-268 .

Research References and Practice Aids

Kentucky Bench & Bar.

Stamm, The Attorney General Goes to Market, Vol. 41, No. 2, April 1977, Ky. Bench & Bar 14.

Baxter, Private Right of Action Under the Consumer Protection Act — New Avenues for Recovery, Vol. 43, No. 4, October 1979, Ky. Bench & Bar 8.

Kentucky Law Journal.

Comments, Precomplaint Investigations Under the Kentucky Consumer Protection Act: Validity and Scope of the Civil Investigation Demand, 65 Ky. L.J. 169 (1976-77).

367.152. Attorney General’s concurrent authority to enforce bait advertising statute.

The Attorney General shall have concurrent authority with the county attorney for the enforcement of the following statute: KRS 517.040 , Bait advertising.

History. Enact. Acts 1994, ch. 193, § 1, effective July 15, 1994.

367.160. Cooperation of state agencies — Access to material evidence and information by utility and health insurance intervenors.

  1. All departments, agencies, officers, and employees of the Commonwealth shall fully cooperate with the Attorney General in carrying out the functions of KRS 367.120 to 367.300 .
  2. The persons designated by the Attorney General as utility consumer intervenors shall have the same access to material evidence and information of the Public Service Commission relating to any case before it as other parties to the case.
  3. The persons designated by the Attorney General as health insurance consumer intervenors shall have the same access to material evidence and information of the commissioner of the Department of Insurance relating to any health insurance rate hearings before it as other parties to the hearing.

History. Enact. Acts 1972, ch. 4, § 5; 1976, ch. 88, § 16, effective March 29, 1976; 1986, ch. 406, § 5, effective July 15, 1986; 1996, ch. 371, § 17, effective July 15, 1996; 2010, ch. 24, § 1917, effective July 15, 2010.

367.170. Unlawful acts.

  1. Unfair, false, misleading, or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful.
  2. For the purposes of this section, unfair shall be construed to mean unconscionable.

History. Enact. Acts 1972, ch. 4, § 7; 1976, ch. 221, § 1.

NOTES TO DECISIONS

Analysis

1.Constitutionality.

The words “false,” “misleading,” and “deceptive” though undefined, have meanings which are generally well understood by reasonably prudent persons of common intelligence and for that reason are not unconstitutionally vague. Dare To Be Great, Inc. v. Commonwealth, 511 S.W.2d 224, 1974 Ky. LEXIS 482 ( Ky. 1974 ).

The Consumer Protection Act is not unconstitutional as it is neither overly broad nor vague. Telcom Directories, Inc. v. Commonwealth, 833 S.W.2d 848, 1991 Ky. App. LEXIS 159 (Ky. Ct. App. 1991).

Because effect on out-of-state commerce of Kentucky’s price-gouging laws was entirely dependent upon retailer’s independent decisionmaking with regard to structure of its online marketplace, application of those laws to Kentucky-based third-party sellers on marketplace in connection with sales to Kentucky consumers was unlikely to offend extraterritoriality doctrine of dormant commerce clause, and district court erred in concluding otherwise. Online Merchs. Guild v. Cameron, 995 F.3d 540, 2021 FED App. 96P, 2021 U.S. App. LEXIS 12825 (6th Cir. Ky. 2021 ).

2.Applicability.

Plaintiff’s claim that defendant check cashing company’s use of the threat of prosecution under the so called “bad check” law, KRS 514.040 , was unfair, false and misleading pursuant to the Kentucky Consumer Protection Act, as it applied to the issue of whether the bad check law applied when a check was post-dated was sufficient to state a claim under which relief could be granted and therefore was not subject to dismissal. Miller v. HLT Check Exchange (In re Miller), 215 B.R. 970, 1997 Bankr. LEXIS 2107 (Bankr. E.D. Ky. 1997 ).

If the Attorney General has stated a cause of action under the Consumer Protection Act, his claim is not barred even though the filed rate doctrine limits the potential remedies to something other than damages, such as an injunction or a civil penalty. Commonwealth ex rel. Chandler v. Anthem Ins. Cos., 8 S.W.3d 48, 1999 Ky. App. LEXIS 50 (Ky. Ct. App. 1999).

Neither the Kentucky Consumer Protection Act, KRS 367.170 and KRS 367.220 , nor the Kentucky Unfair Claims Settlement Practices Act, KRS 304.12-230 , are available as vehicles for bringing a civil action against a workers’ compensation insurer. Travelers Indem. Co. v. Reker, 100 S.W.3d 756, 2003 Ky. LEXIS 86 ( Ky. 2003 ).

Because a health care worker alleged that the latex gloves at issue were used at work and not for personal, family, or household use, the worker’s private cause of action under Kentucky’s Unfair Trade Practices Act, KRS 367.170 , was dismissed as a matter of law on the manufacturer’s motion for summary judgment. Collins v. Ansell Inc., 2003 U.S. Dist. LEXIS 21128 (W.D. Ky. Nov. 19, 2003).

In an action related to an underinsured motorist (UIM) policy, the district court erred in granting the insurer’s motion for judgment on the pleadings in relation to the insured’s first-party bad faith claims under Kentucky common law and the Kentucky Consumer Protection Act, KRS 367.110 et seq., based on the insurer’s alleged conduct occurring after the filing of the insured’s complaint in her first lawsuit to enforce her rights under the UIM policy; the first-party bad faith claims based on post-complaint conduct were not barred by res judicata, and material issues of fact remained as to whether the insurer’s actions of failing to comply with the original judgment, demanding that the insured sign a complete release of all potential claims, and complying with the judgment only after the insured sought a writ to enforce the judgment constituted unfair conduct. Rawe v. Liberty Mut. Fire Ins. Co., 462 F.3d 521, 2006 FED App. 0337P, 2006 U.S. App. LEXIS 22440 (6th Cir. Ky. 2006 ).

Removal under 28 USCS §§ 1332, 1441 was proper because a drug manufacturer met its burden to show that non-diverse sales agents were fraudulently joined where there was no causal nexus for colorable liability for negligence or negligent misrepresentation and a Kentucky Consumer Protection Act claim under KRS 367.170(1) failed because there was no allegations in the proposed amended complaint that the agents sold the drugs to plaintiffs. Anderson v. Merck & Co., 417 F. Supp. 2d 842, 2006 U.S. Dist. LEXIS 7784 (E.D. Ky. 2006 ).

Kentucky Consumer Protection Act did not apply to a personal representative’s private right of action under KRS 367.220(1) and KRS 367.170 against a hospital as a result of a surgery performed on a decedent by an intoxicated doctor as: (1) the actions about which the plaintiff complained arose from the decedent’s surgery, (2) the plaintiff did not prove that the hospital promoted the services of the doctor to increase profits or patient volume, and then failed to adequately advise the decedent of the risks of the surgery, (3) the plaintiff did not prove that the hospital and the doctor had a financial arrangement of any sort, and (4) the only allegation made was that the hospital failed to advise him or the decedent of the problems that arose during surgery, which did not constitute part of the entrepreneurial aspect of the practice of medicine. Barnett v. Mercy Health Partners-Lourdes, Inc., 233 S.W.3d 723, 2007 Ky. App. LEXIS 320 (Ky. Ct. App. 2007).

Nationwide class could not be certified under Fed. R. Civ. P. 23(b)(3) in a truck purchaser’s action against a manufacturer under the Kentucky Consumer Protection Act, KRS 367.170 et seq.; Kentucky law could not be applied class-wide, and application of states’ consumer protection laws would have required individualized inquiries. Corder v. Ford Motor Co., 272 F.R.D. 205, 2011 U.S. Dist. LEXIS 944 (W.D. Ky. 2011 ).

Bank’s filing of a proof of claim was not done in the conduct of any trade as required for a claim based on the Kentucky Consumer Protection Act and thus, the Act did not provide a debtor with a private right of action. The act of including a social security number in a proof of claim was not “false, misleading, or deceptive” as would be understood by the public, and such an action in no way provided the bank with an unfair advantage over the debtor. Lucky v. Ky. Bank (In re Lucky), 2011 Bankr. LEXIS 5734 (Bankr. E.D. Ky. Mar. 21, 2011).

One drug company could not be found liable under the Kentucky Medicaid Fraud Statute, KRS 205.8463(4), the Kentucky False Advertising Statute, KRS 517.030 , and the Kentucky Consumer Protection Act, KRS 367.170 , and the second drug company could not be found liable under the Kentucky Medicaid Fraud Statute and the Kentucky Consumer Protection Act, all for allegedly misreporting the “average wholesale prices” of their prescription drugs. The jury acted unreasonably in finding them liable to the Commonwealth because the Commonwealth absolutely failed to show that any conduct by them was a “substantial factor” in damaging the Commonwealth given that the Commonwealth had long known that “average wholesale prices” were reported as inflated figures rather than the cost of real transactions. Sandoz Inc. v. Commonwealth ex rel. Conway, 405 S.W.3d 506, 2012 Ky. App. LEXIS 205 (Ky. Ct. App. 2012).

Actions arising from transactions regarding the lottery do not fall within the purview of the Kentucky Consumer Protection Act. Therefore, purchasers of scratch-off game tickets that paid out $20 in winnings did not have a claim based on advertising that promised that the minimum prize was $25 dollars. Collins v. Ky. Lottery Corp., 399 S.W.3d 449, 2012 Ky. App. LEXIS 212 (Ky. Ct. App. 2012).

Where aircraft purchasers alleged that an airplane company misled them about the engine warranties, a purchaser could not maintain a claim under the Kentucky Consumer Protection Act, KRS 367.110 et seq., because the complaint made no allegation that the aircraft was bought or leased primarily for personal, family, or household purposes, and the documents contained an agreement to lease the aircraft in question to a commercial air taxi business. Morris Aviation, LLC v. Diamond Aircraft Indus., 730 F. Supp. 2d 683, 2010 U.S. Dist. LEXIS 74989 (W.D. Ky. 2010 ), aff'd, 536 Fed. Appx. 558, 2013 FED App. 802N, 2013 U.S. App. LEXIS 18203 (6th Cir. Ky. 2013 ).

Trial court properly granted summary judgment to a funeral home and a cemetery on a family’s claim for violation of the Kentucky Consumer Protection Act because the family lacked standing where the family did not enter into a contract with the cemetery and did not show any unconscionable, false, misleading, or deceptive acts. Keaton v. G.C. Williams Funeral Home, Inc., 436 S.W.3d 538, 2013 Ky. App. LEXIS 153 (Ky. Ct. App. 2013).

Where a university made changes to a clinical psychology Ph.D. program, students' claims under the Kentucky Consumer Protection Act failed because the students sought a degree for a business, as opposed, to personal purpose. Suhail v. Univ. of the Cumberlands, 107 F. Supp. 3d 748, 2015 U.S. Dist. LEXIS 68742 (E.D. Ky. 2015 ).

3.Fraudulent and Deceptive Acts.

Scheme by which defendants enrolled prospective customers in a chain-letter type program through the sale of a series of motivational tapes, where the chief function of the tapes was to lure the customer into investing in pyramid selling arrangement offering prospects of quick earnings, was fraudulent and deceptive. Dare To Be Great, Inc. v. Commonwealth, 511 S.W.2d 224, 1974 Ky. LEXIS 482 ( Ky. 1974 ).

Private trade organization engaged in scheme of certifying people as “certified hearing aid audiologist” knew or should have known that customers would be deceived by use of this term in reference to people who had not met the statutory requirements for audiologist, and thus violated the Consumer Protection Act by the use of false, misleading and deceptive practices. National Hearing Aid Soc. v. Commonwealth, 551 S.W.2d 247, 1977 Ky. App. LEXIS 716 (Ky. Ct. App. 1977).

The Kentucky Consumer Protection Act does not require proof of actual deception of some person in order to find a violation thereof. Telcom Directories, Inc. v. Commonwealth, 833 S.W.2d 848, 1991 Ky. App. LEXIS 159 (Ky. Ct. App. 1991).

The defendant motor vehicle manufacturer and dealer were not entitled to summary judgment in an action by the purchaser of a van since a fact-finder might reasonably conclude that the sale of the van as “new” without disclosure of its pre-sale repair history constituted a false, misleading, or deceptive act. Smith v. GMC, 979 S.W.2d 127, 1998 Ky. App. LEXIS 99 (Ky. Ct. App. 1998).

Regarding the Kentucky Consumer Protection Act claim, the mother’s alleged “injury” was not an ascertainable loss of money or property as required by the statute where the mother claimed that she was injured because the Kentucky Department of Insurance did not pursue her claim after receiving the false and misleading statements from the insurance company. Yates v. Bankers Life & Cas. Ins. Co., 720 F. Supp. 2d 809, 2010 U.S. Dist. LEXIS 58712 (W.D. Ky. 2010 ).

Requiring a person to personally inquire about an account rather than allow electronic access is neither unfair, misleading, nor deceptive. When debtor joined the credit union, she accepted the limitations on that membership, and one of those limitations imposed restrictions on members that caused a loss to the credit union; enforcing the limitation, that was agreed to by debtor, could hardly be considered deceptive or misleading. Spearman v. Commonwealth Credit Union (In re Spearman), 2017 Bankr. LEXIS 627 (Bankr. W.D. Ky. Mar. 9, 2017).

4.— Absence.

Where, after purchase proposal for car was initialed by sales manager, manager refused to sell car for specified amount, claiming that salesman had misled manager by incorrectly completing the proposal form, no unfair or unconscionable acts were shown which would violate this act and purchaser could not collect either punitive damages or attorney’s fees. Wahba v. Don Corlett Motors, Inc., 573 S.W.2d 357, 1978 Ky. App. LEXIS 608 (Ky. Ct. App. 1978).

A violation of KRS 186.076 (now repealed), which requires the dealer to title a vehicle in the name of the dealership within 10 days after acquiring the vehicle in any manner or before selling the vehicle to another party, whichever occurs first, is not in and of itself consumer fraud; accordingly, where an automobile buyer merely alleged that the defendant dealer violated that section by failing to transfer title to him within 10 days after he purchased the automobile and the buyer offered no other proof of fraud or damages, the trial court should have granted the dealer’s motion for a directed verdict. Red Bird Motors, Inc. v. Endsley, 657 S.W.2d 954, 1983 Ky. App. LEXIS 328 (Ky. Ct. App. 1983).

A landlord’s failure to make promised repairs to a rental property and the landlord’s failure to comply with a local housing code do not constitute unfair, false, misleading or deceptive acts unlawful under the Consumer Protection Act. Miles v. Shauntee, 664 S.W.2d 512, 1983 Ky. LEXIS 282 ( Ky. 1983 ).

Lender’s failure to itemize a “rent charge” — which included an administrative fee — when disclosing to a consumer the amounts upon which the consumer’s lease payment were based did not violate the Consumer Leasing Act (CLA), 15 USCS § 1667 et seq., or the Kentucky Consumer Protection Act (KCPA), KRS 367.170 et seq.; the CLA did not require that the rent charge be itemized, and the consumer’s KCPA claim failed because the consumer failed to show any loss caused by the lack of itemization, KRS 367.220(1), and the lender committed no “deceptive acts or practices,” KRS 367.170 . Schlenk v. Ford Motor Credit Co., 308 F.3d 619, 2002 FED App. 0370P, 2002 U.S. App. LEXIS 22341 (6th Cir. Ky. 2002 ), cert. denied, 540 U.S. 877, 124 S. Ct. 288, 157 L. Ed. 2d 141, 2003 U.S. LEXIS 6242 (U.S. 2003).

5.Unfair Trade Practice.

Where a defective truck could not be repaired within a reasonable time, manufacturer acted “unconscionably” when it insisted that buyers had no remedy other than to allow manufacturer and its dealer to continue indefinitely in their efforts to correct the problem and where such manufacturer followed a warranty policy which refused to recognize the rights of buyers under the Uniform Commercial Code when the only remedy afforded by its limited warranty failed of its purpose, such policy was an “unfair” trade practice which was unlawful under the Consumer Protection Act. Ford Motor Co. v. Mayes, 575 S.W.2d 480, 1978 Ky. App. LEXIS 649 (Ky. Ct. App. 1978).

6.Extent of Attorney General’s Authority.

This act authorizes the attorney general to proceed on behalf of the Commonwealth in his law-enforcement authority when (1) he has reason to believe that any person is using, has used or is about to use any method, act or practice declared to be unlawful, and (2) that said proceeding would be in the public interest; there are no other express restrictions to limit the nature of the activities against which he may proceed, nor is it implicit in the act that he proceed only against methods and practices used in the merchandising of goods or services intended for personal, family or household use. Commonwealth ex rel. Stephens v. North American Van Lines, Inc., 600 S.W.2d 459, 1979 Ky. App. LEXIS 532 (Ky. Ct. App. 1979).

7.Issue of Fact.

When the evidence creates an issue of fact that any particular action is unfair, false, misleading or deceptive, it is to be decided by a jury. Stevens v. Motorists Mut. Ins. Co., 759 S.W.2d 819, 1988 Ky. LEXIS 75 ( Ky. 1988 ).

8.Insurance Company.

The purchase of an insurance policy is a purchase of a “service” intended to be covered by the Consumer Protection Act, thus where an insurance company intentionally misrepresented engineers’ reports and arbitrarily refused to negotiate a claim, the Consumer Protection Act provided a homeowner with a remedy for the conduct of their own insurance company in denying such a claim because the act has provided a “statutory” bad faith cause of action. Stevens v. Motorists Mut. Ins. Co., 759 S.W.2d 819, 1988 Ky. LEXIS 75 ( Ky. 1988 ).

Failure of insurance company to settle a claim, in and of itself, is not unfair, false, or misleading as contemplated by this section. State Farm Fire & Casualty Ins. Co. v. Aulick, 781 S.W.2d 531, 1989 Ky. App. LEXIS 158 (Ky. Ct. App. 1989).

Because there was no coverage under the insureds’ homeowner’s policy due to their admitted material misrepresentations of their financial condition when their home was destroyed by fire, there was no basis for their Kentucky Consumer Protection Act claims against the insurer. But even if there was coverage under the policy, the insurer had a reasonable basis for denying the claim, particularly considering the false statements made by the insureds. Baymon v. State Farm Ins. Co., 2006 U.S. Dist. LEXIS 72490 (W.D. Ky. Oct. 2, 2006), aff'd, 257 Fed. Appx. 858, 2007 FED App. 0843N, 2007 U.S. App. LEXIS 29069 (6th Cir. Ky. 2007 ).

9.Jurisdiction.

Since there is no conflict between the state and federal statutes and the federal statutes fail to comprehensively deal with the rights of the consumers after the delivery of mailed material, the Kentucky Consumer Protection Act is not preempted by United States Postal Service Regulations dealing with nonmailable materials; thus, state trial court had jurisdiction to entertain an action against a publisher’s direct mail solicitation of listings for telephone directory. Commonwealth ex rel. Cowan v. Telcom Directories, Inc., 806 S.W.2d 638, 1991 Ky. LEXIS 40 ( Ky. 1991 ).

The language of this section speaks of “misleading” or “deceptive” acts; whether or not a cable company’s billing practices constitute “negative option billing” as contemplated under § 543(f) of the 1992 Cable Act, it seems reasonable that a court could find that defendants had violated the state act’s prohibition against deceptive trade practices. Because the standard for liability under the state act is not co-extensive with the 1992 Cable Act, it cannot be said that the outcome of the litigation necessarily depends upon any given construction of the federal act, and federal jurisdiction will not lie. Kentucky ex rel. Gorman v. Comcast Cable, 881 F. Supp. 285, 1995 U.S. Dist. LEXIS 3919 (W.D. Ky. 1995 ).

Bankruptcy court lacked jurisdiction to hear a debtor’s claims alleging that an auto finance company and a credit services company violated the Fair Debt Collections Practices Act, 15 U.S.C.S. § 1692, and the Kentucky Consumer Protection Act, KRS 367.170 , when they contacted him after he received a discharge in bankruptcy, and demanded that he pay the outstanding balance on a loan he obtained to purchase a vehicle. All acts on which the claims were based occurred after the debtor declared bankruptcy, and they were not related to the debtor’s bankruptcy case and did not affect his bankruptcy case. Frambes v. Nuvell Nat'l Auto Fin. (In re Frambes), 454 B.R. 437, 2011 Bankr. LEXIS 2076 (Bankr. E.D. Ky. 2011 ).

10.Availability of Underinsured Motorist Coverage.

Plaintiffs alleged that defendant insurer’s agents violated this section by failing to inform them of the availability of underinsured motorist coverage and added reparation benefits. Because the legislature does not mandatorily require offering the insurance coverages in question, defendant’s failure to inform the plaintiffs about such coverage does not constitute an unfair, false, misleading, or deceptive act or practice, as found in this section. Mullins v. Commonwealth Life Ins. Co., 839 S.W.2d 245, 1992 Ky. LEXIS 126 ( Ky. 1992 ).

11.Federal Preemption.

Plaintiff’s state law claims include claims that defendant insurer committed a tort by denying her claim in bad faith, and that insurer’s actions violated both this section and KRS 304.12-130 . However these state law claims were preempted by the Employee Retirement Income Security Act of 1974 (ERISA). There are three (3) criteria for determining whether a given state law claim is preempted by federal law: (1) the state law must regulate insurance, (2) the state law must fall under the business of insurance as interpreted by case law under the McCarran-Ferguson Act, and most importantly, (3) the state law must not fall within the clear expression of congressional intent that ERISA’s civil enforcement scheme be exclusive. The state law claims in this case did not meet the necessary criteria to be saved from preemption. Curry v. Cincinnati Equitable Ins. Co., 834 S.W.2d 701, 1992 Ky. App. LEXIS 177 (Ky. Ct. App. 1992).

State law claims of an Employee Retirement Income Security Act (ERISA) plan participant who sought relief for alleged wrongful termination of long-term disability benefits under ERISA and the Kentucky Consumer Protection Act were dismissed as they were preempted by ERISA. West v. Sedgwick Claims Mgmt. Servs., 2006 U.S. Dist. LEXIS 41653 (W.D. Ky. June 19, 2006).

Mortgage company that incorrectly reported a bankruptcy filing to numerous credit reporting agencies was entitled to summary judgment in an action filed by the mortgagor consumers under the Kentucky Consumer Protection Act (KCPA); because the claims for violation of KCPA were statutory causes of action, they were preempted by 15 USCS § 1681t(b)(1)(F) of the Fair Credit Reporting Act. Miller v. Wells Fargo & Co., 2008 U.S. Dist. LEXIS 23099 (W.D. Ky. Mar. 21, 2008), overruled in part, Scott v. First Southern Nat'l Bank, 936 F.3d 509, 2019 FED App. 0220P, 2019 U.S. App. LEXIS 26208 (6th Cir. Ky. 2019 ).

12.Subsequent Purchaser.

A subsequent purchaser may not maintain an action against a seller with whom he did not deal or who made no warranty for the benefit of the subsequent purchaser. The language of KRS 362.220 plainly contemplates an action by a purchaser against his immediate seller. This is abundantly clear from its venue provision which states the action may be filed “in the Circuit Court in which the seller or lessor resides or has his principal place of business.” Further evidence of legislative intent is found in KRS 367.220(5), which provides that an action under the statute must be brought “within one (1) year after any action of the Attorney General has been terminated or within two (2) years after the violation of KRS 367.170 , whichever is latter.” This shows a lack of concern for a subsequent purchaser who often purchases used merchandise more than two (2) years after the violation. The legislature intended that privity of contract exist between the parties in a suit alleging a violation of the Consumer Protection Act. Skilcraft Sheetmetal, Inc. v. Kentucky Machinery, Inc., 836 S.W.2d 907, 1992 Ky. App. LEXIS 175 (Ky. Ct. App. 1992).

13.Third-Party Claims.

Although the purchase of an insurance policy is covered under the Consumer Protection Act, coverage of the Act has not been extended to third-party claims; the insured who purchased the policy is the one who may properly have a claim for unfair practices against the insurer. Anderson v. National Sec. Fire & Casualty Co., 870 S.W.2d 432, 1993 Ky. App. LEXIS 102 (Ky. Ct. App. 1993).

14.Bifurcated Trial.

Where an insured’s tort claims alleging violations of the Consumer Protection Act of Kentucky and the Unfair Settlement Practices Act of Kentucky depended upon the success of his contract claims, and the insurer alleged that discovery on the tort claims could lead to disputes about privileged, confidential, and/or irrelevant material, the court granted the insurer’s motion to bifurcate proceedings on the contract claims from those on the tort claims per Fed. R. Civ. P. 42(b) and to stay discovery on the tort claims. Hoskins v. Allstate Prop. & Cas. Ins. Co., 2006 U.S. Dist. LEXIS 80327 (E.D. Ky. Nov. 2, 2006).

15.Privity.

Debtor’s claim under KRS 367.170 was summarily dismissed because the debtor was not in privity, as required by KRS 367.220(1), with the defendant bill collectors who used an allegedly coercive “blind garnishment” procedure to collect on a credit card bill that had been reduced to judgment and that they had purchased from a lender; the Kentucky Consumer Protection Act, by its terms, did not furnish the debtor with a cause of action. Tallon v. Lloyd & McDaniel, 497 F. Supp. 2d 847, 2007 U.S. Dist. LEXIS 53197 (W.D. Ky. 2007 ).

The absence of a finding of a valid contract is not fatal to a claim for unfair trade practices under the KCPA as it would be to a breach of contract claim. Nothing in the KCPA, particularly KRS 367.170 and KRS 367.220 , explicitly requires that a binding contract be reached for a purchaser damaged by unlawful trade practices to have a private right of action. Because the plaintiffs qualified as purchasers under the KCPA, they were entitled to sue for any damages resulting from unfair trade practices under KRS 367.220 . Craig & Bishop, Inc. v. Piles, 247 S.W.3d 897, 2008 Ky. LEXIS 61 ( Ky. 2008 ).

Cited in:

Commonwealth ex rel. Hancock v. Pineur, 533 S.W.2d 527, 1976 Ky. LEXIS 112 ( Ky. 1976 ); Hearing Aid Asso. v. Bullock, 413 F. Supp. 1032, 1976 U.S. Dist. LEXIS 16212 (E.D. Ky. 1976 ); Bell v. Louisville Motors, Inc., 573 S.W.2d 351, 1978 Ky. App. LEXIS 606 (Ky. Ct. App. 1978); Commonwealth ex rel. Stephens v. Isaacs, 577 S.W.2d 617, 1979 Ky. App. LEXIS 380 (Ky. Ct. App. 1979); Capitol Cadillac Olds, Inc. v. Roberts, 813 S.W.2d 287, 1991 Ky. LEXIS 133 ( Ky. 1991 ); General Accident Ins. Co. v. Blank, 873 S.W.2d 580, 1993 Ky. App. LEXIS 182 (Ky. Ct. App. 1993); Martinez v. Employers Ins. of Wausau, 1999 Ky. App. LEXIS 131 (Ky. Ct. App. 1999); Louisa Coca-Cola Bottling Co. v. Pepsi-Cola Metro. Bottling Co., 94 F. Supp. 2d 804, 1999 U.S. Dist. LEXIS 21663 (E.D. Ky. 1999 ); Sparks v. Re/Max Allstar Realty, Inc., 55 S.W.3d 343, 2000 Ky. App. LEXIS 131 (Ky. Ct. App. 2000); Gall v. Commonwealth, 702 S.W.2d 37, 1985 Ky. LEXIS 286 ( Ky. 1985 ), cert. denied, Gall v. Kentucky, 478 U.S. 1010, 106 S. Ct. 3311, 92 L. Ed. 2d 724, 1986 U.S. LEXIS 2668 (1986); Stafford v. Cross Country Bank, 262 F. Supp. 2d 776, 2003 U.S. Dist. LEXIS 7886 (W.D. Ky. 2003 ); Grange Mut. Ins. Co. v. Trude, 151 S.W.3d 803, 2004 Ky. LEXIS 242 ( Ky. 2004 ), review denied, — S.W.3d —, 2005 Ky. LEXIS 443 (Ky. Jan. 20, 2005); Williams v. Chase Bank USA, N.A., 390 S.W.3d 824, 2012 Ky. App. LEXIS 78 (Ky. Ct. App. 2012).

NOTES TO UNPUBLISHED DECISIONS

Analysis

1.Insurance Company.

Unpublished decision: Insured’s claims against an insurer under tort law and KRS 304.12-230 , 367.170 , were properly dismissed as barred under the res judicata doctrine because pursuant to CR 13.01, the insured should have raised the claims in the declaratory judgment suit that the insurer had previously filed, which sought a declaration as to the insured’s coverage under an insurance policy: (1) R. 13.01, Kentucky’s compulsory counterclaim rule, applied to declaratory judgment suits; (2) the insured’s claims had accrued by the time the declaratory judgment action was filed because they arose out of the insurer’s initial refuse to defend or indemnify her in a suit filed by a third party, which initial refusal occurred before the declaratory judgment suit was filed; and (3) in asserting her claims, the insured was doing more than merely attempting to enforce the declaratory judgment issued against the insured, as permitted under KRS 418.055 . Holbrook v. Shelter Ins. Co., 186 Fed. Appx. 618, 2006 FED App. 0446N, 2006 U.S. App. LEXIS 16588 (6th Cir. Ky. 2006 ).

Unpublished decision: Insurer was entitled to summary judgment on an action brought by insured for failure to pay a claim for the loss of their home in a fire because it was undisputed that the insureds made false statements to the insurer’s investigator five days after the fire, in violation of clear policy language, denying the home was set for foreclosure. Baymon v. State Farm Ins. Co., 257 Fed. Appx. 858, 2007 FED App. 0843N, 2007 U.S. App. LEXIS 29069 (6th Cir. Ky. 2007 ).

2.Miscellaneous.

Unpublished decision: Where a franchisee appealed a district court's Fed. R. Civ. P. 12(b)(60 dismissal, its initial argument was without merit that Ky. Rev. Stat. Ann. § 446.070 , which provided that a person injured by the violation of any statute may recover from the offender such damages as he sustained by reason of the violation, allowed it to bring an action for a violation of Ky Rev. Stat. Ann. 367.170 , even though it was not a purchaser or lessee for personal, family, or household purposes. 859 Boutique Fitness, LLC v. Cyber Franchising, LLC, 699 Fed. Appx. 457, 2017 U.S. App. LEXIS 11618 (6th Cir. Ky. 2017 ).

Opinions of Attorney General.

The manufacture and sale of silver cups by a private firm which have been stamped with a manufactured device in the form of the seal of the commonwealth would violate this section. OAG 72-694 .

The legislature intended that actions based upon allegations of false, misleading, or deceptive acts or practices in the conduct of any trade or commerce must be brought in the Circuit Court, to the exclusion of the inferior courts pursuant to KRS 367.220 . OAG 73-502 .

An industrial loan company, under KRS 291.460 , can advertise that it will lend money on a term note at six percent (6%) per annum without engaging in false advertising or deceptive acts under KRS 360.255 (now repealed) and this section unless the ad is merely used to get the borrower into the loan office and then the term loan is not made as asked for but the industrial loan is given instead. OAG 74-220 .

Use of the title “audiologist” by one not licensed under KRS 334A.010 to 334A.990 is false, misleading, and deceptive to the public in violation of this section, making such a person subject to the penalties of KRS 334.120 , and if the person is a licensed hearing aid dealer, subject to revocation or suspension of his license by the Kentucky board for licensing hearing aid dealers. OAG 75-454 .

A psychotherapist who holds himself out to the public by any title or description of services which is misleading or deceptive regardless of the words used is in violation of the Consumer Protection Act, KRS 367.110 to 367.390 ; the public must not be deceived as to the educational background of a psychotherapist or the services which he is qualified to perform. OAG 80-326 .

Where a soft drink bottler runs a “flexible participation” scheme whereby the public can obtain specially marked bottle caps through purchase, visiting the bottling plant, or requesting them through a toll-free telephone number, an advertisement of the scheme which states “no purchase necessary,” without more, would, under this section, be unfair and misleading by failing to disclose the other alternatives for participating in the scheme; accordingly, any advertisement must include all of the alternatives for participation. OAG 81-146 .

A promotional scheme by a hamburger chain which would entail the consumer receiving a sweepstakes ticket with the purchase of a certain type sandwich would not be a “lottery” in violation of Const., § 226 and KRS 528.010 , since consumers could also send a form, available at the store, to the parent corporation to receive a free sweepstakes ticket without making a purchase, or could send directly to a post office box for a ticket without making a purchase; accordingly, the consumer does not have to pay consideration in order to receive a ticket and the chance to win an award; however, in order not to violate this section any advertisement of the scheme, in addition to stating “no purchase necessary,” must also include all of the alternatives for participation in the scheme. OAG 81-259 .

If drugs labelled with such statements as “clinic pack,” “clinic package — not for retail pharmacy sale,” or similar wording are distributed to an ultimate consumer and the labelling misleads the ultimate consumer in any respect, there is a violation of KRS 217.065(1). Further, this practice may also constitute a violation of KRS 517.020(1)(e), as well as a violation of the Consumer Protection Act, this chapter, and more specifically this section. OAG 85-114 .

If the seller performs the work in order to discourage the buyer from exercising her cancellation rights, this is potentially an unfair trade practice in violation of this section. OAG 92-41 .

Research References and Practice Aids

Kentucky Bench & Bar.

Stamm, The Attorney General Goes to Market, Vol. 41, No. 2, April 1977, Ky. Bench & Bar 14.

Baxter, Private Right of Action Under the Consumer Protection Act — New Avenues for Recovery, Vol. 43, No. 4, October 1979, Ky. Bench & Bar 8.

Mapother, Attorneys’ Fees Recoverable in Kentucky Litigation, Vol. 44, No. 4, October 1980, Ky. Bench & Bar 28.

O’Roark, The Ethics of Civil Practice Investigations — Part I, Vol. 71, No. 5, Sept. 2007, Ky. Bench & Bar 31.

Kentucky Law Journal.

Ham, Corporations, 63 Ky. L.J. 739 (1974-75).

Comments, Precomplaint Investigations Under the Kentucky Consumer Protection Act: Validity and Scope of the Civil Investigation Demand, 65 Ky. L.J. 169 (1976-77).

Kentucky Law Survey, Adams, Torts, 73 Ky. L.J. 481 (1984-85).

Northern Kentucky Law Review.

Notes, U.C.C. — Consumer Protection Act — Limited Warranties — Automobile Manufacturer’s Refusal to Recognize Buyers’ Rights Under the U.C.C. When a Limited Warranty Fails of its Essential Purpose Constitutes an Unfair Trade Practice Under the Consumer Protection Act, 6 N. Ky. L. Rev. 403 (1979).

Miller, The Kentucky Law of Products LiabilityIn A Nutshell, 12 N. Ky. L. Rev. 201 (1985).

Cox, Lender Liability in the Bluegrass: Are New Theories Emerging Under Kentucky Law?, 16 N. Ky. L. Rev. 43 (1988).

Comment, Underinsured Motorists: An Evolving Insurance Concern, 17 N. Ky. L. Rev. 417 (1990).

Kruer and Goetz, Common Sense Is No Longer a Stranger In The House of Kentucky Insurance Law, 21 N. Ky. L. Rev. 377 (1994).

Raper & Evans, A Survey of Kentucky Medical Malpractice Law., 32 N. Ky. L. Rev. 711 (2005).

Article: Real Estate Broker Liability, 36 N. Ky. L. Rev. 409 (2009).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Violation of Kentucky Consumer Protection Act, Form 192.03.

Caldwell’s Kentucky Form Book, 5th Ed., Complaint under Consumer Protection Act Against Insurer for Fraudulent Business Practice, Form 143.09.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Antitrust Actions, § 63.00.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

Kentucky Instructions To Juries (Civil), 5th Ed., Insurance, § 44.10.

367.175. Other unlawful acts.

  1. Every contract, combination in the form of trust and otherwise, or conspiracy, in restraint of trade or commerce in this Commonwealth shall be unlawful.
  2. It shall be unlawful for any person or persons to monopolize, or attempt to monopolize or combine or conspire with any other person or persons to monopolize any part of the trade or commerce in this Commonwealth.
  3. The sale, delivery, holding, or offering for sale of any self-testing kits designed to tell persons their status concerning human immunodeficiency virus or acquired immunodeficiency syndrome or related disorders, and any advertising of such kits, shall be prohibited.
  4. In addition to any other penalties, violations of this section shall also be a Class C felony.

History. Enact. Acts 1976, ch. 330, § 1; 1990, ch. 443, § 42, effective July 13, 1990.

NOTES TO DECISIONS

1.Construction.

The enactment of this section did not effect a material change in the common law of Kentucky respecting the validity of restrictive covenants in leases. Mendell v. Golden-Farley of Hopkinsville, Inc., 573 S.W.2d 346, 1978 Ky. App. LEXIS 605 (Ky. Ct. App. 1978).

Arbitration clause contained in provider agreements between health insurance providers and doctors did not apply to the doctors’ antitrust claims brought against the providers asserting that the providers conspired to fix and lower the insurance reimbursement rates paid to hospitals and physicians, in violation of KRS 367.175 , where the antitrust violations did not arise from or relate to the service provider contracts and that the doctors’ claims were maintainable without reference to their individual provider agreements. Anthem Health Plans of Ky., Inc. v. Acad. of Med., 2004 Ky. App. LEXIS 315 (Ky. Ct. App. Oct. 29, 2004), cert. denied, 549 U.S. 942, 127 S. Ct. 374, 166 L. Ed. 2d 252, 2006 U.S. LEXIS 7422 (U.S. 2006).

2.Restrictive Covenant.

A restrictive covenant prohibiting lessor of space in shopping center from leasing space to business competitors of lessee was not an unreasonable restraint of trade and did not violate this section. Mendell v. Golden-Farley of Hopkinsville, Inc., 573 S.W.2d 346, 1978 Ky. App. LEXIS 605 (Ky. Ct. App. 1978).

3.Sherman Antitrust Act.

The Kentucky Consumer Protection Act is virtually identical to the Sherman Antitrust Act and has been interpreted as such; therefore, upon such agreement by the parties, where plaintiffs failed to establish a conspiracy necessary to support a restraint of trade claim under § 1 of the Sherman Act and the defendant was entitled to summary judgment on the Sherman Antitrust Act claim, it was also entitled to summary judgment on the Kentucky Consumer Protection Act claim. Borg-Warner Protective Servs. Corp. v. Guardsmark, Inc., 946 F. Supp. 495, 1996 U.S. Dist. LEXIS 18001 (E.D. Ky. 1996 ), aff'd, 156 F.3d 1228 (6th Cir. Ky. 1998 ).

4.Protected Parties.

Non-profit union multi-employer health and welfare trust funds were not parties intended to be protected by the Consumer Protection Act and, therefore, they could not recover under the statute. Kentucky Laborers Dist. Council Health & Welfare Trust Fund v. Hill & Knowlton, 24 F. Supp. 2d 755, 1998 U.S. Dist. LEXIS 16052 (W.D. Ky. 1998 ).

Cited in:

Brandon v. Combs, 666 S.W.2d 755, 1983 Ky. App. LEXIS 390 (Ky. Ct. App. 1983); Williams v. Chase Bank USA, N.A., 390 S.W.3d 824, 2012 Ky. App. LEXIS 78 (Ky. Ct. App. 2012).

Opinions of Attorney General.

The necessity for the state to purchase at the lowest possible cost under KRS 45.360 and KRS 45A.010 and the policy against restraint of trade reflected in this section combine to allow the state to purchase motor vehicles from out-of-state dealers who are not licensed in Kentucky. OAG 81-89 .

A cemetery will be subject to liability under federal and state antitrust laws for imposing any rule or policy requiring that a purchaser of a cemetery lot buy a grave marker only from the cemetery where the lot is purchased. OAG 85-70 .

A cemetery’s rule requiring a purchaser of a cemetery lot to have his or her cemetery marker, regardless of where it was purchased, installed only by the cemetery constitutes an illegal tie-in which violates the antitrust laws. OAG 85-70 .

Even though it is clearly prohibitive for cemeteries to adopt an exclusive right to install cemetery markers in the cemetery, they may adopt reasonable rules and guidelines with respect to the foundation preparation and installation of markers by third-party installers. OAG 85-70 .

Stringent verification requirements in cemetery regulations, requiring third-party installers of markers to obtain extensive bronze analysis reports and granite analysis reports on all markers being installed by third parties and to provide affidavits from manufacturers concerning a breakdown on the bronze alloy content and requiring that the granite be verified as having a certain bulk density (PCF) average absorption (%.07), average compression strength (PSI) 26.670 and average modulus of rupture (PSI) 1615, would appear to have an anticompetitive effect. In addition, a cemetery could devise a less restrictive way to protect its property interest. OAG 85-70 .

Research References and Practice Aids

Kentucky Bench & Bar.

Stamm, The Attorney General Goes to Market, Vol. 41, No. 2, April 1977, Ky. Bench & Bar 14.

Kentucky Law Journal.

Comments, Precomplaint Investigations Under the Kentucky Consumer Protection Act: Validity and Scope of the Civil Investigation Demand, 65 Ky. L.J. 169 (1976-77).

Kentucky Law Survey, Bondurant and Arvin, Real Property, 69 Ky. L.J. 625 (1980-81).

Northern Kentucky Law Review.

Braden, Aids: Dealing With the Plague, 19 N. Ky. L. Rev. 277 (1992).

367.176. Construction of KRS 367.175.

  1. No provision of KRS 367.175 shall be construed to make illegal the activities of any person or organization, including but not limited to any labor organization, agricultural or horticultural cooperative organization, or consumer organization, or of individual members thereof which are legitimate under the laws of this Commonwealth or the United States, or of any utility as defined in KRS 278.010(3).
  2. KRS 367.175 shall not apply to activities authorized or approved under any federal or state statute or regulation.

History. Enact. Acts 1976, ch. 330, § 3.

Research References and Practice Aids

Kentucky Law Journal.

Comments, Precomplaint Investigations Under the Kentucky Consumer Protection Act: Validity and Scope of the Civil Investigation Demand, 65 Ky. L.J. 169 (1976-77).

367.178. Collection of donated clothing, household items, or other items for resale. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 2009, ch. 28, § 1, effective June 25, 2009) was repealed by Acts 2013, ch. 13, § 3, effective June 25, 2013.

367.180. Knowledge required in violation by publisher.

KRS 367.170 shall not apply to the owner or publisher of newspapers, magazines or publications wherein such advertisements appear, or to the owner or operator of a radio or television station which disseminates such advertisement when the owner, publisher or operator has no knowledge that such advertisement may be in violation of KRS 367.170 .

History. Enact. Acts 1972, ch. 4, § 8.

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

367.190. Injunction — Hearing.

  1. Whenever the Attorney General has reason to believe that any person is using, has used, or is about to use any method, act or practice declared by KRS 367.170 to be unlawful, and that proceedings would be in the public interest, he may immediately move in the name of the Commonwealth in a Circuit Court for a restraining order or temporary or permanent injunction to prohibit the use of such method, act or practice. The action may be brought in the Circuit Court of the county in which such person resides or has his principal place of business or in the Circuit Court of the county in which the method, act or practice declared by KRS 367.170 to be unlawful has been committed or is about to be committed; or with consent of the parties may be brought in the Franklin Circuit Court.
  2. Upon application of the Attorney General, a restraining order shall be granted whenever it reasonably appears that any person will suffer immediate harm, loss or injury from a method, act or practice prohibited by KRS 367.170 . If the defendant moves for the dissolution of a restraining order issued under this section, the court shall hold a hearing within five (5) business days of the date of service of the defendant’s motion to dissolve, unless a delay in hearing the cause is requested by, or otherwise caused by the defendant. If such a hearing is not held within five (5) business days, the restraining order will automatically be dissolved.
  3. In order to obtain a temporary or permanent injunction, it shall not be necessary to allege or prove that an adequate remedy at law does not exist. Further, it shall not be necessary to allege or prove that irreparable injury, loss or damage will result if the injunctive relief is denied.

History. Enact. Acts 1972, ch. 4, § 9.

NOTES TO DECISIONS

1.Jurisdiction.

In suit by state for permanent injunction against defendants for allegedly deceptive trade practices, the circuit court had jurisdiction over Florida corporation, its wholly owned subsidiary, and its principal stockholders, where the parent corporation was licensed to do business in the state and where the affairs of the corporations and the principal stockholder were intertwined in the alleged misleading practices. Dare To Be Great, Inc. v. Commonwealth, 511 S.W.2d 224, 1974 Ky. LEXIS 482 ( Ky. 1974 ).

2.Extent of Attorney General’s Authority.

This act authorizes the Attorney General to proceed on behalf of the Commonwealth in his law-enforcement authority when (1) he has reason to believe that any person is using, has used or is about to use any method, act or practice declared to be unlawful, and (2) that said proceeding would be in the public interest; there are no other express restrictions to limit the nature of the activities against which he may proceed, nor is it implicit in the act that he proceed only against methods and practices used in the merchandising of goods or services intended for personal, family or household use. Commonwealth ex rel. Stephens v. North American Van Lines, Inc., 600 S.W.2d 459, 1979 Ky. App. LEXIS 532 (Ky. Ct. App. 1979).

A trial court erred in not authorizing the state Attorney General to seek restitution on behalf of defrauded consumers pursuant to KRS 367.200 , since the legislature, in enacting KRS 367.200 , intended to vest the Attorney General with such authority, concurrently exercised with his authority to maintain an action for injunctive relief under this section. Commonwealth ex rel. Beshear v. ABAC Pest Control, Inc., 621 S.W.2d 705, 1981 Ky. App. LEXIS 290 (Ky. Ct. App. 1981).

Because the allegations the Attorney General raised against the insurance company could, if proven, amount to a violation of the Consumer Protection Act, and because remedies other than damages are potentially available, the trial court erred by dismissing the Attorney General’s complaint. Commonwealth ex rel. Chandler v. Anthem Ins. Cos., 8 S.W.3d 48, 1999 Ky. App. LEXIS 50 (Ky. Ct. App. 1999).

Cited:

Commonwealth ex rel. Stephens v. Isaacs, 577 S.W.2d 617, 1979 Ky. App. LEXIS 380 (Ky. Ct. App. 1979).

Research References and Practice Aids

Kentucky Bench & Bar.

Stamm, The Attorney General Goes to Market, Vol. 41, No. 2, April 1977, Ky. Bench & Bar 14.

Baxter, Private Right of Action Under the Consumer Protection Act — New Avenues for Recovery, Vol. 43, No. 4, October 1979, Ky. Bench & Bar 8.

Kentucky Law Journal.

Comments, Precomplaint Investigations Under the Kentucky Consumer Protection Act: Validity and Scope of the Civil Investigation Demand, 65 Ky. L.J. 169 (1976-77).

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

367.200. Restoration of property — Appointment of receiver.

The court may make such additional orders or judgments as may be necessary to restore to any person in interest any moneys or property, real or personal, which may have been paid out as a result of any practice declared to be unlawful by KRS 367.130 to 367.300 , including the appointment of a receiver or the revocation of a license or certificate authorizing any person to engage in business in the Commonwealth, or both.

History. Enact. Acts 1972, ch. 4, § 10; 1986, ch. 250, § 1, effective July 15, 1986.

NOTES TO DECISIONS

1.Purpose.

The statute was intended to permit a court to order relief for the consumers on whose behalf the Attorney General has successfully brought suit and not to function as an individual remedy for private plaintiffs. Kentucky Laborers Dist. Council Health & Welfare Trust Fund v. Hill & Knowlton, 24 F. Supp. 2d 755, 1998 U.S. Dist. LEXIS 16052 (W.D. Ky. 1998 ).

2.Restitution.

A trial court erred in not authorizing the state attorney general to seek restitution on behalf of defrauded consumers pursuant to this section, since the legislature, in enacting this section intended to vest the attorney general with such authority, concurrently exercised with his authority to maintain an action for injunctive relief under KRS 367.190 ; since KRS 367.220 specifically provides for actions by private persons injured as a result of deceptive acts and practices, there was no need for the legislature to have enacted this section dealing with restitution, and KRS 367.210 , dealing with the power of receivers, unless it intended to vest someone other than private persons with the authority to seek restitution. Commonwealth ex rel. Beshear v. ABAC Pest Control, Inc., 621 S.W.2d 705, 1981 Ky. App. LEXIS 290 (Ky. Ct. App. 1981).

3.Enforcement of Arbitration Provision.

Those counts of a complaint seeking a declaration that debtor's loan was void and unenforceable under the Kentucky Consumer Loan Act and that creditor filed false proofs of claim on illegal loans were both statutorily and constitutionally core, as they would necessarily be resolved in the claims allowance process, but counts seeking a determination that the loan violated the Kentucky Consumer Protection Act, that creditor committed common law fraud, and that collection activities violated the FDCPA were statutorily but not constitutionally core. Court declined to enforce arbitration provisions as to the counts that were both statutorily and constitutionally core, but did not have the discretion to decline enforcement as to the other counts. Kiskaden v. LVNV Funding, LLC (In re Kiskaden), 571 B.R. 226, 2017 Bankr. LEXIS 996 (Bankr. E.D. Ky. 2017 ).

Research References and Practice Aids

Kentucky Bench & Bar.

Stamm, The Attorney General Goes to Market, Vol. 41, No. 2, April 1977, Ky. Bench & Bar 14.

Kentucky Law Journal.

Comments, Precomplaint Investigations Under the Kentucky Consumer Protection Act: Validity and Scope of the Civil Investigation Demand, 65 Ky. L.J. 169 (1976-77).

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

Northern Kentucky Law Review.

Cox, Lender Liability in the Bluegrass: Are New Theories Emerging Under Kentucky Law?, 16 N. Ky. L. Rev. 43 (1988).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Appointment of Receiver Without Written Agreement to Appoint Receiver, Form 157.01.

367.210. Powers of receiver — Distribution of assets.

Whenever a receiver is appointed by the court pursuant to KRS 367.110 to 367.300 , he shall have the power to sue for, collect, receive and take into his possession all the goods and chattels, rights and credits, moneys and effects, lands and tenements, books, records, documents, papers, choses in action, bills, notes and property of every description, derived by means of any practice declared to be illegal and prohibited by KRS 367.110 to 367.300 , including property with which such property has been mingled if it cannot be identified in kind because of such commingling, and to sell, convey, and assign the same and hold and dispose of the proceeds thereof under the direction of the court. Any person who has suffered damages as a result of the use or employment of any unlawful practices and submits proof to the satisfaction of the court that he has in fact been damaged, may participate with general creditors in the distribution of the assets to the extent he has sustained out-of-pocket losses. In the case of a partnership or business entity, the receiver shall settle the estate and distribute the assets under the direction of the court. The court shall have jurisdiction of all questions arising in such proceedings and may make such orders and judgments therein as may be required.

History. Enact. Acts 1972, ch. 4, § 11.

NOTES TO DECISIONS

1.Authority of Attorney General.

The trial court erred in not authorizing the state Attorney General to seek restitution on behalf of defrauded consumers pursuant to KRS 367.200 ; since KRS 367.220 specifically provides for actions by private persons injured as a result of deceptive acts and practices, there was no need for the legislature to have enacted KRS 367.200 dealing with restitution and this section dealing with the power of receivers, unless it intended to vest someone other than private persons with the authority to seek restitution. Commonwealth ex rel. Beshear v. ABAC Pest Control, Inc., 621 S.W.2d 705, 1981 Ky. App. LEXIS 290 (Ky. Ct. App. 1981).

Research References and Practice Aids

Kentucky Bench & Bar.

Stamm, The Attorney General Goes to Market, Vol. 41, No. 2, April 1977, Ky. Bench & Bar 14.

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Appointment of Receiver Without Written Agreement to Appoint Receiver, Form 157.01.

367.220. Action for recovery of money or property — When action may be brought.

  1. Any person who purchases or leases goods or services primarily for personal, family or household purposes and thereby suffers any ascertainable loss of money or property, real or personal, as a result of the use or employment by another person of a method, act or practice declared unlawful by KRS 367.170 , may bring an action under the Rules of Civil Procedure in the Circuit Court in which the seller or lessor resides or has his principal place of business or is doing business, or in the Circuit Court in which the purchaser or lessee of goods or services resides, or where the transaction in question occurred, to recover actual damages. The court may, in its discretion, award actual damages and may provide such equitable relief as it deems necessary or proper. Nothing in this subsection shall be construed to limit a person’s right to seek punitive damages where appropriate.
  2. Upon commencement of any action brought under subsection (1) of this section, the clerk of the court shall mail a copy of the complaint or other initial pleading to the Attorney General and, upon entry of any judgment or decree in the action, shall mail a copy of such judgment or decree to the Attorney General.
  3. In any action brought by a person under this section, the court may award, to the prevailing party, in addition to the relief provided in this section, reasonable attorney’s fees and costs.
  4. Any permanent injunction, judgment or order of the court made under KRS 367.190 shall be prima facie evidence in an action brought under this section that the respondent used or employed a method, act or practice declared unlawful by KRS 367.170 .
  5. Any person bringing an action under this section must bring such action within one (1) year after any action of the Attorney General has been terminated or within two (2) years after the violation of KRS 367.170 , whichever is later.

History. Enact. Acts 1972, ch. 4, § 12; 1974, ch. 308, § 62.

NOTES TO DECISIONS

Analysis

1.Applicability.

Neither the Kentucky Consumer Protection Act, KRS 367.170 and KRS 367.220 , nor the Kentucky Unfair Claims Settlement Practices Act, KRS 304.12-230 , are available as vehicles for bringing a civil action against a workers’ compensation insurer. Travelers Indem. Co. v. Reker, 100 S.W.3d 756, 2003 Ky. LEXIS 86 ( Ky. 2003 ).

Kentucky Consumer Protection Act did not apply to a personal representative’s private right of action under KRS 367.220(1) and KRS 367.170 against a hospital as a result of a surgery performed on a decedent by an intoxicated doctor as: (1) the actions about which the plaintiff complained arose from the decedent’s surgery, (2) the plaintiff did not prove that the hospital promoted the services of the doctor to increase profits or patient volume, and then failed to adequately advise the decedent of the risks of the surgery, (3) the plaintiff did not prove that the hospital and the doctor had a financial arrangement of any sort, and (4) the only allegation made was that the hospital failed to advise him or the decedent of the problems that arose during surgery, which did not constitute part of the entrepreneurial aspect of the practice of medicine. Barnett v. Mercy Health Partners-Lourdes, Inc., 233 S.W.3d 723, 2007 Ky. App. LEXIS 320 (Ky. Ct. App. 2007).

Plaintiff, a prospective franchisee, failed to state a claim upon which relief could be granted in asserting that defendant franchisor made false, misleading, and deceptive representations in violation of the Kentucky Consumer Protection Act. The Act only provides a private cause of action for an individual “who purchases or leases goods or services primarily for personal, family or household purposes,” and the complaint revealed no such purchase or lease. 859 Boutique Fitness LLC v. CycleBar Franchising, LLC, 2016 U.S. Dist. LEXIS 59744 (E.D. Ky. May 5, 2016), dismissed, 2016 U.S. Dist. LEXIS 109842 (E.D. Ky. Aug. 18, 2016).

2.Failure of Limited Warranty.

Buyers of defective truck could recover damages for loss of use against manufacturer who had engaged in unlawful trade practice by refusing to repurchase or replace truck after limited warranty failed of its purpose, notwithstanding warranty provision excluding liability for loss of use. Ford Motor Co. v. Mayes, 575 S.W.2d 480, 1978 Ky. App. LEXIS 649 (Ky. Ct. App. 1978).

3.Attorney’s Fees.

Awarding $5,000 in attorney’s fees to buyers of defective truck was not an abuse of discretion on the part of the trial court where, unless attorney’s fees were awarded, the compensatory damages would in fact be inadequate. Ford Motor Co. v. Mayes, 575 S.W.2d 480, 1978 Ky. App. LEXIS 649 (Ky. Ct. App. 1978).

The statute authorizes, but does not mandate, an award of attorney fees and costs in an action brought under the Kentucky Consumer Protection Act; whether to award such is a decision subject to the sound discretion of the trial judge. Alexander v. S & M Motors, Inc., 28 S.W.3d 303, 2000 Ky. LEXIS 72 ( Ky. 2000 ).

When a trial court is considering whether to award attorney fees and costs and/or how much to award, the trial court’s decision should be guided by the purpose and the intent of providing an award of attorney fees and costs under the act; thus, a trial court’s polar star when considering a motion for attorney fees under the act is keeping the courthouse door open for those aggrieved by violations of the act. Alexander v. S & M Motors, Inc., 28 S.W.3d 303, 2000 Ky. LEXIS 72 ( Ky. 2000 ).

Since plaintiff would be potentially able to recover attorney’s fees in her claim under the Kentucky Consumer Protection Act, a potential attorney’s fee award could be considered when calculating the amount in controversy under 28 USCS § 1332. Hollon v. Consumer Plumbing Recovery Ctr., 417 F. Supp. 2d 849, 2006 U.S. Dist. LEXIS 7789 (E.D. Ky. 2006 ).

4.Finance Charges.

Buyers of defective truck were not entitled to recover finance charges attributable to the period of time when they had the use of the truck or for any period following the destruction of the truck in an accident which was not the fault of manufacturer; any recovery of finance charges should have been limited to those charges which accrued while the truck was in the possession of dealer following the revocation of acceptance by the buyers. Ford Motor Co. v. Mayes, 575 S.W.2d 480, 1978 Ky. App. LEXIS 649 (Ky. Ct. App. 1978).

5.Punitive Damages.

Subsection (1) of this section does not purport to expand the right to claim punitive damages, but only makes clear that the Consumer Protection Act does not limit a right to punitive damages where one previously existed and buyers who recovered for unlawful conduct under such act were not entitled to punitive damages against manufacturer. Ford Motor Co. v. Mayes, 575 S.W.2d 480, 1978 Ky. App. LEXIS 649 (Ky. Ct. App. 1978).

Where, after purchase proposal for car was initialed by sales manager, manager refused to sell car for specified amount, claiming that salesman had misled manager by incorrectly completing the proposal form, no unfair or unconscionable acts were shown which would violate this act and purchaser could not collect either punitive damages or attorney’s fees. Wahba v. Don Corlett Motors, Inc., 573 S.W.2d 357, 1978 Ky. App. LEXIS 608 (Ky. Ct. App. 1978).

Since plaintiff would be potentially able to recover punitive damages in her claim under the Kentucky Consumer Protection Act, a potential punitive damages award could be considered when calculating the amount in controversy under 28 USCS § 1332. Hollon v. Consumer Plumbing Recovery Ctr., 417 F. Supp. 2d 849, 2006 U.S. Dist. LEXIS 7789 (E.D. Ky. 2006 ).

6.Extent of Attorney General’s Authority.

This act authorizes the Attorney General to proceed on behalf of the Commonwealth in his law-enforcement authority when (1) he has reason to believe that any person is using, has used or is about to use any method, act or practice declared to be unlawful, and (2) that said proceeding would be in the public interest; there are no other express restrictions to limit the nature of the activities against which he may proceed, nor is it implicit in the act that he proceed only against methods and practices used in the merchandising of goods or services intended for personal, family or household use. Commonwealth ex rel. Stephens v. North American Van Lines, Inc., 600 S.W.2d 459, 1979 Ky. App. LEXIS 532 (Ky. Ct. App. 1979).

Trial court erred in not authorizing the state Attorney General to seek restitution on behalf of defrauded consumers pursuant to KRS 367.200 since by enacting this section which specifically provides for actions by private persons injured as a result of deceptive acts and practices, there was no need for the legislature to have enacted KRS 367.200 dealing with restitution and KRS 367.210 , dealing with the power of receivers, unless it intended to vest someone other than private persons with the authority to seek restitution. Commonwealth ex rel. Beshear v. ABAC Pest Control, Inc., 621 S.W.2d 705, 1981 Ky. App. LEXIS 290 (Ky. Ct. App. 1981).

7.Insurance Claims.

The purchase of an insurance policy is a purchase of a “service” intended to be covered by the Consumer Protection Act, thus where an insurance company intentionally misrepresented engineers’ reports and arbitrarily refused to negotiate a claim, the Consumer Protection Act provided a homeowner with a remedy for the conduct of their own insurance company in denying such a claim because the act has provided a “statutory” bad faith cause of action. Stevens v. Motorists Mut. Ins. Co., 759 S.W.2d 819, 1988 Ky. LEXIS 75 ( Ky. 1988 ).

Although the purchase of an insurance policy is covered under the Consumer Protection Act, coverage of the Act has not been extended to third-party claims; the insured who purchased the policy is the one who may properly have a claim for unfair practices against the insurer. Anderson v. National Sec. Fire & Casualty Co., 870 S.W.2d 432, 1993 Ky. App. LEXIS 102 (Ky. Ct. App. 1993).

A widow’s Kentucky Consumer Protection Act (KCPA) claims against a benefist administrator were time-barred where the widow’s KCPA claims against the administrator were clearly not filed within the two-year limitations period set forth for such claims in KRS 367.220(5), and the fraudulent concealment doctrine did not apply to causes of action arising under the KCPA. Hathaway v. Cont'l Assur. Co., 2006 U.S. Dist. LEXIS 917 (W.D. Ky. Jan. 10, 2006).

Regarding the Kentucky Consumer Protection Act claim, the mother’s alleged “injury” was not an ascertainable loss of money or property as required by the statute where the mother claimed that she was injured because the Kentucky Department of Insurance did not pursue her claim after receiving the false and misleading statements from the insurance company. Yates v. Bankers Life & Cas. Ins. Co., 720 F. Supp. 2d 809, 2010 U.S. Dist. LEXIS 58712 (W.D. Ky. 2010 ).

8.Consumer Goods.

This statute provides a private right of action surrounding the purchase of consumer goods, and because a thoroughbred horse is not a consumer good, purchaser of a thoroughbred has no standing to assert a cause of action under KRS 367.110 . Cohen v. North Ridge Farms, Inc., 712 F. Supp. 1265, 1989 U.S. Dist. LEXIS 5482 (E.D. Ky. 1989 ).

Sale of credit through issuance of a credit card was a purchase of a service permitting a private action under KRS 367.220(1). Stafford v. Cross Country Bank, 262 F. Supp. 2d 776, 2003 U.S. Dist. LEXIS 7886 (W.D. Ky. 2003 ).

Since the buyer purchased a truck for commercial purposes, not as a consumer, pursuant to KRS 367.220(1), he could not assert a claim against the dealer under the Kentucky Consumer Protection Act. Keeton v. Lexington Truck Sales, Inc., 275 S.W.3d 723, 2008 Ky. App. LEXIS 226 (Ky. Ct. App. 2008).

Purchasers of scratch-off game tickets that paid out $20 in winnings did not have a claim against the Kentucky Lottery Corporation for violation of the Consumer Protection Act, based on advertising that promised that the minimum prize was $25 dollars, because the tickets were not goods. Collins v. Ky. Lottery Corp., 399 S.W.3d 449, 2012 Ky. App. LEXIS 212 (Ky. Ct. App. 2012).

9.Subsequent Purchaser.

A subsequent purchaser may not maintain an action against a seller with whom he did not deal or who made no warranty for the benefit of the subsequent purchaser. The language of this section plainly contemplates an action by a purchaser against his immediate seller. This is abundantly clear from its venue provision which states the action may be filed “in the circuit court in which the seller or lessor resides or has his principal place of business.” Further evidence of legislative intent is found in subsection (5) of this section, which provides that an action under the statute must be brought “within one (1) year after any action of the Attorney General has been terminated or within two (2) years after the violation of KRS 367.170 , whichever is latter.” This shows a lack of concern for a subsequent purchaser who often purchases used merchandise more than two (2) years after the violation. The legislature intended that privity of contract exist between the parties in a suit alleging a violation of the Consumer Protection Act. Skilcraft Sheetmetal, Inc. v. Kentucky Machinery, Inc., 836 S.W.2d 907, 1992 Ky. App. LEXIS 175 (Ky. Ct. App. 1992).

10.Unfair Claims.

Although the Kentucky Consumer Protection Act did not provide a reasonable basis for which Kentucky plaintiffs, administrators of deceased’s estate, could prevail, common law bad faith and the Kentucky Unfair Claims Settlement Act provided arguable claims for which plaintiffs could recover against insurance agent residing in Kentucky sufficient to defeat complete diversity among parties claim and require remand of case to state court. Winburn v. Liberty Mut. Ins. Co., 933 F. Supp. 664, 1996 U.S. Dist. LEXIS 11888 (E.D. Ky. 1996 ).

11.Personal, Family or Household Purposes.

The property in question, which consisted of real estate with improvements consisting of ballast, railroad ties and tracks, did not constitute goods used primarily for personal, family or household purposes. Therefore, the plaintiffs did not have standing to bring a private cause of action. Aud v. Illinois Cent. R.R., 955 F. Supp. 757, 1997 U.S. Dist. LEXIS 7405 (W.D. Ky. 1997 ).

Commercial buyer had no standing to bring a claim under the Kentucky Consumer Protection Act because a printing press was not purchased for personal, family, or household purposes pursuant to KRS 367.220(1). Strathmore Web Graphics v. Sanden Mach., Ltd., 2000 U.S. Dist. LEXIS 22618 (W.D. Ky. May 16, 2000).

Because an insurance policy was commercial in nature, there was no private right of action under the Kentucky Consumer Protection Act; moreover, no privity of contract existed between the insured and insurer with regards to the purchase of a motor home damaged in an accident. Adams v. Westfield Ins. Co., 2005 U.S. Dist. LEXIS 27231 (W.D. Ky. Nov. 8, 2005).

Trust beneficiaries were not proper parties to bring a claim against a trustee pursuant to the Kentucky Consumer Protection Act. KRS 367.220(1) limited the class permitted to bring suit to persons who purchased or leased goods or services primarily for personal, family or household purposes. Anderson v. Old Nat'l Bancorp, 675 F. Supp. 2d 701, 2009 U.S. Dist. LEXIS 116124 (W.D. Ky. 2009 ).

Where aircraft purchasers alleged that an airplane company misled them about the engine warranties, a purchaser could not maintain a claim under the Kentucky Consumer Protection Act, KRS 367.110 et seq., because the complaint made no allegation that the aircraft was bought or leased primarily for personal, family, or household purposes, and the documents contained an agreement to lease the aircraft in question to a commercial air taxi business. Morris Aviation, LLC v. Diamond Aircraft Indus., 730 F. Supp. 2d 683, 2010 U.S. Dist. LEXIS 74989 (W.D. Ky. 2010 ), aff'd, 536 Fed. Appx. 558, 2013 FED App. 802N, 2013 U.S. App. LEXIS 18203 (6th Cir. Ky. 2013 ).

Fact that a vehicle was or was not registered as a commercial vehicle under the provisions of Ky. Rev. Stat. Ann. § 186.050 does not answer the inquiry required by the Kentucky Consumer Protection Act (KCPA), KRS § 367.110 et seq. The KCPA addresses the consumer's reason, or primary purpose, for acquiring the good, whereas the registration statute does not consider the reason, or primary purpose, for the consumer's acquisition of the vehicle, but rather addresses the physical attributes of the vehicle and, in one instance, the actual use of the vehicle as a for-hire vehicle. Corder v. Ford Motor Co., 297 F.R.D. 572, 2014 U.S. Dist. LEXIS 6073 (W.D. Ky. 2014 ).

Plaintiff's proposed class definition would rely on the registration statute to distinguish between commercial and non-commercial vehicles on the basis of their physical characteristics or their use as a for-hire vehicle. This class definition fails to satisfy the requirements of the Kentucky Consumer Protection Act, Ky. Rev. Stat. Ann. § 367.110 et seq., because it does not address the consumer's primary purpose for purchasing or leasing the vehicle; as such, the court would still need to undertake an individualized inquiry into the customers' primary initial intended use for the vehicle at the time of acquisition. Corder v. Ford Motor Co., 297 F.R.D. 572, 2014 U.S. Dist. LEXIS 6073 (W.D. Ky. 2014 ).

Where a university made changes to a clinical psychology Ph.D. program, students' claims under the Kentucky Consumer Protection Act failed because the students sought a degree for a business, as opposed, to personal purpose. Suhail v. Univ. of the Cumberlands, 107 F. Supp. 3d 748, 2015 U.S. Dist. LEXIS 68742 (E.D. Ky. 2015 ).

12.Parties.
13.—Privity of Contract.

The statute requires that privity of contract exist between the parties in a suit alleging a violation of the Consumer Protection Act. Kentucky Laborers Dist. Council Health & Welfare Trust Fund v. Hill & Knowlton, 24 F. Supp. 2d 755, 1998 U.S. Dist. LEXIS 16052 (W.D. Ky. 1998 ).

Plaintiff artificial turf manufacturer did not allege privity with defendant competitor and was not a consumer for the purposes of the Kentucky Consumer Protection Act purposes; accordingly, the manufacturer’s claims were dismissed with prejudice. Fieldturf, Inc. v. Southwest Rec. Indus., Inc., 235 F. Supp. 2d 708, 2002 U.S. Dist. LEXIS 24806 (E.D. Ky. 2002 ).

Where a consumer alleged that a bank improperly attempted to collect a debt for amounts charged to a credit card which was fraudulently obtained by someone using the consumer’s name and information, the fact that the consumer denied any contractual relationship with the bank did not preclude the consumer’s action under KRS 367.220(1), since the bank consistently treated the consumer as a purchaser of credit. Stafford v. Cross Country Bank, 262 F. Supp. 2d 776, 2003 U.S. Dist. LEXIS 7886 (W.D. Ky. 2003 ).

A federal District Court has concluded that Kentucky’s highest court would find a sale of credit to be a “service” within the meaning of the Kentucky Consumer Protection Act, in particular KRS 367.220(1). Stafford v. Cross Country Bank, 2003 U.S. Dist. LEXIS 8215 (W.D. Ky. May 9, 2003).

Consumer obtained a loan that was subsequently transferred to a loan servicer; the consumer never entered into a contract with the servicer. Since the consumer purchased nothing from the service, she was not in privity with it, and therefore KRS 367.220 provided no recovery; the court agreed with the servicer, that the consumer lacked standing to sue it under the Kentucky Consumer Protection Act. Eversole v. EMC Mortg. Corp., 2005 U.S. Dist. LEXIS 28770 (E.D. Ky. Nov. 9, 2005).

A consumer’s Kentucky Consumer Protection Act claim against a manufacturer of breast implants failed because the consumer did not purchase her breast implants from the company; as such, there was no privity of contract between the consumer and the company. Alfred v. Mentor Corp., 2007 U.S. Dist. LEXIS 15535 (W.D. Ky. Mar. 5, 2007).

Debtor’s claim under KRS 367.170 was summarily dismissed because the debtor was not in privity, as required by KRS 367.220(1), with the defendant bill collectors who used an allegedly coercive “blind garnishment” procedure to collect on a credit card bill that had been reduced to judgment and that they had purchased from a lender; the Kentucky Consumer Protection Act, by its terms, did not furnish the debtor with a cause of action. Tallon v. Lloyd & McDaniel, 497 F. Supp. 2d 847, 2007 U.S. Dist. LEXIS 53197 (W.D. Ky. 2007 ).

Although the debtor was a cardholder with the bank, the debtor was not a party to the agreements between the merchants and the bank which caused his alleged damages; therefore, he did not have standing to maintain an action under the Consumer Protection Act, KRS 367.220(1). Williams v. Chase Bank USA, N.A., 390 S.W.3d 824, 2012 Ky. App. LEXIS 78 (Ky. Ct. App. 2012).

Board did not purchase the school bus for personal, family or household purposes, nor were appellants in the board’s family or household or guests in its home; therefore, appellants could not be considered part of the board’s “family” pursuant to the statutes; the warranty protections were only afforded to the board, not appellants, and there was no privity of contract between the parties to support a Kentucky Consumer Protection Act or breach of warranty claim on behalf of appellants. Jones v. IC Bus, LLC, 626 S.W.3d 661, 2020 Ky. App. LEXIS 114 (Ky. Ct. App. 2020).

14.Real Estate Transactions.

The statute does not apply to single real estate transactions. Craig v. Keene, 32 S.W.3d 90, 2000 Ky. App. LEXIS 64 (Ky. Ct. App. 2000).

Bank that serviced a note and mortgage on a Chapter 13 debtor’s home was entitled to summary judgment on the debtor’s claim that the bank violated the Kentucky Consumer Protection Act (“KCPA”), KRS 367.220 , when it applied payments she made and the Chapter 13 trustee made postpetition to “corporate advances,” ahead of principal and interest on a promissory note. The KCPA did not apply to real estate transactions by an individual homeowner. Mattox v. Wells Fargo, NA (In re Mattox), 2011 Bankr. LEXIS 3139 (Bankr. E.D. Ky. Aug. 17, 2011).

Tenants claimed that the landlords were liable for violating the Kentucky Consumer Protection Act (KCPA), but this argument failed because the KCPA did not apply to individual real estate transactions. Joiner v. Tran & P Properties, LLC, 526 S.W.3d 94, 2017 Ky. App. LEXIS 348 (Ky. Ct. App. 2017).

15.Ascertainable Loss.

Lender’s failure to itemize a “rent charge” — which included an administrative fee — when disclosing to a consumer the amounts upon which the consumer’s lease payment were based did not violate the Consumer Leasing Act (CLA), 15 USCS § 1667 et seq., or the Kentucky Consumer Protection Act (KCPA), KRS 367.170 et seq.; the CLA did not require that the rent charge be itemized, and the consumer’s KCPA claim failed because the consumer failed to show any loss caused by the lack of itemization, KRS 367.220(1), and the lender committed no “deceptive acts or practices,” KRS 367.170 . Schlenk v. Ford Motor Credit Co., 308 F.3d 619, 2002 FED App. 0370P, 2002 U.S. App. LEXIS 22341 (6th Cir. Ky. 2002 ), cert. denied, 540 U.S. 877, 124 S. Ct. 288, 157 L. Ed. 2d 141, 2003 U.S. LEXIS 6242 (U.S. 2003).

Debtor failed to state a claim for violation of the Kentucky Consumer Protection Act based upon a bank’s disclosure of private information in a proof of claim, as she suffered no ascertainable loss of money or property as a result of the proof of claim. Lucky v. Ky. Bank (In re Lucky), 2011 Bankr. LEXIS 5734 (Bankr. E.D. Ky. Mar. 21, 2011).

16.Purchaser.

The plaintiffs were eligible to bring an action as purchasers despite not actually completing the purchase since they took the car, at least for a time, following a period of negotiations and after giving value. At the very least, the plaintiff’s had an equitable interest in the car equal to the value given. Thus, a purchase was made at least for purposes of the Kentucky Consumer Protection Act, which is designed to provide broad protection to consumers victimized by unlawful and deceptive trade practices. Craig & Bishop, Inc. v. Piles, 247 S.W.3d 897, 2008 Ky. LEXIS 61 ( Ky. 2008 ).

Although “purchase” is not defined in the Kentucky Consumer Protection Act, even if the definition of purchase as reflected in Kentucky’s version of the Uniform Commercial Code, KRS 355.1-201 , is applicable, the plaintiffs were eligible to bring an action as purchasers since they took the car, at least for a time, following a period of negotiations and after giving value. Craig & Bishop, Inc. v. Piles, 247 S.W.3d 897, 2008 Ky. LEXIS 61 ( Ky. 2008 ).

The absence of a finding of a valid contract is not fatal to a claim for unfair trade practices under the KCPA as it would be to a breach of contract claim. Nothing in the KCPA, particularly KRS 367.170 and KRS 367.220 , explicitly requires that a binding contract be reached for a purchaser damaged by unlawful trade practices to have a private right of action. Because the plaintiffs qualified as purchasers under the KCPA, they were entitled to sue for any damages resulting from unfair trade practices under KRS 367.220 . Craig & Bishop, Inc. v. Piles, 247 S.W.3d 897, 2008 Ky. LEXIS 61 ( Ky. 2008 ).

17.Time Limitations.

Partial summary judgment was granted to a manufacturer on claims for a violation of the Kentucky Consumer Protection Act because the amended claim was not brought within two (2) years as required by KRS 367.220 , and the amended claim was not sufficiently similar to the original complaint, which had alleged causes of action for products liability in tort, for relation back to apply under CR 15.03. Bennett v. Ford Motor Co., 2008 U.S. Dist. LEXIS 27286 (W.D. Ky. Apr. 3, 2008).

Debtor’s claim for violation of the Kentucky Consumer Protection Act based on a bank’s disclosure of private information in a proof of claim was not brought within two years after the alleged violation, as the unredacted claim was filed more than two years prior to the filing of her complaint. Thus, the bank was granted summary judgment. Lucky v. Ky. Bank (In re Lucky), 2011 Bankr. LEXIS 5734 (Bankr. E.D. Ky. Mar. 21, 2011).

18.Class Actions.

Order certifying a class for a class action lawsuit initiated by the purported class member against the pharmaceutical company for claims made under the Kentucky Consumer Protection Act and claims made for fraudulent misrepresentation, negligent misrepresentation, and unjust enrichment was improper because common questions did not predominate, KRS 367.220(1). Since each plaintiff might have had different medical conditions and circumstances at the time they were prescribed the drug, and because each might have experienced different effects from the drug as compared to its risks, a separate risk/benefit analysis would effectively have to be undertaken for each putative class member. Merck & Co., Inc. v. Ratliff, 2012 Ky. App. LEXIS 31 (Ky. Ct. App. Feb. 10, 2012).

Cited:

Nicholson v. Clark, 802 S.W.2d 934, 1990 Ky. App. LEXIS 82 (Ky. Ct. App. 1990); Capitol Cadillac Olds, Inc. v. Roberts, 813 S.W.2d 287, 1991 Ky. LEXIS 133 ( Ky. 1991 ); Sparks v. Re/Max Allstar Realty, Inc., 55 S.W.3d 343, 2000 Ky. App. LEXIS 131 (Ky. Ct. App. 2000).

Notes to Unpublished Decisions

9.Subsequent Purchaser.

Unpublished decision: Consumer's claim under the Kentucky Consumer Protection Act failed, as it was undisputed that the consumer was not the original purchaser of the arrow that injured him, he bought the arrow second-hard. Yonts v. Easton Tech. Prods., 676 Fed. Appx. 413, 2017 FED App. 0032N, 2017 U.S. App. LEXIS 723 (6th Cir. Ky. 2017 ).

Opinions of Attorney General.

The legislature intended that actions based upon allegations of false, misleading, or deceptive acts or practices in the conduct of any trade or commerce, as set forth in KRS 367.170 , must be brought in the circuit court, to the exclusion of the inferior courts. OAG 73-502 .

Research References and Practice Aids

Kentucky Bench & Bar.

Stamm, The Attorney General Goes to Market, Vol. 41, No. 2, April 1977, Ky. Bench & Bar 14.

Baxter, Private Right of Action Under the Consumer Protection Act — New Avenues for Recovery, Vol. 43, No. 4, October 1979, Ky. Bench & Bar 8.

Mapother, Attorneys’ Fees Recoverable in Kentucky Litigation, Vol. 44, No. 4, October 1980, Ky. Bench & Bar 28.

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

Kentucky Law Survey, Underwood, Insurance, 72 Ky. L.J. 403 (1983-84).

Northern Kentucky Law Review.

Notes, U.C.C. — Consumer Protection Act — Limited Warranties — Automobile Manufacturer’s Refusal to Recognize Buyers’ Rights Under the U.C.C. When a Limited Warranty Fails of Its Essential Purpose Constitutes an Unfair Trade Practice Under the Consumer Protection Act, 6 N. Ky. L. Rev. 403 (1979).

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Complaint for Violation of Kentucky Consumer Protection Act, Form 192.03.

Caldwell’s Kentucky Form Book, 5th Ed., Complaint under Consumer Protection Act Against Insurer for Fraudulent Business Practice, Form 143.09.

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Business Torts, § 143.00.

Kentucky Instructions To Juries (Civil), 5th Ed., Insurance, § 44.10.

367.230. Assurance of voluntary compliance.

In the administration of KRS 367.110 to 367.300 , the Attorney General may accept an assurance of voluntary compliance with respect to any method, act, or practice deemed to be violative of KRS 367.110 to 367.300 from any person who has engaged or was about to engage in that method, act, or practice. This assurance shall be in writing and shall be filed with and subject to the approval of the Circuit Court in which the alleged violator resides or has his principal place of business, or the Franklin Circuit Court. An assurance of voluntary compliance shall not be considered an admission of violation for any purpose. It shall be a willful violation of KRS 367.170 if a person who enters into an assurance of voluntary compliance fails to comply. Matters thus closed may at any time be reopened by the Attorney General for further proceedings in the public interest, pursuant to KRS 367.190 .

History. Enact. Acts 1972, ch. 4, § 13; 1996, ch. 235, § 1, effective July 15, 1996.

Research References and Practice Aids

Kentucky Bench & Bar.

Stamm, The Attorney General Goes to Market, Vol. 41, No. 2, April 1977, Ky. Bench & Bar 14.

Baxter, Private Right of Action Under the Consumer Protection Act — New Avenues for Recovery, Vol. 43, No. 4, October 1979, Ky. Bench & Bar 8.

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

367.240. Investigation — Demand for information or evidence.

  1. When the Attorney General has reason to believe that a person has engaged in, is engaging in, or is about to engage in any act or practice declared to be unlawful by KRS 367.110 to 367.300 , or when he believes it to be in the public interest that an investigation should be made to ascertain whether a person in fact has engaged in, is engaging in or is about to engage in, any act or practice declared to be unlawful by KRS 367.110 to 367.300 , he may execute in writing and cause to be served upon any person who is believed to have information, documentary material or physical evidence relevant to the alleged or suspected violation, an investigative demand requiring such person to furnish, under oath or otherwise, a report in writing setting forth the relevant facts and circumstances of which he has knowledge, or to appear and testify or to produce relevant documentary material or physical evidence for examination, at such reasonable time and place as may be stated in the investigative demand, concerning the advertisement, sale or offering for sale of any goods or services or the conduct of any trade or commerce that is the subject matter of the investigation. Provided however, that no person who has a place of business in Kentucky shall be required to appear or present documentary material or physical evidence outside of the county where he has his principal place of business within the Commonwealth.
  2. At any time before the return date specified in an investigative demand, or within twenty (20) days after the demand has been served, whichever period is shorter, a petition to extend the return date, or to modify or set aside the demand, stating good cause, may be filed in the Circuit Court where the person served with the demand resides or has his principal place of business or in the Franklin Circuit Court.

History. Enact. Acts 1972, ch. 4, § 14.

NOTES TO DECISIONS

1.Notice of Grounds.

In issuing an investigative demand directed to an officer of four (4) affiliated corporations engaged in the selling of mobile homes, the Attorney General was not required to show on the face of the demand, which called for copies of promotional material and the names and addresses of personnel, the reason or grounds for its issuance. Commonwealth ex rel. Hancock v. Pineur, 533 S.W.2d 527, 1976 Ky. LEXIS 112 ( Ky. 1976 ).

2.Evidence.
3.— Insufficient.

Where, to support his motion for partial summary judgment, the Attorney General merely filed one attorney’s affidavit explaining the basis for the issuance of the demand, which affidavit was based on a letter from a representative of the Kentucky Association of Electrical Cooperatives, but the record contained no complaints from customers, nor the affidavits of anyone who tested appellants’ product and found it defective, such facts were insufficient to support a summary judgment in favor of the Attorney General. Ward v. Commonwealth, 566 S.W.2d 426, 1978 Ky. App. LEXIS 521 (Ky. Ct. App. 1978).

4.Investigation.
5.—Demand.

Conditions precedent to issuance of a demand are that the Attorney General must have reason to believe that a violation of the Consumer Protection Act (KRS 367.110 to 367.300 ) is being committed, or that the public interest requires his investigation into potential violations of the act and the facts must be established before the demand is issued. Ward v. Commonwealth, 566 S.W.2d 426, 1978 Ky. App. LEXIS 521 (Ky. Ct. App. 1978).

Under subsection (2) of this section and KRS 367.260 , after the filing of a complaint in Franklin Circuit Court, it is the duty of the court to examine the documentation and facts upon which the Attorney General based his decision to issue the demand in order to protect against arbitrary or mistaken issuance of investigative demands. Ward v. Commonwealth, 566 S.W.2d 426, 1978 Ky. App. LEXIS 521 (Ky. Ct. App. 1978).

Based upon the plain language of KRS 367.240(1), the “relevant to the alleged or suspected violation” language applied to both prongs, but the Attorney General did not have to believe a person was in violation of the Kentucky Consumer Protection Act (KCPA) under the second prong; the Attorney General suspected that the college had violated the KCPA and met the threshold for the issuance of the civil investigative demand (CID), and on remand, the circuit court had to consider the scope of the CID in relation to the Attorney General’s investigation. ABC, Inc. v. Commonwealth ex rel Conway, 2012 Ky. App. LEXIS 156 (Ky. Ct. App. Aug. 24, 2012), review denied, ordered not published, 2013 Ky. LEXIS 119 (Ky. Apr. 17, 2013).

Cited:

Hearing Aid Asso. v. Bullock, 413 F. Supp. 1032, 1976 U.S. Dist. LEXIS 16212 (E.D. Ky. 1976 ).

Research References and Practice Aids

Kentucky Bench & Bar.

Stamm, The Attorney General Goes to Market, Vol. 41, No. 2, April 1977, Ky. Bench & Bar 14.

Baxter, Private Right of Action Under the Consumer Protection Act — New Avenues for Recovery, Vol. 43, No. 4, October 1979, Ky. Bench & Bar 8.

Kentucky Law Journal.

Comments, Precomplaint Investigations Under the Kentucky Consumer Protection Act: Validity and Scope of the Civil Investigation Demand, 65 Ky. L.J. 169 (1976-77).

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

367.250. Subpoenas — Oath — Confidential information.

To accomplish the objectives and to carry out the duties prescribed by KRS 367.110 to 367.300 , the Attorney General, in addition to other powers conferred upon him by KRS 367.110 to 367.300 , may issue subpoenas to any person, administer an oath or affirmation to any person, or conduct hearings in aid of any investigation or inquiry, provided that information obtained pursuant to the powers conferred by KRS 367.110 to 367.300 shall not be made public or disclosed by the Attorney General or his employees beyond the extent necessary for law enforcement purposes in the public interest.

History. Enact. Acts 1972, ch. 4, § 15.

Research References and Practice Aids

Kentucky Bench & Bar.

Baxter, Private Right of Action Under the Consumer Protection Act — New Avenues for Recovery, Vol. 43, No. 4, October 1979, Ky. Bench & Bar 8.

Kentucky Law Journal.

Comments, Precomplaint Investigations Under the Kentucky Consumer Protection Act: Validity and Scope of the Civil Investigation Demand, 65 Ky. L.J. 169 (1976-77).

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

367.260. Unreasonable investigation.

Any person may apply to a Circuit Court for an appropriate order to protect such person from any unreasonable investigative action taken pursuant to KRS 367.110 to 367.300 .

History. Enact. Acts 1972, ch. 4, § 16.

NOTES TO DECISIONS

1.Duty of Court.

Under KRS 367.240(2) and this section, after the filing of a complaint in Franklin Circuit Court, it is the duty of the court to examine the documentation and facts upon which the Attorney General based his decision to issue the demand in order to protect against arbitrary or mistaken issuance of investigative demands. Ward v. Commonwealth, 566 S.W.2d 426, 1978 Ky. App. LEXIS 521 (Ky. Ct. App. 1978).

Research References and Practice Aids

Kentucky Bench & Bar.

Stamm, The Attorney General Goes to Market, Vol. 41, No. 2, April 1977, Ky. Bench & Bar 14.

Kentucky Law Journal.

Comments, Precomplaint Investigations Under the Kentucky Consumer Protection Act: Validity and Scope of the Civil Investigation Demand, 65 Ky. L.J. 169 (1976-77).

367.270. Impounding of evidence in matter under investigation.

Whenever the Attorney General has probable cause to believe that a person has engaged in, or is engaging in, any practice declared by KRS 367.110 to 367.300 to be unlawful and whenever the Attorney General has probable cause to believe that information will not be obtainable pursuant to KRS 367.240 and 367.250 during the course of any investigation, he may apply to a Circuit Court ex parte for an order impounding any record, book, document, account, paper or sample of merchandise which is material to the practice under investigation. Such motion shall state in writing the grounds which the Attorney General believes constitute probable cause. The Circuit Court shall specify by order the length of time for copy or inspection.

History. Enact. Acts 1972, ch. 4, § 17(3).

Research References and Practice Aids

Kentucky Law Journal.

Comments, Precomplaint Investigations Under the Kentucky Consumer Protection Act: Validity and Scope of the Civil Investigation Demand, 65 Ky. L.J. 169 (1976-77).

367.280. Service of subpoena — Service upon persons outside Commonwealth.

  1. To the fullest extent permitted by the Constitution of the United States, service of a subpoena or a demand pursuant to KRS 367.240 and 367.250 may be had in the manner prescribed by the Kentucky Revised Statutes and the Kentucky Rules of Civil Procedure.
  2. Personal service of any process, subpoena or investigative demand pursuant to KRS 367.110 to 367.300 may be made upon any person outside of the Commonwealth if such person has engaged in conduct in violation of KRS 367.110 to 367.300 in the Commonwealth. Such persons shall be deemed to have thereby submitted themselves to the jurisdiction of the courts of the Commonwealth within the meaning of this section.

History. Enact. Acts 1972, ch. 4, § 18.

367.290. Failure to obey subpoena or investigative demand of Attorney General — Revocation of corporate charter — Revocation of licenses.

  1. If any person fails or refuses to file any statement or report, or to obey any subpoena or investigative demand issued by the Attorney General, the Attorney General may, after notice, apply to a Circuit Court and, after hearing thereon, request an order:
    1. Granting injunctive relief to restrain the person from engaging in the advertising or sale of any merchandise or the conduct of any trade or commerce that is involved in the alleged or suspected violation; and
    2. Vacating, annulling, or suspending the corporate charter of a corporation created by or under the laws of this Commonwealth or revoking or suspending the certificate of authority to do business in this Commonwealth of a foreign corporation or revoking or suspending any other licenses, permits or certificates issued pursuant to law to such person which are used to further the allegedly unlawful practice; and
    3. Granting such other relief as may be required, until the person files the statement or report, or obeys the subpoena or investigative demand.
  2. Prior to issuance of any final order the person charged with failing to answer the investigative demand or subpoena pursuant to KRS 367.240 or 367.250 shall be afforded an opportunity for a hearing on the merits of the demand or subpoena. Any disobedience of any final order entered under this section by any court shall be punished as a contempt thereof.

History. Enact. Acts 1972, ch. 4, § 19.

NOTES TO DECISIONS

1.Sanctions Proper.

Circuit court properly imposed sanctions on a college because, inter alia, the trial court's orders did not state partial compliance with the Attorney General's civil investigative demand (CID) would avoid sanctions, the college knew it could avoid sanctions by fully complying with the CID, and the severity of the sanction reflected the trial court's efforts to compel the college to comply with the CID. Thomerson v. Kentucky, 2016 Ky. App. LEXIS 137 (Ky. Ct. App. Aug. 12, 2016), cert. denied, 138 S. Ct. 314, 199 L. Ed. 2d 207, 2017 U.S. LEXIS 6156 (U.S. 2017).

Cited:

Commonwealth ex rel. Hancock v. Pineur, 533 S.W.2d 527, 1976 Ky. LEXIS 112 ( Ky. 1976 ).

Research References and Practice Aids

Kentucky Bench & Bar.

Stamm, The Attorney General Goes to Market, Vol. 41, No. 2, April 1977, Ky. Bench & Bar 14.

Kentucky Law Journal.

Comments, Precomplaint Investigations Under the Kentucky Consumer Protection Act: Validity and Scope of the Civil Investigation Demand, 65 Ky. L.J. 169 (1976-77).

367.300. Assistance to Attorney General — Reporting.

It shall be the duty of the Commonwealth and the county attorneys to lend to the Attorney General such assistance as the Attorney General may request in the commencement and prosecution of court actions pursuant to KRS 367.110 to 367.300 , or the Commonwealth or county attorney with prior approval of the Attorney General may institute and prosecute actions hereunder in the same manner as provided for the Attorney General; provided that if an action is prosecuted by a Commonwealth attorney or county attorney alone, he shall make a full report thereon to the Attorney General, including the final disposition of the matter.

History. Enact. Acts 1972, ch. 4, § 21.

Opinions of Attorney General.

This section does not attempt to limit the ability or authority to any fiscal court to establish a consumer protection ordinance and provide for its local enforcement. OAG 79-268 .

Research References and Practice Aids

Kentucky Bench & Bar.

Stamm, The Attorney General Goes to Market, Vol. 41, No. 2, April 1977, Ky. Bench & Bar 14.

Kentucky Law Journal.

Underwood, Part-Time Prosecutors and Conflicts of Interest: A Survey and Some Proposals, 81 Ky. L.J. 1 (1993).

367.310. Consumer reporting agency records restriction.

No consumer reporting agency shall maintain any information in its files relating to any charge in a criminal case, in any court of this Commonwealth, unless the charge has resulted in a conviction.

History. Enact. Acts 1980, ch. 49, § 1, effective July 15, 1980.

367.320. Processing of payments by servicer of high-cost home loan.

  1. As used in this section, “servicer” means any person or entity who currently collects or processes payments on a high-cost home loan, as that term is defined in KRS 360.100 , regardless of whether that person or entity is the owner, the holder, the assignee, the nominee for the loan, the beneficiary of a trust, or any person acting on behalf of such person.
  2. A servicer shall:
    1. Apply payments promptly upon receipt, so long as the residential mortgage loan is still being actively processed. If a payment is received on a Saturday, a Sunday, or any day when the servicer’s principal place of business is not open or after 1 p.m. on a business day, it shall be considered promptly applied if applied on the next regular business day;
    2. Apply payments first to interest and principal currently due, then to late fees currently due, then to other fees and charges currently due, and then to additional principal, as applicable;
    3. Assess any fee which is otherwise legal under this section within thirty (30) days of the date on which the fee was accrued and disclose any assessed fee clearly and conspicuously in the next periodic statement provided to the borrower;
    4. Charge no late fee, if a payment is otherwise a full payment for the applicable period and is paid on its due date or within an applicable grace period, and the only delinquency or insufficiency of payment is attributable to any late fee or delinquency charge assessed on any earlier payment; and
    5. Make all payments from the escrow account held for the borrower for insurance, taxes, and other charges with respect to the property in a timely manner so as to ensure that no late penalties are assessed or other negative consequences result, regardless of whether the loan is delinquent unless there are not sufficient funds in the account to cover the payments, and disclose any payments from the escrow account clearly and conspicuously in the next periodic statement provided to the borrower.

History. Enact. Acts 2008, ch. 175, § 32, effective April 24, 2008.

Research References and Practice Aids

Northern Kentucky Law Review.

2012 Kentucky Survey Issue: Article: Abusive Lending Practices: A Survey of Kentucky’s Legislative Response, 39 N. Ky. L. Rev. 1 (2012).

367.350. Rebate of sale or lease price contingent on referral of additional customer prohibited.

With respect to a credit sale, cash sale or lease to a consumer, the seller or lessor may not give or offer to give a rebate or discount or otherwise pay or offer to pay value to the buyer or lessee as an inducement for a sale or lease in consideration of his giving to the seller or lessor the names of prospective purchasers or lessees, or otherwise aiding the seller or lessor in making a sale or lease to another person, if the earning of the rebate, discount or other value is contingent upon the occurrence of an event subsequent to the time the buyer or lessee agrees to buy or lease. If a buyer or lessee is induced by a violation of this section to enter into a cash or credit consumer sale or consumer lease, the agreement is unenforceable by the seller or lessor and the buyer or lessee, at his option, may rescind the agreement or retain the goods delivered and the benefit of any services performed, without any obligation to pay for them.

History. Enact. Acts 1972, ch. 23, § 1.

NOTES TO DECISIONS

Cited:

Dare To Be Great, Inc. v. Commonwealth, 511 S.W.2d 224, 1974 Ky. LEXIS 482 ( Ky. 1974 ).

Opinions of Attorney General.

The payment of a premium for an insurance policy covering a charitable club’s bus is a proper expenditure of the club’s funds. OAG 78-740 .

367.360. Subpoenas — Oaths — Hearings — Confidential information.

To accomplish the objectives and to carry out the duties prescribed by KRS 367.350 the Attorney General, in addition to other powers conferred upon him by KRS 367.990(5), may issue subpoenas to any person, administer an oath or affirmation to any person, or conduct hearings in aid of any investigation or inquiry, provided that information obtained pursuant to the powers conferred by this section shall not be made public or disclosed by the Attorney General or his employees beyond the extent necessary for law enforcement purposes in the public interest.

History. Enact. Acts 1972, ch. 23, § 3.

Placement of Security Freeze on Consumer Reports

367.363. Definitions for KRS 367.363 to 367.365.

As used in KRS 367.363 to 367.365 , unless the context requires otherwise:

  1. “Clear and proper identification” means information generally deemed sufficient to identify a person. If the consumer is unable to reasonably identify himself or herself with such information, a consumer reporting agency may require additional information to verify his or her identity;
  2. “Consumer report” means a consumer report, as defined in the federal Fair Credit Reporting Act, 15 U.S.C. sec. 1681 a(d);
  3. “Consumer reporting agency” means a consumer reporting agency as defined by the federal Fair Credit Reporting Act, 15 U.S.C. sec. 1681 a(f). “Consumer reporting agency” shall not mean a check acceptance service which provides check approval and guarantees services to merchants; and
  4. “Security freeze” means a notice placed on a consumer file, at the request of the consumer and subject to certain exceptions, that prohibits a consumer reporting agency from releasing the consumer’s consumer report or credit score relating to the extension of credit without the express authorization of the consumer.

History. Enact. Acts 2006, ch. 42, § 1, effective July 12, 2006.

367.364. Persons not required to place a security freeze on a consumer report.

The following persons are not required to place a security freeze on a consumer report in accordance with KRS 367.363 to 367.365 :

  1. A check services or fraud prevention services company, which issues reports on incidents of fraud or authorizations for the purpose of approving or processing negotiable instruments, electronic funds transfers, or similar methods of payments;
  2. A deposit account information service company, which issues reports regarding account closures due to fraud, substantial overdrafts, automated teller machine (ATM) abuse, or similar negative information regarding a consumer to inquiring banks or other financial institutions for use only in reviewing a consumer request for a deposit account at the inquiring bank or financial institution;
  3. A reseller of credit information that assembles or merges information contained in the database of another consumer reporting agency or multiple consumer reporting agencies, and does not maintain a permanent database of credit information from which new consumer reports are produced;
  4. Any database or file which consists solely of any information adverse to the interests of the consumer, including but not limited to criminal record information, which is used for fraud prevention or detection, tenant screening, employment screening, or any purpose permitted by the federal Fair Credit Reporting Act, 15 U.S.C. sec. 1681 b;
  5. A person to the extent such person offers fraud prevention services that issues reports on incidents of fraud or reports used primarily in the detection or prevention of fraud;
  6. A bank, as defined in 12 U.S.C. sec. 1813(a) or Subtitles 1, 2, and 3 of KRS Chapter 286;
  7. A credit union, as defined in 12 U.S.C. sec. 1752 or Subtitle 6 of KRS Chapter 286;
  8. A savings association, as defined in 12 U.S.C. sec. 1813(b) , or an association, as defined in Subtitle 5 of KRS Chapter 286;
  9. An insurer, as defined in KRS Chapter 304; and
  10. A retail establishment selling its own inventory.

History. Enact. Acts 2006, ch. 42, § 2, effective July 12, 2006.

367.3645. Request for security freeze on protected person’s record or consumer report — Effect of security freeze — Removal of security freeze — Fees — Liability for willful noncompliance or acting under false pretenses — Nonapplicability to specified circumstances.

  1. For the purposes of this section:
    1. “Protected person” means an individual who is under sixteen (16) years of age at the time a request for the placement of a security freeze is made, or who is an incapacitated person or other person for whom a guardian or conservator has been appointed;
    2. “Record” means a compilation of information which:
      1. Identifies a protected person;
      2. Is created by a consumer reporting agency solely for the purpose of complying with this section; and
      3. Is not created or used to consider the protected person’s creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living;
    3. “Representative” means a person who provides to a consumer reporting agency sufficient proof of authority to act on behalf of a protected person; and
    4. “Sufficient proof of authority” means documentation that shows a representative has authority to act on behalf of a protected person, including but not limited to:
      1. A court order granting custodianship, guardianship, or conservatorship;
      2. A birth certificate;
      3. A lawfully executed and valid power of attorney; or
      4. A written, notarized statement signed by a representative that expressly describes the authority of the representative to act on behalf of a protected person.
  2. A consumer reporting agency shall place a security freeze on a protected person’s record or consumer report if:
    1. The consumer reporting agency receives a request from the protected person’s representative for the placement of the security freeze; and
    2. The protected person’s representative:
      1. Submits the request to the consumer reporting agency at the address designated by the consumer reporting agency to receive the request;
      2. Provides to the consumer reporting agency clear and proper identification of the protected person and the representative;
      3. Provides to the consumer reporting agency sufficient proof of authority to act on behalf of the protected person; and
      4. Pays to the consumer reporting agency a fee as prescribed in subsection (8) of this section.
  3. If a consumer reporting agency does not have a file pertaining to a protected person when the consumer reporting agency receives a request pursuant to subsection (2) of this section, the consumer reporting agency shall create a record for the protected person.
  4. Within thirty (30) days after receiving a request pursuant to this section, a consumer reporting agency shall place a security freeze on the protected person’s record or consumer report.
  5. Unless a security freeze is removed pursuant to subsection (7) or (10) of this section, a consumer reporting agency may not release the protected person’s consumer report, any information derived from the protected person’s consumer report, or any record created for the protected person.
  6. A security freeze that is placed on a protected person’s record or consumer report placed under this section remains in effect until either:
    1. The protected person or the protected person’s representative requests that the consumer reporting agency remove the security freeze pursuant to subsection (7) of this section; or
    2. The security freeze is removed pursuant to subsection (10) of this section.
    1. To remove a security freeze for a protected person, the protected person or the protected person’s representative shall submit a request for the removal of the security freeze to the consumer reporting agency at the address designated by the consumer reporting agency to receive the request, and pay a fee as prescribed in subsection (8) of this section. In addition: (7) (a) To remove a security freeze for a protected person, the protected person or the protected person’s representative shall submit a request for the removal of the security freeze to the consumer reporting agency at the address designated by the consumer reporting agency to receive the request, and pay a fee as prescribed in subsection (8) of this section. In addition:
      1. If the protected person requested the removal of the security freeze, the protected person shall provide to the consumer reporting agency both of the following:
        1. Proof that the protected person’s representative no longer has sufficient proof of authority to act on behalf of the protected person; and
        2. Clear and proper identification of the protected person; and
      2. If the protected person’s representative requested the removal of the security freeze on behalf of the protected person, the protected person’s representative shall provide to the consumer reporting agency both of the following:
        1. Clear and proper identification of the protected person and the representative; and
        2. Sufficient proof of authority to act on behalf of the protected person.
    2. Within thirty (30) days after receiving a request to remove a security freeze placed pursuant to subsection (2) of this section, the consumer reporting agency shall remove the security freeze for the protected person.
  7. A consumer reporting agency may charge a fee for each placement or removal of a security freeze on a protected person’s record or consumer report. The fee may not exceed ten dollars ($10).
  8. Notwithstanding subsection (8) of this section, a consumer reporting agency may not charge any fee under this section if:
    1. The protected person’s representative provides a copy of a police report to the consumer reporting agency alleging that the protected person has been a victim of an offense involving identity theft; or
    2. A request for the placement or removal of a security freeze is for a protected person who is under sixteen (16) years of age at the time of the request and the consumer reporting agency has a consumer report pertaining to the protected person.
  9. A consumer reporting agency may remove a security freeze for a protected person or may delete a protected person’s record if the security freeze was placed or the record was created based on a material misrepresentation of fact by the protected person or the protected person’s representative.
  10. Any person who willfully fails to comply with any requirement imposed under this section with respect to any protected person is liable to that person in an amount equal to the sum of:
    1. Any actual damages sustained by the consumer as a result of the failure;
    2. Any liquidated damages of not less than one hundred dollars ($100) and not more than one thousand dollars ($1,000);
    3. Any punitive damages as the court may allow; and
    4. In the case of any successful action to enforce any liability under this section, the costs of the action together with reasonable attorney’s fees as determined by the court.
  11. Any person, other than the named individual or individuals in the report, who obtains a consumer report, requests a security freeze, requests the temporary lift of a freeze, or requests the removal of a security freeze from a consumer reporting agency under false pretenses or in an attempt to violate federal or state law shall be liable to the consumer reporting agency for actual damages sustained by the consumer reporting agency or one thousand dollars ($1,000), whichever is greater.
  12. This section does not apply to a protected person’s consumer report or record provided to:
    1. A federal, state, or local governmental entity, including a law enforcement agency, or court, or their agents or assigns;
    2. A private collection agency for the sole purpose of assisting in the collection of an existing debt of the consumer who is the subject of the consumer report requested;
    3. A person or entity, or a subsidiary, affiliate, or agent of that person or entity, or an assignee of a financial obligation owing by the consumer to that person or entity, or a prospective assignee of a financial obligation owing by the consumer to that person or entity in conjunction with the proposed purchase of the financial obligation, with which the consumer has or had prior to assignment an account or contract, including a demand deposit account, or to whom the consumer issued a negotiable instrument, for the purposes of reviewing the account or collecting the financial obligation owing for the account, contract, or negotiable instrument. For purposes of this paragraph, “reviewing the account” includes activities related to account maintenance, monitoring, credit line increases, and account upgrades and enhancements;
    4. A person, for the purposes of prescreening as provided by the federal Fair Credit Reporting Act, 15 U.S.C. secs. 1681 et seq.;
    5. A consumer reporting agency for the purposes of providing a consumer with a copy of his or her own report on his or her request;
    6. A child support enforcement agency;
    7. A consumer reporting agency that acts only as a reseller of credit information by assembling and merging information contained in the database of another consumer reporting agency or multiple credit reporting agencies and does not maintain a permanent database of credit information from which new consumer reports are produced. However, a consumer reporting agency acting as a reseller shall honor any security freeze placed on a consumer report by another consumer reporting agency;
    8. A check services or fraud prevention services company, which issues reports on incidents of fraud or authorizations for the purpose of approving or processing negotiable instruments, electronic funds transfers, or similar methods of payments;
    9. A deposit account information service company, which issues reports regarding account closures due to fraud, substantial overdrafts, ATM abuse, or similar negative information regarding a consumer to inquiring banks or other financial institutions for use only in reviewing a consumer request for a deposit account at the inquiring bank or financial institution;
    10. Any person or entity using a consumer report in preparation for a civil or criminal action, or an insurance company in investigation of a claim; or
      1. Any insurance company for setting or adjusting a rate or underwriting for property and casualty insurance purposes; or (k) 1. Any insurance company for setting or adjusting a rate or underwriting for property and casualty insurance purposes; or
      2. Any consumer reporting agency database or file which consists solely of consumer information concerning, and used solely for:
        1. Criminal record information;
        2. Personal loss history information;
        3. Fraud prevention or detection;
        4. Employment screening; or
        5. Tenant screening.

HISTORY: 2017 ch. 119, § 1, effective January 1, 2018; 2018 ch. 41, § 2, effective March 30, 2018.

367.365. Consumer’s election regarding security freeze on consumer report — Subsequent access — Duties of consumer reporting agency — Duration of security freeze — Removal and temporary lifting — Inapplicability to certain consumer reports — Permitted charges for security freeze — Changes to official consumer report information — Penalties for section’s violation.

    1. A consumer may elect to place a security freeze on the consumer’s consumer report by written request, sent by certified mail, to a consumer reporting agency at an address designated by the consumer reporting agency to receive security freeze requests, or by the use of telephone, fax, or Web-based or other electronic method that the consumer reporting agency has established to receive security freeze requests. A request made pursuant to this subsection shall include clear and proper identification. A consumer reporting agency shall place a security freeze on a consumer’s consumer report no later than ten (10) business days after receiving a request made pursuant to this subsection for the placement of a security freeze from the consumer. (1) (a) A consumer may elect to place a security freeze on the consumer’s consumer report by written request, sent by certified mail, to a consumer reporting agency at an address designated by the consumer reporting agency to receive security freeze requests, or by the use of telephone, fax, or Web-based or other electronic method that the consumer reporting agency has established to receive security freeze requests. A request made pursuant to this subsection shall include clear and proper identification. A consumer reporting agency shall place a security freeze on a consumer’s consumer report no later than ten (10) business days after receiving a request made pursuant to this subsection for the placement of a security freeze from the consumer.
    2. When a security freeze is in place, information from a consumer’s consumer report shall not be released to a third party without prior express authorization from the consumer. This subsection does not prevent a consumer reporting agency from advising a third party that a security freeze is in effect with respect to the consumer’s consumer report.
  1. The consumer reporting agency shall, no later than ten (10) business days after the date the agency receives the request for a security freeze, provide the consumer with a unique personal identification number or password to be used by the consumer when providing authorization for the access to his or her credit file for a specific period of time. In addition, the consumer reporting agency shall simultaneously provide to the consumer in writing the process of placing, removing, and temporarily lifting a security freeze and the process for allowing access to information from the consumer’s credit file for a specific period while the security freeze is in effect.
  2. A consumer may request a replacement personal identification number or password in the same manner utilized in subsection (1) of this section to request the initial security freeze and shall also include clear and proper identification. No later than ten (10) business days after the date the consumer reporting agency receives the request for a replacement personal identification number or password, the consumer reporting agency shall provide the consumer with a new, unique personal identification number or password to be used by the consumer instead of the number or password that was provided under subsection (2) of this section.
  3. If a third party requests access to a consumer report on which a security freeze is in effect, and this request is in connection with an application for credit, the third party may treat the application as incomplete.
  4. If the consumer wishes to allow his or her consumer report or credit score to be accessed for a specific period of time while a freeze is in place, the consumer shall contact the consumer reporting agency and request that the freeze be temporarily lifted and provide the following:
    1. Clear and proper identification;
    2. The unique personal identification number or password provided by the consumer reporting agency pursuant to subsection (2) or (3) of this section; and
    3. The proper information regarding the time period for which the report shall be available to users of the consumer report.
  5. A consumer reporting agency that receives a request from a consumer to temporarily lift a freeze on a consumer report pursuant to subsection (5) of this section shall comply with the request no later than three (3) business days after receiving the request. A consumer reporting agency may develop procedures involving the use of telephone, fax, the Internet, or other electronic media to receive and process a request from a consumer to temporarily lift a freeze on a consumer report or credit score pursuant to subsection (5) of this section in an expedited manner.
  6. A consumer reporting agency shall remove or temporarily lift a freeze placed on a consumer’s consumer report only:
    1. Upon the consumer’s request made pursuant to subsection (5) or (8) of this section; or
    2. If the consumer’s consumer report was frozen due to a material misrepresentation of fact by the consumer. If a consumer reporting agency intends to remove a freeze upon a consumer’s consumer report pursuant to this paragraph, the consumer reporting agency shall notify the consumer in writing prior to removing the freeze on the consumer’s consumer report.
  7. A security freeze shall remain in place until the consumer requests that the security freeze be removed, or the consumer reporting agency has notified the consumer in writing that it is removing the freeze due to a misrepresentation of fact by the consumer pursuant to subsection (7)(b) of this section. A consumer reporting agency shall remove a security freeze within three (3) business days of receiving:
    1. A request for removal from the consumer; and
    2. Both of the following:
      1. Clear and proper identification; and
      2. The unique personal identification number or password provided by the consumer reporting agency.
  8. A security freeze does not apply to a consumer report provided to:
    1. A federal, state, or local governmental entity, including a law enforcement agency, or court, or their agents or assigns;
    2. A private collection agency for the sole purpose of assisting in the collection of an existing debt of the consumer who is the subject of the consumer report requested;
    3. A person or entity, or a subsidiary, affiliate, or agent of that person or entity, or an assignee of a financial obligation owing by the consumer to that person or entity, or a prospective assignee of a financial obligation owing by the consumer to that person or entity in conjunction with the proposed purchase of the financial obligation, with which the consumer has or had prior to assignment an account or contract, including a demand deposit account, or to whom the consumer issued a negotiable instrument, for the purposes of reviewing the account or collecting the financial obligation owing for the account, contract, or negotiable instrument. For purposes of this paragraph, “reviewing the account” includes activities related to account maintenance, monitoring, credit line increases, and account upgrades and enhancements;
    4. A subsidiary, affiliate, agent, assignee, or prospective assignee of a person to whom access has been granted under subsection (5) of this section for the purposes of facilitating the extension of credit;
    5. A person for the purposes of prescreening as provided by the federal Fair Credit Reporting Act;
    6. A consumer reporting agency for the purposes of providing a consumer with a copy of his or her own report on the consumer’s request;
    7. A child support enforcement agency;
    8. A consumer reporting agency that acts only as a reseller of credit information by assembling and merging information contained in the database of another consumer reporting agency or multiple credit reporting agencies and does not maintain a permanent database of credit information from which new consumer reports are produced. However, a consumer reporting agency acting as a reseller shall honor any security freeze placed on a consumer report by another consumer reporting agency;
    9. A check services or fraud prevention services company, which issues reports on incidents of fraud or authorizations for the purpose of approving or processing negotiable instruments, electronic funds transfers, or similar methods of payments;
    10. A deposit account information service company, which issues reports regarding account closures due to fraud, substantial overdrafts, ATM abuse, or similar negative information regarding a consumer to inquiring banks or other financial institutions for use only in reviewing a consumer request for a deposit account at the inquiring bank or financial institution;
    11. Any person or entity using a consumer report in preparation for a civil or criminal action, or an insurance company in investigation of a claim; or
    12. Any insurance company for setting or adjusting a rate or underwriting for property and casualty insurance purposes.
  9. A consumer reporting agency may impose a reasonable charge on a consumer for initially placing, temporarily lifting, or removing a security freeze on a consumer file. The amount of the charge may not exceed ten dollars ($10). On January 1 of each year, a consumer reporting agency may increase the charge for placing a security freeze. The increase shall be based proportionally on changes to the Consumer Price Index for All Urban Consumers as determined by the United States Department of Labor with fractional changes rounded to the nearest twenty-five cents ($0.25). A consumer shall not be charged any fee by the consumer reporting agency for placing the security freeze if the consumer is a victim of identity theft and, upon the request of the consumer reporting agency, provides the consumer reporting agency with a valid police report.
  10. If a security freeze is in place, a consumer reporting agency shall not change any of the following official information in a consumer report without sending a written confirmation of the change to the consumer within thirty (30) days of the change being posted to the consumer’s file:
    1. Name;
    2. Date of birth;
    3. Social Security number; and
    4. Address.

      Written confirmation is not required for technical modifications of a consumer’s official information, including name and street abbreviations, complete spellings, or transposition of numbers or letters. In the case of an address change, the written confirmation shall be sent to both the new address and to the former address.

  11. Any person who willfully fails to comply with any requirement imposed under this section with respect to any consumer is liable to that consumer in an amount equal to the sum of:
    1. Any actual damages sustained by the consumer as a result of the failure;
    2. Any liquidated damages of not less than one hundred dollars ($100) and not more than one thousand dollars ($1,000);
    3. Any punitive damages as the court may allow; and
    4. In the case of any successful action to enforce any liability under this section, the costs of the action together with reasonable attorney’s fees as determined by the court.
  12. Any person, other than the named individual or individuals in the report, who obtains a consumer report, requests a security freeze, requests the temporary lift of a freeze, or the removal of a security freeze from a consumer reporting agency under false pretenses or in an attempt to violate federal or state law shall be liable to the consumer reporting agency for actual damages sustained by the consumer reporting agency or one thousand dollars ($1,000), whichever is greater.
  13. Any person who is negligent in failing to comply with any requirement imposed under this section with respect to any consumer is liable to that consumer in an amount equal to the sum of:
    1. Any actual damages sustained by the consumer as a result of the failure; and
    2. In the case of any successful action to enforce any liability under this section, the costs of the action together with reasonable attorney’s fees as determined by the court.
  14. Nothing in KRS 367.363 to 367.365 shall be construed to limit or restrict the exercise of powers or the performance of the duties of the Attorney General authorized under any other provision of law to bring or seek redress for persons that violate KRS 367.363 to 367.365 .

History. Enact. Acts 2006, ch. 42, § 3, effective July 12, 2006; 2018 ch. 41, § 1, effective March 30, 2018.

367.370. Funds recovered in legal action for state handled in accordance with KRS 48.005.

KRS 367.190 , 367.200 , 367.210 , 367.220 and KRS 367.110 to 367.360 to the contrary notwithstanding, if funds of any kind or nature whatsoever are recovered by or on behalf of the Commonwealth in a legal action, including an ex rel. action in which the Attorney General has entered an appearance or is a party under statutory or common law authority, those funds recovered shall be handled in accordance with KRS 48.005 .

History. Enact. Acts 2000, ch. 483, § 4, effective April 21, 2000.

Research References and Practice Aids

Treatises

Caldwell’s Kentucky Form Book, 5th Ed., Practice Context for Consumer Protection, § 192.00.

Sales and Rentals During State of Emergency

367.372. Definitions for KRS 367.372 to 367.378.

As used in KRS 367.372 to 367.378 , unless the context requires otherwise:

  1. “Building materials” means lumber, construction tools, windows, and anything else used in the building or rebuilding of property;
  2. “Consumer food item” means any article used or intended for use for food, drink, confection, or condiment by a person or animal;
  3. “Cost” means any cost directly or indirectly related to the sale of a good, provision of a service, or the operation of the seller’s business, and includes any actual or anticipated replacement cost;
  4. “Emergency supplies” includes but is not limited to water, flashlights, radios, batteries, candles, blankets, soap, diapers, temporary shelters, tape, toiletries, plywood, nails, and hammers;
  5. “Gasoline” means any fuel used to power any motor vehicle or power tool;
  6. “Goods” has the same meaning as in KRS 355.2-105 ;
  7. “Housing” means any rental housing and includes any housing provided by a hotel or motel;
  8. “Medical supplies” includes but is not limited to prescription and nonprescription medications, bandages, gauze, isopropyl alcohol, and antibacterial products;
  9. “Person” has the same meaning as in KRS 446.010 ;
  10. “Price prior to the declaration” means the person’s price for a good or service on the day before the date of the Governor’s order implementing the provisions of KRS 367.374 ;
  11. “Repair or reconstruction services” means services performed by any person for repairs to residential or commercial property of any type that is damaged as a result of a natural or man-made disaster or emergency resulting from an event referred to in subsection (13) of this section;
  12. “Services” means work, labor, or services, including services furnished in connection with the sale or repair of goods or real property or improvements thereto;
  13. “State of emergency” means a natural or man-made disaster resulting from a tornado, earthquake, flood, fire, riot, storm, act of war, threat of war, military action, the time of instability following a terrorist attack, or any other event for which a state of emergency has been proclaimed by the President of the United States or declared by the Governor. It shall also include the duration of a Condition Red as declared by the United States Department of Homeland Security under the Homeland Security Advisory System; and
  14. “Transportation, freight, and storage services” means any service that is performed by a person that contracts to move, store, or transport personal or business property or rents equipment for those purposes.

HISTORY: Enact. Acts 2004, ch. 156, § 1, effective July 13, 2004; 2018 ch. 93, § 1, effective July 14, 2018.

367.374. Sale or rental of goods and services during declared state of emergency — Fifteen-day prohibition against grossly excessive prices — Additional fifteen-day extensions to protect citizens — Application of section.

    1. When a Condition Red has been declared by the United States Department of Homeland Security under the Homeland Security Advisory System or the Governor has declared a state of emergency under KRS 39A.100 , the Governor may implement this section by executive order for a period of fifteen (15) days from notification of implementation, as required by KRS 367.376 . The order implementing this section shall be limited to the geographical area indicated in the declaration of emergency. The Governor may terminate or limit the scope of the order at any time. (1) (a) When a Condition Red has been declared by the United States Department of Homeland Security under the Homeland Security Advisory System or the Governor has declared a state of emergency under KRS 39A.100 , the Governor may implement this section by executive order for a period of fifteen (15) days from notification of implementation, as required by KRS 367.376 . The order implementing this section shall be limited to the geographical area indicated in the declaration of emergency. The Governor may terminate or limit the scope of the order at any time.
    2. No person shall sell, rent, or offer to sell or rent, regardless of whether an actual sale or rental occurs, a good or service listed in this paragraph or any repair or reconstruction service for a price which is grossly in excess of the price prior to the declaration and unrelated to any increased cost to the seller. Goods and services to which this section applies are:
      1. Consumer food items;
      2. Goods or services used for emergency cleanup;
      3. Emergency supplies;
      4. Medical supplies;
      5. Home heating oil;
      6. Building materials;
      7. Housing;
      8. Transportation, freight, and storage services; and
      9. Gasoline or other motor fuels.
    3. A person’s price does not violate this subsection if it is:
      1. Related to an additional cost imposed by a supplier of a good or other costs of providing the good or service, including an additional cost for labor or materials used to provide a service;
      2. Ten percent (10%) or less above the price prior to the declaration;
      3. Ten percent (10%) or less above the sum of the person’s costs and normal markup for a good or service;
      4. Generally consistent with fluctuations in applicable commodity, regional, national, or international markets, or seasonal fluctuations; or
      5. A contract price, or the result of a price formula, established prior to the order implementing this subsection.
    4. Whether a price violates this subsection is a question of law. In determining if a violation of this subsection has occurred, the court shall consider all relevant circumstances, including prices prevailing in the locality at that time.
  1. The provisions of this section may be extended for up to three (3) additional fifteen (15) day periods by the Governor, if necessary to protect the lives, property, or welfare of the citizens.
  2. If a person sold or rented a good or service listed in subsection (1) of this section at a reduced price in the thirty (30) days prior to the Governor’s implementation of this section, the price at which that person usually sells or rents the good or service in the area for which the declaration was issued shall be used in determining if the person is in violation of this section.
  3. If a person did not sell or rent or offer to sell or rent a good or service listed in subsection (1) of this section prior to the Governor’s implementation of this section, the price at which a good or service was generally available in the area for which the declaration was issued shall be used in determining if the person is in violation of this section.
  4. Nothing in this section shall be affected by the requirements of KRS 39A.090 .

History. Enact. Acts 2004, ch. 156, § 2, effective July 13, 2004; 2007, ch. 109, § 1, effective June 26, 2007; 2018 ch. 93, § 2, effective July 14, 2018; 2021 ch. 6, § 9, effective February 2, 2021.

NOTES TO DECISIONS

1.Federal Preemption.

Since the Oil companies’ claim that KRS 367.374 was pre-empted by 42 USCS § 6396 of the Energy Policy and Conservation Act of 1975 (EPCA) could not be facially conclusive because it raised at least two factual issues: whether the Kentucky Act artificially depressed gasoline prices and whether depressed prices increased demand and consumption of gasoline, the federal court should abstain from the case pursuant to the Younger doctrine. Marathon Petroleum Co. LLC v. Stumbo, 528 F. Supp. 2d 639, 2007 U.S. Dist. LEXIS 85817 (E.D. Ky. 2007 ).

—2.—Constitutionality.

Because effect on out-of-state commerce of Kentucky’s price-gouging laws was entirely dependent upon retailer’s independent decisionmaking with regard to structure of its online marketplace, application of those laws to Kentucky-based third-party sellers on marketplace in connection with sales to Kentucky consumers was unlikely to offend extraterritoriality doctrine of dormant commerce clause, and district court erred in concluding otherwise. Online Merchs. Guild v. Cameron, 995 F.3d 540, 2021 FED App. 96P, 2021 U.S. App. LEXIS 12825 (6th Cir. Ky. 2021 ).

367.376. Notice of Governor’s implementation of KRS 367.372 to 367.378 — Renewal and termination notice.

Upon the Governor’s implementation of the provisions of KRS 367.374 , renewal of the implementation, or termination of the implementation, the Division of Emergency Management shall immediately notify the public and those registered with the division for the purpose of receiving notice of the implementation, renewal, or termination. The division shall notify the public by any means available, including the division’s Web site, news media, and electronic mail. Any person or trade association may register with the division for the purpose of receiving notification.

History. Enact. Acts 2004, ch. 156, § 3, effective July 13, 2004.

367.378. Exclusive penalties for violation of KRS 367.374 — Applicability of chapter — Powers of Attorney General.

  1. A willful violation of KRS 367.374 is punishable by a civil monetary penalty of an amount not to exceed five thousand dollars ($5,000) for the first violation and an amount not to exceed ten thousand dollars ($10,000) for each subsequent violation, with an aggregate total not to exceed twenty-five thousand dollars ($25,000) for any twenty-four (24) hour period against any person who violates KRS 367.374 . No additional civil monetary penalties may be imposed under this chapter for conduct prohibited by KRS 367.374.
  2. Except as provided in subsection (1) of this section, all of the remedies, powers, and duties provided by KRS Chapter 367 shall apply with equal force and effect to an act declared unlawful by KRS 367.374 .
  3. Nothing in KRS 367.372 to 367.378 shall be construed to limit or restrict the exercise of powers or the performance of the duties of the Attorney General which he or she is authorized to exercise or perform under any other provision of law.

HISTORY: Enact. Acts 2004, ch. 156, § 4, effective July 13, 2004; 2018 ch. 93, § 3, effective July 14, 2018.

Loan Brokers

367.380. Definitions for KRS 367.380 to 367.389.

As used in KRS 367.380 to 367.389 , unless the context requires otherwise:

  1. “Advance fee” means any consideration which is assessed or collected, prior to the closing of a loan, by a loan broker.
  2. “Affiliate” means any person who directly or indirectly, through one (1) or more intermediaries, controls, is controlled by, or is under common control with another person.
  3. “Borrower” means a person obtaining or desiring to obtain a loan of money, a credit card, or a line of credit;
    1. “Loan broker” means any person, not exempt under paragraph (b), who: (4) (a) “Loan broker” means any person, not exempt under paragraph (b), who:
      1. For or in expectation of consideration arranges, attempts to arrange, or offers to fund a loan of money, a credit card, or a line of credit;
      2. For or in expectation of consideration assists, or advises a borrower in obtaining or attempting to obtain a loan of money, a credit card, a line of credit, or related guarantee, enhancement, or collateral of any kind or nature;
      3. Acts for or on behalf of a loan broker for the purpose of soliciting borrowers; or
      4. Holds himself out as a loan broker.
    2. The following persons shall not be considered loan brokers under paragraph (a):
      1. A bank; savings and loan association; trust company; credit union; consumer loan company; investment company; industrial loan company; securities broker-dealer, agent, or investment adviser; real estate broker or sales associate; attorney; Federal Housing Administration or United States Department of Veterans Affairs approved lender; credit card company; mortgage loan company; mortgage loan broker; public utility; insurance company; or insurance agent, solicitor, consultant, motor vehicle manufacturer, or motor vehicle dealer, if it is licensed by and subject to regulation or supervision of an agency, commission, or department of the United States or the Commonwealth, and if it is acting within the scope of its license, permit, or registration or with express written authority from the regulatory or supervising agency. Subsidiaries of licensed or chartered consumer loan companies, banks, or savings and loan associations are not loan brokers.
      2. A person extending or arranging credit, or offering to extend or arrange credit, to a partnership or corporation exclusively for commercial or business purposes;
      3. A depository financial institution chartered or licensed by an agency, commission, or department of another state, if the funds on deposit with the institution are insured by the Federal Deposit Insurance Corporation;
      4. An affiliate of a person listed in subparagraph 2; or
      5. A bona fide seller or lessor of goods, services, or interests in real estate in a transaction in which the seller or lessor extends, arranges, or offers to extend or arrange credit that is to be used exclusively for financing the purchase or lease or for services performed by an independent third party directly related to the purchase or lease. A transaction shall not be exempt under this subparagraph if the purchaser or lessee receives, or is to receive, a cash advance or consolidation loan in addition to the financing;
  4. “Principal” means any officer, director, partner, joint venturer, branch manager, or other person with similar managerial or supervisory responsibilities for a loan broker.

HISTORY: Enact. Acts 1992, ch. 301, § 1, effective July 14, 1992; 2017 ch. 42, § 18, effective June 29, 2017.

367.381. Prohibited acts.

No loan broker shall:

  1. Assess or collect an advance fee from a borrower to provide services as a loan broker;
  2. Make or use unfair, false, misleading, or deceptive representations or omit any material fact in the offer or sale of the services of a loan broker, or engage, directly or indirectly, in any act that operates or would operate as an unfair, false, misleading, or deceptive representation in its business dealings, or to the Attorney General or conceal a material fact from the Attorney General.

History. Enact. Acts 1992, ch. 301, § 2, effective July 14, 1992.

367.383. Liability of loan broker’s principal.

A principal of a loan broker shall be liable under KRS 367.385 and 367.387 to the same extent as the loan broker himself for any actions on behalf of the loan broker, or the loan broker’s agents, or employees, which violate KRS 367.381 .

History. Enact. Acts 1992, ch. 301, § 3, effective July 14, 1992.

367.385. Violation of KRS 367.381 deemed unlawful act under Consumer Protection Act — Availability of Consumer Protection Act remedies — Authority to promulgate administrative regulations.

  1. A violation of any provision of KRS 367.381 shall be deemed an unfair, false, misleading, or deceptive act or practice in the conduct of trade or commerce in violation of KRS 367.170 .
  2. All of the remedies, powers, and duties delegated to the Attorney General by KRS 367.190 to 367.300 , and the penalties provided in KRS 367.990 , pertaining to acts and practices declared unlawful by KRS 367.170 , shall be applied to acts and practices declared unlawful by KRS 367.381 .
  3. Nothing in KRS 367.380 to 367.389 shall be construed to restrict the exercise of powers or the performance of the duties of the Attorney General, which he is authorized to exercise or perform by law.
  4. The Attorney General shall have the authority to promulgate administrative regulations as he deems necessary for the proper administration of KRS 367.380 to 367.389 .

History. Enact. Acts 1992, ch. 301, § 4, effective July 14, 1992.

367.387. Remedies for borrower — Time limitation.

  1. Any borrower who suffers a loss of money or property as a result of a violation of KRS 367.381 may bring an action against the loan broker, its principals, employees, or agents, and against the surety bond, or trust account, if any, of the loan broker. The action shall be brought in the county in which the solicitation was made, and recovery shall not exceed an amount equal to three (3) times his actual damages. The court may award to the prevailing party, in addition to the relief provided in this section, reasonable attorney’s fees and costs.
  2. A permanent injunction, judgment, or order of the court obtained by the Attorney General pursuant to KRS 367.385 shall be prima facie evidence in an action brought under this section that the defendant used or employed a method, act, or practice declared unlawful by KRS 367.381 .
  3. A person bringing an action under this section shall bring the action within one (1) year after any action brought by the Attorney General has been terminated, or two (2) years after the violation occurred, whichever is later.

History. Enact. Acts 1992, ch. 301, § 5, effective July 14, 1992.

367.389. Nonexclusivity of remedies and penalties.

The remedies and penalties provided in KRS 367.385 , 367.387 , and 367.993 shall be in addition to any other remedies or penalties for any conduct provided for by common law or statute.

History. Enact. Acts 1992, ch. 301, § 6, effective July 14, 1992.

367.390. Right to refinance consumer loan or consumer credit transaction — Conditions — Exception.

  1. With respect to a consumer loan or consumer credit transaction, other than one primarily for an agricultural purpose or one pursuant to a revolving loan account or a revolving charge account, if any scheduled payment is more than twice as large as the average of earlier scheduled payments, the debtor has the right to refinance the amount of that payment at the time it is due without penalty. The terms of the refinancing shall be no less favorable to the debtor than the terms of the original loan or consumer credit transaction. These provisions do not apply to the extent that the payment schedule is adjusted to the seasonal or irregular income of the debtor.
  2. Notwithstanding any other provision of this section, this section shall not apply to a consumer loan or consumer credit transaction directly between a debtor and a financial institution in connection with the purchase or construction of residential property where payment of such loan or transaction is secured by a mortgage lien upon such property.

History. Enact. Acts 1972, ch. 34, § 1; 1980, ch. 170, § 1, effective July 15, 1980.

Financial Institutions

367.393. Certificates of deposit — Renewal term and rate — Violation and penalties.

  1. As used in this section, “financial institution” means a bank, trust company, savings and loan association, or credit union authorized by law to do business in this state.
    1. A financial institution that issues a certificate of deposit that is subject to automatic renewal at maturity shall, upon automatic renewal, renew the certificate of deposit for a like term at the best available rate of interest as posted at the issuing financial institution for similarly issued certificates of like term. (2) (a) A financial institution that issues a certificate of deposit that is subject to automatic renewal at maturity shall, upon automatic renewal, renew the certificate of deposit for a like term at the best available rate of interest as posted at the issuing financial institution for similarly issued certificates of like term.
    2. Any notice sent by the financial institution to the holder of a certificate of deposit subject to automatic renewal prior to maturity which notifies the holder of the holder’s options upon renewal shall disclose that if the certificate of deposit automatically renews it will be renewed for a like term at the best available rate of interest as posted at the issuing financial institution for similarly issued certificates of like term.
    1. Any violation of this section shall be an unfair, false, misleading, and deceptive act or practice in the conduct of trade or commerce in violation of KRS 367.170 . (3) (a) Any violation of this section shall be an unfair, false, misleading, and deceptive act or practice in the conduct of trade or commerce in violation of KRS 367.170 .
    2. All of the remedies, powers, and duties provided for the Attorney General in KRS 367.190 to 367.300 , and all of the penalties provided in KRS 367.990 , pertaining to acts declared unlawful by KRS 367.170, shall apply to acts and practices declared unlawful in this section.

History. Enact. Acts 2004, ch. 80, § 1, effective July 13, 2004.

Buying Clubs or Vacation Clubs

367.395. Definitions.

As used in KRS 367.397 to 367.407 , unless the context requires otherwise:

  1. “Club” means any buying club or vacation club.
  2. “Contract” means any oral or written agreement by which one becomes a member of a club.
  3. “Buying club” means any person, corporation, unincorporated association, or other organization which for a consideration provides or purports to provide its members or the members of any other buying club with the ability to purchase goods or services at discount prices; except that such organization shall not include any buying club in which persons receive discount buying services incidentally as part of a package of services provided to, or available to, such individuals on account of membership in such organization which is not organized for the profit of any person or corporation or which does not have as one of its primary purposes or businesses the provision of discount buying services.
  4. “Member” or “membership” means a status by which any natural person is entitled to any of the benefits of a club.
  5. “Prepayment” means any payment for service or merchandise made before the service is rendered or the merchandise is received. It is not a prepayment if a payment for service is made on the same day the service is rendered. Money received by a club from a financial institution upon assignment of a contract shall be considered prepayment when and to the extent the member is required to make prepayments to the financial institution pursuant to the contract.
  6. “Vacation club” means any person, corporation, unincorporated association, or other organization which for a consideration provides or purports to provide its members or the members of any other vacation club with any vacation, vacation plan, or services connected with the scheduling of a vacation at discount prices.

History. Enact. Acts 1982, ch. 21, § 1, effective July 15, 1982; 1988, ch. 62, § 1, effective July 15, 1988.

367.397. Cancellation of club membership.

  1. Any person who has elected to become a member of a club may cancel such membership by giving written notice any time before midnight of the third business day following the date on which the person signs a contract containing the notice of “Members’ Right to Cancel” required by KRS 367.399 . Such cancellation shall be without liability on the part of the member and shall entitle the member to a refund of the entire consideration paid for the contract.
  2. Notice of cancellation shall be in writing and delivered personally or by mail. If given by mail, the notice is effective upon deposit in a mailbox, properly addressed and postage paid.  Notice of cancellation need not take a particular form and is sufficient if it indicates, by any form of written expression, the intention of the member not to be bound by the contract. If delivered personally, the notice is to be accepted by any agent or employee of the club, and a receipt for the notice shall be given by that agent or employee to the person canceling.
  3. The entitled refund shall be delivered to the member within ten (10) days after notice of cancellation is given.
  4. Rights of cancellation may not be waived or otherwise surrendered.
  5. Cancellation shall not relieve the member from paying for any vacation or merchandise actually used by the consumer prior to the date of cancellation.

History. Enact. Acts 1982, ch. 21, § 2, effective July 15, 1982; 1988, ch. 62, § 2, effective July 15, 1988; 2008, ch. 172, § 1, effective July 15, 2008.

Opinions of Attorney General.

For purposes of the Kentucky Buying Club Law, which allows consumers to cancel their memberships outright within five (5) business days (now 3 business days), a factual determination must be made on a case-by-case basis to determine whether Saturday is indeed a “business day” for a company. OAG 83-198 .

367.399. Membership contract requirements — Disclosure of cancellation rights.

  1. A copy of every contract shall be delivered to the member at the time the contract is signed. Every contract shall be in writing, shall be signed by the member, shall designate the date on which the member signed the contract, and shall state, clearly and conspicuously in boldface type of a minimum size of fourteen (14) points, the following:

    “MEMBERS’ RIGHT TO CANCEL”

    “KENTUCKY LAW GIVES YOU THREE (3) DAYS TO CANCEL YOUR AGREEMENT WITH US. If you wish to cancel this contract, you may cancel by delivering or mailing a written notice to the company. Certified mail would provide greater protection than first-class mail, but is not necessary. If you deliver the notice personally, you are entitled to a receipt. Your notice must make known that you do not wish to be bound by the contract. If the notice is delivered or mailed before midnight of the third business day after you sign this contract, you are entitled to a refund of the entire consideration paid for the contract. The notice must be delivered or mailed to (insert name and mailing address of company). If you cancel, the club is required to return, within ten (10) days of the date on which you give notice of cancellation, any payments you have made.”

  2. Until the buying club or vacation club has complied with this section, the member may cancel the contract by notifying the club in any manner and by any means of the member’s intention to cancel and is then entitled to a refund of the entire consideration paid for the contract.

History. Enact. Acts 1982, ch. 21, § 3, effective July 15, 1982; 1988, ch. 62, § 3, effective July 15, 1988; 2008, ch. 172, § 2, effective July 15, 2008.

Opinions of Attorney General.

For purposes of the Kentucky Buying Club Law, which allows consumers to cancel their memberships outright within five (5) business days (now 3 business days), a factual determination must be made on a case-by-case basis to determine whether Saturday is indeed a “business day” for a company. OAG 83-198 .

367.401. Disclosure of refund requirement and that savings claims are based on comparisons with retailers doing business in area.

  1. Every contract shall provide that if any goods ordered by the member from the buying club are not delivered to the member or available for pickup by the member at a location within his county of residence within six (6) weeks from the date the member placed an order for such goods, then any moneys paid by the member for such goods in advance of delivery shall, upon the member’s request, be fully refunded, unless a predetermined delivery date has been furnished to the member in writing at the time he or she ordered such goods and the goods are delivered to the member or are available for pickup by that date.
  2. Every contract shall provide that all savings claims made by the buying club are based on price comparisons with retailers doing business in the trade area in which the claims are made and with prices at which the merchandise is actually sold.
  3. Any contract which does not comply with subsections (1) and (2) of this section shall be void and unenforceable.

History. Enact. Acts 1982, ch. 21, § 4, effective July 15, 1982.

367.403. Bond requirement.

  1. Every club that has a membership fee in excess of thirty-five dollars ($35) shall maintain a bond of fifty thousand dollars ($50,000) issued by a surety company admitted to do business in this state.
  2. The bond required by this section shall be in favor of the Attorney General of the Commonwealth of Kentucky for the benefit of any member who suffers loss of prepayment made pursuant to a contract entered into after July 15, 1982, due to insolvency of the club or the cessation of business by the club, or failure by the club to perform under any contract. A copy of the bond shall be filed with the Attorney General prior to the making of any membership contract by a club. Any person claiming against the bond may maintain an action at law against the club and the surety. Failure to so maintain a bond as required by this section shall make the principals of any club personally liable for the claims of members.
  3. The aggregate liability of the surety to all persons for all breaches of the conditions of the bonds provided herein shall in no event exceed the amount of the bond.

History. Enact. Acts 1982, ch. 21, § 5, effective July 15, 1982; 1988, ch. 62, § 4, effective July 15, 1988.

367.405. Remedies, powers and duties of Attorney General.

  1. All of the remedies, powers, and duties provided for the Attorney General by KRS 367.190 to 367.300 appertaining to acts declared unlawful by KRS 367.170 shall apply with equal force and effect to acts declared unlawful by KRS 367.397 to 367.405 .
  2. Nothing in KRS 367.397 to 367.407 shall be construed to limit or restrict the exercise of powers or the performance of the duties of the Attorney General which he is authorized to exercise or perform under any other provision of law.

History. Enact. Acts 1982, ch. 21, § 6, effective July 15, 1982.

367.407. Exemptions — Conditions.

Any organization which is not organized for the profit of any person or corporation may file an application with the office of Attorney General to seek exemption from the provisions of KRS 367.397 to 367.403 . The Attorney General shall grant an exemption to any applicant organization which:

  1. Is chartered or operated on a cooperative not-for-profit basis primarily for the benefit of its members who are the ultimate consumers of such goods, services, or facilities produced or furnished by the organization;
  2. Makes such goods, services or facilities available to its members on a not-for-profit basis;
  3. Allocates or distributes its net savings to all its members or patrons or retains net savings for the expansion of its services or for the reduction of charges to its patrons; and
  4. Restricts its voting control to members on a one (1) vote per person basis.

History. Enact. Acts 1982, ch. 21, § 8, effective July 15, 1982.

Solicitations After Accident

367.4081. Definitions for KRS 367.4081 to 367.4083.

As used in KRS 367.4081 to 367.4083 :

  1. “Healthcare provider” means an individual licensed by any of the following:
    1. The Kentucky Board of Medical Licensure, pursuant to KRS Chapter 311;
    2. The Kentucky Board of Chiropractic Examiners, pursuant to KRS Chapter 312;
    3. The Kentucky Board of Nursing, pursuant to KRS Chapter 314;
    4. The Kentucky Board of Physical Therapy, pursuant to KRS Chapter 327;
    5. The Kentucky Board of Occupational Therapy, pursuant to KRS Chapter 319A; or
    6. The Kentucky Board for Massage Therapy, pursuant to KRS 309.350 to 309.364 ;
  2. “Intermediary” means an individual, including but not limited to a telemarketer, agent, employee, or contractor, who solicits a person, on behalf of a healthcare provider, for the provision of reparation benefits, as defined by KRS 304.39-020 (2);
  3. “Person” means an individual who was involved in an automobile accident; and
    1. “Solicit” means the initiation of communication with a person involved in a motor vehicle accident, including but not limited to any face-to-face contact with the person, in writing, electronically, or by any form of telephonic communication, in anticipation of financial gain or remuneration for the communication itself or for prospective charges for healthcare services. (4) (a) “Solicit” means the initiation of communication with a person involved in a motor vehicle accident, including but not limited to any face-to-face contact with the person, in writing, electronically, or by any form of telephonic communication, in anticipation of financial gain or remuneration for the communication itself or for prospective charges for healthcare services.
    2. “Solicit” does not mean:
      1. Advertising directed to the general public;
      2. Telemarketing, which is;
        1. Taken from a general list of phone numbers;
        2. Not targeted at motor vehicle accident victims; and
        3. Not in violation of the state’s prohibition on telephone solicitation under KRS 367.46951 to 367.46999 and 367.990 ; or
      3. Contact between a healthcare provider and an individual with whom the healthcare provider had a preexisting provider-patient relationship.

HISTORY: 2015 ch. 46, § 1, effective June 24, 2015.

367.4082. Prohibited solicitation of person involved in motor vehicle accident by a healthcare provider or intermediary.

  1. During the first thirty (30) days following a motor vehicle accident a healthcare provider or an intermediary, at the request or direction of a healthcare provider, shall not solicit or knowingly permit another individual to solicit a person involved in a motor vehicle accident for the provision of reparation benefits, as defined by KRS 304.39-020 (2).
  2. A healthcare provider shall not:
    1. Pay or receive compensation for the referral or solicitation of reparation benefits for a person involved in a motor vehicle accident;
    2. Provide monetary compensation or other consideration to any individual for the purpose of inducing, enticing, or directing the provision of reparation benefits for a person involved in a motor vehicle accident; or
    3. Contact, request, or direct an intermediary to contact, for the purpose of solicitation, a person involved in a motor vehicle accident during the first thirty (30) days following a motor vehicle accident.
  3. A healthcare provider shall be responsible for the content of any contact, made at the direction or request of the healthcare provider, by an intermediary with a person involved in a motor vehicle accident within the first thirty (30) days following the motor vehicle accident involving a person.
  4. Any healthcare provider having knowledge of facts, actual or direct, of a violation of this section by another healthcare provider, an intermediary, or on behalf of the healthcare provider within their scope of practice, shall report the suspected violation to the appropriate board listed in KRS 367.4081(1).
  5. An individual licensed or certified as a healthcare provider, who violates this section, shall be subject to the disciplinary process of the respective licensing or regulatory authority.

HISTORY: 2015 ch. 46, § 2, effective June 24, 2015.

367.4083. Voiding of charges billed for health services rendered by healthcare provider in violation of KRS 367.4082.

  1. Any charges owed by, or on behalf of, a person involved in a motor vehicle accident for health services rendered by a healthcare provider to the person, in violation of KRS 367.4082 , shall be void.
  2. Any charges billed and paid by, or on behalf of, a person of a motor vehicle accident for health services rendered by a healthcare provider to the person, in violation of KRS 367.4082 , shall be returned to the reparations obligor or other payor. The healthcare provider who violates KRS 367.4082 shall not pursue collection from the person.

HISTORY: 2015 ch. 46, § 3, effective June 24, 2015.

367.409. Business solicitation following motor vehicle accident prohibited — Exceptions — Penalty — Additional sanctions by state regulating authority. [Repealed]

History. Enact. Acts 2011, ch. 69, § 1, effective June 8, 2011; repealed by 2015 ch. 46, § 5, effective June 24, 2015.

Home Solicitation Sales

367.410. Definition of home solicitation sale.

As used in KRS 367.410 to 367.450 , unless the context otherwise requires:

“Home solicitation sale” means a sale of goods or services, including consumer loans, in which the seller or a person acting for him engages in a personal solicitation of the sale at a residence of the buyer and the buyer’s agreement or offer to purchase is there given to the seller or a person acting for him. It does not include a sale made pursuant to prior negotiations between the parties, by telephone initiated by the buyer or at a business establishment at a fixed location where goods or services, including loans, are offered or exhibited for sale.

History. Enact. Acts 1972, ch. 29, § 1; 2003, ch. 64, § 13, effective June 24, 2003.

Opinions of Attorney General.

The fact that a buyer requested the seller’s presence at his residence in and of itself will not relieve the seller of being engaged in a personal solicitation at the home of the buyer subject to the provisions of KRS 367.410 to 367.450 . OAG 73-549 .

The rights of a buyer in a sale defined under this section and not specifically exempted in KRS 367.410 to 367.450 cannot be waived with any type of waiver form because to allow such a practice would negate the effect of this section. OAG 73-677 .

The Federal Trade Commission’s Rule on the Cooling-Off Period for Door-to-Door Sales (16 C.F.R. § 429), which is similar to the Kentucky Home Solicitation Sales Act in the protection it affords to consumers, includes Saturday as a business day for purposes of cancellation of a home solicitation sale; since the Kentucky Home Solicitation Sales Act provides no definition of business day, it appears that compliance with the federal rule in this regard constitutes compliance with KRS 367.410 to 367.460 . OAG 83-198 .

The effective date of the transaction does not occur until a credit contract is completed and signed, and the buyer is provided with the Truth-in-Lending disclosures required by federal law. Regardless of when the original sales contract may have been signed, the buyer’s three (3) day right to cancel will not begin to run until after she is provided with a copy of the completed and signed credit contract and the accompanying Truth-in-Lending disclosures. OAG 92-41 .

In a combined sales/credit transaction involving a second mortgage, a seller/creditor is not exempt from the state home solicitations statute just because it has complied with the federal Truth-in-Lending Act. OAG 92-41 .

In a combined sales/credit transaction involving a second mortgage in addition to providing the consumer with two copies of the separate “Notice of Right to Cancel” form required by the Truth-in-Lending Act, the consumer’s right to cancel must also be disclosed in the sales contract itself under the conspicuous caption, “BUYER’S RIGHT TO CANCEL.” OAG 92-41 .

In a combined sales/credit transaction involving a second mortgage the seller/creditor shall not require use of the federal Truth-in-Lending form to cancel, but shall accept any form of written notice indicating “by any form of written expression the intention of the buyer not to be bound.” OAG 92-41 .

In a combined sales/credit transaction involving a second mortgage, the seller/creditor shall take the steps required by KRS 367.440 (return of payments, note, and goods traded-in) within ten (10) days following any cancellation, rather than the twenty (20) days permitted by the Truth-in-Lending Act. OAG 92-41 .

367.420. Buyer’s right to cancel home solicitation sale — Method of cancellation.

  1. Except for home solicitation sales on loans in which a security interest is taken in the principal dwelling of the buyer as provided in subsection (6) of this section, and except as provided in subsection (5) for other goods and services, including all other consumer loans, in addition to any right otherwise to revoke an offer, the buyer has the right to cancel a home solicitation sale until midnight of the third business day after the day on which the buyer signs an agreement or offer to purchase which complies with this part.
  2. Cancellation occurs when the buyer gives written notice of cancellation to the seller at the address stated in the agreement or offer to purchase.
  3. Notice of cancellation, if given by mail, is given when it is deposited in a mailbox properly addressed and postage prepaid.
  4. Notice of cancellation given by the buyer need not take a particular form and is sufficient if it indicates by any form of written expression the intention of the buyer not to be bound by the home solicitation sale.
  5. The buyer may not cancel a home solicitation sale if the buyer requests the seller to provide goods or services without delay because of an emergency, and
    1. The seller in good faith makes a substantial beginning of performance of the contract before the buyer gives notice of cancellation, and
    2. In the case of goods, the goods cannot be returned to the seller in substantially as good condition as when received by the buyer.
  6. For home solicitation sales on loans in which a security interest is taken in the principal dwelling of the buyer, the buyer shall have the right to rescind or cancel the transaction until midnight of the tenth business day following the later of the consummation of the loan transaction or the delivery of the material disclosures required under the Truth in Lending Act, 15 U.S.C. 1601 et seq.

History. Enact. Acts 1972, ch. 29, § 2; 2003, ch. 64, § 14, effective June 24, 2003; 2008, ch. 175, § 33, effective April 24, 2008.

Opinions of Attorney General.

The Federal Trade Commission’s Rule on the Cooling-Off Period for Door-to-Door Sales (16 C.F.R. § 429), which is similar to the Kentucky Home Solicitation Sales Act in the protection it affords to consumers, includes Saturday as a business day for purposes of cancellation of a home solicitation sale; since the Kentucky Home Solicitation Sales Act provides no definition of business day, it appears that compliance with the federal rule in this regard constitutes compliance with KRS 367.410 to 367.460 . OAG 83-198 .

In a combined sales/credit transaction involving a second mortgage, a seller/creditor is not exempt from the state home solicitations statute just because it has complied with the federal Truth-in-Lending Act. OAG 92-41 .

In a combined sales/credit transaction involving a second mortgage the seller/creditor shall not require use of the federal Truth-in-Lending form to cancel, but shall accept any form of written notice indicating “by any form of written expression the intention of the buyer not to be bound.” OAG 92-41 .

367.430. Notice of buyer’s right to cancel home solicitation sale — Emergency sales exempted.

  1. In a home solicitation sale, unless the buyer requests the seller to provide goods or services in an emergency, the seller must present to the buyer and obtain his signature to a written agreement or offer to purchase which designates as the date of the transaction the date on which the buyer actually signs and contains a statement of the buyer’s rights which complies with subsection (2).
  2. The statement must:
    1. Appear under the conspicuous caption: “BUYER’S RIGHT TO CANCEL,” and
    2. Read as follows: “If this agreement was solicited to your residence and you do not want the goods or services, you may cancel this agreement by mailing a notice to the seller. The notice must say that you do not want the goods or services and must be mailed before midnight of the third business day after you sign this agreement. The notice must be mailed to:  . . . . .  . . . . . ”
  3. Until the seller has complied with this section the buyer may cancel the home solicitation by notifying the seller in any manner and by any means of his intention to cancel.

History. Enact. Acts 1972, ch. 29, § 3; 1974, ch. 284, § 3.

Opinions of Attorney General.

Compliance by a buyer with the parallel notice of cancellation provisions of federal trade commission trade regulation rule, Title 16, Code of Federal Regulations, Chapter I, Subchapter D, Part 429, constitutes substantial compliance with this section and a separate notice complying with the Kentucky form is unnecessary. OAG 74-729 .

The Federal Trade Commission’s Rule on the Cooling-Off Period for Door-to-Door Sales (16 C.F.R. § 429), which is similar to the Kentucky Home Solicitation Sales Act in the protection it affords to consumers, includes Saturday as a business day for purposes of cancellation of a home solicitation sale; since the Kentucky Home Solicitation Sales Act provides no definition of business day, it appears that compliance with the federal rule in this regard constitutes compliance with KRS 367.410 to 367.460 . OAG 83-198 .

In a combined sales/credit transaction involving a second mortgage, a seller/creditor is not exempt from the state home solicitations statute just because it has complied with the federal Truth-in-Lending Act. OAG 92-41 .

In a combined sales/credit transaction involving a second mortgage in addition to providing the consumer with two (2) copies of the separate “Notice of Right to Cancel” form required by the Truth-in-Lending Act, the consumer’s right to cancel must also be disclosed in the sales contract itself under the conspicuous caption, “BUYER’S RIGHT TO CANCEL.” OAG 92-41 .

367.440. Return of evidence of sale to buyer after cancellation.

  1. Within ten (10) days after a home solicitation sale has been canceled or an offer to purchase revoked, the seller must tender to the buyer any payments made by the buyer and any note or other evidence of indebtedness.
  2. If the down payment includes goods traded in, the goods must be tendered in substantially as good condition as when received by the seller. If the seller fails to tender the goods as provided by this section, the buyer may elect to recover an amount equal to the trade-in allowance stated in the agreement.
  3. Until the seller has complied with the obligations imposed by this section the buyer may retain possession of goods delivered to him by the seller and has a lien on the goods in his possession or control for any recovery to which he is entitled.

History. Enact. Acts 1972, ch. 29, § 4; 1974, ch. 284, § 1.

Opinions of Attorney General.

In a combined sales/credit transaction involving a second mortgage, a seller/creditor is not exempt from the state home solicitations statute just because it has complied with the federal Truth-in-Lending Act. OAG 92-41 .

In a combined sales/credit transaction involving a second mortgage, the seller/creditor shall take the steps required by this section (return of payments, note, and goods traded-in) within ten (10) days following any cancellation, rather than the twenty (20) days permitted by the Truth-in-Lending Act. OAG 92-41 .

367.450. Return of goods to seller after cancellation — Time and place of return — Seller’s compensation — Application of statute.

  1. Except as provided by the provisions on retention of goods by the buyer in KRS 367.440(3), within a reasonable time after a home solicitation sale has been canceled or an offer to purchase revoked, the buyer upon demand must tender to the seller any goods delivered by the seller pursuant to the sale but he is not obligated to tender at any place other than his residence. If the seller fails to demand possession of goods within a reasonable time after cancellation or revocation, the goods become the property of the buyer without obligation to pay for them. For the purpose of this section, 40 days is presumed to be a reasonable time.
  2. The buyer has a duty to take reasonable care of the goods in his possession before cancellation or revocation and for a reasonable time thereafter, during which time the goods are otherwise at the seller’s risk.
  3. If the seller has performed any services pursuant to a home solicitation sale prior to its cancellation, the seller is entitled to no compensation.
  4. KRS 367.410 to 367.450 shall not apply to sales under $25.00 or any type of insurance sale or sales.

History. Enact. Acts 1972, ch. 29, § 5; 1974, ch. 284, § 4.

Opinions of Attorney General.

Until a seller has provided a buyer with the required notice, the buyer may cancel the transaction by notifying the seller in any manner and by any means of his intention to cancel. If the seller has performed any services pursuant to the home solicitation sale prior to its cancellation, the seller is entitled to no compensation whatsoever. OAG 92-41 .

If the seller performs the work in order to discourage the buyer from exercising her cancellation rights, this is potentially an unfair trade practice in violation of KRS 367.170 . OAG 92-41 .

367.460. Status of waiver of rights provided under KRS 367.410 to 367.450 by buyer.

Any waiver by the buyer of rights provided in KRS 367.410 to 367.450 is null and void, and will not operate to relieve the seller of any obligation placed upon him by KRS 367.410 to 367.450 or this section.

History. Enact. Acts 1974, ch. 284, § 2.

Telephone Solicitations

367.461. Conditions for use of automated calling equipment.

  1. As used in KRS 367.461 to 367.469 , “automated calling equipment” means any device or combination of devices which is used to select or dial telephone numbers and to deliver recorded messages to the numbers so selected or dialed.
  2. Unless the conditions set out in paragraphs (a) to (f) of this subsection are met, no person shall use automated calling equipment, or cause it to be used, for conducting polls, for soliciting information, or for advertising goods, services, or property:
    1. The person receiving the call consents to it, as specified in KRS 367.463 ;
    2. The recorded message clearly states the name and telephone number of the person or organization initiating the call within the first twenty-five (25) seconds of the message and at the conclusion of the message. That telephone number given in the recorded message shall, during normal office hours, be answered promptly and personally by an agent of the person or organization on whose behalf the automatic calls are made, who is able to provide information concerning the automatic calls;
    3. The automated calling equipment terminates its connection with any telephone call within ten (10) seconds after the person called either fails to consent to hear a recorded message or hangs up the telephone;
    4. The use does not involve either the random or sequential dialing of telephone numbers, does not call telephone numbers which are omitted from the telephone directory at the customer’s request, and does not call hospitals, nursing homes, fire protection agencies, or law enforcement agencies;
    5. Calls using the automated calling equipment are made only between 8:00 a.m. and 9:00 p.m.; and
    6. The automated calling equipment operates only when it is attended and is designed or installed so that it does not operate without an attendant, even in the event of power failures.
  3. Nothing in this section prohibits the use of automated calling equipment to make calls with recorded messages or an artificial voice when the calls:
    1. Are made in response to calls initiated by the person to whom the automatic call or recorded message is directed;
    2. Concern goods or services, or the availability of same which were previously ordered or purchased;
    3. Relate to collection of lawful debts;
    4. Are made by a public school as part of a program to regulate and control absenteeism of students;
    5. Are reminders and notices of meetings and activities of organizations of which the person called is a member or a subscribed consumer of the services of the organization, or are made to a person with whom there is an existing business relationship; or
    6. Are made to a publicly available telephone number which the business intends to be called by customers or potential customers, in relation to subject matter that is customary for such calls, including but not limited to inquiring about and booking reservations, inquiring about or initiating purchases, seeking information such as hours of operation, directions, merchandise availability, or other information provided to, or sought by, customers in the ordinary course of business. A person or company making calls under this paragraph shall not sell the name or personal information of any individual using its services. The person or company shall only disseminate the name and personal information of the individual for whom it is making the call during the actual call and only to the extent that such information would be disclosed by the individual if he or she were making the call on his or her own behalf.

History. Enact. Acts 1992, ch. 32, § 1, effective July 14, 1992; 2020 ch. 71, § 1, effective July 15, 2020.

367.463. Consent to calls made with automated calling equipment — Written consent — Withdrawal of written consent — Period of validity of written consent.

  1. A person may consent to a call made with automated calling equipment when:
    1. A live operator introduces the call and states an intent to play a recorded message; or
    2. By using the telephone keypad to provide a consent response.

      Consent obtained pursuant to this subsection applies only to the particular call and does not constitute prior consent to receive further calls through automated calling equipment.

  2. A person may consent to receive telephone calls through automated calling equipment by giving written consent to the person using automated calling equipment or causing it to be used.
    1. Any form used to obtain written consent shall state clearly and conspicuously its purpose and effect and shall clearly and conspicuously give notice of how the consent can be withdrawn.
    2. A record of written consent shall be maintained by the person to whom consent is given and shall be made available to the Attorney General or his authorized representative during normal business hours and upon twenty-four (24) hours’ notice.
    3. A written consent to receive telephone calls through automated calling equipment shall be void on and after the fifteenth day after receipt of a letter withdrawing the consent.
    4. Unless withdrawn, a written consent shall be valid for two (2) years from the date on which it is executed; the record of written consent shall be maintained by the person to whom consent is given for at least the same period of time.

History. Enact. Acts 1992, ch. 32, § 2, effective July 14, 1992.

367.465. Prohibitions relating to use of automated calling equipment to solicit calls for telephone fee lines.

  1. As used in this section, “telephone fee line” means a telephone number with a charge attached to calling it, whereby the telephone company as billing agent charges the caller an amount for accessing the line in addition to applicable rates, if any, for the telephone call.
  2. No person shall use automated calling equipment, or cause it to be used, to solicit persons to call a telephone fee line under his control.
  3. No telephone company shall knowingly provide a telephone fee line to a person who solicits calls to that line through the use of automated calling equipment. A telephone company shall, on order of the Attorney General, withdraw control of a telephone fee line from any person if calls to that line are solicited by automated calling equipment.

History. Enact. Acts 1992, ch. 32, § 3, effective July 14, 1992.

367.467. Applicability of remedies of Consumer Protection Act.

  1. Any violation of KRS 367.461 , 367.463 , or 367.465 shall be an unfair, false, misleading, and deceptive act or practice in the conduct of trade or commerce in violation of KRS 367.170 .
  2. All of the remedies, powers, and duties provided for the Attorney General in KRS 367.190 to 367.300 , and all of the penalties provided in KRS 367.990 , pertaining to acts declared unlawful by KRS 367.170 , shall apply to acts and practices declared unlawful in KRS 367.461 , 367.463 , and 367.465 .

History. Enact. Acts 1992, ch. 32, § 4, effective July 14, 1992.

367.469. Requirement of permit from Attorney General — Surety bond — Authority to promulgate administrative regulations.

  1. Unless covered by one (1) of the exceptions in KRS 367.461(3), and prior to using automated calling equipment to call telephone numbers in this Commonwealth, a person or company shall first obtain a permit from the Attorney General. The application for permit shall include:
    1. Name, address, and telephone number of the company or person utilizing the equipment;
    2. If the address required by paragraph (a) of this subsection is not in Kentucky, the name and address of a designated agent for the automated calling equipment operator located in Kentucky;
    3. A surety bond executed by the automated calling equipment operator from a surety company authorized to do business in this Commonwealth for the sum of ten thousand dollars ($10,000), to be maintained continuously in full force and effect. The Attorney General may accept an alternate form of surety, such as a letter of credit, for an operator demonstrating financial responsibility.
  2. The Attorney General shall promulgate administrative regulations to govern the issuance, revocation, suspension, or reissuance of permits for automated calling equipment operators utilizing equipment to call telephone numbers located in Kentucky. The Attorney General may revoke permits for any violation of KRS 367.461 , 367.463 , or 367.465 , following an administrative hearing conducted in accordance with KRS Chapter 13B.

History. Enact. Acts 1992, ch. 32, § 5, effective July 14, 1992; 1996, ch. 318, § 348, effective July 15, 1996.

367.46951. Definitions for KRS 367.46951 to 367.46999 and 367.990.

As used in KRS 367.46951 to 367.46999 and 367.990 , unless the context otherwise requires:

  1. “Telephone solicitation” means:
    1. A live or recorded communication sent by a telephone or message sent by a facsimile machine to a residential, mobile, or telephone paging device telephone number, including a call made by an automatic dialing or recorded message device, for the purpose of:
      1. Soliciting a sale of consumer goods or services, offering an investment, business, or employment opportunity, or offering a consumer loan to the person called;
      2. Obtaining information that will or may be used for the solicitation of a sale of consumer goods or services, the offering of an investment, business, or employment opportunity, or the offering of a consumer loan to the person called;
      3. Offering the person called a prize, gift, or anything else of value, if payment of money or other consideration is required in order to receive the prize or gift, including the purchase of other merchandise or services or the payment of any processing fees, delivery charges, shipping and handling fees, or other fees or charges; or
      4. Offering the person called a prize, gift, or other incentive to attend a sales presentation for consumer goods or services, an investment or business opportunity, or a consumer loan; or
    2. A live or recorded communication sent by telephone, facsimile machine, mobile telephone, or telephone paging device in response to inquiries generated by unrequested notifications sent by the merchant to persons who have not previously purchased goods or services from the merchant or telemarketer or who have not previously requested credit from the merchant, to a prospective purchaser if the merchant or telemarketer represents or implies to the recipient of the notification that any of the following applies:
      1. That the recipient has in any manner been specially selected to receive the notification or the offer contained in the notification;
      2. That the recipient will receive a prize or gift if the recipient calls the merchant or telemarketer; or
      3. That if the recipient buys one (1) or more items from the merchant or telemarketer, the recipient will also receive additional or other items of the same or a different type at no additional cost or for less than the regular price of the items;
  2. “Telephone solicitation” does not mean the following:
    1. A telephone call made in response to an express request of a person called, unless the request was made during a prior telephone solicitation;
    2. A telephone call made to the debtor or a party to the contract in connection with the payment or performance of an existing debt or contract, the payment or performance of which has not been completed at the time of the call;
    3. A telephone call to any person with whom the telemarketer or merchant has a prior or existing business relationship, including but not limited to the solicitation of contracts for the maintenance or repair of items previously purchased from the person making the solicitation or on whose behalf the solicitation is made;
    4. A telephone call made by the following:
      1. A merchant or telemarketer located in Kentucky to a location outside of the Commonwealth of Kentucky;
      2. A telephone call made by one (1) merchant to another;
  3. “Consumer goods or services” means goods, services, or interests in real property used by natural persons primarily for personal, family, or household purposes;
  4. “Consumer loan” means any extension of credit, including credit cards and other forms of revolving credit, to a natural person primarily for the purposes of purchasing consumer goods or services or for paying existing personal, family, or household debts;
  5. “Consumer” means a natural person who receives a telephone solicitation;
  6. “Legal name of the merchant” means the real name of the merchant, as defined in KRS 365.015 (1), or the assumed name of the merchant for which all proper certificates have been filed pursuant to KRS 365.015 ;
  7. “Merchant” means the individual or business entity offering the consumer goods or services, an investment, business, or employment opportunity, or a consumer loan;
  8. “Caller” or “sales person” means the individual making the call or operating the automatic dialing or recorded message device and causing the call to be made;
  9. “Division” means the Consumer Protection Division of the Office of the Attorney General;
  10. “Automated calling equipment” means any device or combination of devices used to select or dial telephone numbers and to deliver recorded messages to those numbers without the use of a live operator;
  11. “Telemarketer” means any person who under contract with a merchant or in connection with a telephone solicitation initiates or receives telephone calls to or from a consumer of goods and services. A telemarketer includes but is not limited to any such person that is an owner, operator, officer, director, or partner to the management activities of a business;
  12. “Publicly traded corporation” means an issuer or subsidiary of an issuer that has a class of securities which is:
    1. Subject to Section 12 of the Securities Exchange Act of 1934 (15 U.S.C. sec. 78 l) and which is registered or exempt from registration under paragraph (A), (B), (C), (E), (F), (G), or (H) of subsection (g)(2) of that section;
    2. Listed on the New York Stock Exchange, the American Stock Exchange, or the NASDAQ National Market System; or
    3. A reported security within the meaning of subparagraph (4) of Regulation Section 240.11Aa3-1.(a) under the Securities Exchange Act of 1934. A subsidiary of an issuer that qualifies for exemption under this paragraph shall not itself be exempt unless at least sixty percent (60%) of the voting power of its shares is owned by the qualifying issuer;
  13. “Telemarketing company” means a company whose primary business is to engage in telephone solicitation; and
  14. “Zero call list” means the national Do Not Call Registry maintained by the United States Federal Trade Commission containing the residential or wireless telephone numbers of the individuals that indicate their preference not to receive telephone solicitations.

History. Enact. Acts 1994, ch. 302, § 1, effective July 15, 1994; ch. 463, § 1, effective July 15, 1994; 1998, ch. 426, § 573, effective July 15, 1998; 1998, ch. 581, § 1, effective July 15, 1998; 2002, ch. 21, § 1, effective July 15, 2002; 2007, ch. 115, § 1, effective June 26, 2007.

Legislative Research Commission Note.

(7/15/94). This statute was created by 1994 Ky. Acts chs. 302 and 463, which are substantively identical and have been codified together. Minor variations have been resolved by giving precedence to Acts ch. 463 which was enacted last.

NOTES TO DECISIONS

1.Long-arm Jurisdiction.

There was no personal jurisdiction over the solicitors because, although they committed telephone solicitation, their alleged actions or the consequences caused by them did not have a substantial enough connection with Kentucky to make the exercise of jurisdiction reasonable under the Fourteenth Amendment and they would endure a substantial burden if forced to defend the action in Kentucky. Perkins v. Bennett, 2013 U.S. Dist. LEXIS 160833 (W.D. Ky. Nov. 12, 2013).

Dentist's telephone calls to a patient in Kentucky were not “telephone solicitations” and did not subject the dentist to personal jurisdiction in Kentucky; the patient had a preexisting relationship with the dentist and initiated contact with the dentist. Newberry v. Silverman, 789 F.3d 636, 2015 FED App. 0103P, 2015 U.S. App. LEXIS 8904 (6th Cir. Ohio 2015).

367.46953. Requirements for making telephone solicitation.

A caller making a telephone solicitation shall:

  1. Immediately upon making contact by telephone with the consumer, state his actual name, the merchant’s legal name, a telephone number or address at which the merchant may be contacted, and the town or city and state where the caller is physically located;
  2. Within the first thirty (30) seconds of the call, identify the goods, services, interest in real estate, investment or business opportunity, or type of credit being offered and inquire whether the consumer is interested in listening to a sales presentation; and
  3. Immediately discontinue the solicitation if the consumer responds in the negative.

History. Enact. Acts 1994, ch. 302, § 2, effective July 15, 1994; ch. 463, § 2, effective July 15, 1994.

Legislative Research Commission Note.

(7/15/94). This statute was created by 1994 Ky. Acts chs. 302 and 463, which are substantively identical and have been codified together. Minor variations have been resolved by giving precedence to Acts ch. 463 which was enacted last.

367.46955. Prohibited telephone solicitation acts and practices.

It is a prohibited telephone solicitation act or practice and a violation of KRS 367.46951 to 367.46999 for any person making a telephone solicitation through telecommunications services or interconnected Voice over Internet Protocol or VoIP service to engage in the following conduct:

  1. Advertising or representing that registration as a telemarketer equals an endorsement or approval by any government or governmental agency;
  2. Requesting a fee in advance to remove derogatory information from or improve a person’s credit history or credit record;
  3. Requesting or receiving a payment in advance from a person to recover or otherwise aid in the return of money or any other item lost by the consumer in a prior telephone solicitation transaction;
  4. Requesting or receiving payment of any fee or consideration in advance of obtaining a loan or other extension of credit when the telemarketing company has guaranteed or represented a high likelihood of success in obtaining or arranging a loan or other extension of credit for a person;
  5. Obtaining or submitting for payment a check, draft, or other form of negotiable paper drawn on a person’s checking, savings, or bond or other account without the consumer’s express written authorization, or charging a credit card account or making electronic transfer of funds except in conformity with KRS 367.46963 ;
  6. Procuring the services of any professional delivery, courier, or other pickup service to obtain immediate receipt or possession of a consumer’s payment, unless the goods are delivered with the opportunity to inspect before any payment is collected;
  7. Assisting, supporting, or providing substantial assistance to any telemarketer when the telemarketing company knew or should have known that the telemarketer was engaged in any act or practice prohibited under this section;
  8. Making a telephone solicitation to anyone under eighteen (18) years of age. When making a telephone solicitation the telemarketer shall inquire as to whether the person is eighteen (18) years of age or older and the answer shall be presumed to be correct;
    1. Causing misleading caller identification information to be transmitted to users of caller identification services, or to otherwise misrepresent the origin of the telephone solicitation. (9) (a) Causing misleading caller identification information to be transmitted to users of caller identification services, or to otherwise misrepresent the origin of the telephone solicitation.
      1. This subsection shall not apply to solicitations which block caller identification, nor shall it apply to solicitations in which the name and telephone number of the party on whose behalf the call is made is substituted for the name and telephone number of the actual caller. (b) 1. This subsection shall not apply to solicitations which block caller identification, nor shall it apply to solicitations in which the name and telephone number of the party on whose behalf the call is made is substituted for the name and telephone number of the actual caller.
      2. This subsection shall not apply to a telecommunications, broadband, or Voice over Internet Protocol service provider that is:
        1. Acting in the telecommunications, broadband, or Voice over Internet Protocol service provider’s capacity as an intermediary for the transmission of telephone service between the caller and the recipient;
        2. Providing or configuring a service or service feature as requested by the customer;
        3. Acting in a manner that is authorized or required by applicable law; or
        4. Engaging in other conduct that is necessary to provide service;
  9. Directing or permitting employees to use a fictitious name or not to use their name while making a telephone solicitation;
  10. Threatening, intimidating, or using profane or obscene language;
  11. Causing the telephone to ring more than thirty (30) seconds in an intended telephone solicitation;
  12. Engaging any person repeatedly or continuously with behavior a reasonable person would deem to be annoying, abusive, or harassing;
  13. Initiating a telephone solicitation call to a person, when that person has stated previously that he or she does not wish to receive solicitation calls from that seller;
  14. Making or causing to be made an unsolicited telephone solicitation call if the residential number for that telephone appears in the current publication of the national Do Not Call Registry maintained by the United States Federal Trade Commission;
  15. Making telephone solicitations to a person’s residence at any time other than between 10 a.m. - 9 p.m. local time, at the called person’s location;
  16. Selling or making available for economic gain any information revealed during a telephone solicitation without the express written consent of the consumer;
  17. Making a telephone solicitation to any residential telephone using an artificial or prerecorded voice to deliver a message, unless the call is initiated for emergency purposes by schools regulated by the Kentucky Department of Education or the call is made with the prior express consent of the called party; or
  18. Engaging in any unfair, false, misleading, or deceptive practice or act as part of a telephone solicitation.

History. Enact. Acts 1998, ch. 581, § 3, effective July 15, 1998; 2002, ch. 21, § 2, effective July 15, 2002; 2007, ch. 115, § 2, effective June 26, 2007; 2018 ch. 145, § 1, effective July 14, 2018; 2019 ch. 105, § 1, effective June 27, 2019.

Legislative Research Commission Note.

(7/15/2002). Under the authority of KRS 7.136 , the Reviser of Statutes has corrected a clearly erroneous statutory reference in subsection (5) of this section as enacted in 2002 Ky. Acts ch. 21, sec. 2, by changing “KRS 367.46953 ” to “KRS 367.46963 .”

367.46957. Contract or agreement voidable by consumer if resulting from nonconforming telephone solicitation.

A contract or agreement made as a result of a telephone solicitation violating KRS 367.46951 to 367.46999 is voidable by the consumer for any reason at any time and shall not be enforced against the consumer.

History. Enact. Acts 1994, ch. 302, § 3, effective July 15, 1994; ch. 463, § 3, effective July 15, 1994.

Legislative Research Commission Note.

(7/15/94). This statute was created by 1994 Ky. Acts chs. 302 and 463, which are substantively identical and have been codified together. Minor variations have been resolved by giving precedence to Acts ch. 463 which was enacted last.

367.46961. Cancellation of contract not reduced to writing — Exception.

  1. Unless the contract is reduced to writing in compliance with subsection (4) of this section, a consumer may cancel a contract made as a result of a telephone solicitation and obtain a full refund of all money paid, by returning the goods, if any, undamaged and unused, or canceling services within the later of:
    1. Fourteen (14) calendar days following receipt of the goods; or
    2. Fourteen (14) calendar days following receipt of two (2) copies of a written notice of cancellation rights containing the following language in no less than ten (10) point, bold-faced type:
  2. The consumer shall be deemed to have complied with subsection (1) of this section if the cancellation notice and goods, if any, are returned to the merchant and are postmarked by midnight of the fourteenth day.
  3. The merchant shall process the refund due any consumer within thirty (30) days of receiving the merchandise returned by the consumer or the written cancellation provided in subsection (1) of this section.
  4. The cancellation period provided in subsection (1) of this section shall not apply to a written contract signed by the consumer that:
    1. Complies with all applicable federal and state laws and regulations:
    2. Contains a description of the goods, services, investment or business opportunity, extension of credit, or interest in realty matching the description used in the telephone solicitation;
    3. Contains the name, address, and telephone number of the merchant, the total price of the contract, including any finance or interest charges, and a detailed description of the goods, services, credit, or interest in realty being offered;
    4. Contains all oral or written representations made to the consumer in connection with the transaction; and
    5. Sets out in at least ten (10) point, bold-face type, immediately preceding the signature, the following statement:

      YOU ARE NOT OBLIGATED TO PAY ANY

      MONEY UNLESS YOU SIGN THIS CONTRACT

NOTICE OF CANCELLATION RIGHTS BECAUSE YOU AGREED TO BUY THESE GOODS (or services or other appropriate description) AS A RESULT OF AN UNSOLICITED TELEPHONE CALL, KENTUCKY LAW GIVES YOU FOURTEEN (14) DAYS TO CANCEL YOUR AGREEMENT WITH US. IF YOU WANT TO CANCEL, YOU MUST SIGN YOUR NAME BELOW AND RETURN A COPY OF THIS NOTICE, TOGETHER WITH ANY GOODS YOU HAVE RECEIVED, SO THEY ARE POSTMARKED NO LATER THAN MIDNIGHT OF THE FOURTEENTH DAY FOLLOWING THE DATE YOU RECEIVED THE GOODS OR AGREED TO THE SERVICES, OR THE FOURTEENTH DAY FOLLOWING THE DATE YOU RECEIVED THIS NOTICE, WHICHEVER IS LATER. THE NOTICE AND GOODS MUST BE ADDRESSED AS FOLLOWS: (Name and address of Merchant) I want to cancel my agreement to purchase. (Signature) (Name of Consumer — Printed) (Address of Consumer — Printed) (Address — City, State, Zip) (Date)

Click to view

AND RETURN IT TO THE MERCHANT.

History. Enact. Acts 1994, ch. 302, § 4, effective July 15, 1994; ch. 463, § 4, effective July 15, 1994.

Legislative Research Commission Note.

(7/15/94). This statute was created by 1994 Ky. Acts chs. 302 and 463, which are substantively identical and have been codified together. Minor variations have been resolved by giving precedence to Acts ch. 463 which was enacted last.

367.46963. Requirements to be met before accepting payment from or charging consumer.

No caller or merchant making or causing to be made a telephone solicitation shall request or accept payment from a consumer or make or submit any charge to the consumer’s credit or bank account until either:

  1. The merchant receives from the consumer a signed copy of a written contract complying with KRS 367.46961(4); or
  2. The cancellation period provided in KRS 367.46961(1) has expired, and the consumer has not exercised his right to cancel.

History. Enact. Acts 1994, ch. 302, § 5, effective July 15, 1994; ch. 463, § 5, effective July 15, 1994.

Legislative Research Commission Note.

(7/15/94). This statute was created by 1994 Ky. Acts chs. 302 and 463, which are substantively identical and have been codified together. Minor variations have been resolved by giving precedence to Acts ch. 463 which was enacted last.

367.46967. Violation as unfair or deceptive trade practice — Powers of Attorney General.

  1. A violation by a telemarketing company, telemarketer, caller, or merchant of KRS 367.46951 to 367.46999 shall constitute an unfair, false, misleading, or deceptive act or practice in the conduct of trade or commerce in violation of KRS 367.170 .
  2. All of the remedies, powers, and duties provided for the Attorney General by KRS 367.190 to 367.300 and the penalties provided in KRS 367.990 , relating to acts and practices violating KRS 367.170 shall apply with equal force and effect to acts and practices declared unlawful by KRS 367.46951 to 367.46999 .
  3. Nothing in KRS 367.46951 to 367.46999 shall be construed to limit or restrict the exercise of powers or the performance of the duties of the Attorney General authorized under any other provision of law.

History. Enact. Acts 1994, ch. 302, § 6, effective July 15, 1994; ch. 463, § 6, effective July 15, 1994; 2002, ch. 21, § 7, effective July 15, 2002.

Legislative Research Commission Note.

(7/15/94). This statute was created by 1994 Ky. Acts chs. 302 and 463, which are substantively identical and have been codified together. Minor variations have been resolved by giving precedence to Acts ch. 463 which was enacted last.

367.46971. Registration of telemarketing companies doing business in this state — Filing fee — Renewal — Addendum — Written confirmation of receipt of filing — Posting of registration statement.

  1. At least ten (10) days prior to doing business in this state, a telemarketing company shall register with the division by filing the information described below and paying a filing fee of three hundred dollars ($300). A telemarketing company shall be deemed to do business in this state if the telemarketing company solicits prospective purchasers from locations in this state or solicits prospective purchasers who are located in this state. The information required by this section shall be submitted on a form provided by the Attorney General and shall be verified by a declaration signed by each principal of the telemarketing company, under penalty of perjury. The declaration shall specify the date and location of signing. Information submitted pursuant to KRS 367.46951 to 367.46999 shall be clearly identified and appended to the filing.
  2. Registration of a telemarketing company shall be valid for one (1) year from the effective date thereof and may be renewed annually by making the filing required by this section and paying a filing fee of fifty dollars ($50).
  3. If, prior to expiration of a telemarketing company’s annual registration, there is a material change in the information required by KRS 367.46951 to 367.46999 , the telemarketing company shall, within ten (10) days, file an addendum updating the information with the division. However, changes in salespersons soliciting on behalf of a telemarketing company shall be updated by filing addenda, if necessary, in quarterly intervals computed from the effective date of registration. The addendum shall include the required information for all salespersons currently soliciting or having solicited on behalf of the telemarketing company at any time during the period between the filing of the registration, or the last addendum, and the current addendum, and shall include information on salespersons no longer soliciting for the telemarketing company as of the date of the filing of the current addendum.
  4. Upon receiving the filing and the filing fee pursuant to this section, the division shall send the telemarketing company a written confirmation of receipt of the filing. If the telemarketing company has more than one (1) business location, the written confirmation shall be sent to the telemarketing company’s principal business location as identified in the telemarketing company’s filing in sufficient numbers so that the telemarketing company can meet the requirements of this subsection. Within ten (10) days of receipt of the confirmation, the telemarketing company shall post in a conspicuous place at each of the telemarketing company’s business locations within this state a copy of the entire registration statement which has been filed with the division. Until confirmation of receipt of filing is received and posted, the telemarketing company shall post in a conspicuous place at each of the telemarketing company’s business locations within this state a copy of the first page of the registration form sent to the department. The telemarketing company shall also post in close proximity to either the confirmation of receipt of filing or the first page of the submitted registration form the name of the individual in charge of each location from which the telemarketing company does business in this state.

History. Enact. Acts 1994, ch. 302, § 7, effective July 15, 1994; ch. 463, § 7, effective July 15, 1994; 2002, ch. 21, § 3, effective July 15, 2002; 2007, ch. 115, § 3, effective June 26, 2007.

Legislative Research Commission Note.

(7/15/94). This statute was created by 1994 Ky. Acts chs. 302 and 463, which are substantively identical and have been codified together. Minor variations have been resolved by giving precedence to Acts ch. 463 which was enacted last.

367.46973. Contents of filing.

Each filing pursuant to KRS 367.46971 shall contain the following information:

  1. The name or names of the telemarketing company, including the name under which the telemarketing company is doing or intends to do business, if different from the name of the telemarketing company, and the name of any parent or affiliated organization that will engage in business transactions with purchasers relating to sales solicited by the telemarketing company, or that accepts responsibility for statements made by, or acts of, the telemarketing company relating to sales solicited by the telemarketing company;
  2. The telemarketing company’s business form and place of organization and, if the telemarketing company is a corporation, a copy of its articles of incorporation and bylaws and amendments to those, or, if a partnership, a copy of the partnership agreement, or if operating under a fictitious business name, the location where the fictitious name has been registered, along with a copy of the registration documents. The same information shall be included for any parent or affiliated organization disclosed pursuant to subsection (1) of this section;
  3. The complete street address of all locations designating the principal location from which the telemarketing company will be conducting business. If the principal business location of the telemarketing company is not in this state, then the telemarketing company shall also designate which of its locations within this state is its main location;
  4. A listing of all telephone numbers to be used by the telemarketing company and the address where each telephone using each of these telephone numbers is located;
  5. The name of and the office held by the telemarketing company’s officers, directors, trustees, general and limited partners, sole proprietor, and owners and the names of persons having management responsibilities in the telemarketing company’s business activities;
  6. The principal residence, the date of birth, and the driver’s license number and state of issuance of each person named pursuant to subsection (5) of this section;
  7. The name and principal residence of each person the telemarketing company leaves in charge at each location in which the telemarketing company does business in this state, and the business location at which each of these persons is in charge;
  8. A statement, meeting the requirements of this subsection, as to both the telemarketing company, whether a corporation, partnership, firm, association, joint venture, or any other type of business entity and as to any person identified pursuant to subsection (5) or (7) of this section who:
    1. Has been convicted of a felony or a misdemeanor involving a violation of this article, or fraud, theft, embezzlement, fraudulent conversion, or misappropriation of property. For purposes of this paragraph, a plea of nolo contendere shall be considered a conviction;
    2. Has had entered against him a final judgment or order in a civil or administrative action, including a stipulated judgment or order, if the complaint or petition in the civil or administrative action alleged acts constituting a violation of KRS 367.46951 to 367.46999 , fraud, theft, embezzlement, fraudulent conversion, or misappropriation of property, the use of untrue or misleading representations in an attempt to sell or dispose of real or personal property, or the use of unfair, unlawful, or deceptive business practices;
    3. Is subject to an injunction or restrictive court order relating to business activity as the result of an action brought by a federal, state, or local public agency or unit of that agency, including but not limited to an action affecting any vocational license; or
    4. Has during the previous seven (7) tax years filed in bankruptcy, been adjudged a bankrupt, been reorganized due to insolvency, or been a principal, director, officer, trustee, general or limited partner, or had management responsibilities of any other corporation, partnership, joint venture, or business entity that has so filed or was so adjudicated or reorganized, during or within one (1) year after the period that the person held that position. The statement required by paragraphs (a), (b), and (c) of this subsection shall identify the telemarketing company or person, the court or administrative agency rendering the conviction, judgment, or order, the docket number of the matter, the date of the conviction, judgment, or order, and the name of the governmental agency, if any, that brought the action resulting in the conviction, judgment, or order. For purposes of paragraph (d) of this section, the statement required shall include the name and location of the telemarketing company or person filing in bankruptcy, adjudged a bankrupt, or reorganized due to insolvency, and shall include the date thereof, the court which exercised jurisdiction, and the docket number of the matter;
  9. A list of the names, driver’s license numbers and states of issuance, principal residence addresses, and telephone numbers of salespersons who solicit on behalf of the telemarketing company, and any names the salesperson uses while soliciting;
  10. A description of the items the telemarketing company is offering for sale and a copy of all sales scripts the telemarketing company requires salespersons to use when soliciting prospective purchasers. If no sales script is required to be used, a statement to that effect shall be included;
  11. A copy of all sales information and literature including but not limited to scripts, outlines, instructions, and information regarding how to conduct telephonic sales, sample introductions, sample closings, product information, and contest or premium-award information provided by the telemarketing company to salespersons or of which the telemarketing company informs salespersons, and a copy of all written materials the telemarketing company sends to any prospective or actual purchaser;
    1. If the telemarketing company represents or implies, or directs salespersons to represent or imply, to purchasers that the purchaser will receive certain specific items, including a certificate of any type which the purchaser must redeem to obtain the item described in the certificate, or one (1) or more items among designated items, whether the items are denominated as gifts, premiums, bonuses, prizes, or otherwise, the filing shall include the following: (12) (a) If the telemarketing company represents or implies, or directs salespersons to represent or imply, to purchasers that the purchaser will receive certain specific items, including a certificate of any type which the purchaser must redeem to obtain the item described in the certificate, or one (1) or more items among designated items, whether the items are denominated as gifts, premiums, bonuses, prizes, or otherwise, the filing shall include the following:
      1. A list of the items offered;
      2. The actual value or worth of each item described to prospective purchasers and the basis for the valuation; and
      3. The price paid by the telemarketing company to its supplier for each of these items and the name, address, and telephone number of each item’s supplier;
    2. If the purchaser is to receive fewer than all of the items described by the telemarketing company, the filing shall include the following:
      1. The manner in which the telemarketing company decides which item each prospective purchaser is to receive;
      2. The odds a single prospective purchaser has of receiving each described item;
      3. The name and address of each recipient who has, during the preceding twelve (12) months, or if the telemarketing company has not been in business that long, during the period the telemarketing company has been in business, received the item having the greatest value and the item with the smallest odds of being received; and
      4. All rules, regulations, terms, and conditions a prospective purchaser must meet in order to receive the item; and
  12. If the telemarketing company is offering an investment, business, or employment opportunity, the filing shall include the following:
    1. The number of consumers or investors who have participated to date;
    2. The actual experience of the consumers or investors as measured by standards used in the sales presentations; and
    3. If the opportunity is so recent that no actual performance experience exists, that fact shall be disclosed in all sales presentations, and no other representation of performance shall be made in sales presentations.

History. Enact. Acts 1994, ch. 302, § 8, effective July 15, 1994; ch. 463, § 8, effective July 15, 1994; 2007, ch. 115, § 4, effective June 26, 2007.

Legislative Research Commission Note.

(7/15/94). This statute was created by 1994 Ky. Acts chs. 302 and 463, which are substantively identical and have been codified together. Minor variations have been resolved by giving precedence to Acts ch. 463 which was enacted last.

367.46977. Disclosure requirements for sale presentations.

  1. If the merchant or telemarketer represents or implies that the consumer will receive a prize, award, or similar item of value from a number of such prizes or awards, all sales presentations shall include the actual number of individuals who have received the item having the greatest value, a description of the item, the market value of the item, the number of prizes to be awarded, the conditions to receive the item, the odds of winning, the statement that no purchase is necessary to win the prize or to participate in the promotion, and the actual number of individuals who have received the item with the least value within the preceding twelve (12) months or since the merchant or telemarketer has been in business if less than twelve (12) months.
  2. If the merchant or telemarketer is offering real estate, an investment, business, or employment opportunity, the sales presentation shall include the following:
    1. The number of consumers or investors who have participated to date;
    2. The actual experience of the consumers or investors as measured by the standards used in the sales presentations; and
    3. The price of the real estate or investment;
    4. The location of the real estate or investment;
    5. Regarding an investment or business opportunity, the reasonable likelihood of success and a notice of the risk; and
    6. If the opportunity is so recent that no actual performance experience exists, that fact shall be disclosed in all sales presentations, and no other representation of performance shall be made in sales presentations.
  3. If the sales presentation includes representations of prices below those usually charged for items, the sales presentation shall include the name of the manufacturer, importer, or supplier of such items and the locations within the merchant’s or telemarketer’s calling state or this state at which the items are offered at usual prices. If the item has never been sold in the merchant’s or telemarketer’s calling state or this state no representation of usual selling price shall be made.
  4. If presenting information on merchandise or service, the total cost of the goods or services that are the subject of the call shall be given.
  5. If any restrictions, limitations, or conditions for the purchase or investment exist, these shall be disclosed during the telephone sales presentation.
  6. Terms for refunds, cancellation, exchange, or repurchase of the subject of the sales presentation shall be disclosed during the telephone sales presentation.

History. Enact. Acts 1994, ch. 302, § 9, effective July 15, 1994; ch. 463, § 9, effective July 15, 1994; 1998, ch. 581, § 2, effective July 15, 1998.

Legislative Research Commission Note.

(7/15/94). This statute was created by 1994 Ky. Acts chs. 302 and 463, which are substantively identical and have been codified together. Minor variations have been resolved by giving precedence to Acts ch. 463 which was enacted last.

367.46981. Bond required for telemarketing companies — Notification to Attorney General of promotion offering premium.

  1. Every telemarketing company shall maintain a bond issued by a surety company admitted to do business in this state. The bond shall be in the amount of fifty thousand dollars ($50,000) in favor of the Attorney General for the benefit of any person suffering injury or loss by reason of any violation of KRS 367.46951 to 367.46999 to be paid under the terms of any order of a court of competent jurisdiction obtained by the Attorney General, as a result of any violation of KRS 367.46951 to 367.46999 . A copy of the bond shall be filed with the division.
  2. At least ten (10) days prior to the inception of any promotion offering a premium with an actual market value or advertised value of five hundred dollars ($500) or more, the telemarketing company shall notify the Attorney General in writing of the details of the promotion, describing the premium and its current market value, the value at which it is advertised or held out to the customer, the date the premium shall be awarded, and the conditions under which the award shall be made. The telemarketing company shall maintain an additional bond for the greater of the current total market value or the advertised value of the premiums held out or advertised to be available to a purchaser or recipient. A copy of the bond shall be filed with the division. The bond, or a portion of it necessary to cover the cost of the award, shall be forfeited if the premium is not awarded to a bona fide customer within thirty (30) days of the date disclosed as the time of award or the time otherwise required by law. The proceeds of the bond shall be paid to any person suffering injury or loss by reason of any violation of KRS 367.46951 to 367.46999 or shall be paid pursuant to the terms of any order of a court of competent jurisdiction obtained by the Attorney General, Commonwealth’s attorney, or county attorney as a result of any violation of KRS 367.46951 to 367.46999 . The bond shall be maintained until the telemarketing company files with the Attorney General proof that the premium was awarded.

History. Enact. Acts 1994, ch. 302, § 10, effective July 15, 1994; ch. 463, § 10, effective July 15, 1994; 2002, ch. 21, § 4, effective July 15, 2002.

Legislative Research Commission Note.

(7/15/94). This statute was created by 1994 Ky. Acts chs. 302 and 463, which are substantively identical and have been codified together. Minor variations have been resolved by giving precedence to Acts ch. 463 which was enacted last.

367.46983. Authority for administrative regulations.

The Attorney General may promulgate administrative regulations necessary for the proper administration and enforcement of KRS 367.46951 to 367.46999 .

History. Enact. Acts 1994, ch. 302, § 11, effective July 15, 1994; ch. 463, § 11, effective July 15, 1994.

Legislative Research Commission Note.

(7/15/94). This statute was created by 1994 Ky. Acts chs. 302 and 463, which are substantively identical and have been codified together. Minor variations have been resolved by giving precedence to Acts ch. 463 which was enacted last.

367.46987. Person using electronic equipment for solicitation deemed to have accepted Kentucky law.

Any merchant, caller, or other person who uses electronic equipment within this Commonwealth for purposes of telephone solicitation shall, as a condition of that use, be deemed to have accepted the provisions of KRS 367.46951 to 367.46999 and of KRS Chapter 526.

History. Enact. Acts 1994, ch. 302, § 12, effective July 15, 1994; ch. 463, § 12, effective July 15, 1994.

Legislative Research Commission Note.

(7/15/94). This statute was created by 1994 Ky. Acts chs. 302 and 463, which are substantively identical and have been codified together. Minor variations have been resolved by giving precedence to Acts ch. 463 which was enacted last.

367.46991. Burden of proving exemption or defense on claimant.

In a civil proceeding alleging a violation of KRS 367.46951 to 367.46999 , the burden of proving an exemption shall be on the person claiming the exemption, and in a criminal proceeding alleging a violation of KRS 367.46951 to 367.46999 , the burden of producing evidence to support a defense based on an exemption shall be on the person claiming the exemption.

History. Enact. Acts 1994, ch. 302, § 13, effective July 15, 1994; ch. 463, § 13, effective July 15, 1994.

Legislative Research Commission Note.

(7/15/94). This statute was created by 1994 Ky. Acts chs. 302 and 463, which are substantively identical and have been codified together. Minor variations have been resolved by giving precedence to Acts ch. 463 which was enacted last.

367.46993. Telemarketer prohibited from contacting credit card issuer to obtain account number — Issuer prohibited from providing account number.

  1. A telemarketer shall not contact a credit card issuer, in writing or by telephone, facsimile, computer, or by any other means, for the purpose of obtaining a consumer’s credit card account number.
  2. A credit card issuer shall not provide a consumer’s credit card account number to a telemarketer.

History. Enact. Acts 2002, ch. 18, § 1, effective July 15, 2002.

367.46994. Transfer of numbers on zero call list to national Do Not Call Registry — Consumer education materials — Publication of materials by telephone companies.

  1. The Office of the Attorney General immediately shall request that the Federal Trade Commission include on the national Do Not Call Registry the residential numbers that were placed on the zero call list on or before June 26, 2007. If the Federal Trade Commission denies the request, then those households whose residential numbers will be purged from the zero call list shall be informed by the Office of the Attorney General on how to place their telephone number on the national Do Not Call Registry.
  2. Persons whose telephone numbers appear on the zero call list shall not receive telephone solicitations except in accordance with the provisions of KRS 367.46951 to 367.46999 .
  3. Information contained in a database established for the purpose of administering the zero call list shall be used only for the purpose of implementing the zero call program in conformance with KRS 367.46951 to 367.46999 .
  4. The Kentucky Public Service Commission shall produce consumer education materials that:
    1. Describe Kentucky’s telemarketing laws;
    2. Describe the consumer’s rights and responsibilities regarding the receipt of telephone solicitation;
    3. Explain how consumers can apply to be placed on any federal Do Not Call Registry established by the Federal Communications Commission and the Federal Trade Commission;
    4. Explain how to apply to be placed on company-specific and industrywide no solicitation calls list, including those lists provided by the Direct Marketing Association (DMA) and the Telephone Preference Service (TPS); and
    5. Describe how a consumer can file a complaint if the consumer receives calls after being placed on the Do Not Call Registry established by the Federal Communications Commission and the Federal Trade Commission.
  5. The Public Service Commission shall require that, once a year, telephone companies under the jurisdiction of the Public Service Commission shall include the customer education material or portions thereof, at the discretion of the companies, in either the billing inserts, billing messages, or in the Customer Guide pages of their telephone directories.

History. Enact. Acts 2002, ch. 21, § 5, effective July 15, 2002; 2007, ch. 115, § 5, effective June 26, 2007.

367.46995. Claims alleging calls made to persons on zero call list — Defenses.

  1. Any claim or action alleging the making of a call to a person on the zero call list in violation of KRS 367.46955 shall be in writing and verified by the claimant.
  2. In any action or claim alleging the making of a call to a person on the zero call list, it shall be a defense that the defendant obtains the current zero call list in a timely manner and makes reasonable efforts to avoid calling persons whose telephone numbers appear on the list.
  3. It shall be a defense in any action or proceeding brought under KRS 367.46951 to 367.46999 that the defendant has established and implemented, with due care, reasonable practices and procedures to prevent telephone solicitations in violation of KRS 367.46951 to 367.46999 .

History. Enact. Acts 2002, ch. 21, § 6, effective July 15, 2002.

367.46999. Penalties for violation — Concurrent enforcement powers of Attorney General.

  1. Any person, including, but not limited to, a merchant, a telemarketer, a salesperson, agent or representative of the merchant, or an independent contractor, who knowingly violates any provision of KRS 367.46951 to 367.46999 or engages in any act, practice, or course of business which operates or would operate as fraud or deceit upon any person in connection with a sale shall be guilty of a Class D felony, except that any person who violates KRS 367.46955(7) to (16) shall be guilty of:
    1. A Class B misdemeanor for the first offense that shall be punishable by imprisonment of not more than ninety (90) days, or a fine of no more than five hundred dollars ($500), or both; and
    2. A Class A misdemeanor for any subsequent offense that shall be punishable by imprisonment of not more than one (1) year, or a fine of not more than five thousand dollars ($5,000), or both.
  2. Notwithstanding any other provision of law, in addition to the penalties provided in this section, any person found guilty of violating KRS 367.46955(9) shall pay restitution of any financial benefit secured through conduct proscribed by KRS 367.46955(9).
  3. The Office of the Attorney General shall have concurrent enforcement powers as to such felonies and misdemeanors.
    1. Notwithstanding other criminal and administrative remedies, a person or class of persons alleging: (4) (a) Notwithstanding other criminal and administrative remedies, a person or class of persons alleging:
      1. Receipt of a call in violation of KRS 367.46955(9); or
      2. That a number assigned to the person was misleadingly transmitted as a caller identification number by a solicitor in violation of KRS 367.46955(9);

        may bring a civil action in the county where the plaintiff resides or has his or her principal place of business, against any person who is responsible for or who knowingly participated in the violation.

    2. The civil action brought under paragraph (a) of this subsection may be for:
      1. Appropriate injunctive relief;
      2. Actual damages;
      3. Actual expenses incurred, including court costs and attorney’s fees; and
      4. Punitive damages.

History. Enact. Acts 1994, ch. 302, § 14, effective July 15, 1994; ch. 463, § 14, effective July 15, 1994; 1998, ch. 581, § 4, effective July 15, 1998; 2018 ch. 145, § 2, effective July 14, 2018; 2019 ch. 105, § 2, effective June 27, 2019.

Legislative Research Commission Note.

(7/15/94). This statute was created by 1994 Ky. Acts chs. 302 and 463, which are substantively identical and have been codified together. Minor variations have been resolved by giving precedence to Acts ch. 463 which was enacted last.

Recreation and Retirement Use Land Sales

367.470. Legislative findings.

  1. The provisions of KRS 367.472 to 367.486 shall apply to recreation and retirement use land sales.
  2. The General Assembly finds and declares that the sale and offering for sale of recreation and retirement use land, the sale of which is often premised upon future completion of improvements by the subdivider, affects a great number of the citizens of this state and that regulation of such promised improvements in recreation and retirement use land is essential.

History. Enact. Acts 1978, ch. 316, § 1, effective June 17, 1978; 1988, ch. 194, § 7, effective July 15, 1988.

Legislative Research Commission Note.

(1988). A technical correction has been made in this section by the Reviser of Statutes pursuant to KRS 7.136 .

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

367.472. Definitions.

Unless the context otherwise requires, the following terms shall mean:

  1. “Recreational and retirement use” land means that land which is sold and promoted with primary emphasis on the land’s value for recreational purposes or for retirement purposes. In order to carry out the purposes of KRS 367.470 to 367.486 , the Attorney General may by administrative regulations further define the term “recreational and retirement use” of land;
  2. “Offer” includes every inducement, solicitation, or attempt to encourage a person to acquire an interest in land;
  3. “Person” means an individual, corporation, government, or governmental subdivision or agency, business trust, estate, partnership, unincorporated association, two (2) or more of any of the foregoing having a joint or common interest or any other legal or commercial entity;
  4. “Purchaser” means a person who acquires or attempts to acquire or succeeds to an interest in land;
  5. “Subdivider” means any owner of subdivided land who offers it for disposition or the principal agent of the owner.
  6. “Subdivision and subdivided lands” means any land which is divided or is proposed to be divided for the purpose of disposition into ten (10) or more lots, parcels, units, or interests and also includes any land, whether contiguous or not, if ten (10) or more lots, parcels, units, or interests are offered as a part of a common promotional plan of advertising and sale.
  7. “Land” and “interest in land” mean any right to own, use, or enjoy land, including, but not limited to, fee estates, life estates, leasehold estates, easements, undivided interests, licenses, and any other legal or equitable interest in real property but not including interests in the nature of personal property which are nontransferable by the purchaser.
  8. “Development” means the recreational and retirement use land itself together with any existing or future common areas, undeveloped land, improvements, or amenities which are or have been advertised or used to induce the purchase of recreational and retirement use land irrespective of whether particular improvements or amenities existed at the time of sales to particular individuals.
  9. “Consumer credit contract” means any instrument which evidences or embodies a debt incurred by a natural person for the purchase, lease, or use of recreational and retirement use land which is intended for personal, family, or household use.

History. Enact. Acts 1978, ch. 316, § 2, effective June 17, 1978; 1992, ch. 209, § 1, effective July 14, 1992.

367.474. Performance bond by subdivider — Cash in lieu of bond.

  1. In the sale or offering for sale of any subdivision which is primarily directed toward recreational or retirement use, in the sale of which any improvements are advertised but not completed, or which are completed but for which supplies of labor and material have not been paid, the subdivider shall furnish a performance bond payable to the Attorney General in an amount equal to the costs of all the improvements, including, but not limited to, roads, lakes, golf courses, and stables which are advertised prior to the sale of the land or property. The bond shall remain in effect until the advertised improvements are made; and if they are not completed within a time deemed reasonable by the Attorney General, the bond shall, after a hearing, be forfeited to the Attorney General for the use and benefit of the purchasers of the property. Surety for the bond shall be by a company authorized to write surety bonds in this state. Upon completion of the promised improvements and production of releases by all creditors with a potential lien interest in the improvements and production of a verified statement to this effect, the subdivider may petition the Attorney General for release of the bond.
  2. If the land or property offered for sale by the subdivider is located outside of the Commonwealth of Kentucky and is sold both to Kentucky residents and residents of other jurisdictions, the Attorney General may accept a bond as described in subsection (1) of this section equal to the pro rata share of improvements for that property that is reasonably anticipated to be sold to Kentucky residents.
  3. In lieu of the bonding requirements appearing in subsection (1) of this section, a subdivider may, with the approval of the Attorney General, place in an approved escrow account fifty percent (50%) of receipts of sales of the subdivided lots until the amount necessary to make the improvements has been accumulated or the improvements advertised by the subdivider made and the suppliers of labor and material paid. If the improvements are not made within a reasonable time as determined by the Attorney General, the escrow account, after hearing, shall revert to the benefit of the subdivision purchasers.

History. Enact. Acts 1978, ch. 316, § 3, effective June 17, 1978; 1988, ch. 194, § 1, effective July 15, 1988; 1992, ch. 209, § 5, effective July 14, 1992.

367.476. Offer for sale without bond prohibited.

It shall be unlawful for any subdivider to offer for sale recreational or retirement use land in which the improvements as described in KRS 367.474 (1) have not been made unless the provisions of all of KRS 367.474 have been met.

History. Enact. Acts 1978, ch. 316, § 4, effective June 17, 1978.

367.477. Statement of buyer’s rights.

  1. In the sale of any interest subject to KRS 367.472 , 367.474 , 367.4774 , 367.4776 , 367.4778 , 367.484 , 367.993 , and this section, the subdivider shall present to the buyer and obtain his signature to a written agreement or offer to purchase which designates as the date of the transaction the date on which the buyer actually signs and contains a statement of the buyer’s rights which complies with subsection (2) of this section.
  2. The statement shall:
    1. Appear under the conspicuous caption: “BUYER’S RIGHT TO CANCEL,” in bold-face type of a minimum size of fourteen (14) points; and
    2. Read as follows: “If you decide you do not want this interest you may cancel this agreement by mailing a notice to the seller. The notice must say that you do not want the interest and must be mailed before midnight of the fifth business day after you sign this agreement. The notice must be mailed to:  . . . . .  . . . . . ”
  3. A copy of the written agreement or offer to purchase containing the notice of right to cancel shall be given to the buyer on the date the buyer signs.
  4. Until the seller has complied with this section, the buyer may cancel the sale by notifying the seller in any manner and by any means of his intention to cancel.

History. Enact. Acts 1988, ch. 194, § 4, effective July 15, 1988; 1992, ch. 209, § 6, effective July 14, 1992.

367.4771. Cancellation of purchase of an interest from subdivider.

  1. In addition to any right otherwise to revoke an offer, the buyer has the right to cancel a purchase of an interest from a subdivider until midnight of the fifth business day after the day on which the buyer signs an agreement or offer to purchase which is subject to KRS 367.470 to 367.486 .
  2. Cancellation occurs when the buyer gives written notice of cancellation to the subdivider at the address stated in the agreement or offer to purchase.
  3. Notice of cancellation, if given by mail, is given when it is deposited in a mailbox, properly addressed and postage prepaid.
  4. Notice of cancellation given by the buyer need not take a particular form and is sufficient if it indicates by any form of written expression the intention of the buyer not to be bound by the purchase of an interest.

History. Enact. Acts 1988, ch. 194, § 3, effective July 15, 1988.

367.4772. Waiver or surrender of cancellation rights prohibited.

Rights of cancellation may not be waived or otherwise surrendered.

History. Enact. Acts 1988, ch. 194, § 6, effective July 15, 1988.

367.4774. Maintenance fees on Kentucky recreational and retirement use land.

  1. For any recreational and retirement use land physically located in this state, maintenance fees paid shall be held in trust by the seller of recreational and retirement use land for the benefit of the owners of individual interests. The fees shall be deposited into a separate account in a financial institution authorized to conduct business in this state. For purposes of this section, “financial institution” means a federally chartered bank, a state chartered bank, or a federally chartered savings and loan association. If any agent is designated by the seller of recreational and retirement use land to collect maintenance fees, both the seller and the agent shall be trustees of the funds collected.
  2. The maintenance fees shall be used only for the maintenance, care, and security of the development. The Attorney General shall be entitled to demand and inspect the records necessary to verify compliance with this statute.
  3. Nothing in this section shall be construed to limit the right of the seller of recreational and retirement use land from assigning for collection purposes only any maintenance fees which are more than sixty (60) days delinquent if:
    1. The assignee for collection purposes receives no more than thirty-five percent (35%) of the delinquent fees collected; and
    2. The assignee for collection purposes is not owned or controlled by the seller of recreational and retirement use land.

History. Enact. Acts 1992, ch. 209, § 2, effective July 14, 1992.

367.4776. Easement interest.

  1. Any natural person who purchases recreational and retirement use land for personal, family, or household purposes shall have an easement for the use of any common areas, undeveloped land, improvements, or amenities which are part of the development in which the person has purchased an interest or which are later added to the development. An individual person’s right to exercise this easement may be suspended for wrongful nonpayment of maintenance fees.
  2. The easement interest shall be superior to that of any other lien, encumbrance, license, or other interest in the real property.
  3. Any person who obtained or granted an encumbrance, lien, lease, license, or other interest in any of the real property upon which the development is located with actual or constructive knowledge of its intended use as recreational and retirement use land shall be estopped from denying the validity of the easement.
  4. Any waiver of this right to an easement shall be void.

History. Enact. Acts 1992, ch. 209, § 3, effective July 14, 1992.

367.4778. Status of holder or assignee of consumer credit contract — Limitation on liability.

Any holder or assignee of a consumer credit contract shall be subject to the claims and defenses that the consumer has against the seller or lessor of recreational and retirement use land notwithstanding whether the sale or lease is for a specific portion of real property; an undivided interest in real property; or an easement, license, lease, or other right to use real property. The liability of the assignee or holder under this statute shall not exceed the amount due on the contract.

History. Enact. Acts 1992, ch. 209, § 4, effective July 14, 1992.

367.478. Registration of seller — Fee.

  1. Persons offering for sale recreational and retirement use land as defined in KRS 367.472(1) shall register with the Attorney General. The Attorney General, after ascertaining that the applicant has complied with KRS 367.474 , shall issue a registration number to the person, which must appear in any advertising engaged in by the registrant to promote recreational and retirement use land sales in Kentucky.
  2. The Attorney General may charge each registrant a fee not to exceed ten dollars ($10), plus such additional fees as the Attorney General finds necessary to cover any extraordinary investigational costs necessary to investigate the registrant pursuant to KRS 367.470 to 367.486 .

History. Enact. Acts 1978, ch. 316, § 5, effective June 17, 1978.

Research References and Practice Aids

2020-2022 Budget Reference.

See State/Executive Branch Budget, 2021 Ky. Acts ch. 169, Pt. I, A, 19, (5) at 1068.

367.479. Return of payments and notes of indebtedness.

Within ten (10) days after a sale of interest has been canceled or an offer to purchase revoked, the subdivider shall tender to the buyer any payments made by the buyer and any note or other evidence of indebtedness.

History. Enact. Acts 1988, ch. 194, § 5, effective July 15, 1988.

367.480. Administrative regulations.

The Attorney General shall promulgate administrative regulations which will ensure an adequate disclosure to the purchaser of recreational and retirement use land the probable costs of any necessary maintenance of improvements of such land which may accrue in the future, or lease, mortgage, and similar financial payments, including but not limited to the costs of taxes, assessments, belonging to an association, costs of inflation, and repairs or improvements. Such disclosure shall be made both orally and in writing prior to the sale of such land.

History. Enact. Acts 1978, ch. 316, § 6, effective June 17, 1978; 1988, ch. 194, § 2, effective July 15, 1988.

367.482. Road system and grading of lots necessary prior to sale of lots.

No lots or property shall be sold which are primarily to be used for recreation and retirement use, unless the road system and grading to all such lots are completed in such a manner as to allow a full and complete ingress and egress.

History. Enact. Acts 1978, ch. 316, § 7, effective June 17, 1978.

367.484. Attorney General’s ability to obtain restraining order — Availability of remedies of Consumer Protection Act — Authority to promulgate administrative regulations.

  1. When the Attorney General has reason to believe that any person is offering recreational and retirement use land for sale in violation of KRS 367.470 to 367.486 or any administrative regulations issued by the Attorney General pursuant to KRS 367.480 , and that proceedings would be in the public interest, he may move in the name of the Commonwealth in a Circuit Court for a restraining order or temporary or permanent injunction to prohibit the offer. The action may be brought in the Circuit Court in the county in which the person resides or has his principal place of business or in the Circuit Court of the county in which the unlawful offer or sale has been or is about to be committed, or in the county in which the land is situated.
  2. A violation of KRS 367.472 , 367.474 , 367.477 , 367.4774 , 367.4776 , and 367.4778 shall be deemed to be an unfair, false, misleading, or deceptive act or practice in the conduct of trade or commerce in violation of KRS 367.170 .
  3. All the remedies, powers, and duties provided for the Attorney General by KRS 367.190 to 367.300 and 367.990 , pertaining to acts declared unlawful by KRS 367.170 , shall apply with equal force and effect to acts declared unlawful by KRS 367.470 to 367.486 .
  4. Nothing in KRS 367.470 to 367.486 shall be construed to limit or restrict the exercise of powers or the performance of the duties of the Attorney General which he is authorized to exercise or perform under any other provision of law.
  5. The Attorney General shall have the authority to adopt other administrative regulations he deems necessary for the proper administration of this chapter.

History. Enact. Acts 1978, ch. 316, § 8, effective June 17, 1978; 1992, ch. 209, § 7, effective July 14, 1992.

367.486. Exemptions for certain subdividers.

Subdividers subject to and complying with 15 U.S.C. secs. 1701 -1720, “Interstate Land Sale Full Disclosure Act” as currently administered by the Office of Interstate Land Sales Registration of the United States Department of Housing and Urban Development shall during the continuance of such compliance be exempt from the provisions of KRS 367.474 to 367.482 , but shall file duplicate copies of all registration statements with the Attorney General.

History. Enact. Acts 1978, ch. 316, § 9, effective June 17, 1978.

Underground Facility Damage Prevention

367.4901. Legislative declaration — Short title for KRS 367.4901 to 367.4917.

The General Assembly finds that the objective of underground facility damage prevention and the resulting benefits of public and workplace safety and protection of consumer services require an effective underground damage prevention procedure. KRS 367.4901 to 367.4917 , which may be cited as the “Underground Facility Damage Prevention Act of 1994,” are created to provide for this procedure and accomplish this objective.

History. Enact. Acts 1994, ch. 425, § 1, effective January 1, 1995.

Compiler’s Notes.

Section 10 of Acts 1994, ch. 425 provides that KRS 367.4901 to 367.4917 “shall become effective on January 1, 1995.”

367.4903. Definitions for KRS 367.4903 to 367.4917. [Effective until January 1, 2022]

As used in KRS 367.4903 to 367.4917 :

  1. “Underground facility” means an underground line or system used for producing, storing, conveying, transmitting, or distributing telecommunications, electricity, gas, petroleum, petroleum products, cable television, hazardous liquids, water, steam, or sewerage, including storm drainage;
  2. “Damage” means weakening of structural or lateral support or penetration of a facility coating, housing, or other protective device. It also means the partial or complete dislocation or severance of underground facilities or rendering any underground facility permanently inaccessible by the placement of a permanent structure having one (1) or more stories;
  3. “Demolition” means any operation by which a structure or mass of material is wrecked, razed, moved, or removed by means of mechanized equipment, or discharge of explosives;
  4. “Excavator” means any entity or individual, other than those exempted by KRS 367.4915 , engaged in excavation, demolition, or timber harvesting using mechanized equipment;
  5. “Operator” means any entity or individual owning or operating underground facilities to serve the public;
  6. “Excavation” means any activity that results in the movement, placement, probing, boring, or removal of earth, rock, or other material in or on the ground by the use of any tools or equipment, by the discharge of explosives, or by the harvesting of timber using mechanized equipment. Forms of excavating include but are not limited to auguring, backfilling, digging, ditching, drilling, driving, grading, piling, pulling-in, ripping, scraping, trenching, and tunneling. Driving wooden stakes by use of hand tools to a depth of six (6) inches or less below existing grade shall not constitute excavation;
  7. “Emergency” means there exists substantial likelihood that loss of life or property, the inability to restore interrupted utility service, an imminent danger to health or the environment, or the blockage of public transportation facilities will result before procedures required under KRS 367.4909 to 367.4913 can be completed;
  8. “Protection notification center” means an operator-provided notification center through which an excavator can contact the operator to enable the operator to provide the excavator with the approximate location of underground facilities;
  9. “Kentucky Contact Center” means Kentucky Underground Protection, Inc., organized as a nonprofit corporation and a multimember protection notification center providing a single telephone contact number and designated by the Kentucky Public Service Commission to be the sole recipient of 811 dialed calls through which an excavator may contact all Kentucky Contact Center members and all affected operators may receive information to enable them to provide the excavator with the approximate location of underground facilities;
  10. “Routine road maintenance” means preservation, including road repairs and resurfacing, and the replacement of signs, posts, and guardrails at the exact same location when no additional penetration of existing grade is necessary, but does not include road construction, installation of signs, posts, and guardrails, or any activity that requires penetration of existing grade;
  11. “Approximate location,” when referring to an underground facility, means:
    1. For underground metallic facilities and underground nonmetallic facilities with metallic tracer wire, a distance not to exceed the combined width of the underground facility plus eighteen (18) inches measured from the outer edge of each side of the underground facility; or
    2. For nonmetallic facilities without metallic tracer wire, the underground facility shall be located as accurately as possible from field location records and shall require notification from the operator of the inability to accurately locate the facility;
  12. “Working day” means a twenty-four (24) hour period commencing from the time of receipt of the notification by the Kentucky Contact Center except Saturday, Sunday, and holidays established by federal or state statute;
  13. “Nonintrusive excavating” means excavation using hand tools or equipment that uses air or water pressure as the direct means to break up soil for removal by hand tools or vacuum excavation;
  14. “Mechanized equipment” means mechanical power equipment, including trenchers, bulldozers, power shovels, augers, backhoes, scrapers, drills, cable and pipe plows, skidders, and yarders;
  15. “Normal excavation locate request” means a notification made to a protection notification center where a request for locating utility facilities is processed;
  16. “Emergency locate request” means a notification made to a protection notification center by an excavator to alert facility owners or operators of the need to begin immediate excavation in response to an emergency;
  17. “Design information request” means a notification made to a protection notification center by a person providing professional services and making a request in preparation for bidding, preconstruction engineering, or other advance planning efforts. A design information request may not be used for excavation purposes;
  18. “Large project” means an area of excavation occurring on or after July 1, 2016, measuring more than two thousand (2,000) feet in length. Multiple excavation notifications in an area may be considered together in determining if the excavations are part of a large project; and
  19. “Commission” means the Kentucky Public Service Commission.

History. Enact. Acts 1994, ch. 425, § 2, effective January 1, 1995; 2000, ch. 222, § 1, effective July 14, 2000; 2008, ch. 180, § 1, effective July 15, 2008; 2012, ch. 137, § 1, effective July 12, 2012; 2014, ch. 100, § 1, effective July 15, 2014; 2015 ch. 31, § 1, effective June 24, 2015; 2018 ch. 70, § 2, effective July 14, 2018.

Compiler’s Notes.

Section 10 of Acts 1994, ch. 425 provides that KRS 367.4901 to 367.4917 “shall become effective on January 1, 1995.”

367.4903. Definitions for KRS 367.4903 to 367.4917. [Effective January 1, 2022]

As used in KRS 367.4903 to 367.4917 :

  1. “Underground facility” means an underground line or system used for producing, storing, conveying, transmitting, or distributing telecommunications, electricity, gas, petroleum, petroleum products, cable television, hazardous liquids, water, steam, or sewerage, including storm drainage;
  2. “Damage” means weakening of structural or lateral support or penetration of a facility coating, housing, or other protective device. It also means the partial or complete dislocation or severance of underground facilities or rendering any underground facility permanently inaccessible by the placement of a permanent structure having one (1) or more stories;
  3. “Demolition” means any operation by which a structure or mass of material is wrecked, razed, moved, or removed by means of mechanized equipment, or discharge of explosives;
  4. “Excavator” means any entity or individual, other than those exempted by KRS 367.4915 , engaged in excavation, demolition, or timber harvesting using mechanized equipment;
  5. “Operator” means any entity or individual owning or operating underground facilities to serve the public, but does not include any entity or individual owning or operating underground storage tanks that are subject to Subchapter 60 of KRS Chapter 224;
  6. “Excavation” means any activity that results in the movement, placement, probing, boring, or removal of earth, rock, or other material in or on the ground by the use of any tools or equipment, by the discharge of explosives, or by the harvesting of timber using mechanized equipment. Forms of excavating include but are not limited to auguring, backfilling, digging, ditching, drilling, driving, grading, piling, pulling-in, ripping, scraping, trenching, and tunneling. Driving wooden stakes by use of hand tools to a depth of six (6) inches or less below existing grade shall not constitute excavation;
  7. “Emergency” means there exists substantial likelihood that loss of life or property, the inability to restore interrupted utility service, an imminent danger to health or the environment, or the blockage of public transportation facilities will result before procedures required under KRS 367.4909 to 367.4913 can be completed;
  8. “Protection notification center” means an operator-provided notification center through which an excavator can contact the operator to enable the operator to provide the excavator with the approximate location of underground facilities;
  9. “Kentucky Contact Center” means Kentucky Underground Protection, Inc., organized as a nonprofit corporation and a multimember protection notification center providing a single telephone contact number and designated by the Kentucky Public Service Commission to be the sole recipient of 811 dialed calls through which an excavator may contact all Kentucky Contact Center members and all affected member operators may receive information to enable them to provide the excavator with the approximate location of underground facilities;
  10. “Routine road maintenance” means preservation, including road repairs and resurfacing, and the replacement of signs, posts, and guardrails at the exact same location when no additional penetration of existing grade is necessary, but does not include road construction, installation of signs, posts, and guardrails, or any activity that requires penetration of existing grade;
  11. “Approximate location,” when referring to an underground facility, means:
    1. For underground metallic facilities and underground nonmetallic facilities with metallic tracer wire, a distance not to exceed the combined width of the underground facility plus twenty-four (24) inches measured from the outer edge of each side of the underground facility; or
    2. For unmapped or untonable facilities, the underground facility shall be located as accurately as possible from field location records and shall require notification from the operator of the inability to accurately locate the facility;
  12. “Working day” means every day, except Saturday, Sunday, and holidays established by federal or state statute. For purposes of measuring any period of time prescribed or allowed under the Underground Facility Damage Prevention Act of 1994, a working day shall commence at 12:01 a.m. eastern time and end at 12 midnight eastern time excluding the day the locate request was made;
  13. “Nonintrusive excavating” means excavation using hand tools or equipment that uses air or water pressure as the direct means to break up soil for removal by hand tools or vacuum excavation;
  14. “Mechanized equipment” means mechanical power equipment, including trenchers, bulldozers, power shovels, augers, backhoes, scrapers, drills, cable and pipe plows, skidders, and yarders;
  15. “Normal excavation locate request” means a notification made to a protection notification center where a request for locating utility facilities is processed;
  16. “Emergency locate request” means a notification made to a protection notification center by an excavator to alert facility owners or operators of the need to begin immediate excavation in response to an emergency;
  17. “Design information request” means a notification made to a protection notification center by a person providing professional services and making a request in preparation for bidding, preconstruction engineering, or other advance planning efforts. A design information request may not be used for excavation purposes;
  18. “Large project request” means an area of excavation occurring on or after July 1, 2016, measuring more than two thousand (2,000) feet in length. Multiple excavation notifications in an area may be considered together in determining if the excavations are part of a large project;
  19. “Commission” means the Kentucky Public Service Commission;
  20. “Person” means an individual, an entity, a foreign entity, or other legal or commercial entity;
  21. “Positive response” means an automated or written communication system provided by each protection notification center for all locate requests the center receives pursuant to KRS 367.4909 that allows excavators, locators, operators, and other interested parties to determine the status of locating an underground facility and requires response and verification by operators and excavators to comply with their respective requirements of the Underground Facility Damage Prevention Act of 1994;
  22. “Unique identification number” or “locate request number” means a unique number that any protection notification center or operator pursuant to KRS 367.4913 has assigned to a locate request for excavation;
  23. “Locator” means any entity or individual that locates lines or facilities for an operator;
  24. “Second notice” means a notice that is made by an excavator to a notification center when an operator has failed to comply with the positive response requirements under KRS 367.4909(5);
  25. “Tolerance zone” means a strip of land at least four (4) feet wide but not wider than the width of the underground facility plus two (2) feet on either side of the outer limits of the facility;
  26. “Untonable facility” means an underground facility that cannot be located from the surface using locating methods which meet industry standards and that requires additional efforts and extended time;
  27. “Work site contact” means an individual that will be present at the excavation site when the excavation will occur; and
  28. “Fiber-to-the-premises” means a service that provides network connectivity between a location and a subscriber using fiber.

HISTORY: Enact. Acts 1994, ch. 425, § 2, effective January 1, 1995; 2000, ch. 222, § 1, effective July 14, 2000; 2008, ch. 180, § 1, effective July 15, 2008; 2012, ch. 137, § 1, effective July 12, 2012; 2014, ch. 100, § 1, effective July 15, 2014; 2015 ch. 31, § 1, effective June 24, 2015; 2018 ch. 70, § 2, effective July 14, 2018; 2021 ch. 80, § 1, effective January 1, 2022.

367.4905. Permit not relieving person from complying with provisions of KRS 367.4905 to 367.4917.

A permit issued pursuant to law authorizing excavation or demolition work shall not relieve a person from the responsibility for complying with KRS 367.4905 to 367.4917 .

History. Enact. Acts 1994, ch. 425, § 3, effective January 1, 1995.

Compiler’s Notes.

Section 10 of Acts 1994, ch. 425 provides that KRS 367.4901 to 367.4917 “shall become effective on January 1, 1995.”

367.4907. Responsibility of persons engaging in nonemergency and emergency work.

Every person who engages in nonemergency timber harvesting using mechanized equipment, excavation, or demolition work shall conform to KRS 367.4905 to 367.4917 . Compliance with excavator and operator notification requirements of KRS 367.4905 to 367.4917 shall not be required of authorized persons responding to emergency situations. However, these persons shall take every reasonable precaution to protect the public safety and underground facilities of others.

History. Enact. Acts 1994, ch. 425, § 4, effective January 1, 1995; 2012, ch. 137, § 2, effective July 12, 2012.

Compiler’s Notes.

Section 10 of Acts 1994, ch. 425 provides that KRS 367.4901 to 367.4917 “shall become effective on January 1, 1995.”

367.4909. Operator to provide protection notification center access to excavators — Kentucky Contact Center — Report of excavation damage — Rejection of design information request — Color coding for temporary underground facility markers — Operator’s inability to comply due to extraordinary circumstances — Underground facilities installed after January 1, 2013. [Effective until January 1, 2022]

  1. Each operator shall provide protection notification center access to excavators.
  2. Voluntary operator membership in the Kentucky Contact Center shall satisfy the requirement of subsection (1) of this section.
  3. Each operator member of the Kentucky Contact Center shall provide and update as needed to the Kentucky Contact Center the general location of its underground facilities, the operator identity and business address, and emergency notification telephone numbers.
  4. Each operator shall report to the commission excavation damage to an underground facility used in the transportation of gas or hazardous liquid within thirty (30) calendar days of being informed of the damage. Each report of excavation damage shall be made by electronic mail or as otherwise prescribed by the commission.
  5. An operator shall respond to facility locate requests as follows:
    1. To a normal excavation locate request within two (2) working days after receiving notification from an excavator, excluding large projects;
    2. To an emergency locate request as quickly as possible but not to exceed forty-eight (48) hours after receiving notification from an excavator;
    3. To a design information request within ten (10) working days after receiving notification from the person making the request; and
    4. To a large project request within five (5) working days from the later of receiving notification from an excavator or the scheduled excavation start date for that location.
  6. An operator shall, upon receiving an emergency locate request or a normal excavation locate request:
    1. Inform the excavator of the approximate location and description of any of the operator’s facilities that may be damaged or pose a safety concern because of excavation or demolition;
    2. Inform the excavator of any other information that would assist in locating and avoiding contact with or damage to underground facilities;
    3. Unless permanent facility markers are provided, provide temporary markings to inform the excavator of the ownership and approximate location of the underground facility; and
    4. Notify the requesting party if underground facilities are not in conflict with the excavation or demolition.
  7. Upon receiving a design information request, an operator shall contact the person making the request within the time period specified in subsection (5) of this section. The operator shall:
    1. Designate with temporary underground facility markers the location of all underground facilities owned by the operator within the area of the design information request as defined in KRS 367.4903 ;
    2. Provide to the person making the design information request a description of all underground facilities owned by the operator in the area of the design information request and the location of the facilities, which may include drawings marked with a scale, dimensions, and reference points for underground utilities already built in the area or other facility records that are maintained by the operator; or
    3. Allow the person making the design information request or an authorized person to inspect the drawings or other records for all underground facilities with the proposed area of excavation at a location that is acceptable to the operator.
  8. An operator may reject a design information request based upon security considerations or if producing the information will place the operator at a competitive disadvantage, pending the operator obtaining additional information confirming the legitimacy of the notice. The operator shall notify the person making the design information request and may request additional information.
  9. Temporary underground facility markers shall consist of paint, chalk, flags, stakes, or any combination thereof and shall conform to the following standards of the American Public Works Association uniform color code:
    1. Electric power distribution and transmission Safety Red (b) Municipal electric systems Safety Red (c) Gas distribution and transmission High visibility safety yellow (d) Oil distribution and transmission High visibility safety yellow (e) Dangerous materials, product lines High visibility safety yellow (f) Telecommunication systems and cable television Safety alert orange (g) Temporary survey markings Safety pink (h) Police and fire communications Safety alert orange (i) Water systems Safety precaution blue (j) Sewer and storm drainage systems Safety green (k) Proposed excavation or construction boundaries White () Reclaimed water, slurry, and irrigation facilities l Purple
  10. If extraordinary circumstances exist, an operator shall notify the excavator of the operator’s inability to comply with this section. Extraordinary circumstances include extreme weather conditions, force majeure, disasters, or civil unrest that make timely response difficult or impossible.
  11. All underground facilities installed after January 1, 2013, shall include a means to accurately identify and locate the underground facilities from the surface.

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This subsection does not apply to the repair of existing facilities.

HISTORY: Enact. Acts 1994, ch. 425, § 5, effective January 1, 1995; 2000, ch. 222, § 2, effective July 14, 2000; 2008, ch. 180, § 2, effective July 15, 2008; 2012, ch. 137, § 3, effective July 12, 2012; 2014, ch. 100, § 2, effective July 15, 2014; 2015 ch. 31, § 2, effective June 24, 2015; 2018 ch. 70, § 3, effective July 14, 2018.

Compiler’s Notes.

Section 10 of Acts 1994, ch. 425 provides that KRS 367.4901 to 367.4917 “shall become effective on January 1, 1995.”

367.4909. Operator to provide protection notification center access to excavators — Kentucky Contact Center — Report of excavation damage — Duties of operators upon receiving requests — Rejection of design information request — Color coding for temporary underground facility markers — Operator’s inability to comply due to extraordinary circumstances — Underground facilities installed after January 1, 2013. [Effective January 1, 2022]

  1. Each operator shall provide protection notification center access to excavators.
  2. Voluntary operator membership in the Kentucky Contact Center shall satisfy the requirement of subsection (1) of this section.
  3. Each operator member of the Kentucky Contact Center shall provide and update as needed to the Kentucky Contact Center the general location of its underground facilities, the operator identity and business address, and emergency notification telephone numbers.
  4. Each operator shall report to the commission excavation damage to an underground facility used in the transportation of gas or hazardous liquid within thirty (30) calendar days of being informed of the damage. Each report of excavation damage shall be made by electronic mail or as otherwise prescribed by the commission.
  5. An operator shall respond to facility locate requests and provide a positive response as follows:
    1. To a normal excavation locate request, within two (2) working days after receiving notification from an excavator or any time prior to the scheduled excavation start date if agreed upon as provided in KRS 367.4917(7), excluding large project requests, design information requests, emergency locate requests, and unmapped or untonable facilities;
    2. To an emergency locate request, as quickly as possible but not to exceed forty-eight (48) hours after receiving notification from an excavator;
    3. To a design information request, within ten (10) working days after receiving notification from the person making the request;
    4. To a large project request, within two (2) working days the operator shall notify the excavator that an excavation area has been determined to be a large project, and the operator shall respond to the request within five (5) working days from the later of receiving notification from an excavator or prior to the scheduled excavation start date for that location if agreed upon as provided in KRS 367.4917(7);
    5. To an unmapped or untonable facility request, within two (2) working days the operator shall notify the excavator that an excavation area has been determined to be an unmapped or untonable project, and the operator shall respond to the request within five (5) working days for a normal locate request or eight (8) working days for a large project request from the later of receiving notification from an excavator or prior to the scheduled excavation start date if agreed upon as provided in KRS 367.4917(7); and
    6. To a fiber-to-the-premises broadband deployment excavation request, in locations not already served by fiber-to-the-premises, within four (4) working days.
  6. Within one (1) working day after receiving a second notice request from an excavator pursuant to KRS 367.4911(12), an operator shall locate its facility and update the positive response system.
  7. An operator shall, after receiving an emergency locate request, a normal excavation locate request, an unmapped or untonable locate request, or a large project request as provided in subsection (5) of this section:
    1. Inform the excavator of the approximate location and description of any of the operator’s underground facilities that may be damaged or pose a safety concern because of excavation or demolition;
    2. Unless permanent facility markers are provided, provide temporary markings to inform the excavator of the ownership and approximate location of the underground facility; and
    3. Provide a positive response to the requesting party.
  8. Upon receiving a design information request, an operator shall contact the person making the request within the time period specified in subsection (5) of this section. The operator shall:
    1. Designate with temporary underground facility markers the location of all underground facilities owned by the operator within the area of the design information request as defined in KRS 367.4903 ;
    2. Provide to the person making the design information request a description of all underground facilities owned by the operator in the area of the design information request and the location of the facilities, which may include drawings marked with a scale, dimensions, and reference points for underground utilities already built in the area or other facility records that are maintained by the operator; or
    3. Allow the person making the design information request or an authorized person to inspect the drawings or other records for all underground facilities with the proposed area of excavation at a location that is acceptable to the operator.
  9. An operator may reject a design information request and not be held in violation of subsection (6) of this section based upon security considerations or if producing the information will place the operator at a competitive disadvantage, pending the operator obtaining additional information confirming the legitimacy of the notice. The operator shall notify the person making the design information request and may request additional information.
  10. Temporary underground facility markers shall consist of paint, chalk, flags, stakes, or any combination thereof and shall conform to the following standards of the American Public Works Association uniform color code:
    1. Electric power distribution and transmission Safety Red (b) Municipal electric systems Safety Red (c) Gas distribution and transmission High visibility safety yellow (d) Oil distribution and transmission High visibility safety yellow (e) Dangerous materials, product lines High visibility safety yellow (f) Telecommunication systems and cable television Safety alert orange (g) Temporary survey markings Safety pink (h) Police and fire communications Safety alert orange (i) Water systems Safety precaution blue (j) Sewer and storm drainage systems Safety green (k) Proposed excavation or construction boundaries White () Reclaimed water, slurry, and irrigation facilities l Purple (m) Fiber optic and critical telecommunication Safety alert orange
  11. If extraordinary circumstances exist, an operator shall notify the excavator of the operator’s inability to comply with this section. Notification under this subsection shall temporarily relieve the operator of complying with subsections (5) and (6) of this section until the operator can recover from the extraordinary circumstances. Extraordinary circumstances include weather that makes it impossible for any combination of facility markers identified in subsection (10) of this section to be used, extreme weather conditions, force majeure, disasters, or civil unrest that make timely response difficult or impossible.
  12. All underground facilities installed after January 1, 2013, shall include a means to accurately identify and locate the underground facilities from the surface. This subsection does not apply to the repair of existing facilities.

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HISTORY: Enact. Acts 1994, ch. 425, § 5, effective January 1, 1995; 2000, ch. 222, § 2, effective July 14, 2000; 2008, ch. 180, § 2, effective July 15, 2008; 2012, ch. 137, § 3, effective July 12, 2012; 2014, ch. 100, § 2, effective July 15, 2014; 2015 ch. 31, § 2, effective June 24, 2015; 2018 ch. 70, § 3, effective July 14, 2018; 2021 ch. 80, § 2, effective January 1, 2022.

367.4911. Excavator or person responsible for excavation to notify operator of work schedule — Duties of entities responsible for excavation and demolition. [Effective until January 1, 2022]

    1. Each excavator, or person responsible for an excavation, planning excavation or demolition work shall, not less than two (2) full working days nor more than ten (10) full working days prior to commencing work, notify each affected operator of the excavator’s intended work and work schedule. Contacting the applicable protection notification centers shall satisfy this requirement. (1) (a) Each excavator, or person responsible for an excavation, planning excavation or demolition work shall, not less than two (2) full working days nor more than ten (10) full working days prior to commencing work, notify each affected operator of the excavator’s intended work and work schedule. Contacting the applicable protection notification centers shall satisfy this requirement.
    2. An excavator may commence work before the two (2) full working days provided for in paragraph (a) of this subsection have elapsed if all affected operators have notified the person that the location of all the affected operators’ facilities have been marked or that they have no facilities in the area of the proposed excavation, demolition, or timber harvesting.
  1. Locate requests are valid for twenty-one (21) calendar days from the day of the initial request.
  2. Each excavator shall provide each applicable protection notification center with adequate information regarding:
    1. The name of the individual making the notification;
    2. The excavator’s name, address, and a telephone number;
    3. The excavation or demolition site location or locations, each of which shall not exceed two thousand (2,000) feet in length unless the excavator and operator agree to a larger area, the city or community, county and street address, including the nearest cross street;
    4. The type and extent of excavation or demolition to be performed;
    5. A contact name and telephone number of the person responsible for the work to be performed.
  3. If more than one (1) excavator will operate at the same site, each excavator shall notify the protection notification centers individually. Notification by an excavator will serve as notification for any of that excavator’s employees. Failure by an excavator to notify the protection notification center does not relieve individual employees of responsibility.
  4. The excavator shall inform and provide to excavation or demolition site employees:
    1. The underground facility location provided by each operator;
    2. Any related safety information provided by each operator; and
    3. The locate request identification number assigned by each protection notification center.
  5. The excavator shall protect and preserve temporary underground facility markers until the scheduled excavation or demolition is completed.
  6. If, after the two (2) day period provided by KRS 367.4909(5)(a), the excavator finds evidence of an unmarked underground facility at the site, he shall immediately notify the protection notification center.
  7. The excavator shall contact the protection notification center to request remarking two (2) working days in advance of the expiration of each twenty-one (21) day period while excavation or demolition continues or if:
    1. The markings of any underground facility have been removed or are no longer visible; or
    2. The excavator has changed the work plan or location previously filed.
    1. Each excavator who conducts or is responsible for any excavation or demolition that results in underground facility damage shall cease excavation or demolition activities and notify all affected operators of the location and nature of the underground facility damage immediately upon discovery of the damage. (9) (a) Each excavator who conducts or is responsible for any excavation or demolition that results in underground facility damage shall cease excavation or demolition activities and notify all affected operators of the location and nature of the underground facility damage immediately upon discovery of the damage.
    2. Any individual or entity that is otherwise exempt from the requirements of KRS 367.4901 to 367.4917 under KRS 367.4915 , who conducts or is responsible for any excavation or demolition that results in underground facility damage to an underground facility or system used for producing, storing, conveying, transmitting, or distributing gas, petroleum, petroleum products, or hazardous liquids, shall cease excavation or demolition activities and notify all affected operators of the location and nature of the underground facility damage immediately upon discovery of the damage.
    3. If the underground facility damage causes concern for public or workplace safety, the excavator, or the individual or entity that is otherwise exempt from the requirements of KRS 367.4901 to 367.4917 under KRS 367.4915 , shall notify appropriate public safety agencies of the location and nature of the safety concern.
    4. If the underground facility damage results in the escape or suspected escape of any flammable, toxic, or corrosive gas or liquid, the excavator, or the individual or entity that is otherwise exempt from the requirements of KRS 367.4901 to 367.4917 under KRS 367.4915, shall cease excavation or demolition activities and immediately report to the appropriate authorities by calling the 911 emergency telephone number.
  8. When excavation or demolition is necessary within the approximate location of the underground facility, the excavator shall hand-dig or use nonintrusive means to avoid damage to the underground facility.
  9. Upon request by an operator or when the proposed excavation location cannot be accurately identified, an excavator shall mark the boundaries of the location to be excavated using the procedure set forth in KRS 367.4909(9)(k). After marking the boundaries, the excavator shall contact the protection notification center or centers. The requirements of KRS 367.4909(5) to (10) are reestablished upon the operator receiving notification of this marking from the protection notification center or centers. This marking shall not alter, or relieve the excavator from complying with, the requirements of KRS 367.4905 to 367.4917 .

HISTORY: Enact. Acts 1994, ch. 425, § 6, effective January 1, 1995; 2000, ch. 222, § 3, effective July 14, 2000; 2008, ch. 180, § 3, effective July 15, 2008; 2012, ch. 137, § 4, effective July 12, 2012; 2014, ch. 100, § 3, effective July 15, 2014; 2015 ch. 31, § 3, effective June 24, 2015; 2018 ch. 70, § 4, effective July 14, 2018; 2021 ch. 105, § 1, effective June 29, 2021.

Compiler’s Notes.

Section 10 of Acts 1994, ch. 425 provides that KRS 367.4901 to 367.4917 “shall become effective on January 1, 1995.”

Legislative Research Commission Notes.

(1/1/2022). This statute was amended by 2021 Ky. Acts chs. 80 and 105, which do not appear to be in conflict and have been codified together.

367.4911. Excavator or person responsible for excavation to notify operator’s notification center of work schedule — Duties of entities responsible for excavation and demolition. [Effective January 1, 2022]

    1. Each excavator, or person responsible for an excavation, planning excavation, or demolition work shall, not less than two (2) full working days nor more than ten (10) full working days prior to commencing work, unless a future start date is agreed upon as provided in KRS 367.4917(7), notify each affected operator’s designated protection notification center of the excavator’s intended work and work schedule. (1) (a) Each excavator, or person responsible for an excavation, planning excavation, or demolition work shall, not less than two (2) full working days nor more than ten (10) full working days prior to commencing work, unless a future start date is agreed upon as provided in KRS 367.4917(7), notify each affected operator’s designated protection notification center of the excavator’s intended work and work schedule.
    2. The two (2) full working days provided for in paragraph (a) of this subsection have elapsed if all affected operators have notified the person.
  1. Locate requests are valid for twenty-one (21) calendar days from the day of the initial request.
  2. Each excavator shall provide each applicable protection notification center with adequate information regarding:
    1. Name and phone number of the excavator or person requesting the underground facility locate;
    2. Approximate location and type of work being performed by the excavator, including if the request involves a fiber-to-the-premises broadband deployment excavation;
    3. Name and phone number of work site contact;
    4. Estimated start date and start time of excavation; and
    5. The excavation or demolition site location or locations, each of which shall not exceed five thousand (5,000) feet in length unless the excavator and operator agree to a larger area, the city or community, county and street address, including the nearest cross street.
  3. If more than one (1) excavator will operate at the same site, each excavator shall notify the protection notification centers individually. Notification by an excavator will serve as notification for any of that excavator’s employees. Failure by an excavator to notify the protection notification center does not relieve individual employees of responsibility.
  4. The excavator shall inform and provide to excavation or demolition site employees:
    1. The underground facility location provided by each operator;
    2. Any related safety information provided by each operator; and
    3. The locate request identification number assigned by each protection notification center.
  5. The excavator shall protect and preserve temporary underground facility markers until the scheduled excavation or demolition is completed.
  6. If, after the response time provided by KRS 367.4909(5), the excavator finds evidence of an unmarked underground facility at the site, he or she shall immediately notify a protection notification center. When an excavator has complied with subsection (1) of this section and evidence of an unmarked underground facility is uncovered, the operator shall have six (6) business hours to identify the underground facility.
  7. The excavator shall contact the protection notification center to request remarking two (2) working days in advance of the expiration of each twenty-one (21) day period while excavation or demolition continues or if:
    1. The markings of any underground facility have been removed or are no longer visible; or
    2. The excavator has changed the work plan or location previously filed.
    1. Each excavator who conducts or is responsible for any excavation or demolition that results in underground facility damage shall cease excavation or demolition activities and notify all affected operators of the location and nature of the underground facility damage immediately upon discovery of the damage. (9) (a) Each excavator who conducts or is responsible for any excavation or demolition that results in underground facility damage shall cease excavation or demolition activities and notify all affected operators of the location and nature of the underground facility damage immediately upon discovery of the damage.
    2. Any individual or entity that is otherwise exempt from the requirements of KRS 367.4901 to 367.4917 under KRS 367.4915 , who conducts or is responsible for any excavation or demolition that results in underground facility damage to an underground facility or system used for producing, storing, conveying, transmitting, or distributing gas, petroleum, petroleum products, or hazardous liquids, shall cease excavation or demolition activities and notify all affected operators of the location and nature of the underground facility damage immediately upon discovery of the damage.
    3. If the underground facility damage causes concern for public or workplace safety, the excavator, or the individual or entity that is otherwise exempt from the requirements of KRS 367.4901 to 367.4917 under KRS 367.4915 , shall notify appropriate public safety agencies of the location and nature of the safety concern.
    4. If the underground facility damage results in the escape or suspected escape of any flammable, toxic, or corrosive gas or liquid, the excavator, or the individual or entity that is otherwise exempt from the requirements of KRS 367.4901 to 367.4917 under KRS 367.4915, shall cease excavation or demolition activities and immediately report to the appropriate authorities by calling the 911 emergency telephone number.
  8. When excavation or demolition is necessary within the tolerance zone, the excavator shall hand-dig or use nonintrusive means to avoid damage to the underground facility, except that mechanized equipment may be used:
    1. To remove the pavement or other manmade hard surface if used during the initial penetration only to the depth necessary and if an individual other than the equipment operator visually monitors the excavation activity;
    2. To remove indigenous rock if used during the initial penetration only to the extent necessary, if an individual other than the equipment operator visually monitors the excavation activity, and if the excavation is planned to avoid damage to the underground facility. However, if the underground facility contains flammable, toxic, corrosive, or hazardous products, the excavator shall notify the facility owner of the excavator’s intent prior to removing indigenous rock;
    3. To remove materials that are more than twelve (12) inches in any direction from the outer edge of the located facility if the excavator visually identifies the precise location of the underground facility or visually confirms that no facility is present within the depth of the excavation, if an individual other than the equipment operator visually monitors the excavation activity, and if the excavation is planned to avoid damage to the underground facility; and
    4. To place shores into an existing excavation or remove shores from an existing excavation.
  9. Upon request by an operator or when the proposed excavation location cannot be accurately identified, an excavator shall mark the boundaries of the location to be excavated using the procedure set forth in KRS 367.4909(10)(k). After marking the boundaries, the excavator shall contact the protection notification center or centers. The requirements of KRS 367.4909(5) to (11) are reestablished upon the operator receiving notification of this marking from the protection notification center or centers. This marking shall not alter, or relieve the excavator from complying with, the requirements of KRS 367.4905 to 367.4917 .
  10. If an operator has failed to give a positive response within the timeframes provided in KRS 367.4909 (5), the excavator shall submit a second notice to the protection notification center. If one (1) working day after receiving a second notice request as provided in KRS 367.4909 (6), the operator has still failed to give a positive response, an excavator that has fully complied with this section shall not be deemed liable for any damages to an underground facility that would have been located if the operator had complied with the operator’s duties under KRS 367.4909, except for damages to a person or an underground facility due to negligence or intentional misconduct of an excavator. This subsection shall not apply to any underground facility used to transport gas or hazardous liquid subject to the federal pipeline safety laws, 49 U.S.C. secs. 60101 et seq.

HISTORY: Enact. Acts 1994, ch. 425, § 6, effective January 1, 1995; 2000, ch. 222, § 3, effective July 14, 2000; 2008, ch. 180, § 3, effective July 15, 2008; 2012, ch. 137, § 4, effective July 12, 2012; 2014, ch. 100, § 3, effective July 15, 2014; 2015 ch. 31, § 3, effective June 24, 2015; 2018 ch. 70, § 4, effective July 14, 2018; 2021 ch. 105, § 1, effective June 29, 2021; 2021 ch. 80, § 3, effective January 1, 2022.

367.4913. Duties of protection notification center — Board of directors of Kentucky Contact Center — Kentucky Contact Center to serve all counties. [Effective until January 1, 2022]

  1. Each protection notification center shall:
    1. Operate the protection notification center during all working days;
    2. Provide a locate request identification number to the excavator for each excavation or demolition location request;
    3. Promptly after receiving an excavation or demolition work notification from an excavator, provide to each of its affected operator members the excavator information required by KRS 367.4911(3);
    4. Maintain a list of all its operator member’s identities, business address and business and emergency telephone numbers and record this information in accordance with KRS 64.012 with the county clerk of each county where the operator member has underground facilities. The county clerk shall provide this information upon request for the actual cost of providing a copy, to be paid by the requesting party to the county clerk. The county clerk shall assume no liability associated with the receipt of this information from the protection notification center or for subsequent provision of this same information to the requesting party;
    5. Make the operator members information list available to any person for inspection at its place of business without charge or provide a copy of the list to any person for any county upon request for a fee not to exceed the actual cost of providing a copy;
    6. Define and adopt policies and procedures for processing design information requests; and
    7. Provide the person making a design information request a list of identified operators that will receive notification and notify those operators.
  2. The Kentucky Contact Center shall be governed by a board of directors composed of representatives of member operators who are elected by the membership. Board seats may be filled by representatives of the following:
    1. A natural gas provider;
    2. An electric provider;
    3. A telecommunications provider;
    4. A water/sewer provider;
    5. An interstate pipeline operator;
    6. A municipal utility operator; and
    7. An advisory, nonvoting representative of one (1) of the following:
      1. Home Builders Association of Kentucky;
      2. National Electrical Contractors Association;
      3. Associated General Contractors of Kentucky; or
      4. Kentucky Association of Plumbing, Heating-Cooling Contractors.
  3. The Kentucky Contact Center’s board of directors shall establish the method to calculate the cost of service provided by the center.
  4. The Kentucky Contact Center shall serve all Kentucky counties.

History. Enact. Acts 1994, ch. 425, § 7, effective January 1, 1995; 2000, ch. 222, § 4, effective July 14, 2000; 2012, ch. 137, § 5, effective July 12, 2012; 2014, ch. 100, § 4, effective July 15, 2014; 2015 ch. 31, § 4, effective June 24, 2015.

Compiler’s Notes.

Section 10 of Acts 1994, ch. 425 provides that KRS 367.4901 to 367.4917 “shall become effective on January 1, 1995.”

Legislative Research Commission Notes.

(7/12/2012). Under the authority of KRS 7.136(1), the Reviser of Statutes has changed the internal format of this statute from the way it appeared in 2012 Ky. Acts ch. 137, sec. 5, to correct a manifest clerical or typographical error. The words in the text were not changed.

367.4913. Duties of protection notification center — Board of directors of Kentucky Contact Center — Kentucky Contact Center to serve all counties. [Effective January 1, 2022]

  1. All protection notification centers shall:
    1. Provide locate request services during working days and provide an emergency contact number for incidents occurring outside the working day;
    2. Provide a positive response system for excavators, locators, operators, and other interested parties to determine the status of locating an underground facility;
    3. Provide any excavation request with an identification number and the names of the facility owners or operators who will be notified for each locate request;
    4. Promptly after receiving an excavation or demolition work notification from an excavator, provide to each of its affected operator members the excavator information required by KRS 367.4911(3);
    5. Maintain a list of all its operator members, their business addresses and their business and emergency telephone numbers and provide this information in accordance with KRS 64.012 with the county clerk of each county where the operator member has underground facilities. The county clerk shall provide this information upon request for the actual cost of providing a copy, to be paid by the requesting party to the county clerk. The county clerk shall assume no liability associated with the receipt of this information from the protection notification center or for subsequent provision of this same information to the requesting party;
    6. Make the operator members information list available to any person for inspection at its place of business without charge or provide a copy of the list to any person for any county upon request for a fee not to exceed the actual cost of providing a copy;
    7. Define and adopt policies and procedures for processing design information requests;
    8. Provide the person making a design information request a list of identified operators that will receive notification and notify those operators;
    9. Maintain the following information provided by excavators for all requests to locate facilities for at least five (5) years from the date of the request:
      1. Name and phone number of the excavator or person requesting the underground facility locate;
      2. Location and type of work being performed by the excavator;
      3. Name and phone number of work site contact;
      4. Name, address, and phone number of underground facility operators; and
      5. Estimated start date and start time of excavation;
    10. Provide contact information for the protection notification center on its Web site or pursuant to paragraph (e) of this subsection; and
    11. Provide public awareness education and damage prevention programs in the manner and amount determined by each protection notification center.
  2. The Kentucky Contact Center shall be governed by a board of directors who are elected by the membership. Board seats shall be composed of no more than twenty-one (21) voting members and six (6) nonvoting members and may be filled by representatives of the following:
    1. A natural gas provider;
    2. An electric provider;
    3. A telecommunications provider;
    4. A water/sewer provider;
    5. An interstate pipeline operator;
    6. A municipal utility operator;
    7. A commercial excavator;
    8. An oil and gas operator; and
    9. At least one (1) but not more than six (6) advisory, nonvoting members representing the following:
      1. Public Service Commission;
      2. Kentucky Transportation Cabinet;
      3. Home Builders Association of Kentucky;
      4. National Electrical Contractors Association;
      5. Associated General Contractors of Kentucky; or
      6. Kentucky Association of Master Contractors.
  3. Nonvoting members shall be elected by a majority of the voting members and shall serve for one (1) year terms which expire on December 31. Nonvoting members are eligible for reappointment by a majority of the voting members.
  4. The Kentucky Contact Center’s board of directors shall establish the method to calculate the cost of service provided by the center.
  5. The Kentucky Contact Center shall serve all Kentucky counties.

HISTORY: Enact. Acts 1994, ch. 425, § 7, effective January 1, 1995; 2000, ch. 222, § 4, effective July 14, 2000; 2012, ch. 137, § 5, effective July 12, 2012; 2014, ch. 100, § 4, effective July 15, 2014; 2015 ch. 31, § 4, effective June 24, 2015; 2021 ch. 80, § 4, effective January 1, 2022.

367.4915. Activities exempt from KRS 367.4905 to 367.4917.

Except as provided in KRS 367.4911(9), the requirements of KRS 367.4905 to 367.4917 shall not apply to the following:

  1. Excavation by an operator on its own easement except where that easement is crossed by another operator’s facilities;
  2. Routine road maintenance or railroad maintenance or repairs;
  3. Tilling of soil for agricultural purposes;
  4. Excavators excavating on private property, using nonmechanized equipment, if there is no encroachment on any operator’s right-of-way or easement;
  5. The opening of a grave in a cemetery;
  6. A solid waste disposal site which is properly permitted;
  7. Coal mining operations which are currently regulated under KRS Chapter 350;
  8. A utility operator or utility operator subcontractor performing emergency work as defined in KRS 367.4903 ;
  9. Leak migration testing using metal probes inserted by hand by an authorized representative of the operator;
  10. Any nonintrusive excavating performed by an operator or his subcontractor to locate the operator’s underground facilities in response to a notice of excavation from the notification center, if all reasonable precautions have been taken to protect the underground facilities; or
  11. Nonintrusive excavating to inspect or perform maintenance for an existing utility pole.

History. Enact. Acts 1994, ch. 425, § 8, effective January 1, 1995; 2000, ch. 222, § 5, effective July 14, 2000; 2008, ch. 180, § 4, effective July 15, 2008; 2012, ch. 137, § 6, effective July 12, 2012; 2021 ch. 105, § 2, effective June 29, 2021.

Compiler’s Notes.

Section 10 of Acts 1994, ch. 425 provides that KRS 367.4901 to 367.4917 “shall become effective on January 1, 1995.”

367.4917. Penalties — Payment and apportionment of fines — Enforcement by Public Service Commission — Administrative regulations. [Effective until January 1, 2022]

  1. An excavator who fails to comply with any provision of KRS 367.4911 , or an operator who fails to comply with any provision of KRS 367.4909 , shall be guilty of endangering underground facilities and may be subject to a fine of two hundred and fifty dollars ($250) for the first offense, no more than one thousand dollars ($1,000) for the second offense within one (1) year, and no more than three thousand dollars ($3,000) for the third and any subsequent offense.
  2. A protection notification center that fails to comply with any provision of KRS 367.4913 shall be subject to a fine of one thousand dollars ($1,000) for each offense.
  3. A person that knowingly provides false notice to a utility notification center of an emergency as defined in KRS 367.4903 shall be subject to a fine of one thousand dollars ($1,000) for each offense.
  4. Any person who violates any provision of the Underground Facility Damage Prevention Act of 1994, KRS 367.4901 to 367.4917 , that involves damage to a facility containing any flammable, toxic, corrosive, or hazardous material or results in the release of any flammable, toxic, corrosive, or hazardous material shall be subject to a fine not to exceed one thousand dollars ($1,000) for each offense. The penalties of this subsection are not in conflict with and are in addition to civil damages for personal injury or property damage.
    1. Except as provided in subsection (6) of this section, all fines recovered for a violation of this section shall be paid to the general fund of the state, county, city, or fire protection agency which issued the citation. (5) (a) Except as provided in subsection (6) of this section, all fines recovered for a violation of this section shall be paid to the general fund of the state, county, city, or fire protection agency which issued the citation.
    2. In the event that more than one (1) government agency was involved, the court shall direct an apportionment of the fines.
    3. Failure to comply with the provisions of the Underground Facility Damage Prevention Act of 1994, KRS 367.4901 to 367.4917 , may be determined at the conclusion of an investigation and shall be based on evidence available to state, county, or city officials, law enforcement, or fire protection agencies which issue the citation.
  5. The commission shall have statewide authority to enforce and assess civil penalties provided for in this section and to seek injunctive relief for any violation that results in damage to an underground facility used to transport gas or hazardous liquid subject to the federal pipeline safety laws, 49 U.S.C. secs. 60101 et seq. Once the commission initiates an investigation or undertakes an enforcement action against a person for an alleged violation, no other state, county, city, or fire protection agency shall initiate or continue any enforcement action against the person for the same alleged violation. Any action to recover penalties assessed pursuant to this subsection shall be brought in the Franklin Circuit Court. All penalties recovered by the commission shall be paid into the State Treasury and credited to the account of the commission.
  6. The commission may promulgate administrative regulations in accordance with KRS Chapter 13A to enforce the Underground Facility Damage Prevention Act of 1994. The commission shall exercise its authority under the Underground Facility Damage Prevention Act of 1994 in accordance with the rules and procedures set forth in KRS Chapter 278 and all applicable administrative regulations promulgated by the commission.

History. Enact. Acts 1994, ch. 425, § 9, effective January 1, 1995; 2000, ch. 222, § 6, effective July 14, 2000; 2008, ch. 180, § 5, effective July 15, 2008; 2012, ch. 137, § 7, effective July 12, 2012; 2014, ch. 100, § 5, effective July 15, 2014; ch. 116, § 1, effective July 15, 2014; 2015 ch. 31, § 5, effective June 24, 2015; 2018 ch. 70, § 5, effective July 14, 2018.

Compiler’s Notes.

Section 10 of Acts 1994, ch. 425 provides that KRS 367.4901 to 367.4917 “shall become effective on January 1, 1995.”

Legislative Research Commission Notes.

(7/15/2014). This statute was amended by 2014 Ky. Acts chs. 100 and 116. Where these Acts are not in conflict, they have been codified together. Where a conflict exists, Acts ch. 116, wich was last enacted by the General Assembly, prevails under KRS 446.250 .

367.4917. Penalties — Payment and apportionment of civil penalties — Enforcement by Public Service Commission — Written agreement form — Administrative regulations. [Effective January 1, 2022]

  1. An excavator who fails to comply with any provision of KRS 367.4911 , or an operator who fails to comply with any provision of KRS 367.4909 may be subject to a civil penalty of two hundred fifty dollars ($250) for the first violation, no more than one thousand dollars ($1,000) for the second violation and no more than three thousand dollars ($3,000) for the third and any subsequent violation. A violation shall be considered a first violation under this subsection if more than three hundred sixty-five (365) days have elapsed since the last incident attributable to a person in violation of KRS 367.4909 or 367.4911 . If a person commits a violation in the course and scope of employment, the penalties shall be imposed on the employer.
  2. A protection notification center that fails to comply with any provision of KRS 367.4913 shall be subject to a civil penalty of one thousand dollars ($1,000) for each violation.
  3. A person that knowingly provides false notice to a utility notification center of an emergency as defined in KRS 367.4903 shall be subject to a civil penalty of one thousand dollars ($1,000) for each violation.
  4. Any person who violates any provision of the Underground Facility Damage Prevention Act of 1994, KRS 367.4901 to 367.4917 , that involves damage to a facility containing any flammable, toxic, corrosive, or hazardous material or results in the release of any flammable, toxic, corrosive, or hazardous material shall be subject to a civil penalty, in addition to the civil penalty in subsection (1) of this section, not to exceed one thousand dollars ($1,000) for each violation. The penalties of this subsection are not in conflict with and are in addition to civil damages for personal injury or property damage.
    1. Except as provided in subsection (6) of this section, all civil penalties recovered for a violation of this section shall be paid to the general fund of the state, county, city, or fire protection agency which issued the citation. (5) (a) Except as provided in subsection (6) of this section, all civil penalties recovered for a violation of this section shall be paid to the general fund of the state, county, city, or fire protection agency which issued the citation.
    2. In the event that more than one (1) government agency was involved, the court shall direct an apportionment of the civil penalties.
    3. Failure to comply with the provisions of the Underground Facility Damage Prevention Act of 1994, KRS 367.4901 to 367.4917 , may be determined at the conclusion of an investigation and shall be based on evidence available to state, county, or city officials, law enforcement, or fire protection agencies which issue the citation.
  5. The commission shall have statewide authority to enforce and assess civil penalties provided for in this section and to seek injunctive relief for any violation that results in damage to an underground facility used to transport gas or hazardous liquid subject to the federal pipeline safety laws, 49 U.S.C. secs. 60101 et seq. Once the commission initiates an investigation or undertakes an enforcement action against a person for an alleged violation, no other state, county, city, or fire protection agency shall initiate or continue any enforcement action against the person for the same alleged violation. Any action to recover penalties assessed pursuant to this subsection shall be brought in the Franklin Circuit Court. All penalties recovered by the commission shall be paid into the State Treasury and credited to the account of the commission.
  6. The commission shall make available on its Web site a written agreement form for an operator and an excavator to agree to a date or series of dates by which time the locate request must be completed if different from those dates established in KRS 367.4909 . The form shall contain but is not limited to the parties’ names, the locate request number, the date requested, and the location. The parties shall make the executed agreement form available upon request of the commission.
  7. The commission may promulgate administrative regulations in accordance with KRS Chapter 13A to enforce the Underground Facility Damage Prevention Act of 1994. The commission shall exercise its authority under the Underground Facility Damage Prevention Act of 1994 in accordance with the rules and procedures set forth in KRS Chapter 278 and all applicable administrative regulations promulgated by the commission.

HISTORY: Enact. Acts 1994, ch. 425, § 9, effective January 1, 1995; 2000, ch. 222, § 6, effective July 14, 2000; 2008, ch. 180, § 5, effective July 15, 2008; 2012, ch. 137, § 7, effective July 12, 2012; 2014, ch. 100, § 5, effective July 15, 2014; ch. 116, § 1, effective July 15, 2014; 2015 ch. 31, § 5, effective June 24, 2015; 2018 ch. 70, § 5, effective July 14, 2018; 2021 ch. 80, § 5, effective January 1, 2022.

Misrepresentation of Geographical Location

367.500. Listing of floral business in telephone directory — Misrepresentation of geographical location prohibited — Application.

  1. A person may not misrepresent the geographical location of a business that derives fifty percent (50%) or more of its gross income from the sale or arranging for the sale of flowers or floral arrangements in the listing of the business in a telephone directory or other directory assistance database.
  2. A person is considered to misrepresent the geographical location of a business in a telephone directory or other directory assistance database if the name of the business indicates that the business is located in a geographical area and:
    1. The business is not located within the geographical area indicated;
    2. The listing fails to identify the municipality and state of the business’s geographical location; and
    3. A telephone call to the local telephone number listed in the telephone directory or directory assistance database routinely is forwarded or transferred to a location that is outside the calling area covered by the telephone directory or directory assistance database in which the number is listed.
  3. A person may place a directory listing for a business described in subsection (1) of this section whose name indicates that it is located in a geographical area that is different from the geographical area in which the business is actually located, only if a conspicuous notice in the listing states the municipality and state in which the business is located.
  4. This section does not apply to a publisher of a telephone directory or other publication or a provider of a directory assistance service publishing or providing information about another business.
  5. This section creates no duty and imposes no obligation upon anyone other than the business that is the subject of the advertisement or listing.
  6. This section applies only to information supplied to a telephone directory published after June 26, 2007, or to information supplied for entry into a directory assistance database after June 26, 2007.

History. Enact. Acts 2007, ch. 134, § 1, effective June 26, 2007.

Subscription Sales of Printed Material

367.510. “Solicitor” defined.

As used in KRS 367.513 to 367.530 unless the context requires otherwise, “solicitor” means any person engaged in the business of soliciting orders for magazines, periodicals, encyclopedias, books, Bibles, or other printed matter or material on a subscription basis and payable on installments or on a cash basis or by contract or note, the delivery of which magazines, periodicals, encyclopedias, books, Bibles, or other printed material is contingent upon a future event, such as a down payment or one (1) or more installment payments, in any county in this state.

History. Enact. Acts 1972, ch. 55, § 1; 1974, ch. 281, § 1, effective July 1, 1974.

NOTES TO DECISIONS

1.In General.

The utility of the Kentucky long arm statute is negated if the consumer who is the potential plaintiff in an action involving the solicitation contract cannot identify or locate the subscription solicitor who knocks on the door or rings the telephone today and then is seen or heard no more. Budget Marketing, Inc. v. Commonwealth, 587 S.W.2d 245, 1979 Ky. LEXIS 290 ( Ky. 1979 ).

2.Constitutionality.

The legislature can constitutionally require nonresident engaged in the business of soliciting orders, via interstate telephone, for magazines on a subscription basis, the delivery of which is contingent on a future event, to register in each county in the Commonwealth in which they solicit. Budget Marketing, Inc. v. Commonwealth, 587 S.W.2d 245, 1979 Ky. LEXIS 290 ( Ky. 1979 ).

3.Applicability.

Even where a continuing relationship has arisen the “solicitor” appellation will not apply if the printed material is delivered before payment is required or C.O.D. Budget Marketing, Inc. v. Commonwealth, 587 S.W.2d 245, 1979 Ky. LEXIS 290 ( Ky. 1979 ).

It is clear that the registration plan extends only to solicitations conducted in person or by telephone, and does not apply to solicitations through the use of the mails or the advertising media. Budget Marketing, Inc. v. Commonwealth, 587 S.W.2d 245, 1979 Ky. LEXIS 290 ( Ky. 1979 ).

Opinions of Attorney General.

Any ordinance passed by the fiscal court under KRS 67.083 providing for solicitors’ licenses as a police measure would be in conflict with KRS 367.510 to 367.515 , which are designed as state police measures to protect the public generally from fraudulent and deceptive practices which may emerge from solicitation of orders for magazines and books and certain other matter, but the fiscal court can pass an ordinance under authority of Const., § 181 providing for solicitors’ licenses as a license or occupational tax measure if it is nondiscriminatory, nonconfiscatory and based upon reasonable classification. OAG 74-614 .

Colporteurs, including members of the Jehovah’s Witness faith, are not required to register pursuant to this section. OAG 74-687 .

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

367.513. Registration of solicitor of subscription sales of printed material — Information required.

Beginning July 1, 1974, every solicitor shall register annually with the county clerk of the county in which such solicitations are to occur and shall furnish to the county clerk the following information:

  1. Whether solicitations shall be made in person or by telephone, and if made in person shall give an adequate description, including state of issue and license number, of any motor vehicle to be used in soliciting sales of printed material, or the telephone number from which telephone solicitations shall be made;
  2. His name and Social Security number;
  3. The mailing address and telephone number of his permanent residence; and
  4. The name, address and telephone number of the company or organization he represents, if any.

History. Enact. Acts 1974, ch. 281, § 2, effective July 1, 1974; 1978, ch. 384, § 498, effective June 17, 1978.

NOTES TO DECISIONS

1.Constitutionality.

The legislature can constitutionally require nonresident engaged in the business of soliciting orders, via interstate telephone, for magazines on a subscription basis, the delivery of which is contingent on a future event, to register in each county in the Commonwealth in which they solicit. Budget Marketing, Inc. v. Commonwealth, 587 S.W.2d 245, 1979 Ky. LEXIS 290 ( Ky. 1979 ).

2.Applicability.

This section does not apply to the physical activity of soliciting orders for printed materials since the statute is couched in terms which apply it to those persons engaged in the business of soliciting orders but not to each telephone operator of the solicitor and, thus, the statute would not apply to publishers seeking to sell their own product because they are in the business of publishing, not soliciting; on the other hand, a person engaged in the business of solicitation cannot escape the reach of KRS 367.510 to 367.515 merely because of a collateral business venture. Budget Marketing, Inc. v. Commonwealth, 587 S.W.2d 245, 1979 Ky. LEXIS 290 ( Ky. 1979 ).

Even where a continuing relationship has arisen the “solicitor” appellation will not apply if the printed material is delivered before payment is required or C.O.D. Budget Marketing, Inc. v. Commonwealth, 587 S.W.2d 245, 1979 Ky. LEXIS 290 ( Ky. 1979 ).

It is clear that the registration plan extends only to solicitations conducted in person or by telephone, and does not apply to solicitations through the use of the mails or the advertising media. Budget Marketing, Inc. v. Commonwealth, 587 S.W.2d 245, 1979 Ky. LEXIS 290 ( Ky. 1979 ).

367.515. Registration fee — Display of registration receipt — Exceptions.

  1. Upon registration, every solicitor shall pay the county clerk a fee pursuant to KRS 64.012 , and the county clerk shall issue the solicitor a numbered receipt to be effective for a period of one (1) year from the date of registration.
  2. Prior to actual solicitation, the solicitor shall display to the potential purchaser the registration receipt issued by the county clerk if soliciting in person or cite to the potential purchaser the number of the registration receipt if soliciting by telephone.
  3. The provisions of KRS 367.513 to 367.530 shall not apply to minors soliciting orders for articles mentioned in KRS 367.510 when such sales are made for the sole purpose of obtaining funds for a school band, club or other organization and such sales are approved in writing by the superintendent of the school system at which the minors are students. The written approval of the superintendent shall identify the product or products being sold, the solicitors to be involved and the duration of sales and shall be filed with the county clerk.

History. Enact. Acts 1974, ch. 281, § 3, effective July 1, 1974; 1978, ch. 384, § 499, effective June 17, 1978; 2006, ch. 255, § 31, effective January 1, 2007.

NOTES TO DECISIONS

1.Constitutionality.

The legislature can constitutionally require nonresident engaged in the business of soliciting orders, via interstate telephone, for magazines on a subscription basis, the delivery of which is contingent on a future event, to register in each county in the Commonwealth in which they solicit. Budget Marketing, Inc. v. Commonwealth, 587 S.W.2d 245, 1979 Ky. LEXIS 290 ( Ky. 1979 ).

2.Applicability.

It is clear that the registration plan extends only to solicitations conducted in person or by telephone, and does not apply to solicitations through the use of the mails or the advertising media. Budget Marketing, Inc. v. Commonwealth, 587 S.W.2d 245, 1979 Ky. LEXIS 290 ( Ky. 1979 ).

367.520. Voidable contracts for sale of printed material.

All orders or contracts for magazines, periodicals, encyclopedias, books, Bibles, or other printed matter or material shall be void and unenforceable at the option of the purchaser if the person or persons soliciting such order or contract is in violation of the provisions of KRS 367.513 and 367.515 .

History. Enact. Acts 1972, ch. 55, § 2; 1974, ch. 281, § 4, effective July 1, 1974.

367.530. Permanent registration books maintained.

All county clerks in the Commonwealth shall maintain a book or other similar record on a permanent basis containing the registrations and other information required to be filed under KRS 367.513 . Said book shall be a public record.

History. Enact. Acts 1972, ch. 55, § 3; 1974, ch. 281, § 5, effective July 1, 1974; 1978, ch. 384, § 500, effective June 17, 1978.

367.540. Statement of magazine subscription date.

All magazines excluding newspapers mailed into and received in Kentucky shall have included on the label affixed to the magazine or its mailing wrapper the expiration date of the subscriber’s subscription written so as to be understandable to an average subscriber.

History. Enact. Acts 1972, ch. 55, § 4.

Opinions of Attorney General.

Where an individual joins the Elks or similar fraternal organization and the organization desires to regularly distribute a magazine to that person because he is a dues-paying member, this is neither a subscription arrangement nor a subscribing individual within the meaning of this section. OAG 72-729 .

Termination of Service Contracts

367.550. Termination of service contract by military service member.

  1. Any person who enters military service or a member of the Armed Forces of the United States, Reserves, or National Guard, after receiving official orders to relocate for a period of service of no less than ninety (90) days, may terminate or suspend, without penalty or fee, any of the following contracts for services:
    1. Internet;
    2. Television and cable;
    3. Athletic club or gym memberships; and
    4. Satellite radio.
  2. Termination or suspension of a contract under this section shall be made by delivery of a written or electronic notice to the specified service provider with a copy of the service member’s official military orders.
  3. A termination or suspension under this section shall be effective on the day notice is given under subsection (2) of this section.
  4. A service member who terminates or suspends a contract for services under the provisions of this section may reinstate the provisions of services upon providing written or electronic notice to the service provider that he or she is no longer on active military service.
  5. Nothing in this section shall be construed to conflict with the provisions of the federal Servicemembers Civil Relief Act, 50 U.S.C. secs. 3901 et seq.
  6. Nothing in this section shall be construed to excuse or limit the liability of the service member of an outstanding balance due to the service provider.
  7. The provisions of this section shall only apply to contracts entered into on and after June 27, 2019.

HISTORY: 2019 ch. 43, § 1, effective June 27, 2019.

Negative Option Plan

367.570. Definitions.

For purposes of KRS 367.570 to 367.585 unless the context requires otherwise:

  1. “Negative option plan” means a contractual plan or arrangement under which a seller periodically sends to subscribers an announcement which identifies merchandise (other than annual supplements to previously acquired merchandise) it proposes to send to subscribers to such plan, and the subscribers thereafter receive and are billed for the merchandise identified in each such announcement, unless by a date or within a time specified by the seller with respect to each such announcement the subscribers, in conformity with the provisions of such plan, instruct the seller not to send the identified merchandise.
  2. “Subscriber” means any person who has agreed to receive the benefits of, and assume the obligations entailed in, membership in any negative option plan and whose membership in such negative option plan has been approved and accepted by the seller.
  3. “Contract-complete subscriber” refers to a subscriber who has purchased the minimum quantity of merchandise required by the terms of membership in a negative option plan.
  4. “Promotional material” refers to an advertisement containing or accompanying any device or material which a prospective subscriber sends to the seller to request acceptance or enrollment in a negative option plan.
  5. “Selection” refers to the merchandise identified by a seller under any negative option plan as the merchandise which the subscriber will receive and be billed for, unless by the date or within the period specified by the seller, the subscriber instructs the seller not to send such merchandise.
  6. “Announcement” refers to any material sent by a seller using a negative option plan in which the selection is identified and offered to subscribers.
  7. “Form” refers to any form which the subscriber returns to the seller to instruct the seller not to send the selection.
  8. “Return date” refers to a date specified by a seller using a negative option plan as the date by which a form must be received by the seller to prevent shipment of the selection.
  9. “Mailing date” refers to the time specified by a seller using a negative option plan as the time by or within which a form must be mailed by a subscriber to prevent shipment of the selection.

History. Enact. Acts 1978, ch. 304, § 1, effective June 17, 1978; 1984, ch. 111, § 150, effective July 13, 1984.

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

367.575. Unfair practices — Duties of Attorney General.

  1. In connection with the sale, offering for sale, or distribution of goods and merchandise in “trade” or “commerce” as defined by KRS 367.110(2), it is an unfair, false, misleading and deceptive practice as prohibited by KRS 367.170 for a seller in connection with the use of any negative option plan to fail to comply with the requirements of KRS 367.570 to 367.585 .
  2. All of the remedies, powers and duties provided for the Attorney General by the Consumer Protection Act appertaining to acts declared unlawful by KRS 367.170 shall apply with equal force and effect to acts or practices declared unlawful by KRS 367.570 to 367.585 .
  3. KRS 367.570 to 367.585 shall not be construed to limit or restrict the exercise of powers or the performance of the duties of the Attorney General which he is authorized to exercise or perform under any other provision of law.

History. Enact. Acts 1978, ch. 304, § 2, effective June 17, 1978.

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

367.580. Contents of promotional material — Time limits for mailing.

  1. In connection with the use of any negative option plan, promotional material shall clearly and conspicuously disclose the material terms of the plan, including:
    1. That aspect of the plan under which the subscriber must notify the seller, in the manner provided for by the seller, if he does not wish to purchase the selection;
    2. Any obligation assumed by the subscriber to purchase a minimum quantity of merchandise;
    3. The right of a contract-complete subscriber to cancel his membership at any time;
    4. Whether billing charges will include an amount for postage and handling;
    5. A disclosure indicating that the subscriber will be provided with at least ten (10) days in which to mail any form, contained in or accompanying an announcement identifying the selection, to the seller;
    6. A disclosure that the seller will credit the return of any selections sent to a subscriber, and guarantee to the postal service or the subscriber postage to return such selections to the seller when the announcement and form are not received by the subscriber in time to afford him at least ten (10) days in which to mail his form to the seller;
    7. The frequency with which the announcements and forms will be sent to the subscriber, and the maximum number of announcements and forms which will be sent to him during a 12-month period.
  2. In connection with the use of any negative option plan, prior to sending any selection, the seller shall mail to its subscribers, within the time specified by subsection (3) of this section:
    1. An announcement identifying the selection;
    2. A form, contained in or accompanying the announcement, clearly and conspicuously disclosing that the subscriber will receive the selection identified in the announcement unless he instructs the seller that he does not want the selection, designating a procedure by which the form may be used for the purpose of enabling the subscriber so to instruct the seller, and specifying either the return date or the mailing date.
  3. The seller shall mail the announcement and form either at least twenty (20) days prior to the return date or at least fifteen (15) days prior to the mailing date, or provide a mailing date at least ten (10) days after receipt by the subscriber, provided, however, that whichever system the seller chooses for mailing the announcement and form, such system must provide the subscriber with at least ten (10) days in which to mail his form.

History. Enact. Acts 1978, ch. 304, § 3, effective June 17, 1978.

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

367.585. Duties of the seller.

  1. No seller in connection with the use of a negative option plan shall refuse to credit, for the full invoiced amount thereof, the return of any selection sent to a subscriber, and to guarantee to the postal service or the subscriber postage adequate to return such selection to the seller, when:
    1. The selection is sent to a subscriber whose form indicating that he does not want to receive the selection was received by the seller by the return date or was mailed by the subscriber by the mailing date;
    2. Such form is received by the seller after the return date, but has been mailed by the subscriber and postmarked at least three (3) days prior to the return date;
    3. Prior to the date of shipment of such selection, the seller has received from a contract-complete subscriber, a written notice of cancellation of membership adequately identifying the subscriber; however, this provision is applicable only to the first selection sent to a canceling contract-complete subscriber after the seller has received written notice of cancellation. After the first selection shipment, all selection shipments, thereafter are deemed to be unsolicited as defined in KRS 365.710 ;
    4. The announcement and form are not received by the subscriber in time to afford him at least ten (10) days in which to mail his form.
  2. No seller shall:
    1. Fail to notify a subscriber known by the seller to be within any of the circumstances set forth in subsection (1) of this section, that if the subscriber elects, the subscriber may return the selection with return postage guaranteed and receive a credit to his account.
    2. Refuse to ship within four (4) weeks after receipt of an order merchandise due subscribers as introductory and bonus merchandise, unless the seller is unable to deliver the merchandise originally offered due to unanticipated circumstances beyond the seller’s control and promptly makes a reasonably equivalent alternative offer. However, where the subscriber refuses to accept alternatively offered introductory merchandise, but instead insists upon termination of his membership due to the seller’s failure to provide the subscriber with his originally requested introductory merchandise, or any portion thereof, the seller must comply with the subscriber’s request for cancellation of membership, provided the subscriber returns to the seller any introductory merchandise which already may have been sent him.
    3. Fail to terminate promptly the membership of a properly identified contract-complete subscriber upon his written request.
    4. Ship, without the express consent of the subscriber, substituted merchandise for that ordered by the subscriber.

History. Enact. Acts 1978, ch. 304, § 4, effective June 17, 1978.

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

Consumer Credit Contracts

367.600. Definitions.

As used in KRS 367.610 :

  1. “Person” means an individual, corporation, or any other business organization.
  2. “Consumer” means a natural person who seeks or acquires goods or services for personal, family, or household use.
  3. “Creditor” means a person who, in the ordinary course of business, lends purchase money or finances the sale of goods or services to consumers on a deferred payment basis, provided such person is not acting, for the purposes of a particular transaction, in the capacity of a credit card issuer.
  4. “Purchase money loan” means a cash advance which is received by a consumer in return for a finance charge, which is applied, in whole or substantial part, to a purchase of goods or services from a seller who:
    1. Refers consumers to the creditor; or
    2. Is affiliated with the creditor by common control, contract, or business arrangement.
  5. “Consumer credit contract” means any instrument which evidences or embodies a debt arising from a “purchase money loan” transaction or in which credit is extended by a seller or lessor in connection with a sale or lease to a consumer.

History. Enact. Acts 1976, ch. 152, § 1.

Research References and Practice Aids

Kentucky Law Journal.

Comments, Precomplaint Investigations Under the Kentucky Consumer Protection Act: Validity and Scope of the Civil Investigation Demand, 65 Ky. L.J. 169 (1976-77).

Kentucky Law Survey, Weinberg, Commercial Law and Consumer Credit, 65 Ky. L.J. 370 (1976-77).

367.610. Assignee of rights of seller or lessor subject to defenses of buyer against seller or lessor — Exception.

  1. With respect to any consumer credit contract taken in connection with any purchase money loan or any sale or lease of goods or services other than credit card transaction, an assignee of the rights of the seller or lessor is subject to all defenses of the buyer against the seller or lessor arising out of the sale or lease notwithstanding an agreement to the contrary, but the assignee’s liability under this section may not exceed the amount owing to the assignee at the time the defense is asserted against the assignee. Rights of the buyer or lessee under this section can only be asserted as a matter of defense to or set off against a claim by the assignee.
  2. This section shall not apply to any consumer credit contract taken in connection with any purchase money loan or any sale or lease of goods or services which is in compliance with any trade regulation issued or promulgated by the Federal Trade Commission or any regulation of the Board of Governors of the Federal Reserve System or similar federal agency having jurisdiction relating to preservation of consumer claims and defenses in credit transactions.

History. Enact. Acts 1976, ch. 152, §§ 2, 3.

Opinions of Attorney General.

Contractual provisions between the buyer and seller of an automobile which are otherwise valid and enforceable will not conflict with this section so long as the provisions do not purport to limit the raising of defenses against an assignee of the sales contract. OAG 76-540 .

The application of this section is limited to goods or services for personal, family or household use. OAG 76-540 .

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Weinberg, Commercial Law and Consumer Credit, 65 Ky. L.J. 370 (1976-77).

Weinberg, Pleading and Practice in Commercial Paper Cases: Burdens of Proof, 72 Ky. L.J. 575 (1983-84).

Residential Roof Repair or Replacement Contracts

367.620. Definitions for KRS 367.620 to 367.628.

As used in KRS 367.620 to 367.628 :

  1. “Residential real estate” means a new or existing building constructed for habitation by one (1) to four (4) families, including detached garages;
  2. “Roof system” means the components of a roof to include but not be limited to covering, framing, insulation, sheathing, ventilation, and weatherproofing; and.
  3. “Roofing contractor” means a person or entity in the business of contracting or offering to contract with an owner of residential real estate to repair or replace a roof system.

History. Enact. Acts 2012, ch. 97, § 1, effective July 12, 2012.

Legislative Research Commission Notes.

(7/12/2012). Under the authority of KRS 7.136(1), the Reviser of Statutes has changed the order of the subsections in this statute from the way they appeared in 2012 Ky. Acts ch. 97, sec. 1, to place the terms in alphabetical order. The words in the text were not changed.

367.622. Right to cancel residential roof repair or replacement contract — Conditions — Notice of cancellation.

  1. A person who, on or after July 12, 2012, enters into a contract with a roofing contractor to provide goods or services related to a roof system of residential real estate, where the goods or services are expected to be paid from the proceeds of a property and casualty insurance policy, may cancel the contract prior to midnight of the fifth business day after the person has received written notice from the insurer that all or part of the claim is not a covered loss under the property and casualty insurance policy.
  2. Cancellation shall be deemed to have occurred when the person either personally delivers written notice of cancellation to the roofing contractor; deposits the written notice of cancellation in the United States mail, postage prepaid, and addressed to the roofing contractor at the address stated in the contract; or, if applicable, at the time notice of cancellation is transmitted to the roofing contractor by facsimile or at the time an e-mail notice of cancellation is sent.
  3. Notice of cancellation given by the person need not take a particular form and is sufficient if it indicates by any form of written expression the intention of the person not to be bound by the contract.

History. Enact. Acts 2012, ch. 97, § 2, effective July 12, 2012.

367.624. Roofing contractor’s duty to disclose cancellation rights and provide standard form.

Prior to entering into a contract on or after July 12, 2012, for the provision of goods or services relating to the repair or replacement of any part of a roof system of residential real estate as provided in KRS 367.622 , a roofing contractor shall furnish the owner of the residential real estate with:

  1. The mailing address of the roofing contractor through which written communication may be received;
  2. The telephone number of the roofing contractor and, if applicable, the facsimile number and e-mail address;
  3. A statement in at least ten (10) point boldface type that states:

    “You may cancel this contract at any time before midnight on the fifth business day after you have received written notification from your insurer that all or any part of the claim or contract is not a covered loss under the insurance policy. This right to cancel is in addition to any other rights of cancellation you may have under state or federal law or regulation. See the attached Notice of Cancellation form for an explanation of this right.”; and

  4. A fully completed form in duplicate, under the conspicuous caption “NOTICE OF CANCELLATION,” and attached to but easily detachable from the contract, in at least ten (10) point boldface type that shall read as follows:

    “NOTICE OF CANCELLATION

    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

    (enter date of transaction)

    If you are notified by your insurer that all or any part of the claim or contract is not a covered loss under the insurance policy, you may cancel this contract without penalty or monetary obligation before midnight of the fifth business day after you have received notice from your insurer. To cancel this transaction you may use any of the following methods: mail or otherwise deliver a signed and dated copy of this cancellation notice, or any other written notice of cancellation which you sign and date, to (enter physical address of roofing contractor), or e-mail a notice of cancellation to (enter e-mail address of roofing contractor), or transmit a notice of cancellation to (enter facsimile number of roofing contractor), not later than midnight of the fifth day after you receive notice from your insurer.

    I HEREBY CANCEL THIS TRANSACTION.

    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

    (Date)

    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(Buyer’s Signature)”

History. Enact. Acts 2012, ch. 97, § 3, effective July 12, 2012.

367.626. Advance payments prohibited during cancellation period — Return of payments or notes of indebtedness — Contractor’s right to collect reasonable amount for services performed — Unenforceable contract provisions.

  1. Except as provided in subsection (3) of this section, on or after July 12, 2012, a roofing contractor shall not require any advance payments under a contract for the repair or replacement of any part of a roof system of residential real estate when payment is expected to be made from the proceeds of a property or casualty insurance policy until the cancellation period, as provided in KRS 367.622 , has expired.
  2. Within ten (10) days after a contract has been cancelled as provided in KRS 367.622 , a roofing contractor shall tender to the payor any payments, partial payments, or deposits made, and any note or other evidence of indebtedness, except as provided in subsection (3) of this section.
  3. A roofing contractor that performs any repair services authorized by the owner of residential real estate, including but not limited to repair services necessary to prevent further damage to the premises, shall be entitled to collect a reasonable and customary amount for the repair services performed.
  4. Any provision in a contract executed on or after July 12, 2012, for the repair of a roof system of residential real estate, as provided in KRS 367.620 to 367.628 , that requires the payment of any fee, except for repair services performed under subsection (3) of this section, shall not be enforceable against any person who has cancelled a contract under KRS 367.622 .

History. Enact. Acts 2012, ch. 97, § 4, effective July 12, 2012.

367.627. Actions for injunctive relief and recovery of actual economic damages.

    1. Any person may maintain an action to enjoin continuing any act in violation of KRS 367.620 to 367.628 and, if injured by the act, may also maintain an action for the recovery of damages. (1) (a) Any person may maintain an action to enjoin continuing any act in violation of KRS 367.620 to 367.628 and, if injured by the act, may also maintain an action for the recovery of damages.
    2. If the court finds based on evidence presented by the plaintiff that the defendant is violating or has violated any of the provisions of KRS 367.620 to 367.628, the court shall enjoin the defendant from continuing the violations.
    3. It shall not be necessary that actual economic damages be alleged or proved by the plaintiff in order for the court to enjoin violations.
  1. In addition to injunctive relief, the plaintiff in the action shall be entitled to recover from the defendant two (2) times the amount of any actual economic damages sustained.
  2. The court may award reasonable attorneys’ fees and costs to the owner of residential real estate who prevails in an action under subsection (1) of this section, in addition to any other relief the residential real estate owner may be entitled to under this section.
  3. In addition to the provisions of this section, all of the remedies, powers, and duties provided for the Attorney General by this chapter shall apply with equal force and effect to any act declared unlawful by KRS 367.620 to 367.628 .
  4. Nothing in this section shall prohibit a person from pursuing the recovery of damages afforded elsewhere under the law.

HISTORY: 2017 ch. 46, § 2, effective June 29, 2017.

367.628. Acts prohibited for roofing contractor.

  1. A roofing contractor shall not represent, negotiate, or advertise to represent or negotiate on behalf of an owner of residential real estate on any insurance claim in connection with the repair or replacement of a roof system. Nothing in this subsection shall be construed to prohibit a roofing contractor from:
    1. Providing an estimate for repair, replacement, construction, or reconstruction of the property to the owner of residential real estate; or
    2. Conferring with an insurance company’s representative about damage to the property after a claim has been submitted by the owner of residential real estate.

      This subsection shall not apply to a public adjuster licensed under Subtitle 9 of KRS Chapter 304.

  2. Where the goods or services are expected to be paid from the proceeds of a property and casualty policy, a roofing contractor or person representing a roofing contractor shall not:
    1. Cause damage to any part of a roof system in order to increase the scope of repair or replacement, or encourage a person to cause damage to any part of a roof system in order to secure a contract for repair or replacement;
    2. Offer to pay or rebate all or any portion of an insurance deductible or claims proceeds as an inducement to the sale of goods or services related to a residential roof contract;
    3. Grant an allowance or discount against the fee to be charged under the contract; or
    4. Pay or offer to pay the owner of residential real estate or his or her representative for whom services have been or will be performed pursuant to KRS 367.620 to 367.628 , for any reason, any form of compensation in excess of one hundred dollars ($100), including but not limited to a:
      1. Bonus;
      2. Coupon;
      3. Credit;
      4. Gift;
      5. Prize;
      6. Referral fee; or
      7. Any other item having a monetary value.

HISTORY: Enact. Acts 2012, ch. 97, § 5, effective July 12, 2012; 2017 ch. 46, § 1, effective June 29, 2017.

Solicitation for Charitable and Civic Purposes

367.650. Definitions for KRS 367.650 to 367.670.

As used in KRS 367.650 to 367.670 unless the context requires otherwise:

  1. “Charitable or civic purpose” means any purpose or activity which holds itself out to be benevolent, educational, philanthropic, humane, patriotic, religious, eleemosynary or fraternal, or to be established for a social welfare or advocacy, public health, environmental conservation, or civic purpose, or is designed to serve the welfare of society generally, or any class or group to which society is morally obligated, or a specific community or to preserve or improve the culture thereof or environment enjoyed thereby.
  2. “Charitable organization” means any person determined by the Internal Revenue Service to be a tax exempt organization pursuant to Section 501(c)(3) of the Internal Revenue Code; or a person who is or holds himself out to be established for a charitable or civic purpose; or a person who employs a charitable or civic appeal as the basis of a solicitation, or employs an appeal that suggests there is a charitable or civic purpose to a solicitation.
  3. “Contribution” means the grant, promise, or pledge of money, credit, property, financial assistance, or other thing of any kind or value in response to a solicitation for a charitable or civic purpose. It does not include:
    1. Bona fide fees, dues, or assessments paid by members, if that membership is not conferred solely as consideration for making a contribution in response to a solicitation; or
    2. Money, property, or compensated services received from any governmental authority.
  4. “Solicit” and “solicitation” mean, respectively, to engage in, and the act of, requesting, directly or indirectly, that an addressed person or limited audience or the public generally make a contribution. Solicitation shall be deemed to have taken place when the request is made, whether or not the requested contribution is made.
  5. “Person” means any individual, corporation, trust, partnership, organization, foundation, society, or other legal entity.
  6. “Professional solicitor” means a person who for compensation or other financial consideration solicits contributions in this state, directly or indirectly, for or on behalf of a charitable organization. A person qualifies as a professional solicitor if he is hired on a fee, commission, or percentage basis and the work is performed by him or his agents or the employees or volunteers of the benefitting charitable organization under the direction, supervision, or instruction of the solicitor. A professional solicitor conducts or supervises specific fundraising activities or events in which gifts are solicited, received, and deposited by the professional solicitor or his agents, expenses are paid, and net proceeds delivered to the charitable organization. A bona fide salaried officer, employee, or volunteer of a charitable organization shall not be deemed to be a professional solicitor, unless he is employed or engaged as a fundraising consultant or a professional solicitor by another charitable organization.
  7. “Fundraising consultant” means any person who, for compensation, plans, manages, advises, consults, or develops material for or with respect to the solicitation for any charitable organization. A fundraising consultant shall not, at any time, have custody of contributions from a solicitation or solicit contributions, directly or indirectly. If a fundraising consultant’s fee is related to the amount of contributions received from a solicitation in which he took part, the consultant is considered a professional solicitor. A fundraising consultant shall not employ, procure, or otherwise engage any compensated person to solicit contributions. A bona fide salaried officer, employee, or volunteer of a charitable organization shall not be deemed to be a fundraising consultant, unless he is employed or engaged as a fundraising consultant or a professional solicitor by another charitable organization.
  8. “Religious organization” means any organization, the activity of which is protected by Section 1(2) of the Constitution of Kentucky and the First Amendment to the Constitution of the United States.
  9. “Solicitor” means a natural person who, by personal contact, transmitted oral communication or writing which identifies that person, requests a specific person to make a contribution for charitable or civic purposes.

History. Enact. Acts 1976, ch. 216, § 1; 1994, ch. 151, § 1, effective July 15, 1994.

Compiler’s Notes.

Section 501(c)(3) of the Internal Revenue Code referred to in subsection (2) of this section is compiled as 26 USCS § 501(c)(3).

Opinions of Attorney General.

Where an advertising agency assisted charitable organizations by providing form letters, cards, and “membership” information designed for use by a state sheriffs’ association youth ranch in its solicitation of citizen members into an honorary/associate membership program, where it merely printed and mailed this material with payment based on a “per letter” rate and the number of “mailings” made, where compensation was not based upon flat fees, retainers, nor percentage of money contributed, and where all of the material bore the boys’ ranch’s name and logo, with all contributions being paid directly to the charity rather than being collected by the agency, the advertising agency was not a “professional fund raiser” nor a “professional solicitor” within subdivisions (6) and (7) of this section. OAG 79-415 .

367.652. Registration of professional solicitors and fundraising consultants — Prohibitions — Background check.

  1. A professional solicitor shall file a registration statement with, and obtain the approval of, the Attorney General before acting as a professional solicitor. The registration statement shall be attested to by the professional solicitor, if an individual, or by the principal officer of the professional solicitor, if the solicitor is a business entity. The statement shall be accompanied by a fee of three hundred dollars ($300), plus the costs of a background investigation to the Attorney General’s office. The funds shall be placed in a trust or agency account pursuant to KRS 45.253 . If a professional solicitor is a corporation or partnership, a single fee shall cover all its partners, members, employees, directors, agents, or officers.
  2. Each registration shall expire on December 31 of the calendar year in which it is filed and may be renewed by reapplying and paying the prescribed fee.
  3. At the time of filing the registration statement, a professional solicitor shall file with and have approved by the Attorney General a full cash or surety bond in the amount of twenty-five thousand dollars ($25,000). The bond shall be in favor of the Attorney General and shall be held for any person having prevailed in a cause of action against the solicitor for liabilities resulting from the solicitor’s violation of KRS 367.650 to 367.670 or any administrative regulation promulgated pursuant to these sections. The bond shall be in a form prescribed by the Attorney General. If a surety bond is issued, it shall be issued by an insurer authorized to transact surety insurance in this state pursuant to KRS Chapter 304. The Attorney General may require that any cash offered as security for a full cash bond be held in escrow by a financial institution located in the state, subject to an escrow agreement approved by the Attorney General.
  4. The registration statement shall be filed in a form prescribed by the Attorney General and shall include:
    1. The name, address, and telephone number of the professional solicitor and the agent authorized to accept service of process in this state;
    2. The names in which the professional solicitor is doing business in Kentucky and any names used in the past;
    3. The names and addresses of any charity sharing in the charitable contributions received in this state;
    4. A copy of any articles of incorporation and by-laws of the solicitor, fund raising consultant, and the charitable organization, and any tax-exempt status letter from the Internal Revenue Service;
    5. The names, addresses, and occupations of persons employed by or who have contracted with the professional solicitor and a statement of whether those persons have been convicted of a felony or a misdemeanor involving moral turpitude or arising from their conduct as solicitors for a charitable organization or purpose;
    6. A copy of the financial statement for the professional solicitor’s preceding fiscal year, which shall set out the total profits and revenue from all fundraising activities, the balance sheet, the kind and amounts of funds raised, specific costs in raising funds, the percentage of funds raised on behalf of the charitable organization which are actually paid to the organization for charitable purposes, and the location of the original financial records;
    7. A statement of whether the professional solicitor has ever been enjoined by any court or otherwise prohibited from soliciting contributions in any jurisdiction;
    8. A statement indicating the method by which the solicitation is made, a description of the promotional plan together with copies of all advertisements, the location of all telephones being used, and the time period during and the areas in which the solicitations are made; and
    9. Any other information which may be required by the Attorney General for the public interest or for the protection of contributors.
  5. A fundraising consultant shall file a registration statement with and obtain the approval of the Attorney General before acting as a consultant. The registration statement shall be attested to by the fundraising consultant, if the consultant is an individual, or by the principal officer of the fundraising consultant, if the consultant is a business entity. The statement shall be accompanied by a fee of fifty dollars ($50), plus the costs of a background investigation. The fees shall be placed in a trust or agency account pursuant to KRS 45.253 . If a fundraising consultant is a corporation or partnership, a single fee shall cover all its partners, members, employees, directors, agents, or officers.
  6. Each registration shall expire on December 31 of the calendar year in which it is filed and may be renewed by reapplying and paying the fee.
  7. The professional solicitor and fundraising consultant shall report in writing to the Attorney General any material change in the registration statement occurring after filing. The report shall be filed within seven (7) calendar days after the change occurs.
  8. No person shall act as a professional solicitor or fundraising consultant if he, his officers, directors, or any person with a controlling interest in the business, or any person the professional solicitor or fundraising consultant employs or procures to solicit for compensation or to advise, consult, plan, or manage in regards to the solicitation campaign, has been convicted by a court of any state or the United States of a felony or a misdemeanor involving moral turpitude or arising from his conduct as a solicitor or consultant for a charitable organization or purpose. A background check on each person set out in this subsection shall be performed by the Attorney General’s office. The actual cost of the investigation shall be added to the registration fee.

History. Enact. Acts 1994, ch. 151, § 3, effective July 15, 1994.

367.653. Contracts — Requirements — Filing of contract and promotion registration statement — Violability of contract with unregistered party.

  1. A contract between a charitable organization and a professional solicitor or a charitable organization and a fundraising consultant shall be in writing. The contract shall be signed by two (2) authorized officials of the charitable organization, one (1) of whom shall be a member of the organization’s governing body and the authorized contracting officer for the professional solicitor or fundraising consultant.
  2. The contract shall clearly state:
    1. The respective obligations of each party;
    2. The percentage of the gross revenue from the campaign that the charitable organization will receive;
    3. The goods or services to be offered to the public;
    4. The geographic area where the campaign will take place;
    5. The date the campaign will begin and end;
    6. A fundraising budget; and
    7. Provisions for a final accounting.

      The contract shall also identify the services to be provided by the professional solicitor or the fundraising consultant and shall indicate whether the solicitor or the consultant will, at any time, have custody of any contributions. The contract may further be defined by administrative regulations promulgated by the Attorney General pursuant to this section.

  3. At least fourteen (14) calendar days prior to the performance of any service pursuant to the contract, a professional solicitor or fundraising consultant shall file with the Attorney General a copy of the contract. No solicitation pursuant to the contract shall begin until the Attorney General has certified that the contract meets the statutory requirements.
  4. When filing the contract, a professional solicitor shall also file a written promotion registration statement with the Attorney General. The statement shall be attested to by the professional solicitor’s authorized contracting officer and shall be in the form as prescribed by the Attorney General in administrative regulations. The contract filed by a professional solicitor shall be valid only if it complies with this section and is accompanied by a promotion registration statement.
  5. No professional solicitor or fundraising consultant shall contract with a charitable organization unless the professional solicitor or fundraising consultant is registered with the Attorney General. A contract with an unregistered professional solicitor or fundraising consultant shall be violable at the option of the charitable organization.

History. Enact. Acts 1994, ch. 151, § 4, effective July 15, 1994.

367.655. Unlawful acts. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1976, 216, § 2; 1982, ch. 309, § 1, effective July 15, 1982) was repealed by Acts 1994, ch. 151, § 14, effective July 15, 1994. For present law see KRS 367.667 .

367.656. Nonacceptance, revocation, suspension, or refusal to renew registration — Judicial review — Civil action.

    1. A filing pursuant to KRS 367.653 and this section shall be accepted unless the Attorney General notifies the professional solicitor or fundraising consultant otherwise, within fourteen (14) calendar days of the receipt of filing. If a filing is not accepted, the Attorney General shall notify the affected charity at the time of rejection. Within seven (7) calendar days after receiving a notice that the filing requirements are not satisfied, the professional solicitor or fundraising consultant may request a hearing. The hearing shall be held in accordance with KRS Chapter 13B. (1) (a) A filing pursuant to KRS 367.653 and this section shall be accepted unless the Attorney General notifies the professional solicitor or fundraising consultant otherwise, within fourteen (14) calendar days of the receipt of filing. If a filing is not accepted, the Attorney General shall notify the affected charity at the time of rejection. Within seven (7) calendar days after receiving a notice that the filing requirements are not satisfied, the professional solicitor or fundraising consultant may request a hearing. The hearing shall be held in accordance with KRS Chapter 13B.
    2. A professional solicitor or fundraising consultant may submit an amended filing upon receiving notice that his prior filing has not been accepted.
  1. The Attorney General may revoke, suspend, or refuse to renew the registration of a professional solicitor or fundraising consultant if:
    1. He has violated any provision of KRS 367.650 to 367.670 or any administrative regulations promulgated by the Attorney General pursuant to those sections;
    2. He or any of his principal officers have refused or failed, after notice, to produce any records or disclose any information required pursuant to KRS 367.650 to 367.670 , or any administrative regulations promulgated by the Attorney General pursuant to those sections.
    3. He has made a material false statement in an application, statement, or report required to be filed under KRS 367.650 to 367.670.
  2. Any party to a hearing who is aggrieved by the final order may seek judicial review by filing an appeal in the Franklin Circuit Court in accordance with KRS Chapter 13B.
  3. The Attorney General may bring a civil action directly in the Franklin Circuit Court or in the Circuit Court of any county in which the fundraising campaign involving the professional solicitor or fundraising consultant is being conducted to revoke or suspend the registration statement for any of the grounds set forth in this section.

History. Enact. Acts 1994, ch. 151, § 5, effective July 15, 1994; 1996, ch. 318, § 349, effective July 15, 1996.

367.657. Filing of federal Form 990 fulfills reporting requirement.

  1. Prior to any solicitation, every charitable organization required by the Internal Revenue Service to file a federal Form 990 and soliciting contributions in the Commonwealth, or for which contributions are solicited shall file with the Attorney General a copy of its most recent federal Form 990 unless exempted by KRS 367.660 .
  2. If a charitable organization is newly formed and a Form 990 has not yet been filed with the Internal Revenue Service, a notice of intent to solicit, in a form prescribed pursuant to administrative regulations promulgated by the Attorney General, shall be filed prior to any solicitation. Each chapter, branch, or affiliate of a charitable organization shall file a separate notice of intent or report the necessary information to its parent charitable organization that shall then file a consolidated notice of intent to solicit. If a consolidated notice of intent is filed, information arising out of the activities of each chapter, branch, or affiliate of the charitable organization in this state shall be covered in the notice. A separate notice of intent shall be filed for each chapter, branch, or affiliate upon the request of the Attorney General. The notice shall expire on December 31 of the calendar year in which it was filed.
  3. The Form 990 shall be filed with the Attorney General each year in which contributors are solicited in the Commonwealth at the same time the form is filed with the Internal Revenue Service. If a Form 990 is not filed with the Internal Revenue Service, a new notice of intent to solicit shall be filed with the Attorney General.

History. Enact. Acts 1982, ch. 309, § 2, effective July 15, 1982; 1994, ch. 151, § 2, effective July 15, 1994.

367.658. Financial report of campaign — Filing — Audit.

Within ninety (90) days after the completion of a solicitation campaign or on the anniversary of the commencement of a solicitation campaign lasting more than one (1) year, a professional solicitor shall file with the Attorney General a financial report of the campaign, including gross revenues and an itemization of all expenses incurred. This report shall be attested to by the authorized contracting agent for the professional solicitor and two (2) authorized officials of the charitable organization and shall be completed on a form prescribed by the Attorney General. This financial report shall be audited at the request of the Attorney General’s office.

History. Enact. Acts 1994, ch. 151, § 7, effective July 15, 1994.

367.660. Exempt solicitations.

The following solicitations are exempt from the provisions of KRS 367.650 to 367.670 :

  1. Solicitations by an organization of contributions from its members and their families only, if membership is not included in a solicitation to avoid the provisions of KRS 367.650 to 367.670 , is not granted upon the basis of contributions alone, and is within the exception of KRS 367.650 (3).
  2. Solicitations by a religious organization for funds for religious purposes such as maintenance of a house of worship, conduct of services, and propagation of its faith and tenets as distinguished from other charitable and civic purposes employed by nonreligious organizations.
  3. Solicitations by a publicly-owned or nonprofit privately-endowed educational institution regulated by the Kentucky Board of Education, the Council on Postsecondary Education, or an equivalent public authority of the jurisdiction where the institution is located, from the alumni, faculty members, student body of the institution and their families, and from corporations, for the continuance of an established educational program.
  4. Local solicitations by a student group or parent-teacher association for its campus or group connected activities with the approval of the administration of the educational institution.

History. Enact. Acts 1976, ch. 216, § 3; 1994, ch. 151, § 13, effective July 15, 1994; 1996, ch. 362, § 6, effective July 15, 1996; 1997 (1st Ex. Sess.), ch. 1, § 148, effective May 30, 1997.

Opinions of Attorney General.

Subsection (4) of this section does not require approval of the local board of education for other than school group activities as would already need to be approved pursuant to KRS 158.290 . OAG 79-556 .

367.664. Signage for receptacle or drop-off site for donations of clothing or other items.

  1. If any person places or maintains a receptacle in public view or establishes or maintains some form of drop-off site for collecting donations of clothing or any other items that do not qualify as a charitable contribution as defined by Section 170(c) of the Internal Revenue Code, the receptacle or drop-off site shall contain a permanently attached sign or label that includes, in lettering not less than two (2) inches in height and one-half (1/2) inch in width:
    1. The name, address, telephone number, and e-mail address of the person who places or maintains the receptacle or establishes or maintains the drop-off site; and
    2. A statement that reads as follows: “Donations do not qualify as a charitable contribution for federal tax purposes.”
  2. The sign or label shall be placed immediately below the opening in the receptacle or shall be prominently displayed at the drop-off site.

HISTORY: 2016 ch. 56, § 2, effective July 15, 2016.

367.665. Applicability of remedies, powers, and duties of Attorney General provided by KRS 367.190 to 367.300 or by other provisions of law.

  1. All of the remedies, powers, and duties provided for the Attorney General by KRS 367.190 to 367.300 appertaining to acts declared unlawful by KRS 367.170 shall apply with equal force and effect to acts declared unlawful by KRS 367.650 to 367.670 .
  2. Nothing in KRS 367.650 to 367.670 shall be construed to limit or restrict the powers, duties, remedies, or penalties available to the Attorney General, the Commonwealth, or any private person under any other provision of statutory or common law.

History. Enact. Acts 1976, ch. 216, § 4; 1994, ch. 151, § 11, effective July 15, 1994.

367.666. Interstate reciprocal agreements on exchanging information — Fiscal records — Contribution deposit requirements — Maintenance of records.

  1. The Attorney General may enter into reciprocal agreements with the appropriate authority of any other state for the purpose of exchanging information with respect to charitable organizations, professional solicitors, and fundraising consultants.
  2. A professional solicitor shall maintain fiscal records concerning his charitable solicitations in the Commonwealth. These records shall be kept on file during each solicitation campaign and for at least three (3) years after completion of the solicitation campaign.
  3. Each contribution collected by or in the custody of a professional solicitor shall be solely in the name of the charitable organization for which the contribution was solicited. The professional solicitor shall deposit the contribution in an account at a bank or other financial institution within two (2) business days of receiving the contribution. The account shall be in the name of the charitable organization, which shall have sole control of all withdrawals from the account. Neither the professional solicitor nor the fundraising consultant shall withdraw any deposited funds from the account.
  4. The records shall be maintained by the professional solicitor or the fundraising consultant, if contributions are collected, and shall be available for inspection by the Attorney General no later than ten (10) business days after his request.

History. Enact. Acts 1994, ch. 151, § 8, effective July 15, 1994.

367.667. Prohibited acts and practices in charitable solicitations.

  1. The following acts and practices in the conduct of charitable solicitation shall be considered unfair, false, misleading, or deceptive in violation of KRS 367.170 :
    1. Representing or leading anyone in any manner to believe that a solicitation is for or on behalf of a charitable organization; or utilizing any emblem, device, or printed matter belonging to or associated with a charitable organization; or otherwise representing that any part of the contributions received will be donated to a charitable organization without first being authorized in writing to do so by the charitable organization;
    2. Utilizing a name, symbol, or statement so closely related or similar to that used by another charitable organization, public official, or public agency that its use would tend to confuse or mislead a solicited person;
      1. Causing misleading caller identification information to be transmitted to users of caller identification services, or to otherwise misrepresent the origin of the charitable telephone solicitation. (c) 1. Causing misleading caller identification information to be transmitted to users of caller identification services, or to otherwise misrepresent the origin of the charitable telephone solicitation.
      2. This paragraph shall not apply to solicitations which block caller identification, nor shall it apply to solicitations in which the name and telephone number of the party on whose behalf the call is made is substituted for the name and telephone number of actual caller;
      3. This paragraph shall not apply to a telecommunications, broadband, or Voice over Internet Protocol service provider that is:
        1. Acting in the telecommunications, broadband, or Voice over Internet Protocol service provider’s capacity as an intermediary for the transmission of telephone service between the caller and the recipient;
        2. Providing or configuring a service or service feature as requested by the customer;
        3. Acting in a manner that is authorized or required by applicable law; or
        4. Engaging in other conduct that is necessary to provide service; or
    3. Representing when soliciting funds that a charity will be the recipient of the funds when the professional solicitor or his employer pursuant to a contract is allowed to or will receive more than fifty percent (50%) of the gross receipts of the funds solicited as his compensation. It shall be a defense in any action brought to enforce this subsection for the professional solicitor to show that he disclosed in a clear and conspicuous manner to the prospective donor the percentage of the funds which he was allowed by contract to receive.
    1. Notwithstanding other criminal and administrative remedies, a person or class of persons alleging: (2) (a) Notwithstanding other criminal and administrative remedies, a person or class of persons alleging:
      1. Receipt of a call in violation of subsection (1)(c) of this section; or
      2. That a number assigned to the person was misleadingly transmitted as a caller identification number by a solicitor;

        may bring a civil action in the county where the plaintiff resides or has his or her principal place of business, against any person who is responsible for or who knowingly participated in the violation.

    2. The civil action brought under paragraph (a) of this subsection may be for:
      1. Appropriate injunctive relief;
      2. Actual damages;
      3. Actual expenses incurred, including court costs and attorney’s fees; and
      4. Punitive damages.

History. Enact. Acts 1992, ch. 457, § 1, effective July 14, 1992; 1994, ch. 151, § 6, effective July 15, 1994; 2019 ch. 105, § 3, effective June 27, 2019.

NOTES TO DECISIONS

1.Constitutionality.

Subsection (3) of this section which required professional fundraising solicitors to divulge to potential donors certain details about the financial arrangements between themselves and their represented charities is unduly burdensome and not narrowly tailored to the state’s interest in preventing fraud and thus violates the First Amendment. Kentucky State Police Professional Ass'n v. Gorman, 870 F. Supp. 166, 1994 U.S. Dist. LEXIS 17923 (E.D. Ky. 1994 ).

367.668. Disclosure requirements.

  1. Prior to orally requesting a contribution or when requesting a contribution in writing, a professional solicitor shall clearly disclose:
    1. The professional solicitor’s name, as set out in the registration statement filed with the Attorney General pursuant to KRS 367.652 , phone number or e-mail address, and the fact that the professional solicitor is being paid for providing services;
    2. The name of the charitable organization the professional solicitor represents and a description of how the contributions raised by the solicitation will be used for a charitable or civic purpose; and
    3. If the professional solicitor places or maintains a receptacle in public view for the purpose of collecting contributions in the form of clothing, household items, and other items, the receptacle shall contain a sign or label that:
      1. Includes the information contained in paragraphs (a) and (b) of this subsection;
      2. Includes a statement that reads as follows: “Items donated here support, in part, a for-profit professional solicitor.”;
      3. Is in lettering not less than two (2) inches in height and one-half (1/2) inch in width; and
      4. Is placed immediately below the opening in the receptacle used to deposit donations.
  2. Any individual who acts on behalf of the professional solicitor and identifies himself by name shall give his legal name.
  3. Any responses given by or on behalf of a professional solicitor to an oral or written request for information shall be truthful.
  4. The written confirmation, receipt, or reminder sent to a contributor or one who has pledged to contribute, following an oral solicitation, shall clearly include the information required by subsections (1) and (2) of this section.
  5. If the person being solicited requests information regarding the amount or percentage of funds going to the charitable organization or for a charitable or civic purpose, the professional solicitor shall inform the person solicited of the percentage of the gross revenue or the reasonable estimate of the gross revenue that the charitable organization will receive from the solicitation campaign. The Attorney General shall promulgate administrative regulations necessary to effectuate this disclosure.

History. Enact. Acts 1994, ch. 151, § 9, effective July 15, 1994; 2013, ch. 13, § 2, effective June 25, 2013; 2016 ch. 56, § 1, effective July 15, 2016.

367.669. Local ordinances, rules, and regulations.

KRS 367.650 to 367.670 does not preclude any city, county, urban-county, or charter county government from promulgating or enacting ordinances, rules, and regulations further regulating the solicitation of contributions within the respective city, county, urban-county, or charter county government. The provisions shall not alter any of the obligations set forth in KRS 367.650 to 367.670 or any administrative regulations promulgated pursuant to those sections but may add other requirements and rules as appear to be proper to the city, county, urban-county, or charter county government involved.

History. Enact. Acts 1994, ch. 151, § 10, effective July 15, 1994.

367.670. Powers of Attorney General not limited or restricted.

KRS 367.650 to 367.670 shall not be construed to limit or restrict the exercise of powers or the performance of the duties of the Attorney General which he is authorized to exercise or perform under any other provision of law.

History. Enact. Acts 1976, ch. 216, § 5.

Consumer Protection in Eye Care Act

367.680. Definitions for KRS 367.680 to 367.690.

As used in KRS 367.680 to 367.690 :

  1. “Assessment mechanism”:
    1. Means automated or virtual equipment, application, or technology designed to be used on a telephone, a computer, or an Internet-based device that may be used either in person or remotely to conduct an eye assessment; and
    2. Includes artificial intelligence devices and any equipment, electronic or nonelectronic, that is used to perform an eye assessment;
  2. “Contact lens” means any lens placed directly on the surface of the eye, regardless of whether or not it is intended to correct a visual defect, including any cosmetic, therapeutic, or corrective lens;
  3. “Eye assessment” means an assessment of the ocular health and visual status of a patient that may include but is not limited to objective refractive data or information generated by an automated testing device, including an autorefractor, in order to establish a medical diagnosis for the correction of vision disorders;
  4. “Person” means an individual, corporation, trust, partnership, incorporated or unincorporated association, and any other legal entity;
  5. “Prescription” means a handwritten or electronic order issued by a licensed optometrist, osteopath, or physician, or an oral order issued directly by a licensed optometrist, osteopath, or physician;
  6. “Seller” means an individual or entity that sells contact lenses or visual aid glasses and dispenses them to Kentucky residents in any manner; and
  7. “Visual aid glasses”:
    1. Means eyeglasses, spectacles, or lenses designed or used to correct visual defects, including spectacles that may be adjusted by the wearer to achieve different types or levels of visual correction or enhancement; and
    2. Does not include optical instrument or devices that are:
      1. Not intended to correct or enhance vision;
      2. Sold without consideration of the visual status of the individual who will use the optical instrument or device, including sunglasses that are designed and used solely to filter out light; or
      3. Completely assembled eyeglasses or spectacles designed and used solely to magnify.

HISTORY: Enact. Acts 2003, ch. 1, § 1, effective June 24, 2003; 2018 ch. 44, § 1, effective July 14, 2018.

367.6801. Short title for KRS 367.680 to 367.690.

KRS 367.680 to 367.690 may be cited as the Consumer Protection in Eye Care Act.

HISTORY: 2018 ch. 44, § 11, effective July 14, 2018.

367.6802. Assessment mechanism required to conduct eye assessment or to generate prescription for corrective eyewear — Duties of optometrist, osteopath, or physician — Required disclosures to patient — Construction of statute — Appropriate practice standards.

  1. An assessment mechanism to conduct an eye assessment or to generate a prescription for contact lenses or visual aid glasses to a patient in Kentucky shall:
    1. Provide synchronous or asynchronous interaction between the patient and the Kentucky-licensed optometrist, osteopath, or physician;
    2. Collect the patient’s medical history, previous prescription for corrective eyewear, and length of time since the patient’s most recent in-person comprehensive eye health examination;
    3. Provide any applicable accommodation required by the federal Americans with Disabilities Act, 42 U.S.C. secs. 12101 et seq., as amended;
    4. Gather and transmit protected health information in compliance with the federal Health Insurance Portability and Accountability Act of 1996, as amended;
    5. Be used to perform a procedure with a recognized Current Procedural Terminology code maintained by the American Medical Association, if applicable; and
    6. Maintain liability insurance, through its owner or lessee, in an amount adequate to cover claims made by individuals diagnosed or treated based on information and data, including any photographs and scans, generated by the assessment mechanism.
  2. A Kentucky-licensed optometrist, osteopath, or physician shall:
    1. Read and interpret the diagnostic information and data, including any photographs and scans, gathered by the assessment mechanism;
    2. Verify the identity of the patient requesting treatment via the assessment mechanism;
    3. Create and maintain a medical record for each patient, which is for use during the ongoing treatment of a patient, and complies with all state and federal laws regarding maintenance and accessibility;
    4. Provide a handwritten or electronic signature, along with their Kentucky state license number, certifying their diagnosis, evaluation, treatment, prescription, or consultation recommendations of the patient;
    5. Utilize an assessment mechanism for an eye assessment or to generate a prescription for visual aid glasses only if:
      1. The patient is at least eighteen (18) years of age; and
      2. The patient has received an in-person comprehensive eye health examination by an optometrist, osteopath, or physician within the previous twenty-four (24) months; and
    6. Utilize an assessment mechanism to generate a prescription for contact lenses only if:
      1. The patient is at least eighteen (18) years of age; and
      2. The patient has received an in-person comprehensive eye health examination by an optometrist, osteopath, or physician:
        1. For the initial prescription and one (1) follow-up or first renewal of the initial prescription; or
        2. Within twenty-four (24) months after the follow-up or first renewal of the initial prescription, and every twenty-four (24) months thereafter.
  3. Prior to using an assessment mechanism, each Kentucky patient shall be provided with and shall accept as a term of use a disclosure that includes the following information:
    1. This assessment is not a replacement for an in-person comprehensive eye health examination;
    2. This assessment cannot be used to generate an initial prescription for contact lenses or a follow-up or first renewal of the initial prescription;
    3. This assessment may only be used if the patient has had an in-person comprehensive eye health examination within the previous twenty-four (24) months if the patient is conducting an eye assessment or receiving a prescription for visual aid glasses; and
    4. The United States Centers for Disease Control and Prevention (CDC) advises contact lens wearers to visit an eye doctor one (1) time a year or more often if needed.
  4. Evaluation, treatment, and consultation recommendations by a Kentucky-licensed optometrist, osteopath, or physician utilizing an assessment mechanism as required in this section, including issuing a prescription via electronic means, shall be held to the same standards of appropriate practice as those in traditional in-person clinical settings.
  5. This section shall not:
    1. Limit the discretion of a Kentucky-licensed optometrist, osteopath, or physician to direct a patient to utilize any telehealth service deemed appropriate for any treatment and care of the patient;
    2. Limit the sharing of patient information, in whatever form, between an optometrist, osteopath, or physician; or
    3. Apply beyond ocular health and eye care.

HISTORY: 2018 ch. 44, § 8, effective July 14, 2018.

367.681. Contents of contact lens prescription — Contents of prescription for visual aid glasses — Refusal to release prescription prohibited.

  1. A contact lens prescription shall include the following:
    1. The ophthalmic information necessary to accurately fabricate or dispense the lenses, including the lens manufacturer, lens series, and the lens material if applicable;
    2. Power and base curve;
    3. Name, license number, telephone number, and for written orders, the signature of the prescribing optometrist, osteopath, or physician;
    4. Patient’s name and address, expiration date of the prescription, and number of refills or lenses permitted; and
    5. The date of issuance.
  2. A contact lens prescription may also include the diameter, axis, add power, cylinder, peripheral curve, optical zone, and center thickness.
  3. A prescription for visual aid glasses shall include the following:
    1. The name, license number, telephone number, and for written orders, the signature of the prescribing optometrist, osteopath, or physician;
    2. The patient’s name;
    3. The date of issuance; and
    4. The value of all parameters the licensed optometrist, osteopath, or physician has deemed necessary to dispense corrective lenses appropriate for a patient.
  4. A licensed optometrist, osteopath, or physician shall not refuse to release a prescription for contact lenses or visual aid glasses to a patient.

HISTORY: Enact. Acts 2003, ch. 1, § 2, effective June 24, 2003; 2018 ch. 44, § 2, effective July 14, 2018.

367.682. Expiration of contact lens prescription.

Unless a health-related reason for the limitation is noted in the patient’s medical records, contact lens prescriptions shall not have an expiration date of less than twelve (12) months from the date the prescription is authorized or the last date of the contact lens evaluation by a licensed optometrist, osteopath, or physician, whichever date is later. In no event shall a contact lens prescription be valid twelve (12) months after the date of authorization by a licensed optometrist, osteopath, or physician.

History. Enact. Acts 2003, ch. 1, § 3, effective June 24, 2003.

367.683. Verification of contact lens prescription.

  1. All contact lens sellers and any person authorized in accordance with KRS Chapters 320, 315, or 326 to dispense contact lenses in the Commonwealth shall verify the contact lens prescription by the following:
    1. Receipt of a written or faxed valid contact lens prescription signed by the prescribing optometrist, osteopath, or physician; or
    2. An electronic or oral affirmative communication of the complete contact lens prescription from the prescribing optometrist, osteopath, or physician.
  2. If a contact lens seller or any person authorized to dispense contact lenses in the Commonwealth finds it necessary to contact the prescribing optometrist, osteopath, or physician via telephone in order to verify a contact lens prescription, the following protocols shall be followed:
    1. Calls shall be made during regular business hours;
    2. Any verification requests shall include the name, address, and telephone number of the patient;
    3. The toll-free telephone number as required by KRS 367.687(7) shall be included in voice mail or messages left on answering machines;
    4. Contact lens prescriptions shall not be mailed, sent, delivered, or dispensed before verification by the optometrist, osteopath, or physician;
    5. Touch-tone telephone options offered by a contact lens seller or any person authorized to dispense contact lenses in the Commonwealth shall not constitute verification; and
    6. Response-time options stated by a contact lens seller or any person authorized to dispense contact lenses in the Commonwealth shall not constitute verification.
  3. In the absence of a prescription as defined and described in KRS 367.680 and 367.681 , it shall be a violation of KRS 367.680 to 367.690 to dispense contact lenses through the mail or otherwise to a Kentucky resident.

HISTORY: Enact. Acts 2003, ch. 1, § 4, effective June 24, 2003; 2018 ch. 44, § 3, effective July 14, 2018.

367.684. Responsibility for accurate dispensing of contact lens or visual aid glasses prescription — Limitation of liability.

  1. Any seller or any person authorized to dispense contact lenses or visual aid glasses in the Commonwealth who fills a prescription bears the full responsibility for the accurate dispensing of the contact lenses or visual aid glasses provided under the prescription. At no time shall any changes or substitutions be made, including brand, type of lenses, or ophthalmic parameters, without the direction of the optometrist, osteopath, or physician who issued the contact lens or visual aid glasses prescription.
  2. The optometrist, osteopath, or physician shall not be liable for any damages for injury resulting from the packaging, manufacturing, or dispensing of the contact lenses or visual aid glasses unless the seller and the prescriber are the same person.

HISTORY: Enact. Acts 2003, ch. 1, § 5, effective June 24, 2003; 2018 ch. 44, § 4, effective July 14, 2018.

367.685. Prerequisites for writing contact lens prescriptions.

A contact lens fitting shall be complete and a contact lens prescription may be written when:

  1. The optometrist, osteopath, or physician has completed all measurements, tests, and examinations necessary to satisfy his or her professional judgment that the patient is a viable candidate to wear contact lenses, recognizing that more than one (1) visit between the patient and the optometrist, osteopath, or physician may be required; and
  2. Contact lenses suitable for the patient’s eyes have been evaluated and fitted by the optometrist, osteopath, or physician to the patient’s eyes and the optometrist, osteopath, or physician is satisfied with the fitting based on ocular health and the visual needs of the patient.

The patient shall be entitled to receive a copy of the contact lens prescription until its expiration date.

HISTORY: Enact. Acts 2003, ch. 1, § 6, effective June 24, 2003; 2018 ch. 44, § 5, effective July 14, 2018.

367.686. Restrictions on sale or delivery of contact lenses or visual aid glasses to Kentucky residents by nonresidents.

No person located outside of Kentucky shall ship, mail, deliver, or sell contact lenses or visual aid glasses to a patient at a Kentucky address unless:

  1. Registered with the Attorney General of the Commonwealth of Kentucky; and
  2. In possession of a valid contact lens or visual aid glasses prescription as defined and described in KRS 367.680 and 367.681 .

HISTORY: Enact. Acts 2003, ch. 1, § 7, effective June 24, 2003; 2018 ch. 44, § 6, effective July 14, 2018.

367.687. Registration of nonresident contact lens sellers with Attorney General.

The Attorney General shall require and provide for the annual registration of all contact lens sellers located outside of the Commonwealth that dispense contact lenses to Kentucky residents, including those providing contact lenses via the Internet. A contact lens seller’s registration shall be granted upon the disclosure and certification by the seller of all of the following:

  1. The seller is licensed or registered to distribute contact lenses in the state in which the dispensing facility is located and from which the contact lenses are dispensed;
  2. The location, names, and titles of all owners, partners, corporate officers, and the person who is responsible for overseeing the dispensing of contact lenses to residents of this state;
  3. The seller has complied with and shall continue to comply with all lawful directives and appropriate requests for information from the appropriate agency of each state in which the seller is licensed or registered;
  4. The seller shall respond to all requests for information from the Attorney General within thirty (30) days from receipt of the request;
  5. The seller shall maintain records of contact lenses dispensed to residents of this state for a period of ten (10) years, and that the records shall be readily available for inspection by the Attorney General upon demand;
  6. The seller shall provide a toll-free telephone service during its regular hours of operation for the sole purpose of responding to the patients in this state concerning questions and complaints. All questions relating to eye care shall be referred to the doctor prescribing the contact lenses;
  7. The seller shall provide a toll-free telephone service during its regular hours of operation solely for optometrists, osteopaths, and physicians.
  8. The seller shall provide the following or a substantially equivalent written notification to the patient whenever contact lenses are supplied: WARNING: IF YOU ARE HAVING ANY OF THE FOLLOWING SYMPTOMS REMOVE YOUR CONTACT LENSES IMMEDIATELY AND CONSULT YOUR EYE CARE PRACTITIONER BEFORE WEARING YOUR LENSES AGAIN: UNEXPLAINED EYE DISCOMFORT, WATERING, VISION CHANGE, OR REDNESS; and
  9. The seller’s license or registration, in the state in which the seller is licensed or registered, has not been suspended or revoked, but should the seller be the subject of any investigation undertaken by the licensing or registering state, or should the seller’s license or registration be suspended or revoked, then the seller shall immediately notify the Attorney General of such actions.

HISTORY: Enact. Acts 2003, ch. 1, § 8, effective June 24, 2003; 2018 ch. 44, § 7, effective July 14, 2018.

367.688. Investigation and registration of nonresident dispensers of contact lenses and visual aid glasses by Attorney General — Fee.

The Attorney General shall charge a fee for investigation and registration of nonresident dispensers of contact lenses and visual aid glasses.

HISTORY: Enact. Acts 2003, ch. 1, § 9, effective June 24, 2003; 2018 ch. 44, § 9, effective July 14, 2018.

367.689. Administrative regulations to be promulgated by Attorney General.

The Attorney General shall have the authority to promulgate administrative regulations to carry out the provisions of KRS 367.680 to 367.690 .

History. Enact. Acts 2003, ch. 1, § 10, effective June 24, 2003.

367.690. Penalties — Hearing — Appeals.

  1. Any person who dispenses, offers to dispense, or attempts to dispense contact lenses or visual aid glasses in violation of KRS 367.680 to 367.690 or the administrative regulations promulgated by the Attorney General concerning the dispensing of contact lenses or visual aid glasses shall, in addition to any other penalty provided by law, pay a civil penalty to the office of the Attorney General in an amount not to exceed eleven thousand dollars ($11,000) for each violation.
  2. Any person charged in a complaint filed by the Attorney General with violating any of the provisions of KRS 367.680 to 367.690 shall be entitled to an administrative hearing conducted in accordance with KRS Chapter 13B.
  3. Any person aggrieved by a final order issued under the authority of this section shall have the right of an appeal by filing a petition with the Franklin Circuit Court in accordance with KRS Chapter 13B.

HISTORY: Enact. Acts 2003, ch. 1, § 11, effective June 24, 2003; 2018 ch. 44, § 10, effective July 14, 2018.

Mobile Home Sales

367.710. Definitions.

  1. “Owner” means the original purchaser of a mobile home for use as a residence.
  2. “Dealer” means any person or business enterprise which sells new mobile homes to consumers.
  3. “Manufacturer” means any person or business enterprise engaged in the business of manufacturing, assembling or distributing on behalf of a manufacturer new mobile homes.
  4. “Wholesaler” means any person other than a manufacturer who sells new mobile homes for the purpose of resale.
  5. “Mobile home” means a structure, transportable in one (1) or more sections, which is eight (8) body feet or more in width and is thirty-two (32) body feet or more in length, and which is built on a permanent chassis and designed to be used as a dwelling with or without a permanent foundation when connected to the required utilities, and includes the plumbing, heating, air-conditioning, and electrical systems contained therein.
  6. “Purchase price” means the actual amount paid by the owner, including the value of any traded merchandise involved in the transaction, and any sales or usage tax.
  7. “Defect” is a defective part or material installed, or improper workmanship performed, by a manufacturer, wholesaler, or dealer which poses an imminent danger to the owner’s or occupant’s health or safety or to the right of occupancy and which would cost the owner more than four percent (4%) of the purchase price to repair or replace.

History. Enact. Acts 1976, ch. 136, § 10.

NOTES TO DECISIONS

Cited:

Tallent v. Mobile Home Estates, Inc., 648 S.W.2d 869, 1983 Ky. LEXIS 240 ( Ky. 1983 ).

Opinions of Attorney General.

Where the cash sale price of a stationary mobile home is $5,000 or less, the provisions of the motor vehicle retail instalment sales act, KRS 190.090 to 190.140 apply; where the cash price of stationary mobile homes exceeds $5,000, the provisions of the Instalment Sales Contracts Act, KRS 371.210 to 371.330 , apply; but see OAG 80-51 following KRS 371.210 . OAG 80-111 .

Research References and Practice Aids

Kentucky Law Journal.

Comments, Precomplaint Investigations Under the Kentucky Consumer Protection Act: Validity and Scope of the Civil Investigation Demand, 65 Ky. L.J. 169 (1976-77).

367.715. Presumption of nonmerchantability.

Any mobile home that, within the first twelve (12) months after delivery to the owner has a defect which cost the owner at least four percent (4%) of the purchase price to repair and which requires repair or replacement on three (3) separate occasions, shall be presumed to be nonmerchantable.

History. Enact. Acts 1976, ch. 136, § 11.

NOTES TO DECISIONS

1.Burden of Proof.

A clear reading of the Mobile Home Sales Act, KRS 367.710 to 367.775 , discloses that it is incumbent upon the complainant to first prove the existence of “a defect.” The burden of going forward with the proof is then shifted to the manufacturer who is then required to prove there exists no defect or that the defective condition is the fault of the owner or of a third party. Tallent v. Mobile Home Estates, Inc., 648 S.W.2d 869, 1983 Ky. LEXIS 240 ( Ky. 1983 ).

2.Evidence Raising Presumption.

The purchaser of a mobile home was entitled to the presumption of nonmerchantability where he established that the magnitude and frequency of the violent vibrations in the mobile home amounted to a defect within the meaning of the Mobile Home Sales Act. Tallent v. Mobile Home Estates, Inc., 648 S.W.2d 869, 1983 Ky. LEXIS 240 ( Ky. 1983 ).

3.Liability of Manufacturer.

Where the purchaser of a mobile home established that the home was subject to frequent violent vibrations, and the jury failed to believe the manufacturer’s proffered evidence that the vibrations were the result of an improper set up of the home by the dealer, the manufacturer failed to rebut the presumption of nonmerchantability and consequently was liable for the cost of the mobile home and a reasonable attorney’s fee. Tallent v. Mobile Home Estates, Inc., 648 S.W.2d 869, 1983 Ky. LEXIS 240 ( Ky. 1983 ).

367.720. Rebuttal of presumption of nonmerchantability.

The presumption of nonmerchantability of a mobile home as provided in KRS 367.715 may be rebutted by evidence that the defect was caused by the owner or occupant or other third party, by an accident or by some act or condition beyond the control of the manufacturer, wholesaler or dealer.

History. Enact. Acts 1976, ch. 136, § 12.

NOTES TO DECISIONS

1.Burden of Proof.

A clear reading of the Mobile Home Sales Act, KRS 367.710 to 367.775 , discloses that it is incumbent upon the complainant to first prove the existence of “a defect.” The burden of going forward with the proof is then shifted to the manufacturer who is then required to prove there exists no defect or that the defective condition is the fault of the owner or of a third party. Tallent v. Mobile Home Estates, Inc., 648 S.W.2d 869, 1983 Ky. LEXIS 240 ( Ky. 1983 ).

367.725. Notice by owner of nonmerchantability.

The owner shall give the manufacturer notice by certified mail, return receipt requested, with a copy to the dealer from whom the mobile home was purchased, within ten (10) days following establishment of the conditions recited in KRS 367.715 containing an accurate description of the condition or conditions which render the mobile home nonmerchantable and the owner’s name and address and his election to exercise the rights provided by KRS 367.745 .

History. Enact. Acts 1976, ch. 136, § 13.

NOTES TO DECISIONS

Cited:

Tallent v. Mobile Home Estates, Inc., 648 S.W.2d 869, 1983 Ky. LEXIS 240 ( Ky. 1983 ).

367.730. Examination by manufacturer, dealer or wholesaler and notification to owner of result.

Within ten (10) days after the receipt of a notice given under KRS 367.725 , the manufacturer or its representatives shall examine the mobile home at the home site of the owner and within ten (10) days after such examination shall notify the owner in writing that they either: (1) find no defect, (2) find a defect but believe that it is due to abuse by the owner, an act beyond their control or the action of a third party, (3) find a defect but can and will promptly put the mobile home in a merchantable condition and will agree to a four (4) month extension of the owner’s rights with respect to such defect under the provisions of KRS 367.710 to 367.775 , or (4) accept the owner’s determination that it is nonmerchantable.

History. Enact. Acts 1976, ch. 136, § 14.

367.735. Owner to make mobile home available for repair.

If the manufacturer notifies the owner that the mobile home can be put in a merchantable condition pursuant to KRS 367.730 , the owner must make the mobile home available for repair at his home site within three (3) days after such notification so that repairs can be made and the defect removed before any rights vest under the provisions of KRS 367.710 to 367.775 .

History. Enact. Acts 1976, ch. 136, § 15.

367.740. Equivalent accommodation or compensation to be supplied to owner during repair.

If the owner or occupants must be removed from the mobile home during repair, the manufacturer shall provide those who are moved with equivalent accommodation or accommodations acceptable to the owner, or pay the owner a reasonable per diem rate of compensation for those moved from the mobile home.

History. Enact. Acts 1976, ch. 136, § 16.

367.745. Return of purchase price or supplying of new mobile home in lieu of repairs.

If the defect is not corrected pursuant to KRS 367.735 the manufacturer shall, at its option, return the price paid by the seller less any diminution in value due to abuse by the owner, or the action of a third party or shall supply a new mobile home of the same model and year at the owner’s home site which shall be warranted as though originally purchased.

History. Enact. Acts 1976, ch. 136, § 17.

367.750. Action to recover purchase price.

In any case in which an owner timely notifies the manufacturer of the nonmerchantability of the mobile home under KRS 367.715 , and the manufacturer refuses to replace the mobile home under KRS 367.745 , the owner may bring an action to recover the price paid by him less any diminution in value due to abuse by the owner, or the action of a third party, and shall be entitled to his reasonable attorney fees if he prevails in the action.

History. Enact. Acts 1976, ch. 136, § 18.

NOTES TO DECISIONS

1.Recovery from Manufacturer Only.

Under the Mobile Home Sales Act, KRS 367.710 to 367.775 , an action to recover the purchase price of the mobile home and a reasonable attorney’s fee may be brought only against the manufacturer. Tallent v. Mobile Home Estates, Inc., 648 S.W.2d 869, 1983 Ky. LEXIS 240 ( Ky. 1983 ).

2.Liability of Manufacturer.

Where the purchaser of a mobile home established that the home was subject to frequent violent vibrations, and the jury failed to believe the manufacturer’s proffered evidence that the vibrations were the result of an improper set up of the home by the dealer, the manufacturer failed to rebut the presumption of nonmerchantability and consequently was liable for the cost of the mobile home and a reasonable attorney’s fee. Tallent v. Mobile Home Estates, Inc., 648 S.W.2d 869, 1983 Ky. LEXIS 240 ( Ky. 1983 ).

Cited:

Riley v. West Kentucky Production Credit Asso., 603 S.W.2d 916, 1980 Ky. App. LEXIS 347 (Ky. Ct. App. 1980).

Research References and Practice Aids

Kentucky Bench & Bar.

Mapother, Attorneys’ Fees Recoverable in Kentucky Litigation, Vol. 44, No. 4, October 1980, Ky. Bench & Bar 28.

367.755. Warranties not excluded — Procedure to justify price increase.

  1. No manufacturer shall exclude any warranty issued elsewhere in the sale of its mobile homes in Kentucky in retaliation for the provisions of KRS 367.710 to 367.775 .
  2. No manufacturer shall increase the price of its mobile homes in Kentucky by more than the amount necessary to meet the costs actually incurred by compliance with KRS 367.710 to 367.775 , provided, however, that the manufacturer shall be required to furnish the Attorney General’s office with verified actuarial data supporting any such increase at least sixty (60) days before it is put into effect.

History. Enact. Acts 1976, ch. 136, § 19.

367.760. Description of defect repaired on new mobile home.

Any dealer, manufacturer or wholesaler making a repair on a new mobile home prior to the delivery to the owner must state in writing to the owner at the time of the delivery the nature of any defect repaired by such dealer, manufacturer, or wholesaler. The statement must contain a complete description of cause of the damage which was repaired as well as the nature of the repairs made, so that a determination can be made as to whether the owner may have any rights provided by KRS 367.710 to 367.775 .

History. Enact. Acts 1976, ch. 136, § 20.

367.765. Information to be furnished purchaser by seller.

Each owner who purchases a new mobile home shall be furnished by the dealer selling the mobile home the address of the dealer, manufacturer and wholesaler, if any. In addition, the name and address of the dealer, manufacturer, and the wholesaler shall be affixed to the mobile home in a conspicuous place and shown to the owner by the dealer.

History. Enact. Acts 1976, ch. 136, § 21.

367.770. Warranties.

For the purpose of KRS 367.710 to 367.775 , a manufacturer or wholesaler’s warranty whether express and/or implied or created by the provisions of KRS 367.710 to 367.775 extends to any person who purchases the mobile home new.

History. Enact. Acts 1976, ch. 136, § 23.

367.775. Rights and remedies.

The rights and remedies given owners of mobile homes under the provisions of KRS 367.710 to 367.775 shall be in addition to rights presently existing under the law.

History. Enact. Acts 1976, ch. 136, § 24.

Sale of Business Opportunities

367.801. Definitions for KRS 367.801 to 367.819 and KRS 367.990.

As used in KRS 367.801 to 367.819 and KRS 367.990 , unless the context requires otherwise:

  1. “Division” means Division of Consumer Protection of the Office of the Attorney General.
  2. “Person” means natural persons, corporations, trusts, partnerships, incorporated or unincorporated associations, or any other legal entity.
  3. “Offeror” means a person who is engaged in the business of selling business opportunities including any subsidiary business which affiliates with the offeror for goods or services or locations.
  4. “Consumer/investor” means a person who has purchased or is solicited for the purchase of a business opportunity.
  5. “Business opportunity” means the sale or lease, or offer to sell or lease, of any products, equipment, supplies, or services for the purpose of enabling the consumer investor to start a business when:
    1. The offeror obtains an initial required consideration of not less than five hundred dollars ($500) from the purchase or lease of the business opportunity or inventory associated therewith; and
    2. The offeror has represented, directly or indirectly, that the consumer/investor will earn, can earn, or is likely to earn a gross or net profit in excess of the initial required investment paid by the consumer/investor for the business opportunity; or
      1. The offeror has represented that he has knowledge of the relevant market and that the market demand will enable the consumer/investor to earn a profit from the business opportunity; or (c) 1. The offeror has represented that he has knowledge of the relevant market and that the market demand will enable the consumer/investor to earn a profit from the business opportunity; or
      2. The offeror has represented that locations will be provided or assistance will be given directly or indirectly to the consumer/investor in finding locations for the use or operation of the business opportunity including, but not limited to, supplying the consumer/investor with names of locator companies, contracting with the consumer/investor to provide assistance with or supply names of or collect a fee on behalf of or for a locator company; or
      3. The offeror has represented that there is a guaranteed market or that the offeror will buy back or is likely to buy back any product made, manufactured, produced, fabricated, grown, or bred by the consumer/investor using, in whole or in part, the products, supplies, equipment, or services which were initially sold or offered for sale to the consumer/investor by the offeror.

History. Enact. Acts 1978, ch. 315, § 1, effective June 17, 1978; 1994, ch. 165, § 25, effective July 15, 1994; 1994, ch. 329, § 1, effective July 15, 1994.

Legislative Research Commission Note.

(7/15/94). This section was amended by 1994 Ky. Acts chs. 165 and 329 which are in conflict. Under KRS 446.250 , Acts ch. 329, which was last enacted by the General Assembly, prevails.

NOTES TO DECISIONS

1.Purpose.

KRS 367.801 to KRS 367.819 in no way affects or alters the Attorney General’s right to proceed against methods, acts or practices declared unlawful by the Consumer Protection Act; the enactment of the Business Opportunities Act may well have indicated the desire of the legislature to remove all doubt that the Attorney General could rightly proceed against an alleged business opportunity scheme, pursuant to KRS 367.190 if KRS 367.170 had been violated. Commonwealth ex rel. Stephens v. North American Van Lines, Inc., 600 S.W.2d 459, 1979 Ky. App. LEXIS 532 (Ky. Ct. App. 1979).

Opinions of Attorney General.

Market projection formats for the purpose of selling retailer’s plans or arrangements which are represented to increase the retailer’s market share are included within the definition of “distribution devices” under subdivision (6) (h) of this section, but the company did not appear to be providing such a plan or arrangement, but instead furnished data from which a client or retailer could establish his own such plan and this type of management service is not contemplated within the meaning of subdivision (6) (h) of this section. OAG 78-741 .

A “display unit” purchased as part of an investment used as an integral part of an “impulse buying” strategy is a “distribution device” under subsection (6) of this section. OAG 79-340 .

Ideas and operating techniques that have been devised by firms or individuals, and which are not required to be disclosed by KRS 367.805 , come under the exemptions provided by KRS 61.878(1)(b). OAG 82-215 .

The exemption on the Open Records Law, set forth in KRS 61.878 , are inoperative as to records containing the information required under KRS 367.805(1). Any additional information gathered by the division of consumer protection, however, in the course of the registration procedures of this section et seq. may be exempt from mandatory disclosure if it is covered by one of the exemptions in KRS 61.878 . OAG 82-215 .

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

367.803. Addition of distribution devices by Attorney General by regulation. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1978, ch. 315, § 2, effective June 17, 1978) was repealed by Acts 1994, ch. 329, § 9, effective July 15, 1994.

367.805. Registration of persons engaged in sale of business opportunities — Authority for administrative regulations.

  1. It is unlawful for any person to engage in the sale of business opportunities unless prior to the offering the offeror has registered with the division and has furnished a bond pursuant to KRS 367.815(2) and provided all of the following:
    1. All trade names, assumed names, and all trademarks by which the offeror or the prospective consumer/investor of the business opportunity will be doing business.
    2. The names, home addresses, and home telephone numbers of the persons and company offering the business opportunity, and the company’s directors and chief executive officers, and the names, home addresses, and home telephone numbers of all representatives selling business opportunities in Kentucky.
    3. A statement as to the length of time the person and company offering the business opportunity has conducted a business of the type being offered both within and without Kentucky.
    4. A statement as to whether the person or company offering the business opportunity or any of its directors or chief executive officers or sales representatives operating in Kentucky is currently involved in litigation or has been held liable in a civil action by final judgment for having engaged in unfair, false, misleading, or deceptive practices or is currently charged with or has been convicted of or pleaded nolo contendere to a felony involving fraud, embezzlement, fraudulent conversion, or misappropriation of property during the most recent seven (7) year period, or has entered into any agreed settlements or is currently in any bankruptcy proceeding or has been declared bankrupt in any judicial proceeding during the most recent seven (7) year period.
    5. A statement as to whether the person or the company offering the business opportunity or its officers, directors, or agents making the offering of the business opportunity has been a party to any legal cause of action brought by a consumer/investor of the business opportunity within the last seven (7) year period and, if so, the name and address of such individual who has brought the legal action.
    6. A statement disclosing the names, addresses, and telephone numbers of all persons who have been sold a business opportunity by the offeror within the last two (2) year period.
    7. A statement listing the names and addresses of any consumer/investor who has requested within the preceding three (3) years that the offeror return his money.
    8. A current audited financial statement of the offeror.
    9. A specimen of each contract proposed for use in connection with the business opportunity.
    10. A full and detailed description of the actual services that the offeror of the business opportunity undertakes to perform for the consumer/investor.
    11. If training is promised by the offeror, a complete description of the training, including length of the training and costs.
  2. The offeror shall immediately notify the division of any material change in information contained in the application for registration and shall make appropriate amendment of the disclosure statement.
  3. The division shall collect, from any offeror required to comply with this section, an initial fee of one hundred fifty dollars ($150), and an annual renewal fee of fifty dollars ($50), and an update fee of twenty-five dollars ($25) for the administration and enforcement of KRS 367.801 to 367.819 . Funds so collected shall be credited to a trust or agency account for the administrative purpose of the Attorney General’s office, Division of Consumer Protection.
  4. The Attorney General may promulgate administrative regulations as needed to provide for: a hearing, to be conducted in accordance with KRS Chapter 13B, for any business opportunity which the Attorney General initially determines should not be registered or should have registration revoked or suspended; for the establishment of specific standards for the form and content of the disclosure document; and for registration procedures including fee schedules.

History. Enact. Acts 1978, ch. 315, § 3, effective June 17, 1978; 1994, ch. 165, § 26, effective July 15, 1994; 1994, ch. 329, § 2, effective July 15, 1994; 1996, ch. 318, § 350, effective July 15, 1996.

Legislative Research Commission Note.

(7/15/94). This section was amended by 1994 Ky. Acts chs. 165 and 329 which are in conflict. Under KRS 446.250 , Acts ch. 329, which was last enacted by the General Assembly, prevails.

Opinions of Attorney General.

Ideas and operating techniques that have been devised by firms or individuals, and which are not required to be disclosed by this section, come under the exemptions provided by KRS 61.878(1)(b). OAG 82-215 .

The exemptions in the Open Records Law, set forth in KRS 61.878 , are inoperative as to records containing the information required under subsection (1) of this section. Any additional information gathered by the division of consumer protection, however, in the course of the registration procedures of KRS 367.801 et seq. may be exempt from mandatory disclosure if it is covered by one of the exemptions in KRS 61.878 . OAG 82-215 .

Research References and Practice Aids

2020-2022 Budget Reference.

See State/Executive Branch Budget, 2021 Ky. Acts ch. 169, Pt. I, A, 19, (5) at 1068.

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

367.807. Exemptions from registration — Authority for administrative regulations.

  1. An offeror is exempt from the provisions of KRS 367.801 to 367.819 and KRS 367.990 when the offeror:
    1. Meets the definition of a franchise as defined in the Federal Trade Commission’s Regulation on Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures, as set forth in 16 C.F.R. 436 et seq., and has complied with these and filed written notice so stating with the division; or
    2. Offers a security pursuant to KRS 292.313 ;
    3. Offers an ongoing business for sale; or
    4. Offers a not-for-profit sale of sales demonstration equipment, materials, or samples for use in making sales and not for resale for a total price of $500 or less.
  2. The Attorney General may promulgate administrative regulations as needed to provide for additional exemptions. Is offering to sell or selling a package franchise as described in KRS 367.801(7).

History. Enact. Acts 1978, ch. 315, § 4, effective June 17, 1978; 1994, ch. 329, § 3, effective July 15, 1994.

Legislative Research Commission Note.

(7/15/94). It appears from 1994 Ky. Acts ch. 329, sec. 3 that the phrase “Is offering to sell or selling a package franchise as described in KRS 367.801(7).” was intended to be removed from subsection (2) of this statute. Because this text was not bracketed and stricken through, however, it has not been deleted. See KRS 446.145(1) and 446.280 .

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

367.809. Registration number — Inclusion in advertising.

  1. The division, after ascertaining that the applicant has complied with KRS 367.805 , shall issue a registration number.
  2. It shall be unlawful for the registrant to fail to include the registration number in any advertising.

History. Enact. Acts 1978, ch. 315, § 5, effective June 17, 1978; 1994, ch. 165, § 27, effective July 15, 1994.

Legislative Research Commission Note.

(7/15/94). 1994 Ky. Acts chs. 165 and 329 are in conflict in where responsibility for regulation of sale of business opportunities is placed, and ch. 329 has prevailed as the last enactment under KRS 446.250 . Because of this, a change from “division” to “department” in this statute under ch. 165 has not been codified. See KRS 7.136(2).

367.811. Representation regarding potential sale, income, or profit.

It shall be unlawful for any offeror to make any oral or written representation, actual or hypothetical, regarding the business opportunity’s potential sales, income, gross or net profit unless such sales, income, or profits are examples based upon the actual earnings made by existing consumer/investors of the business opportunity. Upon request by the division, names and addresses of the consumer/investors shall be made available for verification of the earnings claims. If such actual or hypothetical earnings examples are in excess of the average net earnings realized by all of the consumer/investors of the business opportunity, then there must be a full and complete disclosure of the average net earnings actually realized by all of these consumer/investors.

History. Enact. Acts 1978, ch. 315, § 6, effective June 17, 1978; 1994, ch. 329, § 4, effective July 15, 1994.

367.813. Display of registration.

  1. Prior to the solicitation of potential consumer/investors the offeror shall furnish and display to the potential consumer/investor a copy of the material required to be furnished the division when registering pursuant to KRS 367.805 .
  2. When furnishing the information required by subsection (1) of this section, the offeror shall furnish the prospective consumer/investor with a notice in at least ten (10) point bold-face type, stating that registration with the division does not directly or indirectly imply approval by the division or the Commonwealth of Kentucky of the business opportunity or any of the activities of representatives selling such business opportunities.

History. Enact. Acts 1978, ch. 315, § 7, effective June 17, 1978; 1994, ch. 165, § 28, effective July 15, 1994.

Legislative Research Commission Note.

(7/15/94). 1994 Ky. Acts chs. 165 and 329 are in conflict in where responsibility for regulation of sale of business opportunities is placed, and ch. 329 has prevailed as the last enactment under KRS 446.250 . Because of this, a change from “division” to “department” in this statute under ch. 165 has not been codified. See KRS 7.136(2).

Opinions of Attorney General.

Ideas and operating techniques that have been devised by firms or individuals, and which are not required to be disclosed by KRS 367.805 , come under the exemptions provided by KRS 61.878(1)(b). OAG 82-215 .

The exemptions in the Open Records Law, set forth in KRS 61.878 , are inoperative as to records containing the information required under KRS 367.805(1). Any additional information gathered by the division of consumer protection, however, in the course of the registration procedures of KRS 367.801 et seq. may be exempt from mandatory disclosure if it is covered by one of the exemptions in KRS 61.878 . OAG 82-215 .

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

367.815. Liability for false, misleading, or deceptive representations — Bond or deposit to insure veracity of statements — Maintenance of records.

  1. Any person who offers a business opportunity and makes representations that are false, misleading, or deceptive shall be liable to the consumer/investor of such business opportunity in an amount equal to the sum of his actual damages or fifteen hundred dollars ($1,500), whichever is greater, as well as the cost of the action together with reasonable attorney’s fees, as determined by the court.
    1. All persons registering pursuant to KRS 367.805 shall either furnish a bond by a surety company authorized to do business in the Commonwealth or establish a full cash certificate of deposit with a licensed and insured bank or savings institution located in the Commonwealth to insure the veracity of all statements contained in the registration. The amount of the bond or certificate of deposit shall be in an amount equal to the total amount of the initial payments under all business opportunity agreements the offeror has entered into in the Commonwealth during the previous year but in no case shall the amount be less than seventy-five thousand dollars ($75,000). The bond or certificate of deposit shall be in the favor of the Attorney General of Kentucky. (2) (a) All persons registering pursuant to KRS 367.805 shall either furnish a bond by a surety company authorized to do business in the Commonwealth or establish a full cash certificate of deposit with a licensed and insured bank or savings institution located in the Commonwealth to insure the veracity of all statements contained in the registration. The amount of the bond or certificate of deposit shall be in an amount equal to the total amount of the initial payments under all business opportunity agreements the offeror has entered into in the Commonwealth during the previous year but in no case shall the amount be less than seventy-five thousand dollars ($75,000). The bond or certificate of deposit shall be in the favor of the Attorney General of Kentucky.
    2. Any person who is damaged by any violation of KRS 367.801 to 367.819 , or by the offeror’s breach of contract for the business opportunity sale, or of any obligation arising therefrom may bring an action against the bond or certificate of deposit to recover damages suffered, provided that the aggregate liability of the surety or trustee shall be only for the actual damages and shall not exceed the amount of the bond or trust account.
  2. A person who has furnished a bond described in subsection (2) of this section may petition the division for release of the bond by submitting a verified statement that such person has not offered business opportunities in the state for the last five (5) years.
  3. Any offeror of a business opportunity who has offered or sold in this state shall maintain a complete set of books, records, and accounts of its business opportunity sales. The sale documents shall be maintained on each transaction for a period of four (4) years after the date of agreement. The offeror shall make the books and records available to the division upon demand at a location within the state.

History. Enact. Acts 1978, ch. 315, § 8, effective June 17, 1978; 1994, ch. 165, § 29, effective July 15, 1994; 1994, ch. 329, § 5, effective July 15, 1994.

Legislative Research Commission Note.

(7/15/94). This section was amended by 1994 Ky. Acts chs. 165 and 329 which are in conflict. Under KRS 446.250 , Acts ch. 329, which was last enacted by the General Assembly, prevails.

Opinions of Attorney General.

Since subsection (2) of this section merely requires “ . . . . . a surety acceptable” to the division of securities with no requirement the surety be from Kentucky, that division is free to accept foreign sureties that can provide bonds as specified in this act. OAG 79-441 .

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

367.816. Agreement or arrangement for a business opportunity — Requirements — Effect of noncompliance — Nonwaiverability.

  1. Every agreement or arrangement for a business opportunity shall be in writing. Copies of the completed agreement and all other documents the offeror requires the consumer/investor to sign shall be given to the consumer/investor at the time they are signed.
  2. Each business opportunity agreement shall set forth in easily legible form all of the following:
    1. The terms and conditions of all payments including the amount owed and a complete schedule for total payment;
    2. A detailed description of the acts or services the offeror or its affiliate undertake to perform for the consumer/investor;
    3. The offeror’s name, telephone number, principal business address, by street and number, and the name and address of its agent in this state authorized to receive service of process;
    4. Whether the offeror is doing business as a corporation, partnership, or otherwise, and the state of its incorporation or organization;
    5. The estimated delivery dates of each installment and whether the items are to be delivered to the consumer/investor or are to be placed by the offeror at locations owned or managed by persons other than the consumer/investor;
    6. If applicable, the terms of the “buy-back” or “security” obligation of the offeror pursuant to KRS 367.801(5)(c)3.
    7. The name and address of each supplier of the items the offeror is to deliver to the consumer/investor; and
    8. The following statement in the form below in no smaller than ten (10) point boldface print:

      STATEMENT OF CONSUMER INVESTOR RIGHTS

      1. You have thirty (30) business days in which you may cancel this contract for any reason.
      2. To cancel, you must mail or deliver a written notice to (Seller’s name and street address) before (last date to mail or deliver notice). If mailed, the notice must be postmarked by the above date. If you deliver the notice, it must be delivered by the end of the normal business day on the above date.
      3. We must promptly refund your payments, and within five (5) business days after you receive your refund, you must allow us to pick up anything we provided to you under this contract.
      4. If we or our affiliates mislead you by what we say, or if we violate the Kentucky Business Opportunities Law, you may cancel this contract. To cancel, you must give written notice to us within one (1) year of the date of the contract.
      5. If you cancel under this provision, you are entitled to a prompt refund of all amounts you have paid, less the value of items we delivered that you do not return.
      6. If we do not deliver items promised within thirty (30) days of the delivery date in your contract except for reasons beyond our control, you may cancel this contract and receive an immediate refund of amounts paid, less the value of items you do not return.
  3. The offeror shall not take a negotiable instrument as evidence of the consumer’s/investor’s obligation unless the instrument on its face abrogates holder in due course status for its holder.
  4. The payment schedule in the agreement shall not require payment of more than twenty percent (20%) of the initial payment before delivery to the consumer/investor of the items to be supplied by the offeror, unless sums in excess of the twenty percent (20%) are placed in escrow until the consumer/investor advises the escrow agent in writing of the delivery of the items, or until the offeror presents the escrow agent with a bill of lading that proves timely delivery of the items. The consumer/investor shall not unreasonably withhold notice of delivery.
  5. A successor or assignee of the offeror’s interest or rights in the agreement is subject to all equities, rights, and defenses of the consumer/investor against the offeror.
  6. Until the offeror has complied with this section, the buyer may cancel the purchase of a business opportunity by notifying the offeror in any manner and by any means of his intention to cancel.
  7. Any waiver by the consumer/investor of a business opportunity of the rights provided in this section is null and void and will not operate to relieve the offeror of any obligation placed upon him by KRS 367.801 to 367.819 .

History. Enact. Acts 1994, ch. 329, § 6, effective July 15, 1994.

367.817. Restraining order.

Whenever the Attorney General has reason to believe that any person is offering business opportunities for sale in violation of KRS 367.801 to 367.819 and 367.990 , and that proceedings would be in the public interest, he may move in the name of the Commonwealth in a Circuit Court for a restraining order or temporary or permanent injunction to prohibit such offer. The action may be brought in the Circuit Court of the county in which such person resides or has his principal place of business or in the Circuit Court of the county in which the unlawful offer or sale has been or is about to be committed.

History. Enact. Acts 1978, ch. 315, § 9, effective June 17, 1978.

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

367.819. Cancellation by purchaser.

  1. The purchaser of a business opportunity has the right to cancel as set forth in this chapter as well as the right to cancel such purchase for any reason at any time prior to midnight of the thirtieth calendar day after signing a contract for purchasing the business opportunity. In addition, the purchaser may cancel such purchase at any time for the following violations:
    1. Not providing locations as represented;
    2. Failing to deliver goods or merchandising materials as represented; or
    3. Failing to comply with KRS 367.809(2).
  2. Cancellation occurs when the consumer/investor gives written notice to the offeror at the address given in the purchase agreement or otherwise provided by the offeror and the notice and statement of the buyer’s right to cancel provided for in subsection (1) of this section.
  3. Notice of cancellation, if given by mail, is given when it is deposited in the mail properly addressed and postage prepaid.
  4. Notice of cancellation given by the purchasers need not take a particular form and is sufficient if it indicates by form of written expression the intention of the buyer not to be bound by any contract to purchase the business opportunity.
  5. Within fifteen (15) days after the date of notice of cancellation by the consumer/investor, the seller must tender to the consumer/investor any payments as well as shipping costs made by him and terminate all financial obligations created in connection with the purchase of the business opportunity. Within five (5) days of refund, the consumer/investor shall make available to the offeror the items delivered by the offeror.
  6. Any waiver by the consumer/investor of a business opportunity of the rights provided in this section is null and void, and will not operate to relieve the seller of any obligation placed upon him by this section.

History. Enact. Acts 1978, ch. 315, § 10, effective June 17, 1978; 1984, ch. 111, § 195, effective July 13, 1984; 1994, ch. 329, § 7, effective July 15, 1994.

Opinions of Attorney General.

The general assembly did not intend, and this section does not allow, company-offerors to deduct any other amounts for alleged expenses, “set-up” fees or commissions from the payments and/or purchase price of the consumer’s investment, other than the excepted items noted in subsection (9) of this section. OAG 79-441 .

Research References and Practice Aids

Kentucky Law Journal.

Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

Health Care Practitioners

367.825. Definitions.

As used in KRS 367.826 , unless the context requires otherwise:

    1. Except as provided in subsection (b) below, “unlicensed health care practitioner” means any person who, for compensation or with expectation of compensation, offers or undertakes to provide advice, counseling, diagnosis, treatment, therapy, correction, or rehabilitation relating to any of the following: (1) (a) Except as provided in subsection (b) below, “unlicensed health care practitioner” means any person who, for compensation or with expectation of compensation, offers or undertakes to provide advice, counseling, diagnosis, treatment, therapy, correction, or rehabilitation relating to any of the following:
      1. Physical or mental health in general;
      2. Particular ailments, diseases, injuries, infirmities, disorders or disabilities, or their prevention;
      3. Nutrition, diet, weight control, fitness, or smoking; or
      4. Aging, baldness, or sexual performance.
    2. A person licensed or certified by an agency or board of this state in an occupation or profession shall not be considered an unlicensed health care practitioner with regard to that occupation or profession.
  1. “Academic title” means a title or other designation indicating receipt of an academic degree, including, but not limited to, the use of “Dr.” before a person’s name. Any use of initials, such as “Ph.D.”, after a person’s name shall also be considered an academic title.
  2. An academic degree shall be considered “accredited” if, at the time of issuance, the institution, program, or specific course of study upon which the degree is based was accredited by a regional or professional accrediting agency recognized by the United States Department of Education or the Council on Postsecondary Accreditation.

History. Enact. Acts 1988, ch. 313, § 1, effective July 15, 1988.

367.826. Accredited degree required.

No unlicensed health care practitioner shall utilize an academic title, or represent in any other manner that he or she possesses an academic degree, unless the practitioner actually possesses the degree, and the degree is accredited. If the degree is honorary, that fact shall be disclosed in every instance by use of the designation “Honorary” or “Hon.”.

History. Enact. Acts 1988, ch. 313, § 2, effective July 15, 1988.

Health Discount Plans

367.828. Health discount plan — Penalties.

  1. As used in this section, “health discount plan” means any card, program, device, or mechanism that is not insurance that purports to offer discounts or access to discounts from a health care provider without recourse to the health discount plan.
  2. No person shall sell, market, promote, advertise, or otherwise distribute a health discount plan unless:
    1. The health discount plan clearly states in bold and prominent type on all cards or other purchasing devices, promotional materials, and advertising that the discounts are not insurance;
    2. The discounts are specifically authorized by an individual and separate contract with each health care provider listed in conjunction with the health discount plan; and
    3. The discounts or the range of discounts advertised or offered by the plan are clearly and conspicuously disclosed to the consumer.
  3. The provisions of subsection (2) of this section do not apply to the following:
    1. A customer discount or membership card issued by a retailer for use in its own facility; or
    2. Any card, program, device, or mechanism that is not insurance and which is administered by a health insurer authorized to transact the business of insurance in this state.
  4. A violation of this section shall be deemed an unfair, false, misleading, or deceptive act or practice in the conduct of trade or commerce in violation of KRS 367.170 . All of the remedies, powers, and duties delegated to the Attorney General by KRS 367.190 to 367.300 and penalties pertaining to acts and practices declared unlawful under KRS 367.170 shall be applied to acts and practices in violation of this section.

History. Enact. Acts 2002, ch. 105, § 29, effective July 15, 2002.

Pyramid Sales

367.830. Definitions.

Unless the context otherwise requires:

  1. “Participant” shall include, but is not limited to, those who give consideration in order to participate in the pyramid distribution plan;
  2. “Person” means natural persons, corporations, trusts, partnerships, incorporated or unincorporated associations, or any other legal entity;
  3. “Promotes” means inducing one (1) or more other persons to become a participant;
  4. “Pyramid distribution plan” means any plan, program, device, scheme, or other process by which a participant gives consideration for the opportunity to receive compensation or things of value in return for inducing other persons to become participants in the program;
  5. “Compensation” means payment of any money, thing of value, or financial benefit conferred in return for inducing others to become participants in the pyramid distribution plan. Compensation does not include payment based on sales of goods or services by the person or by other participants in the plan to anyone, including a participant in the plan, who is purchasing the goods or services for actual use or consumption; and
  6. “Consideration” means the payment of cash or the purchase of goods, services, or intangible property but does not include the purchase of goods or services furnished at cost to be used in making sales and not for resale, nor does it include time and effort spent in pursuit of sales or recruiting activities.

History. Enact. Acts 1986, ch. 184, § 1, effective July 15, 1986.

367.832. Pyramid distribution plan prohibited.

  1. It is hereby declared unlawful for any person to establish, promote, operate, or participate in any pyramid distribution plan.
  2. A limitation as to the number of persons who may participate or the presence of additional conditions affecting eligibility for the opportunity to receive compensation under the plan does not change the identity of the plan as a pyramid distribution plan nor is it a defense under this section that a participant, on giving consideration, obtains goods, services or intangible property in addition to the right to receive compensation.

History. Enact. Acts 1986, ch. 184, § 2, effective July 15, 1986.

367.834. Powers of Attorney General — Powers of Commonwealth or its agencies not limited.

  1. All of the remedies and powers granted to the Attorney General by KRS 367.190 to 367.300 and 367.990 for enforcement of KRS 367.170 shall be granted to the Attorney General with equal force and effect for enforcement of KRS 367.832 .
  2. Nothing in this chapter limits the power of any agency of the Commonwealth of Kentucky to enforce criminal or civil provisions of any other chapter of the Kentucky Revised Statutes or the right of any person to bring civil actions granted by any other chapter of the Kentucky Revised Statutes and based upon conduct prohibited herein and nothing in this chapter limits the power of the Commonwealth of Kentucky to punish any person for any conduct which constitutes a crime by statute or at common law.

History. Enact. Acts 1986, ch. 184, § 3, effective July 15, 1986.

367.836. Short title.

KRS 367.830 to 367.834 may be cited as the “Pyramid Sales Act.”

History. Enact. Acts 1986, ch. 184, § 5, effective July 15, 1986.

Mold Remediation Standards

367.83801. Legislative findings for KRS 367.83801 to 367.83807.

The General Assembly hereby finds that it is necessary to the health and welfare of the citizens of Kentucky that there be maintained, now and in the future, reasonable standards for the remediation of mold in private and public settings. It is therefore in the best interests of the citizens of the Commonwealth of Kentucky to establish standards for providers of mold remediation services in Kentucky.

History. Enact. Acts 2010, ch. 89, § 1, effective July 15, 2010.

367.83803. Definitions for KRS 367.83801 to 367.83807.

As used in KRS 367.83801 to 367.83807 :

  1. “Customer” means any person who contracts for services with a mold remediation company for the purposes of mold remediation;
  2. “Department” means the Department of Law;
  3. “Mold” means any living or dead fungi or related products or parts, including spores, hyphae, and mycotoxins;
  4. “Mold remediation” means the removal, cleaning, sanitizing, demolition, or other treatment, including preventative activities, of mold or mold-contaminated matter, live or dead, that was not intended to be grown, or purposely grown, at that location; and
  5. “Mold remediation company” means an entity that performs mold remediation for compensation.

History. Enact. Acts 2010, ch. 89, § 2, effective July 15, 2010.

367.83805. Department of Law to establish minimum standards for mold remediation companies — Complaints to Attorney General.

  1. The department shall, after consultation with the Public Protection Cabinet and the Department for Public Health, establish minimum standards for mold remediation companies that operate in the Commonwealth. The minimum standards shall be based on the five (5) general principles of mold remediation created by the Institute of Inspection, Cleaning and Restoration Certification (IICRC) in its publication, IICRC S520, Second Edition, Standard and Reference Guide for Professional Mold Remediation, or its successor publication. The five (5) general principles of mold remediation are as follows:
    1. Safety and health;
    2. Project documentation;
    3. Contaminant control;
    4. Contaminant removal; and
    5. Contamination prevention.

      All mold remediation companies operating in the Commonwealth shall adhere to the minimum standards established by the department.

  2. Any customer complaints regarding adherence by mold remediation companies to the administrative regulations promulgated under this section shall be directed to the Attorney General.

History. Enact. Acts 2010, ch. 89, § 3, effective July 15, 2010.

Legislative Research Commission Notes.

(7/15/2010). A reference to the “Environmental and Public Protection Cabinet” in subsection (1) of this section, as created by 2010 Ky. Acts ch. 89, sec. 3, has been changed in codification to the “Public Protection Cabinet” to reflect the reorganization of certain parts of the Executive Branch, as set forth in Executive Order 2009-535 and confirmed by the General Assembly in 2010 Ky. Acts ch. 24. This change was made by the Reviser of Statutes pursuant to 2010 Ky. Acts ch. 24, sec. 1938.

367.83807. Attorney General’s jurisdiction to enforce KRS 367.83801 to 367.83807.

  1. The Attorney General shall have jurisdiction to enforce KRS 367.83801 to 367.83807 , and may recover the reasonable costs of investigation and litigation.
  2. If an act by a mold remediation company violates any provision of this chapter, the Attorney General may take civil action and seek any remedy provided in this chapter, including the recovery of the reasonable costs of investigation and litigation.

History. Enact. Acts 2010, ch. 89, § 4, effective July 15, 2010.

Defective New Cars

367.840. KRS 367.841 to 367.844 to be construed liberally — Purposes.

KRS 367.841 to 367.844 shall be liberally construed and applied to promote the underlying purposes of KRS 367.841 to 367.844 , which purposes are:

  1. To protect consumers who buy or lease new motor vehicles that do not conform to applicable warranties by holding manufacturers accountable for certain nonconformities;
  2. To limit the number of attempts and the amount of times that a manufacturer or its agents shall have to cure such nonconformities; and
  3. To require manufacturers to provide, in as expeditious a manner as possible, a refund, not to exceed the amount in KRS 367.842 , or replacement vehicle that is acceptable to the aggrieved consumer when the manufacturer or its agents fail to cure any nonconformity within the specified limits.

History. Enact. Acts 1986, ch. 387, § 1, effective July 15, 1986; 1998, ch. 54, § 1, effective July 15, 1998.

NOTES TO DECISIONS

Cited:

Tackett v. Campbell Corp., 781 S.W.2d 758, 1989 Ky. App. LEXIS 125 (Ky. Ct. App. 1989).

Research References and Practice Aids

Kentucky Bench & Bar.

Stipanowich, Recent Developments in Commercial Arbitration, Volume 52, No. 1, Winter 1987-88 Ky. Bench & B. 15.

367.841. Definitions.

  1. “Buyer” means any resident person who buys, contracts to buy, or leases a new motor vehicle in the Commonwealth of Kentucky. In the case of the lease of a new motor vehicle, “buyer” shall mean the lessor, lessee, or both.
  2. “Manufacturer” means any person or corporation, resident or nonresident, who manufactures or assembles new motor vehicles, including new conversion van manufacturers, which are sold in the Commonwealth of Kentucky.
  3. “Motor vehicle” means every vehicle which is self-propelled, and which is intended primarily for use and operation on the public highways and required to be registered or licensed in the Commonwealth prior to such use or operation; however, “motor vehicle” shall not include:
    1. Any vehicle substantially altered after its initial sale from a dealer to an individual;
    2. Motor homes;
    3. Motorcycles;
    4. Mopeds;
    5. Farm tractors and other machines used in the production, harvesting, and care of farm products; or
    6. Vehicles which have more than two (2) axles.
  4. “New motor vehicle” means a motor vehicle which has been finally and completely assembled and is in the possession of a manufacturer, factory branch, distributor, wholesaler, or an authorized motor vehicle dealer operating under a valid sales and service agreement, franchise, or contract for the sale of such vehicle granted by the manufacturer, factory branch, distributor, or wholesaler which is, in fact, new and on which the original title has never been issued.
  5. “Express warranty” or “warranty” means the written warranty, so labeled, of the manufacturer of a new automobile, including any terms or conditions precedent to the enforcement of obligations under the warranty.
  6. “Nonconformity” means a failure to conform with an express warranty in a manner which substantially impairs the use, value, or safety of the motor vehicle.
  7. “Reasonable allowance for use” means the amount directly attributable to a consumer’s use of the vehicle other than those time periods when the vehicle is out of service due to the nonconformity.

History. Enact. Acts 1986, ch. 387, § 2, effective July 15, 1986; 1998, ch. 54, § 2, effective July 15, 1998; 1998, ch. 96, § 1, effective July 15, 1998.

Legislative Research Commission Note.

(7/15/98). This section was amended by 1998 Ky. Acts chs. 54 and 96 which do not appear to be in conflict and have been codified together.

Research References and Practice Aids

Kentucky Bench & Bar.

Stipanowich, Recent Developments in Commercial Arbitration, Volume 52, No. 1, Winter 1987-88 Ky. Bench & B. 15.

367.842. Options of buyer if manufacturer unable to repair nonconformity in new motor vehicle — Rights of lienholder — Resolution of disputes — Dealer not liable.

  1. If, after a reasonable number of attempts, the manufacturer or its agents are unable to repair the nonconformity in the motor vehicle to the express warranty during the first twelve thousand (12,000) miles of operation or during the first twelve (12) months following the date of delivery to the buyer, whichever is the earlier date, that buyer shall report the nonconformity, in writing, to the manufacturer.
  2. If, within the period specified in subsection (1) of this section, the manufacturer or its agents, are unable to repair or correct any nonconformity or defect that substantially impairs the use, value, or safety of the motor vehicle, after a reasonable number of attempts, the manufacturer, at the option of the buyer, shall replace the motor vehicle with a comparable motor vehicle, or accept return of the vehicle from the buyer and refund to the buyer the full purchase price. The full purchase price shall include the amount paid for the motor vehicle, finance charge, all sales tax, license fee, registration fee, and any similar governmental charges plus all collateral charges, less a reasonable allowance for the buyer’s use of the vehicle. Refunds shall be made to the buyer and lienholder, if any, as their interests may appear on the records of ownership kept by the Department of Vehicle Regulation. The provisions of this section shall not affect the interests of a lienholder, unless the lienholder consents to the replacement of the lien with a corresponding lien on the automobile accepted by the consumer in exchange for the automobile having a nonconformity, the lienholder shall be paid in full the amount due on the lien, including finance charges and other charges, before an exchange of automobiles or a refund to the consumer is made. It shall be an affirmative defense to any claim under this section that:
    1. The nonconformity, defect, or condition does not substantially impair the use, value, or safety of the motor vehicle; or
    2. The nonconformity, defect, or condition is the result of abuse, neglect, or unauthorized modification or alteration of the motor vehicle by the buyer.
  3. It shall be presumed that a reasonable number of attempts have been undertaken to conform a motor vehicle to the applicable express warranty if, within the first twelve thousand (12,000) miles of operation or during the period of twelve (12) months following the date of original delivery of the motor vehicle to the buyer, whichever is the earlier date:
    1. The same nonconformity, defect, or condition has been subject to repair four (4) or more times by the manufacturer, but such nonconformity, defect, or condition continues to exist; or
    2. The vehicle is out of service/use by reason of repair of the same nonconformity, defect, or condition for a cumulative total of at least thirty (30) calendar days. The time period described in this paragraph shall be extended by a reasonable time when a vehicle cannot be repaired due to the unavailability of parts or supplies as a result of war, invasion, civil unrest, fire, flood, or natural disaster.
  4. Disputes arising under subsection (2) of this section concerning refund or replacement shall be resolved through the dispute resolution system established under either KRS 367.860 to 367.870 , or 16 C.F.R. part 703. Such remedy shall be pursued prior to seeking any judicial relief under KRS 367.843 .
  5. Nothing in this chapter may be construed as imposing any liability on a dealer or creating a cause of action by a consumer against a dealer.
  6. Nothing in this section shall in any way limit the rights or remedies which are otherwise available to a buyer under any other law.
  7. Any agreement entered into by a buyer for the purchase of a new motor vehicle which waives, limits, or disclaims the rights set forth in this section shall be void as contrary to public policy.
  8. Any action brought pursuant to this section shall be commenced within two (2) years after the date of original delivery of the new motor vehicle to the buyer.
  9. A court may award reasonable attorney’s fees to a prevailing plaintiff.

History. Enact. Acts 1986, ch. 387, § 3, effective July 15, 1986; 2012, ch. 13, § 1, effective July 12, 2012.

Research References and Practice Aids

Kentucky Bench & Bar.

Stipanowich, Recent Developments in Commercial Arbitration, Volume 52, No. 1, Winter 1987-88 Ky. Bench & B. 15.

367.843. Action for relief by purchaser.

Any person who purchases a motor vehicle and thereby suffers any ascertainable loss of money or property, real or personal, as a result of a violation of KRS 367.842 , may bring an action under the provisions of KRS 367.220 for relief.

History. Enact. Acts 1986, ch. 387, § 4, effective July 15, 1986.

367.844. Manufacturer prohibited from exposing franchised dealer to liability.

No manufacturer shall, directly or indirectly, by any means or methods, expose or attempt to expose any franchised dealer to liability as forbidden in KRS 367.842(4) and (5). Any violation of this section shall be subject to all applicable provisions of the law, including but not limited to the provisions of KRS 190.062(2).

History. Enact. Acts 1986, ch. 387, § 5, effective July 15, 1986.

Research References and Practice Aids

Kentucky Bench & Bar.

Stipanowich, Recent Developments in Commercial Arbitration, Volume 52, No. 1, Winter 1987-88 Ky. Bench & B. 15.

367.845. Enforcement of provisions of KRS 367.842 to 367.844 by Attorney General.

Noncompliance with the provisions of KRS 367.842 to 367.844 by a manufacturer shall be unlawful. The Attorney General shall have authority to enforce KRS 367.842 to 367.844 in accordance with powers provided by KRS 367.190 and 367.230 , pertaining to acts declared unlawful by KRS 367.170 . Any expenses accruing to the Attorney General from the provisions of KRS 367.842 to 367.844 shall be assessed by his office upon the motor vehicle manufacturer involved in any action cited in the provisions herein.

History. Enact. Acts 1986, ch. 387, § 6, effective July 15, 1986.

Research References and Practice Aids

Kentucky Bench & Bar.

Stipanowich, Recent Developments in Commercial Arbitration, Volume 52, No. 1, Winter 1987-88 Ky. Bench & B. 15.

367.846. Application of KRS 367.840 to 367.845.

KRS 367.840 to 367.845 shall apply to new motor vehicles purchased after July 15, 1986, and to motor vehicles leased after July 15, 1998.

History. Enact. Acts 1986, ch. 387, § 7, effective July 15, 1986; 1998, ch. 54, § 3, effective July 15, 1998.

Research References and Practice Aids

Kentucky Bench & Bar.

Stipanowich, Recent Developments in Commercial Arbitration, Volume 52, No. 1, Winter 1987-88 Ky. Bench & B. 15.

Kosher Meats or Meat Preparations

367.850. False representation of kosher meats or meat preparations — Advertising — Sale.

  1. A person who, with intent to defraud, sells or exposes for sale any meat or meat preparations, and falsely represents the same to be kosher, whether such meat or meat preparations be raw or prepared for human consumption, or as having been prepared under, and of a product or products sanctioned by, the orthodox Hebrew religious requirements, either by direct statement orally, or in writing, which might reasonably be calculated to deceive or lead a reasonable man to believe that a representation is being made that such meat or meat preparation is kosher or prepared in accordance with the orthodox Hebrew religious requirements, or falsely represents any meat products or the contents of any package or container to be so constituted and prepared, by having or permitting to be inscribed thereon the word “kosher” in any language; or sells or exposes for sale in the same place of business both kosher and non-kosher meat or meat preparations, whether raw or prepared for human consumption, and who fails to indicate on his window signs and all display advertising, in block letters at least four (4) inches in height, “kosher and non-kosher meat sold here”; or who exposes for sale in any show window or place of business both kosher and non-kosher meat or meat preparations, either raw or prepared for human consumption, and who fails to display over each kind of meat or meat preparations, so exposed a sign in block letters at least four (4) inches in height reading “kosher meat,” or “non-kosher meat,” as the case may be, or who displays on his window, or in his place of business, or in handbills or other printed matter distributed in or outside of his place of business, words or letters in Hebraic characters other than the word “kosher,” or any sign, emblem, insignia, six (6) pointed star, symbol, or mark in simulation of same, without displaying in conjunction therewith, in English letters of at least the same size as such characters, signs, emblems, insignia, symbols, or marks, the words “we sell kosher meat only,” or “we sell non-kosher meat only,” or “we sell both kosher and non-kosher meat,” as the case may be, is guilty of a misdemeanor. Possession of non-kosher meat or meat preparations, in any place of business advertising the sale of kosher meat and meat preparations only, is presumptive evidence that the person in possession exposes the same for sale with intent to defraud, in violation of the provisions of this section.
  2. A person who, with intent to defraud, sells or exposes for sale in any hotel, restaurant, or other place where meat products are sold for consumption on or off the premises, and falsely represents the same to be kosher, whether such meat or meat preparations, be raw or prepared for human consumption, or as having been prepared under, and of a product or products sanctioned by the orthodox Hebrew religious requirements, either by direct statement orally, or in writing, which might reasonably be calculated to deceive or lead a reasonable man to believe that a representation is being made that such meat is kosher or prepared in accordance with the orthodox Hebrew religious requirements, or falsely represents any meat or meat product or the contents of any package to be so constituted and prepared, by having or permitting to be inscribed thereon the word “kosher” in any language; or sells or exposes for sale in the same place of business both kosher and non-kosher meat or meat preparations, either raw or prepared for human consumption, and who fails to indicate on his window signs and all display advertising, in block letters at least four (4) inches in height, “kosher and non-kosher meat sold here,” either raw or prepared for human consumption, and who fails to display over each kind of meat or meat preparation so exposed a sign in block letters at least four (4) inches in height reading “kosher meat” or “non-kosher meat,” as the case may be, or who displays on his window, door, or in his place of business, or in handbills or other printed matter distributed in or outside of his place of business, words or letters in Hebraic characters other than the word “kosher,” or any sign, emblem, insignia, six (6) pointed star, symbol, or mark in simulation of same, without displaying in conjunction therewith in English letters of at least the same size as such characters, signs, emblems, insignia, symbols, or marks the words “we sell kosher meat only,” or “we sell non-kosher meat only,” or “we sell both kosher and non-kosher meat,” as the case may be, is guilty of a misdemeanor. Possession of non-kosher meat, in any place of business advertising the sale of kosher meat only, is presumptive evidence that the person in possession exposes the same for sale with intent to defraud, in violation of the provisions of this section.

History. Enact. Acts 1980, ch. 49, § 10, effective July 15, 1980.

Fresh Meat or Meat Products Produced Outside United States

367.855. Sign to indicate fresh meat or fresh meat product produced outside United States — Exemptions.

  1. Any person who sells or exposes for sale any fresh meat or fresh meat product which is produced outside of the United States shall indicate by a sign displayed over each kind of meat or meat product that the meat or meat product is “foreign meat” or “imported meat” using lettering at least two (2) inches in height and displayed either in or on the meat counter.
  2. “Meat” means pork, beef, poultry, mutton, and lamb.
  3. This section and KRS 367.857 shall not apply to fresh meat or fresh meat product:
    1. Not prepared for human consumption;
    2. Prepared by food service establishments as defined in KRS Chapter 219; or
    3. Where the meat or meat product is only a portion of the total consumer item.

History. Enact. Acts 1988, ch. 142, § 1, effective July 15, 1988.

367.857. Wholesalers, distributors or processors to indicate in writing the place of origin.

Any wholesaler, distributor or processor of fresh meat or fresh meat product who sells, exposes for sale, delivers or transfers any meat or meat product which is produced outside of the United States shall indicate to the retailer, purchaser or transferee in writing, that the meat or meat product is produced outside of the United States and shall indicate to the retailer, purchaser or transferee in writing, the place of origin of the meat or meat product.

History. Enact. Acts 1988, ch. 142, § 2, effective July 15, 1988.

Informal Dispute Resolution System

367.860. Definitions for KRS 367.865.

As used in KRS 367.865 unless the context requires otherwise:

  1. “Buyer” means any resident person who buys or contracts to buy a new motor vehicle in the Commonwealth of Kentucky.
  2. “Manufacturer” means any person, resident or nonresident, who manufactures or assembles new motor vehicles which are sold in the Commonwealth of Kentucky.
  3. “Motor vehicle” means any two (2) axle, motor-driven vehicle with at least four (4) wheels which is required to be registered or licensed in the Commonwealth of Kentucky before being operated upon the highways and is used or bought for use primarily for personal, family, or household purposes.
  4. “New motor vehicle” means a motor vehicle which, after its final assembly, is either in the possession of the manufacturer, factory branch or distributor, or an authorized dealer operating under a franchise with the manufacturer, factory branch or distributor, and the legal or equitable title to which has never been the subject of a sale or transfer other than to another dealer operating under a similar franchise with the same manufacturer, factory branch or distributor.
  5. “System” means an informal dispute resolution procedure adopted by each manufacturer to resolve questions of law and fact relating to disputes between the buyer and the manufacturer arising within the first two (2) years or twenty-five thousand (25,000) miles of the buyer’s ownership, whichever occurs first, including but not limited to unsatisfactory warranty repairs of the buyer’s motor vehicle, mechanical malfunctions of the buyer’s motor vehicle, or other problems relating to the performance of the buyer’s motor vehicle.

History. Enact. Acts 1982, ch. 193, § 1, effective July 15, 1982.

Research References and Practice Aids

Kentucky Bench & Bar.

Stipanowich, Recent Developments in Commercial Arbitration, Volume 52, No. 1, Winter 1987-88 Ky. Bench & B. 15.

367.865. Informal dispute resolution system.

  1. Effective January 1, 1983, each motor vehicle manufacturer shall offer to the buyer a comprehensive informal dispute resolution system. By transacting business in the Commonwealth of Kentucky, each manufacturer is deemed to have voluntarily consented to participate in the system. Each system shall operate pursuant to written rules and procedures which:
    1. Ensure that the system is impartial, accessible to the buyer, and expeditious, and shall operate at no cost to the buyer;
    2. Provide that if the buyer elects to submit the dispute to the system, the manufacturer shall not refuse to submit the dispute to the system as long as the subject of the dispute occurred during the first two (2) years or twenty-five thousand (25,000) miles, whichever occurs first, of the buyer’s ownership of the motor vehicle involved in the dispute;
    3. Provide that the system shall provide for an oral hearing, unless the buyer agrees in writing that the system shall render a decision based solely on documents submitted to it;
    4. Shall include, but is not limited to, procedures for informing the buyer of the existence of the system, preparing the agreement between the buyer and the manufacturer whereby the dispute may be submitted to the system, selecting the members of the decision-making panel, notifying the parties of the complaint, investigating the complaint, providing for hearings, rendering a fair and expeditious decision, and informing parties of the decision.
  2. The decision of the system shall be legally binding on the manufacturer. The decision of the system shall not be legally binding on the buyer, unless the manufacturer elects to have its system binding on all buyers who submit their disputes to the system. If the system is to be binding to both parties, the written agreement between the buyer and the manufacturer whereby the dispute is submitted to the system shall include in conspicuous, bold-faced type the following statement:
  3. Before a dispute may be submitted to a system which is legally binding on both parties, the buyer shall sign the disclosure statement required by subsection (2) of this section.
  4. Each manufacturer shall take steps reasonably calculated to make the buyer aware of the existence of the system at the time the dispute arises.
  5. Each manufacturer shall take all steps necessary to ensure that the system is sufficiently insulated from the manufacturer so that the decisions of the system are not influenced by the manufacturer. The system’s decision-making panel shall be composed of members at least fifty-one percent (51%) of whom have no involvement in the manufacture, distribution or sale of motor vehicles. No member deciding a dispute shall be a party to the dispute; nor shall any member deciding a dispute be an employee or agent of a party to the dispute, unless solely for the purpose of impartially deciding disputes.
  6. Nothing herein shall prohibit the manufacturer from participating in a system sponsored or administered by an impartial third party having no direct involvement in the manufacture, distribution, sale, or service of motor vehicles.
  7. Each dispute resolution system shall provide to the office of the Attorney General, upon request, the name and address of each buyer whose complaint is resolved through its system. The Attorney General shall have the authority to monitor each dispute resolution system as well as review the records on each complaint, upon request. An annual report shall be prepared and published by the office of the Attorney General evaluating the performance, effectiveness, and benefits of the system, and shall include in this report recommendations for continuing, modifying, or terminating the requirement of this section.

“YOU SHOULD REMEMBER THAT BY ENTERING INTO THIS AGREEMENT YOU ARE DECIDING TO USE THIS DISPUTE RESOLUTION SYSTEM TO SETTLE YOUR DISPUTE INSTEAD OF GOING TO COURT. AFTER A DECISION BY AN ARBITRATOR, NORMALLY A COURT WILL REFUSE TO HEAR THE FACTS IN A CASE IN ALL BUT THE MOST UNUSUAL SITUATIONS. YOUR SIGNATURE IS REQUIRED IMMEDIATELY BELOW TO INDICATE THAT YOU HAVE READ THIS DISCLOSURE. SIGNATURE OF BUYER

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History. Enact. Acts 1982, ch. 193, § 2, effective July 15, 1982; 1984, ch. 360, § 1, effective July 13, 1984.

NOTES TO DECISIONS

1.Nonbinding Decision.

Car purchaser who agreed to have her complaints regarding the vehicle arbitrated by Manufacturer’s Consumer Appeals Board was not legally bound by the board’s decision where the “decision” of the board, assuming one was made, exceeded the scope of the question submitted to it, and the board did not even consider the matter submitted to the board. Tackett v. Campbell Corp., 781 S.W.2d 758, 1989 Ky. App. LEXIS 125 (Ky. Ct. App. 1989).

Opinions of Attorney General.

A manufacturer is prohibited from requiring that a franchise dealer submit to an arbitration panel the question of whether the dealer must pay for all or part of the cost of repairing or replacing a defective new motor vehicle. OAG 87-69 .

Research References and Practice Aids

Kentucky Bench & Bar.

Stipanowich, Recent Developments in Commercial Arbitration, Volume 52, No. 1, Winter 1987-88 Ky. Bench & B. 15.

367.867. Other dispute resolution system satisfies requirements of KRS 367.865.

Notwithstanding the provisions of KRS 367.860 to 367.870 , a dispute resolution system which is established pursuant to and in compliance with 16 C.F.R. Part 703 satisfies the requirements of KRS 367.865 , as long as the dispute resolution system provides each party to the dispute with the right to an oral hearing.

History. Enact. Acts 1984, ch. 360, § 2, effective July 13, 1984.

Research References and Practice Aids

Kentucky Bench & Bar.

Stipanowich, Recent Developments in Commercial Arbitration, Volume 52, No. 1, Winter 1987-88 Ky. Bench & B. 15.

367.870. Enforcement of informal dispute resolution system.

Noncompliance with KRS 367.865 by a manufacturer shall be unlawful. The Attorney General shall have authority to enforce KRS 367.865 in accordance with powers provided by KRS 367.190 and 367.230 to 367.300 , pertaining to acts declared unlawful by KRS 367.170 .

History. Enact. Acts 1982, ch. 193, § 3, effective July 15, 1982.

Research References and Practice Aids

Kentucky Bench & Bar.

Stipanowich, Recent Developments in Commercial Arbitration, Volume 52, No. 1, Winter 1987-88 Ky. Bench & B. 15.

Gift Cards

367.890. “Gift card” defined — Earliest permissible expiration dates — Extra charges and fees prohibited — Liability of violator.

  1. “Gift card,” as used in this section, means a certificate, electronic card, or other medium issued by a merchant that evidences the giving of consideration in exchange for the right to redeem the certificate, electronic card, or other medium for goods, food, services, credit, or money of at least an equal value. “Gift card” includes any electronic card issued by a merchant with a monetary value where the issuer has received payment for the full monetary value for the future purchase or delivery of goods or services and any certificate issued by a merchant where the issuer has received payment for the full monetary face value of the certificate for the future purchase or delivery of goods and services. “Gift card” does not include a prepaid calling card used to make telephone calls, or a general-use, prepaid card or other electronic payment device that is issued by a bank or other financial institution that is usable at multiple, unaffiliated merchants, or at automated teller machines, or both, or a gift card issued by a merchant for a promotional program for which no separate monetary consideration is given.
  2. Subject to subsection (5) of this section, no person or entity shall sell a gift card containing an expiration date that is less than one (1) year after the date the gift card is issued.
  3. No person or entity shall charge service charges or fees relative to that gift card, including dormancy fees, latency fees, or administrative fees, that have the effect of reducing the total amount for which the holder of the gift card may redeem the gift card until the expiration date on the card has expired.
  4. A gift card sold without an expiration date printed on the front or back of the card is valid until redeemed or replaced with a new gift card.
  5. If the expiration date on the card is not less than one hundred twenty (120) days from the date of issue, subsection (2) of this section does not apply to any of the following gift cards:
    1. Sold below face value at a volume discount to employers or to nonprofit and charitable organizations for fundraising purposes;
    2. Sold by a nonprofit or charitable organization for fundraising purposes; or
    3. Given by an employer to an employee, if use of the card is limited to the employer’s business establishment. As used in this paragraph, business establishment may include a group of merchants that are affiliated with that business establishment.
  6. Any person who violates subsection (3) of this section is liable to the holder of the card for any amount that the redemption value of the gift card was reduced, any court costs incurred, and reasonable attorney’s fees.

History. Enact. Acts 2006, ch. 28, § 1, effective July 12, 2006; 2010, ch. 54, § 1, effective July 15, 2010.

Health Spas

367.900. Definitions.

As used in KRS 367.905 to 367.930 , unless the context requires otherwise:

  1. “Health spa” means an establishment, except those defined as nonprofit organizations under 26 U.S.C. sec. 509(a) , which provides for profit as one of its primary purposes, services or facilities which purport to improve the user’s physical condition or appearance through participation in sports activities, fitness training, exercise, or body building. The term includes establishments that offer access to any of the following facilities: gymnasiums, swimming pools, tracks, ball courts, weight lifting equipment, exercise equipment or facilities, saunas, steambaths, or whirlpools. It does not include establishments that limit their services primarily to diet counseling and the provision of special dietary foods.
  2. “Contract” means an oral or written agreement by which one becomes a member of a health spa.
  3. “Member” means a status attained by any natural person entitling him to the services or facilities of a health spa.
  4. “Seller” means the person, corporation, partnership, association, or group engaged in the operation of a health spa as defined in this section, and who offers for sale the right to use the facilities or the services of the health spa.
  5. “Facilities” means equipment, physical structures, and other tangible property utilized by a health spa to conduct its business. The term includes, but is not limited to, saunas, whirlpool baths, gymnasiums, running tracks, swimming pools, shower areas, and exercise equipment.
  6. “Services” means programs, plans, guidance, or instruction provided by a health spa for health spa members. The term includes, but is not limited to diet planning, exercise instruction, exercise programs, and instructional classes.
  7. “Prepayment” means any payment for services or the use of facilities made before the services or facilities are made available by the health spa. It is not a prepayment if a payment for services or the use of facilities is made on the same day the services or use of the facilities is provided. Money or other consideration received by a health spa from a financial institution upon the assignment or sale of a contract shall be considered a prepayment to the extent the member is required to make prepayments to the financial institution pursuant to the contract.
  8. “Special offer or discount” means any offer of health spa services or the use of health spa facilities at a reduced price or without charge to the member or prospective member.
  9. “Contract price” means the total consideration paid by a member pursuant to a contract, including, but not limited to the following:
    1. Any nonrecurring fee charged at, or near, the beginning of a health spa membership or renewal period;
    2. All monthly fees required by the contract;
    3. All finance charges, time-price differentials, interest, and other similar fees and charges; and
    4. All charges for equipment or locker rental, credit check, financial, medical and dietary evaluation, class and training fees.
  10. “Contract term” means the total period of health spa use allowed by a member’s contract, including months or time periods that are called “free” or “bonus,” or that are described in any other terms suggesting that they are provided free of charge.

History. Enact. Acts 1982, ch. 298, § 1, effective July 15, 1982; 1988, ch. 367, § 5, effective July 15, 1988.

Opinions of Attorney General.

An establishment offering a sauna, steamroom, massages and a limited exercise program, which establishment would charge a fee to be collected only at the time the services and facilities were used, so that there would be no prepayment for services or use of the facilities and no contracts of membership would be sold, would be a “health spa” as defined in subdivision (1) of this section. OAG 83-65 .

367.905. Registration of health spa — Annual registration statement and fee — Surety bond — Separate locations.

  1. Any person, corporation, partnership, association, or group intending to open or operate a health spa within the Commonwealth, shall:
    1. File a registration statement, accompanied by a one hundred dollar ($100) initial registration fee, with the Attorney General’s Division of Consumer Protection prior to the sale of any memberships in the Commonwealth of Kentucky. Such a registration statement shall contain the name and address of the health spa; the names and addresses of the officers, directors, and stockholders of the health spa and its parent corporation, if such an entity exists; the type of available facilities; approximate size of the health spa measured in square feet; whether or not a shower area is provided; the names and addresses of employees and their respective qualifications for employment in the health spa field; type of membership plans to be offered and their cost; and a full and complete disclosure of any completed or pending litigation initiated against the health spa and any of its officers or directors within the last three (3) years.
    2. Prior to the sale of any memberships in the Commonwealth of Kentucky, provide the Attorney General’s Division of Consumer Protection with a surety bond meeting the requirements of KRS 367.906 .
  2. A new registration statement, accompanied by an annual registration fee of fifty dollars ($50), shall be filed with the Attorney General’s Division of Consumer Protection on or before July 1 of each year following the opening of the health spa.
  3. Each health spa selling contracts on a prepayment basis shall deposit all funds received from such contracts in an escrow account until the health spa has remained open for a period of thirty (30) days. At the end of this thirty (30) day period, such prepayment funds shall be eligible for withdrawal at the depositor’s discretion.
  4. Each health spa registering pursuant to this statute shall maintain in the files of the health spa, a copy of its registration statement filed pursuant to this section. This registration statement shall be made available for inspection by current health spa members or prospective purchasers of health spa memberships.
  5. The registration fees required by this section shall be credited to a trust or agency account for the administrative purposes of the Attorney General’s Division of Consumer Protection, as set forth in KRS 367.900 to 367.930 .
  6. Each separate location where health spa services are offered shall be considered a separate health spa and shall file a separate registration statement and surety bond, even though the separate locations are owned or operated by the same owner.

History. Enact. Acts 1982, ch. 298, § 2, effective July 15, 1982; 1988, ch. 367, § 6, effective July 15, 1988.

Opinions of Attorney General.

A health spa which collected fees only at the time the facilities were used, and which did not require any prepayment of fees or issue any membership contracts, would be exempt from the bonding provisions in accordance with subdivision (1)(c)(i) of this section as spa users would not be obligating themselves to pay a total of $100.00 or more over a yearly period; this exemption would be available as long as the individuals did not in any way obligate themselves to attend the health spa a specific number of times or for a specific period of time and as long as the price of each visit was less than $100.00. OAG 83-65 .

All health spas operating, or which wish to begin operation, in the Commonwealth must register under subdivision (1)(a) of this section since nothing in that subdivision indicates that “shall” should not be considered as making registration mandatory. OAG 83-65 .

Where establishment would offer a sauna, steamroom, massages and a limited exercise program and would collect a fee only at the time the facilities were used, such establishment must file a registration statement pursuant to subdivision (1)(a) of this section despite the fact that there would be no prepayment for services and no contracts of membership would be sold. OAG 83-65 .

Research References and Practice Aids

2020-2022 Budget Reference.

See State/Executive Branch Budget, 2021 Ky. Acts ch. 169, Pt. I, A, 19, (5) at 1068.

367.906. Form and amount of surety bonds — Exemptions from bonding requirement — Effect of change in membership, ownership.

  1. The surety bond required by KRS 367.905(1)(b) shall be in favor of the Attorney General’s Division of Consumer Protection and shall be held for compensation to any member who suffers loss of money paid due to the insolvency of the health spa, cessation of operation of the health spa, or failure of the health spa to open for business within ninety (90) days from the sale of the first contract.
  2. The bond shall be in a form prescribed by the Attorney General’s Division of Consumer Protection and shall be issued by a company authorized to transact business in the Commonwealth of Kentucky.
  3. The amount of the bond shall be computed as follows:
  4. The Attorney General’s Division of Consumer Protection shall exempt a spa from the bonding requirement if all of its unexpired contracts and present membership plans meet the following criteria:
    1. No initiation fee, or similar nonrecurring fee, is charged at or near the beginning of the contract term or renewal period, and
    2. At no time is any member charged for use of facilities or services more than thirty-one (31) days in advance.
  5. If, because of an increase in membership or change in membership plans, a spa is required to file a bond or increase the amount of its bond, it shall notify the Attorney General’s Division of Consumer Protection in writing at least thirty (30) days prior to the expected change. No contract in excess of the limits stated in subsection (3) of this section or not in compliance with subsection (4) of this section shall be sold until a new bond in the required amount has been provided.
  6. A change in ownership shall not release, cancel or terminate liability under any bond previously filed unless the Attorney General’s Consumer Protection Division agrees in writing to the release, cancellation or termination because the new owner has filed a new bond for the benefit of the previous owner’s members, or because the former owner has paid the required refunds to its members.

Number ofunexpired contracts Amount of bond 150 or fewer $10,000 151 to 300 $25,000 301 or more $50,000

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History. Enact. Acts 1988, ch. 367, § 1, effective July 15, 1988.

367.910. Written contract — Contents.

  1. A fully completed copy of each contract shall be delivered to the buyer at the time the contract is signed. Every contract must constitute the entire agreement between the seller and the buyer, must be in writing, and must be signed by the member.
  2. Each contract shall state in at least ten (10) point bold faced type the following:

    “NOTICE TO BUYER: DO NOT SIGN THIS CONTRACT UNTIL YOU HAVE READ ALL OF IT. ALSO, DO NOT SIGN THIS CONTRACT IF IT CONTAINS ANY BLANK SPACES.”

  3. Every purchaser of a membership shall be entitled to cancel his or her contract within three (3) business days by notifying the health spa in writing by midnight of the third business day following the date of purchase of the membership contract. Written notification is deemed given if mailed or delivered by midnight of the third business day. All money collected pursuant to the contract shall be refunded to the purchaser exercising the right to cancel.
  4. In addition to the cancellation rights stated in subsection (3) of this section, a member shall be entitled to cancellation and to a full or partial refund of the contract price as follows:
    1. A member shall be entitled to cancel if, because of death or medical disability, the member becomes unable to use a substantial portion of the facilities or services for thirty (30) or more consecutive days. Upon receipt of written notice from the member, or from the representative of the member’s estate, the health spa shall pay a refund in an amount computed by dividing the contract price by the number of weeks in the contract term and multiplying the result by the number of weeks remaining in the contract term. Members shall only receive refunds of money actually paid to the spa by them, or on their behalf. In the case of medical disability, the health spa may require the member to submit to an examination by a medical doctor agreeable to both the member and the health spa. The cost of the examination shall be borne by the health spa.
    2. A member shall be entitled to cancel if the health spa relocates more than five (5) miles from the location designated in the health spa contract. Upon receipt of written notice from the member, the health spa shall pay a refund to the member in an amount computed as provided in subsection (4)(a) of this section.
    3. A member shall be entitled to cancel if the member relocates twenty-five (25) miles or more from the residence stated in the contract, and the spa cannot provide comparable alternative facilities and services within five (5) miles of the member’s new residence. Upon written notice from the member, the health spa shall pay a refund in an amount computed as provided in subsection (4)(a) of this section. The health spa may require written verification of the new residence, such as a lease, deed, or utility bill.
    4. If the health spa fails to open for business within ninety (90) days from the sale of the first contract, becomes insolvent, or ceases operation, all membership contracts shall be deemed canceled and the spa shall pay refunds to its members. No notification from any member shall be required. Refunds shall be given in an amount computed as provided in subsection (4)(a) of this section.
  5. If written notice of cancellation is required in subsection (4) of this section, the member shall notify the health spa in writing, by certified mail, return receipt requested, or by personal delivery, to the address stated in the health spa contract. All moneys to be refunded shall be paid within thirty (30) days of receipt of the cancellation notice.
  6. If a refund is required by this section and the member has executed any credit or loan agreement with the health spa to pay for use of all or part of the facilities and services, that agreement shall be canceled and returned within the same time period as required for the refund.
  7. Each contract shall contain the following notice in at least ten (10) point bold faced type:

    “IF WITHIN THREE (3) BUSINESS DAYS YOU DECIDE YOU DO NOT WISH TO REMAIN A MEMBER OF THIS HEALTH SPA, YOU MAY CANCEL THIS AGREEMENT BY MAILING A NOTICE TO THE HEALTH SPA BY MIDNIGHT OF THE THIRD BUSINESS DAY FOLLOWING YOUR PURCHASE OF THE CONTRACT STATING YOUR DESIRE TO CANCEL THIS CONTRACT. THE WRITTEN NOTICE SHOULD BE MAILED TO THE FOLLOWING ADDRESS:”

    (address of the health spa)

    “ADDITIONAL CANCELLATION RIGHTS:

    You may also cancel this contract if any of the following occur:

    1. You may cancel if, because of death or medical disability, you become unable to use a substantial portion of the spa’s facilities or services for thirty (30) or more days. In the event of medical disability, you must provide the spa with a doctor’s statement. In addition, the spa may require you to submit to a physical examination by a mutually agreeable medical doctor, at its cost. Your estate may cancel in the event of your death.
    2. You may cancel if the spa relocates more than five (5) miles from the location stated in the contract.
    3. You may cancel if you relocate more than twenty-five (25) miles from your residence as stated in the contract, and the spa cannot provide comparable facilities and services within five (5) miles of your new residence. The spa may require written verification of your new residence, such as a lease, deed or utility bill.

IN ORDER TO EXERCISE THESE ADDITIONAL CANCELLATION RIGHTS, YOU MUST NOTIFY THE SPA IN WRITING, BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, OR BY PERSONAL DELIVERY, TO THE ADDRESS STATED ABOVE. ALL MONEYS TO BE REFUNDED SHALL BE PAID TO YOU WITHIN THIRTY (30) DAYS AFTER THE SPA’S RECEIPT OF THE CANCELLATION NOTICE.”

History. Enact. Acts 1982, ch. 298, § 3, effective July 15, 1982; 1988, ch. 367, § 7, effective July 15, 1988.

367.911. Term of contract.

  1. No contract term shall exceed thirty-six (36) months from the date the contract is entered into; however, a member may renew a contract for additional terms. No contract term shall be measured by or be for the life of the member.
  2. No contract shall require payments or financing by the member over a period in excess of thirty-six (36) months from the date the contract is entered into.

History. Enact. Acts 1988, ch. 367, § 2, effective July 15, 1988.

367.912. Noncomplying contract void and unenforceable — Waiver deemed void.

  1. Any contract which does not comply with the applicable provisions of KRS 367.900 to 367.930 shall be void and unenforceable as contrary to public policy.
  2. Any waiver by a member or purchaser of a contract of any of the provisions of KRS 367.900 to 367.930 shall be deemed void and unenforceable as contrary to public policy.

History. Enact. Acts 1988, ch. 367, § 3, effective July 15, 1988.

367.913. Member’s cancellation rights.

  1. In addition to any rights that may be conferred upon a member by KRS 367.610 , no holder of a consumer credit contract, as that term is defined in KRS 367.600 , shall fail to honor a member’s cancellation rights and provide a refund within the time period required by KRS 367.910 .
  2. Subsection (1) of this section shall apply regardless of whether the consumer credit contract is in compliance with trade regulations issued or promulgated by the Federal Trade Commission or any regulation of the Board of Governors of the Federal Reserve System or similar federal agency having jurisdiction relating to preservation of consumer claims and defenses in credit transactions.
  3. No assignee of a health spa’s right to payment pursuant to a contract not providing for an extension of credit shall fail to honor a member’s cancellation rights and provide a refund within the time period required by KRS 367.910 .

History. Enact. Acts 1988, ch. 367, § 4, effective July 15, 1988.

367.915. List of membership plans.

  1. Each health spa doing business in the Commonwealth shall prepare a comprehensive list of all membership plans offered for sale by the health spa and the respective price of each plan. The list shall be shown to each prospective purchaser of a membership plan.
  2. A health spa is prohibited from selling a membership plan not included in this list and in the registration statement required by KRS 367.905 .

History. Enact. Acts 1982, ch. 298, § 4, effective July 15, 1982.

367.920. Prohibited activities.

  1. Health spas shall be prohibited from offering specials or discounts unless such specials or discounts are made in writing and available to all prospective members.
  2. Health spas shall be prohibited from making any material misrepresentation to current members, prospective members or purchasers of membership contracts regarding:
    1. Qualifications of staff;
    2. Availability, quality, or extent of facilities or services;
    3. Results obtained through exercise, dieting, or weight control programs;
    4. Rights of membership pursuant to a contract or oral representation; and
    5. Period of time a discount or special offer will be available.

History. Enact. Acts 1982, ch. 298, § 5, effective July 15, 1982.

367.925. Remedies.

All of the remedies, powers and duties provided for the Attorney General by KRS 367.190 to 367.300 appertaining to acts declared unlawful by KRS 367.170 shall apply with equal force and effect to acts and practices declared unlawful by KRS 367.905 to 367.930 .

History. Enact. Acts 1982, ch. 298, § 6, effective July 15, 1982.

367.930. Action in Circuit Court — Attorney’s fees — Effect of judgment — Statute of limitations.

  1. Any person who purchases a health spa membership or enters into a contract to purchase a health spa membership and thereby suffers any ascertainable loss of money or property, real or personal, as a result of the use or employment by another person or corporation of an act or practice declared unlawful by KRS 367.905 to 367.920 may bring an action pursuant to the Rules of Civil Procedure in the Circuit Court in which the seller resides or has his principal place of business or is doing business, or in the Circuit Court in which the purchaser of the membership resides, or where the transaction occurred, to recover actual damages. The court may award such equitable relief as it deems necessary or proper. Nothing in this section shall be construed to limit a person’s right to seek punitive damages where appropriate.
  2. In any action brought by a person under this section, the court may award, to the prevailing party, in addition to the relief provided in this section, reasonable attorney’s fees and costs.
  3. Any permanent injunction, judgment, or order of the court made under KRS 367.925 shall be prima facie evidence in an action under this section that the respondent used or employed a method, act, or practice declared unlawful by KRS 367.905 to 367.930 .
  4. Any person bringing an action under this section must bring such an action within one (1) year after any action of the Attorney General has been terminated or within two (2) years after the violation of this section is discovered, whichever is later.

History. Enact. Acts 1982, ch. 298, § 7, effective July 15, 1982.

Funeral Planning

367.93101 Definitions for KRS 367.93101 to 367.93121.

As used in KRS 367.93101 to 367.93121 , unless the context requires otherwise:

  1. “Cemetery merchandise” has the same meaning as in KRS 367.932 ;
  2. “Declarant” means an individual who signs a funeral planning declaration executed under KRS 367.93101 to 367.93121 ;
  3. “Declaration” means a funeral planning declaration setting forth the declarant’s preferences regarding the manner of disposition of the declarant’s remains that is executed under KRS 367.93101 to 367.93121 and in a form prescribed by administrative regulation promulgated by the Office of the Attorney General;
  4. “Designee” means an individual designated and directed by the terms of the declaration to:
    1. Carry out the funeral plan of the declarant; or
    2. Make any arrangements concerning the disposition of the declarant’s remains, funeral services, cemetery merchandise, funeral merchandise, or ceremonies;
  5. “Funeral” has the same meaning as in KRS 316.010 ; and
  6. “Funeral merchandise” means caskets, outer burial containers, urns, clothing, register books, acknowledgement cards, other memorial products, and any other similar products that are commonly sold by or used in funeral homes.

HISTORY: 2016 ch. 59, § 1, effective July 15, 2016.

367.93103. Funeral planning declarations.

  1. A person who is of sound mind and is at least eighteen (18) years of age may execute a declaration.
    1. A declaration shall not be included in: (2) (a) A declaration shall not be included in:
      1. A will;
      2. A power of attorney; or
      3. A similar document.
    2. If a declaration is included in any of the documents listed in paragraph (a) of this subsection, it shall not invalidate the document but the declaration contained therein is not enforceable.
  2. A declaration shall designate an individual to serve as the designee, or if no designee is designated shall provide instruction concerning funeral services, ceremonies, and the disposition of remains after death.
  3. A declaration, at a minimum, shall be:
    1. Voluntary;
    2. In writing;
    3. Signed by the declarant or by another person in the declarant’s presence and at the direction of the declarant;
    4. Dated;
    5. Signed in the presence of at least two (2) competent witnesses who are at least eighteen (18) years of age at the time they sign the declaration; and
    6. Acknowledged before a notary public or other person authorized to administer oaths.
  4. A declaration is not binding upon a funeral home, a cemetery, or any person engaged in the business of providing funeral services, selling merchandise or grave markers, or providing a service or other property subject to the declaration until the funeral home, cemetery, or person receives full payment for the service, merchandise, or other property.
  5. A person is not considered to be entitled to any part of the declarant’s estate solely by virtue of being designated by the declarant to serve as his or her designee.
  6. Unless an individual is related to the declarant by birth, marriage, or adoption, a declarant shall not designate an individual to be his or her designee or alternate designee who is:
    1. A provider of funeral or cemetery services; or
    2. Employed by any entity that is responsible for providing funeral or cemetery services or disposing of the declarant’s remains.
  7. The following shall not be a witness to a declaration:
    1. The person who signed the declaration on behalf of and at the direction of the declarant; or
    2. The person identified as the designee.

HISTORY: 2016 ch. 59, § 2, effective July 15, 2016; 2017 ch. 144, § 1, effective June 29, 2017; 2018 ch. 185, § 27, effective July 14, 2018.

367.93105. Declaration may specify declarant’s preferences.

A declaration may specify the declarant’s preferences concerning any of the following:

  1. The disposition of the declarant’s remains after the declarant’s death;
  2. Who may direct the disposition of the declarant’s remains;
  3. Who may provide funeral services after the declarant’s death;
  4. Specific directions about the type and form of funeral services desired;
  5. The ceremonial arrangements to be performed after the declarant’s death;
  6. The funeral merchandise and cemetery merchandise for the disposition of the declarant’s remains;
  7. Who may direct the ceremonial arrangements to be performed after the declarant’s death; and
  8. Disinterment.

HISTORY: 2016 ch. 59, § 3, effective July 15, 2016.

367.93107. Most recent declaration of preference prevails.

  1. The provisions of the declarant’s most recent declaration shall prevail over any other document executed by the declarant concerning any preferences described in KRS 367.93105 .
  2. The invalidity of any specific preference or direction shall not affect the validity of the declaration.
  3. This section shall not be construed to enable a legal representative to revoke a properly executed declaration or to invalidate a properly executed power of attorney with respect to any power or duty belonging to the legal representative that is not related to the declaration.

HISTORY: 2016 ch. 59, § 4, effective July 15, 2016.

367.93109. Immunity from liability for actions based on good-faith reliance on a declaration.

  1. A person who acts in good-faith reliance on a declaration is immune from liability to the same extent as if the person had dealt directly with the declarant and the declarant had been a competent and living person.
  2. A person who deals with a declaration may presume, in the absence of actual knowledge to the contrary, that:
    1. The declaration was validly executed and has not been revoked; and
    2. The declarant was competent at the time the declaration was executed.
  3. The directions of a declarant expressed in a declaration are binding as if the declarant were alive and competent.
  4. A crematory authority, licensed funeral director, or cemetery acting pursuant to the terms of a declaration shall not be held liable for good-faith reliance on representations made in the declaration.

HISTORY: 2016 ch. 59, § 5, effective July 15, 2016.

367.93111. Declaration effective until revoked — Delivery of revocation.

  1. A declaration shall remain in effect until revoked by the declarant in writing.
  2. A revocation of a declaration shall be delivered to the person to whom the declaration was given or to the designee.

HISTORY: 2016 ch. 59, § 6, effective July 15, 2016.

367.93113. Events that revoke a designation of authority in a declaration to the declarant’s spouse.

  1. The following events that occur subsequent to a declaration shall act as a revocation of a designation of authority in a declaration to the declarant’s spouse to direct the disposition of the declarant’s body or to make all arrangements concerning funeral services and other ceremonies after the declarant’s death, unless otherwise expressly provided in a declaration:
    1. Dissolution of marriage;
    2. Annulment of marriage;
    3. Legal separation; or
    4. Court determination that the declarant and spouse were physically and emotionally separated at the time of death and the separation was for an extended time that clearly demonstrated an absence of affection, trust, and regard for the declarant.
  2. In the event a spouse’s designation is disqualified pursuant to subsection (1) of this section, the alternate designee, if any, shall assume the responsibility for the declaration.

HISTORY: 2016 ch. 59, § 7, effective July 15, 2016.

367.93115. Failure of person to timely assume obligation in a declaration — Authority to make arrangements in absence of declaration.

  1. If any designee, alternate designee, or person described in KRS 367.93117 fails to assume an obligation set forth in the declaration, within five (5) days of notification of the declarant’s death, the authority to make arrangements shall devolve pursuant to the terms of the declaration or KRS 367.93117 .
  2. In absence of a declaration, if a person described in KRS 367.93117 fails to assume responsibility for a decedent’s remains within five (5) days of notification of the decedent’s death, the authority to make arrangements shall devolve pursuant to KRS 367.93117 .

HISTORY: 2016 ch. 59, § 8, effective July 15, 2016; 2017 ch. 144, § 2, effective June 29, 2017.

367.93117. Persons with authority to make funeral, burial, or other ceremonial arrangements after an individual’s death — Authority for funeral home or District Court to act — Disqualification of person arrested for or charged with the death — Petition to waive disqualification.

  1. Except as provided in subsection (2) of this section, the right to control the disposition of a decedent’s body, make arrangements for funeral services, make arrangements for burial or cremation, and to make other ceremonial arrangements after an individual’s death devolves on the following in the priority listed:
    1. A person:
      1. Named as the designee or alternate designee in a declaration executed by the decedent under KRS 367.93101 to 367.93121 ; or
      2. Named in a United States Department of Defense form “Record of Emergency Data” (DD Form 93) or a successor form adopted by the United States Department of Defense if the decedent died while serving in any branch of the United States Armed Forces, pursuant to KRS 36.440 ;
    2. The decedent’s surviving spouse;
    3. A surviving adult child of the decedent or, if more than one (1) adult child is surviving, the majority of the adult children. Less than half of the surviving adult children have the right to control disposition under this section if the child or children have used reasonable efforts to notify the other surviving adult children of their intentions and are not aware of any opposition to the final disposition instructions by more than half of the surviving adult children and this has been attested to in writing;
    4. The surviving parent or parents of the decedent. If one (1) of the parents is absent, the parent who is present has the right to control disposition under this section if the parent who is present has used reasonable efforts to notify the absent parent and attests to that in writing;
    5. The surviving adult grandchild of the decedent or, if more than one (1) adult grandchild is surviving, the majority of the adult grandchildren. Less than half of the surviving adult grandchildren have the right to control disposition under this section if the grandchild or grandchildren have used reasonable efforts to notify the other surviving adult grandchildren of their intentions and are not aware of any opposition to the final disposition instructions by more than half of the surviving adult grandchildren and this has been attested to in writing;
    6. The decedent’s surviving adult sibling or, if more than one (1) adult sibling is surviving, the majority of the adult siblings. Less than half of the surviving adult siblings have the right to control disposition under this section if the sibling or siblings have used reasonable efforts to notify the other surviving adult siblings of their intentions and are not aware of any opposition to the final disposition instructions by more than half of the surviving adult siblings and this has been attested to in writing;
    7. An individual in the next degree of kinship under KRS 391.010 to inherit the estate of the decedent or, if more than one (1) individual of the same degree is surviving, the majority of those who are of the same degree of kinship. Less than half of the individuals who are of the same degree of kinship have the right to control disposition under this section if they used reasonable efforts to notify the other individuals who are of the same degree of kinship of their intentions and are not aware of any opposition to the final disposition instructions by more than half of the individuals who are of the same degree of kinship and this has been attested to in writing;
    8. If none of the persons described in paragraphs (a) to (g) of this subsection are available, the following may act and arrange for the final disposition of the decedent’s remains:
      1. Any other person willing to act and arrange for the final disposition of the decedent’s remains who attests in writing that a good-faith effort has been made to contact any living individuals described in paragraphs (a) to (g) of this subsection; or
      2. A funeral home that has a valid prepaid funeral plan that makes arrangements for the disposition of the decedent’s remains if the funeral director attests in writing that a good-faith effort has been made to contact any living individuals described in paragraphs (a) to (g) of this subsection;
    9. A court-appointed guardian or conservator for the decedent at the time of death, after all the alternatives in paragraphs (a) to (h) of this subsection have been exhausted. Cremation shall be permitted under this subsection only if:
      1. The decedent has not expressed an objection to cremation to the guardian or conservator prior to death; and
        1. The decedent arranged a preneed policy in effect that is limited to the cost of cremation; or 2. a. The decedent arranged a preneed policy in effect that is limited to the cost of cremation; or
        2. The decedent lacked sufficient funds at the time of death to pay for a full burial; or
    10. The District Court in the county of the decedent’s residence or the county in which the funeral home or the crematory is located.
  2. No person shall have the right to control the disposition of the remains of the decedent if the person has been arrested for, or charged with, committing an offense intentionally, knowingly, or wantonly, which resulted in the death of the decedent.
  3. A person disqualified pursuant to subsection (2) of this section may petition the court, in the interest of justice, to waive the disqualification.

HISTORY: 2016 ch. 59, § 9, effective July 15, 2016; 2017 ch. 144, § 3, effective June 29, 2017; 2020 ch. 52, § 1, effective July 15, 2020; 2020 ch. 123, § 1, effective July 15, 2020.

Legislative Research Commission Notes.

(7/15/2020). This statute was amended by 2020 Ky. Acts chs. 52 and 123, which do not appear to be in conflict and have been codified together.

367.93119. No requirement to honor a declaration executed in another state.

A person in Kentucky is not required to honor a declaration or similar instrument executed in another state, but may rely on a declaration or similar instrument executed in another state that complies with the requirements of KRS 367.93101 to 367.93121 .

HISTORY: 2016 ch. 59, § 10, effective July 15, 2016.

367.93121. Action to contest or determine validity of declaration, cremation authorization form, or disqualification from control over disposition of remains — Resolution of conflict.

An action to contest or determine the validity of any declaration made under KRS 367.93101 to 367.93121 or cremation authorization form, or to resolve a conflict between an executed cremation authorization form and the person or persons authorized in KRS 367.93117 regarding cremation, or to contest a disqualification pursuant to KRS 367.93117 (2), shall be:

  1. Brought in the District Court of the county of the decedent’s residence or the county in which the funeral home or the crematory is located;
  2. Expedited on the docket of the court as a matter requiring priority; and
  3. Accompanied by a bond, cash deposit, or other surety sufficient to guarantee that the entity holding the declarant’s remains is compensated for the safekeeping charges incurred while the action is pending.

HISTORY: 2016 ch. 59, § 11, effective July 15, 2016; 2017 ch. 144, § 4, effective June 29, 2017; 2020 ch. 123, § 2, effective July 15, 2020.

Preneed Funeral Service, Burial, or Cemetery Merchandise Contracts

367.932. Definitions.

As used in KRS 367.934 to 367.974 and 367.991 , unless the context requires otherwise:

  1. “Attorney General” means Division of Consumer Protection in the office of the Attorney General.
  2. “Financial institution” means a bank, trust company, federally chartered credit union, or savings and loan association authorized by law to do business in this state.
  3. “Preneed burial contract” means a contract, which has for a purpose the furnishing or performance of funeral services, or the furnishing or delivery of personal property, merchandise, or services of any nature in connection with the final disposition of a dead human body, for future use at a time determinable by the death of the person whose body is to be disposed of; but does not mean the furnishing of a cemetery lot or mausoleum.
  4. “Agent” means the licensee who is the person, partnership, association or corporation receiving any payments on a preneed funeral contract.
  5. “Trustee” means the financial institution.
  6. “Person” means an individual, corporation, partnership, joint venture, association, business trust, or any other form of business organization; provided, however, that an individual employee of an entity registered pursuant to KRS 367.934 to 367.974 and 367.991 shall not be required to comply with the registration requirement herein.
  7. “Remains” means the bodies of deceased persons, in whatever stage of decomposition, and cremated remains.
  8. “Cemetery” means any one (1) or combination of more than one (1) of the following in a place used or to be used and dedicated or designated for such purposes:
    1. A burial park, for earth interment.
    2. A mausoleum, for entombment.
    3. A columbarium, for inurnment.
  9. “Mausoleum” means a building or structure substantially exposed above ground used or intended to be used for the entombment of human remains, which is sold or offered for sale to the public.
  10. “Columbarium” means a structure or building substantially exposed above ground intended to be used for the inurnment of cremated remains and sold or offered for sale to the public.
  11. “Columbarium niche” means an inurnment space in a columbarium as defined herein.
  12. “Cemetery company” means any person who conducts the business of a cemetery. Excepted are small community cemeteries, their agents, lessees and otherwise that operate nonprofit; have no salaried employees, directors, officers or managers other than maintenance caretakers; are owned, controlled by lot owners; and do not sell any preneed merchandise or services.
  13. “Grave space” means a space of ground in a cemetery intended to be used for the interment in the ground of the remains of one (1) human being.
  14. “Underground crypt” means a single unit entombment space in preplaced chambers below ground and also known as lawn crypt, westminister turftop mausoleum or below ground crypt.
  15. “Bank of underground crypts” means any construction unit of twenty (20) or more underground crypts designed as a part of a below ground crypt program, whether physically connected or not, having a common drainage system.
  16. “Mausoleum crypt” means an entombment space in a mausoleum as defined herein.
  17. “Cemetery merchandise” means urns, memorials, monuments, markers, vases, foundations, memorial bases, and other similar personal property commonly sold by or used in cemeteries.
  18. “Preneed cemetery merchandise contract” means any agreement or contract, or any series or combination of agreements or contracts, which has for a purpose the furnishing or delivery of cemetery merchandise, which within six (6) months of the date of the contract is not attached to the realty and permanently installed or which is not stored in a bonded warehouse with the receipt of ownership issued by the manufacturer in the name of the purchaser and transmitted to the purchaser.

History. Repealed, reenact. and amend. Acts 1984, ch. 116, §§ 1, 9, effective July 13, 1984.

Compiler’s Notes.

Subsections (1) to (5) of this section were formerly compiled as KRS 316.310 and were repealed, reenacted and amended as these subsections by Acts 1984, ch. 116, § 1, effective July 13, 1984.

Subsections (6) to (18) of this section were formerly compiled as KRS 307.100 but were repealed, reenacted and amended as these subsections by Acts 1984, ch. 116, § 9, effective July 13, 1984.

367.934. Preneed payments and increments as trust funds — Conditions required for disbursements.

  1. All payments of money made to any person, partnership, association, or corporation upon any agreement or contract, or any series or combination of agreements or contracts, but not including the furnishing of cemetery lots or mausoleums, which has for a purpose the furnishing or performance of funeral services, or the furnishing or delivery of personal property, merchandise, or services of any nature in connection with the final disposition of a dead human body, for future use at a time determinable by the death of the person whose body is to be disposed of, are held to be trust funds. The person, partnership, association, or corporation receiving the payments is declared to be the agent thereof, and shall deposit all payments in a trust account with a bank or trust company or invest said payments in a savings and loan association or federally chartered credit union. The trustee shall be the financial institution holding said funds. All of the interest, dividends, increases, or accretions of whatever nature earned by the funds deposited in a trust account shall remain with the principal of such account and become a part thereof, subject to all of the regulations concerning the principal of said fund herein contained. The agent shall have the authority at any time to transfer or redesignate the trustee of said funds in his or her discretion upon notification to the Attorney General. In case of any transfer, the former trustee shall transfer funds directly to and payable to the newly designated trustee or its representative.
  2. All payments made to the agent under the agreement, contract, or plan are and shall remain trust funds with the financial institution until the death of the person for whose service the funds were paid and until the delivery of all merchandise and full performance of all services called for by the agreement, contract, or plan, except where payment is made pursuant to a request for refund.
  3. The funds shall not be paid by the financial institution until a certified statement is furnished to the financial institution by the agent setting forth that all of the terms and conditions of the agreement have been fully performed by the person, association, partnership, firm, or corporation. Any balance remaining in the fund after payment for the merchandise and services as set forth in the agreement, contract, or plan shall be paid to the estate of the beneficiary of the agreement, contract, or plan.
  4. The funds shall not be paid by the financial institution until the agent has proven the death of the person for whose service the funds were paid by furnishing the financial institution with a verified or certified copy of a record verifying the death, issued by the state registrar of the Vital Statistics Branch or its successor agency as authorized by KRS Chapter 213, or a provisional certificate of death as described in KRS 213.076 .
  5. No provision of KRS 367.932 to 367.974 shall be construed to apply to contracts for funeral service or merchandise sold as preneed and burial insurance policies which are regulated by the Department of Insurance of this state.

History. Enact. Acts 1966, ch. 12, § 2; repealed, reenact. and amend. Acts 1984, ch. 116, § 2, effective July 13, 1984; 1996, ch. 275, § 1, effective July 15, 1996; 2006, ch. 102, § 1, effective July 12, 2006; 2010, ch. 24, § 1918, effective July 15, 2010.

Compiler’s Notes.

This section was formerly compiled as KRS 316.320 and was repealed, reenacted and amended as this section by Acts 1984, ch. 116, § 2, effective July 13, 1984.

367.936. Refund to persons making payments.

  1. Upon the giving of fifteen (15) days’ written notice, sent to the agent and the trustee, any person, partnership, or corporation who has paid funds for a preneed funeral service may demand a refund of the entire amount actually paid, together with all interest, dividends, increases or accretions, of any kind whatsoever, which have been earned on such funds. If the trustee is unknown, the written notice sent to the agent shall constitute compliance with this section. Upon receipt of notice, the agent shall immediately forward notice to the trustee.
  2. The financial institutions shall be relieved from further liability, after making payment to the person making payment of said funds, to the agent upon receipt of the foregoing written notice. Notice of payment of funds under this section shall be given by the financial institution to the agent.
  3. The trustee may rely upon all certifications and affidavits made pursuant to or required by the provisions of KRS 367.932 to 367.974 and 367.991 , and shall not be liable to any person for such reliance.

History. Repealed, reenact. and amend. Acts 1984, ch. 116, § 3, effective July 13, 1984.

Compiler’s Notes.

This section was formerly compiled as KRS 316.330 and was repealed, reenacted and amended as this section by Acts 1984, ch. 116, § 3, effective July 13, 1984.

367.937. Permissibility of irrevocable trust provision — Effect on determining eligibility for entitlement programs — Required form for application.

  1. Notwithstanding the provisions of KRS 367.936 to the contrary, an agreement, contract, or plan may provide that the trust shall be irrevocable during the lifetime of the beneficiary or grantor, if at the time of the signing of an agreement, contract, or plan or at any time thereafter, the beneficiary or grantor of the trust is, becomes, applies, or intends to apply to be an aged, blind, or disabled recipient of benefits pursuant to the federal Supplemental Security Income program under Title XVI of the Social Security Act or any other federal or state entitlement program. Funds irrevocably set aside for burial reserves, burial spaces, or other funds for funeral and burial expenses, including interest thereon shall be excluded as a financial resource in determining the beneficiary’s or grantor’s eligibility under any federal or state entitlement program as long as exclusion is not prohibited by any federal law or regulation governing the entitlement program.
  2. An application for an irrevocable trust shall be on a form developed by the Attorney General, which shall require proof that the beneficiary or grantor has received, applied for, or intends to apply for entitlement benefits within thirty (30) days of the signing of the agreement, contract, or plan. The form showing proof shall thereafter be maintained in the files of the agent.
  3. If, for any reason, a beneficiary or grantor of the trust fails to apply for entitlement benefits within thirty (30) days of his written intention to do so, fails to receive, or otherwise becomes ineligible for entitlement benefits, then the trust shall be a revocable trust.
  4. An irrevocable trust established pursuant to this section shall not affect the selection of funeral goods or services or the selection of the funeral home. At any time the beneficiary or grantor of the trust may, by written request to the agent and trustee, change the agent, trustee, or both.
  5. All agreements, contracts, or plans entered into prior to the enactment of this statute may be made irrevocable pursuant to the provisions of this section upon written application to the agent.

History. Enact. Acts 1992, ch. 75, § 1, effective July 14, 1992.

Compiler’s Notes.

Title XVI of the Social Security Act, referred to in subsection (1), may be found as 42 USCS § 1381 et seq.

367.938. Trust funds, how kept and deposited — Separate accounting record for each contract.

  1. All trust funds mentioned in KRS 367.932 to 367.974 and 367.991 shall be deposited in the name of the agent, with the financial institution, as trustee, within thirty (30) days after receipt thereof, with a bank or trust company or invested in a savings and loan association and shall be held together with the interest, dividends, or accretions thereon, in trust, subject to the provisions of KRS 367.932 to 367.974 and 367.991 . The agent at the time of making deposit or investment shall furnish to the financial institution the name of each payor, and the amount of payment on each account for which the deposit or investment is being made.
  2. Deposits to such funds and the amounts deposited may be commingled, but the accounting records shall establish a separate account for each prepaid contract and shall show amounts deposited and the income and loss occurring thereon with respect to each contract.

History. Repealed, reenact. and amend. Acts 1984, ch. 116, § 4, effective July 13, 1984.

Compiler’s Notes.

This section was formerly compiled as KRS 316.340 and was repealed, reenacted and amended as this section by Acts 1984, ch. 116, § 4, effective July 13, 1984.

367.940. License as agent required — Fee — Service charge — Annual report to Attorney General — Report not available to general public.

  1. Every person, firm, partnership, association, or corporation shall obtain an agent license from the Attorney General at least thirty (30) days prior to offering for sale any preneed burial contract or accepting any moneys on preneed burial contracts. An application for license shall contain at least the following:

    The full name and address (both residence and place of business) of the applicant, and every member, officer, and director thereof if the applicant is a firm, partnership, association, or corporation. Any license issued pursuant to the application shall be valid only at the address stated in the application for the applicant or at a new address approved by the Attorney General.

  2. Upon receipt of the application and payment of a license fee of fifty dollars ($50), the Attorney General shall issue a license unless he determines that the applicant has made false statements or representations in the application, or is insolvent, or has conducted, or is about to conduct his business in a fraudulent manner, or is not duly authorized to transact business in this state.
  3. Any person selling a preneed funeral service contract shall collect from each purchaser a service charge of five dollars ($5) made payable to the office of the Attorney General, and all of which fees so collected shall be remitted by the person collecting same to the Attorney General at least once each month, and such funds shall be used by the Attorney General in administering KRS 367.932 to 367.974 and 367.991 .
  4. Every licensee shall file an annual report on a form provided by the Attorney General containing information as the Attorney General may require, but at least the following: an itemized list of all preneed burial contracts sold within the last twelve (12) months, the moneys collected on said contracts, the total amount deposited in the preneed funeral trust fund account, and the location and account numbers of said trust funds. A ten dollar ($10) fee shall be paid to the office of the Attorney General by each licensee filing an annual report.
  5. Every such report shall be verified by the agent and shall be attested to by the accountant, auditor, or other person preparing the same.
  6. Such reports shall not be available to the general public and shall be used only for the lawful purpose of the Attorney General’s office.

History. Repealed, reenact. and amend. Acts 1984, ch. 116, § 5, effective July 13, 1984; 1992, ch. 305, § 1, effective July 14, 1992.

Compiler’s Notes.

This section was formerly compiled as KRS 316.350 and was repealed, reenacted and amended as this section by Acts 1984, ch. 116, § 5, effective July 13, 1984.

367.942. Records of licensee — Examination by Attorney General.

  1. Every licensee shall keep and maintain adequate records including but not limited to the following:
    1. A cash receipts journal listing moneys received in chronological order, dates, and amounts received, and identification of the payor or purchaser;
    2. A cash disbursement journal containing the same information for moneys disbursed. If a separate bank account is kept exclusively for any such funds, the checkbook could be used as a cash disbursement journal;
    3. A “reconciliation” done at least once every twelve (12) months. The reconciliation shall indicate the beginning balance in the trust account, payments received during the period, interest earned during the period, disbursements on either cancellation or the death of the beneficiary, and the ending balance for the period. The ending balance for each period is determined as follows: Beginning Balance + Payments received + Interest - Disbursements Ending Balance;
    4. Documentation files supporting the reconciliation and containing the preneed burial contract. Each file, consisting of a separate file for each contract, should include the name and address of the purchaser, the beneficiary, and the financial institution in which the trust funds were deposited. Passbooks, certificates, and other evidence of the account with the financial institution should be kept with the individual files, depending on the safety and security of the files; and
    5. A certified copy of a verification of death, issued by the state registrar of the Vital Statistics Branch or its successor agency as authorized by KRS Chapter 213, or a provisional certificate of death as described in KRS 213.076 , upon the death of each person for whose service funds were paid to the licensee by the trustee under a preneed burial contract.
  2. All sales, trust fund, and accounting records of the agent licensee shall be readily available at the agent’s principal place of business in this state at reasonable times for examination by an authorized representative of the Attorney General’s office.
  3. The necessary expenses of any examination made pursuant to this section shall be paid by the licensee, but in no case shall the Attorney General or his or her authorized representatives be paid more than the actual expenses of such examination not to exceed the lesser of the following amounts: one hundred dollars ($100) per day for each auditor or five dollars ($5) for each agent’s sales contract examined. The agent may pay for this expense using interest moneys which have accrued on the agent’s existing preneed funeral trust fund accounts. Any withdrawal of interest for this purpose shall be taken as a pro rata share of all of the agent’s existing preneed funeral trust fund accounts. The Attorney General shall be advised in writing by the agent when interest moneys is the source of payment and shall receive written certification from the financial institution or agent that the withdrawal was a pro rata share.
  4. This section shall apply to examinations of all preneed funeral contracts whether entered into prior to or after July 13, 1984.

History. Enact. Acts 1984, ch. 116, § 6, effective July 13, 1984; 1992, ch. 305, § 2, effective July 14, 1992; 2006, ch. 102, § 2, effective July 12, 2006.

367.944. Attorney General may hire independent auditor — Cost incurred to be included in court costs.

  1. The Attorney General’s office may hire a special independent auditor of choice to do a complete audit of books as to contracts entered into both prior to and after July 13, 1984, to determine compliance with the preneed funeral laws, if the Attorney General determines any discrepancy as a result of an examination by his office.
  2. In any action brought under this chapter in which the Commonwealth prevails, the court shall award cost incurred by the Attorney General for the special independent auditor.

History. Enact. Acts 1984, ch. 116, § 7, effective July 13, 1984.

367.946. Registration of person selling cemetery merchandise and every cemetery company — Fee — Annual report.

  1. Every person engaged in the sale of any preneed cemetery merchandise contract and cemetery company, hereinafter referred to as registrants, shall register with the Attorney General at least thirty (30) days prior to commencing to do business. Such registration shall be on forms provided by the Attorney General and shall contain at least the following information.
    1. The name and location of the cemetery;
    2. The size and type;
    3. The names, addresses, and other relative information concerning the owners, officers, and directors;
    4. Identification, location, and total amounts deposited in the perpetual care and merchandise trust funds;
    5. Types of services and merchandise sold and whether at need or preneed.
  2. Every registrant shall, within sixty (60) days of any material change of any item required to be reported hereunder, notify the department of such change.
  3. Every registrant shall pay a filing fee of fifty dollars ($50) with its application.
  4. Every registrant shall file an annual report on a form provided by the Attorney General containing information as the Attorney General may reasonably require, but at least the following:
    1. The total amount deposited in the perpetual care and maintenance trust fund, and a listing of the total number of grave spaces, underground crypts, mausoleums, and niches sold within the last twelve (12) months and the gross selling price of each;
    2. The total amount deposited in the cemetery merchandise trust fund account, and a listing of the total number of the different cemetery merchandise sold within the last twelve (12) months and the retail selling price of each; and
    3. The total amount deposited in the preconstruction trust fund accounts, and a listing of the total number of mausoleum crypts, niches, and underground crypts sold within the last twelve (12) months and the retail selling price of each and current balance.
  5. Every such report shall be verified by the registrant and shall be attested to by any other person preparing the same.
  6. Such reports shall not be available to the general public and shall be used only for the lawful purpose of the Attorney General’s office.
  7. A ten dollar ($10) fee shall be paid to the office of the Attorney General by each registrant filing an annual report.

History. Repealed, reenact. and amend. Acts 1984, ch. 116, § 10, effective July 13, 1984; 1992, ch. 305, § 3, effective July 14, 1992.

Compiler’s Notes.

This section was formerly compiled as KRS 307.110 but was repealed, reenacted and amended as this section by Acts 1984, ch. 116, § 10, effective July 13, 1984.

367.948. Records of registrants.

Every registrant shall keep and maintain adequate records, including, but not limited to, the following:

  1. A cash receipts journal, or its equivalent, listing moneys received in chronological order. The journal shall contain dates of all such moneys received, amounts received, and identification of the purchasers;
  2. A cash disbursement journal, or its equivalent, containing the same information as required by subsection (1) of this section for moneys disbursed; if a separate bank account is kept exclusively for any such funds, the checkbook could be used as a cash disbursement journal;
  3. A “reconciliation” done at least once every twelve (12) months. The reconciliation shall indicate the beginning balance in the trust account, payments received during the period, interest earned during the period, disbursements during the period, and the ending balance for the period. The ending balance for each period is determined as follows:
  4. All contracts, sales, trust fund, and accounting records of the registrant shall be readily available at the registrant’s principal place of business in this state at reasonable times for examination by an authorized representative of the Attorney General’s office;
    1. The necessary expenses of any reasonable examination made pursuant to this section shall be paid by the registrant; but in no case shall the Attorney General or his authorized representatives be paid more than the actual expenses of such examination, not to exceed the lesser of the following amounts: one hundred dollars ($100) per day for each auditor or five dollars ($5) for each registrant’s sales contract examined. In any event, the cost of such examination shall not exceed a total of one thousand two hundred fifty dollars ($1,250) during any twelve (12) month period; (5) (a) The necessary expenses of any reasonable examination made pursuant to this section shall be paid by the registrant; but in no case shall the Attorney General or his authorized representatives be paid more than the actual expenses of such examination, not to exceed the lesser of the following amounts: one hundred dollars ($100) per day for each auditor or five dollars ($5) for each registrant’s sales contract examined. In any event, the cost of such examination shall not exceed a total of one thousand two hundred fifty dollars ($1,250) during any twelve (12) month period;
    2. The registrant may pay for this expense using interest moneys which have accrued on the registrant’s existing cemetery merchandise trust fund accounts or preconstruction trust fund account or perpetual care account. Any withdrawal of interest for this purpose shall be taken as a pro rata share of all of the trust fund accounts. The Attorney General shall be advised in writing by the registrant when interest moneys are the source of payment and shall receive written certification from the financial institution or registrant that the withdrawal was a pro rata share;
  5. This section shall apply to examinations of all registrant’s contracts.

Beginning balance + Payments received + Interest - Disbursements Ending Balance

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History. Enact. Acts 1984, ch. 116, § 11, effective July 13, 1984; 1992, ch. 305, § 4, effective July 14, 1992.

367.950. Audit by special auditor hired by Attorney General — Cost of audit to be taxed as court costs.

If the Attorney General determines any discrepancy as a result of his examination, the Attorney General’s office may hire a special independent auditor of choice to do a complete audit of books, both as to contracts entered into prior to and after July 13, 1984, to determine compliance with the cemetery laws; in any action brought under this chapter in which the Commonwealth prevails, the court shall award costs incurred by the Attorney General for the special independent auditor.

History. Enact. Acts 1984, ch. 116, § 12, effective July 13, 1984.

367.952. Perpetual care and maintenance — Creation of funds by cemetery companies — Required payments — Local government exemption — Termination, distribution, and use of funds in local government trust fund.

  1. Every seller of the items described in subsection (2)(a) of this section shall first provide for the future care and maintenance of such items, and to accomplish this purpose shall cause to be established in a financial institution authorized by law to administer trust funds, or in any other financially sound entity with the prior written approval of the Attorney General, an irrevocable trust fund to be known as a perpetual care and maintenance fund. The income of such funds shall be used solely for the general care, maintenance, and embellishment of the cemetery, except as otherwise provided herein.
    1. Every seller of the items described in this paragraph shall place the following amounts into the perpetual care and maintenance fund of the cemetery in which the item is located within thirty (30) days after each calendar quarter of operations for each payment of each sale which occurs or contract of sale entered into after July 13, 1984: (2) (a) Every seller of the items described in this paragraph shall place the following amounts into the perpetual care and maintenance fund of the cemetery in which the item is located within thirty (30) days after each calendar quarter of operations for each payment of each sale which occurs or contract of sale entered into after July 13, 1984:
      1. Twenty percent (20%) of the gross selling price of each grave space, with a minimum of twenty dollars ($20) per grave space;
      2. Underground crypt, five percent (5%) of the gross selling price with a minimum of twenty-five dollars ($25) per crypt;
      3. Mausoleum crypt, five percent (5%) of the gross selling price with a minimum of fifty dollars ($50) per mausoleum crypt; and
      4. Columbarium niche, ten percent (10%) of the gross selling price with a minimum of fifteen dollars ($15) per niche.
    2. For the purposes of this section, “gross selling price” shall not include interest, carrying charges or finance charges.
    3. Every cemetery company hereinafter established shall create and maintain a perpetual care and maintenance fund, depositing therein an initial deposit as listed below, and shall submit proof thereof to the Attorney General prior to the offering for sale of any burial rights. Any payment required under paragraph (a) of this subsection shall be credited against the initial deposit until the required sum has been reached:
      1. In counties of fewer than 50,000 persons, $20,000;
      2. In counties of 50,000 to 99,999 persons, $30,000;
      3. In counties of 100,000 or more persons, $50,000.
  2. In the event that a purchaser is in default of a contract purchasing any of the items described in subsection (2)(a) of this section, the financial institution shall release to the depositor the funds, plus interest, deposited on behalf of the defaulted contract upon receiving from the depositor a sworn affidavit stating that the purchaser is in default of the contract, the date of the default, an explanation of the default and that the depositor mailed a copy of the affidavit to the purchaser’s last known address at least thirty (30) days prior to said request for release.
  3. This section does not apply to any cemetery that is owned and operated by a local government. For the purposes of this section, “local government” means cities, counties, urban-county governments, charter county governments, consolidated local governments, and unified local governments.
  4. Any local government that has established a trust fund pursuant to subsection (1) of this section may petition the Circuit Court pursuant to KRS 386B.2-010 and 386B.2-030 for termination of the trust and distribution of the funds to the local government for use solely for the general care, maintenance, and embellishment of the cemetery.
  5. Any funds distributed to the local government pursuant to subsection (5) of this section shall be held separately from funds subject to the local government’s general power of appropriation.

History. Enact. Acts 1976, ch. 294, § 5; repealed, reenact. and amend. Acts 1984, ch. 116, § 13, effective July 13, 1984; 2008, ch. 168, § 1, effective July 15, 2008; 2014, ch. 25, § 99, effective July 15, 2014.

Compiler’s Notes.

This section was formerly compiled as KRS 307.130 but was repealed, reenacted and amended as this section by Acts 1984, ch. 116, § 13, effective July 13, 1984.

NOTES TO DECISIONS

Cited in:

Johnson v. City of Versailles, 2020 Ky. App. LEXIS 71 (Ky. Ct. App. June 12, 2020).

Opinions of Attorney General.

While cemeteries are required by law to put 20% of the gross sale price of a lot into a trust fund, there is no requirement that they put any percentage of the price received for foundation installation into this fund or any fund. It is envisioned that the 20% of the lot gross sale price will be adequate to cover for maintenance required on foundations and markers when the warranty on these items has expired. OAG 85-70 .

367.954. Forty percent of funds paid for cemetery merchandise to be held in trust for purchaser until delivery — Bond in lieu of trust fund.

  1. Forty percent (40%), not including interest or finance charges, of all payments of money made to any person, partnership, association, or corporation upon any agreement or contract, or any series or combination of agreements or contracts, which has for a purpose the furnishing or delivery of cemetery merchandise, which within six (6) months of the date of the contract is not delivered by attachment to the realty and permanent installation or which is not stored in a bonded warehouse with the receipt of ownership issued by the manufacturer in the name of the purchaser and transmitted to the purchaser are held to be trust funds. The person, partnership, association, or corporation receiving the payments shall deposit forty percent (40%) of all payments received on a preneed cemetery merchandise contract in a trust fund account within six (6) months of the date of contract, and forty percent (40%) of all payments received thereafter on said contract shall be deposited in the trust fund account within thirty (30) days after each calendar quarter of operation. The trustee shall be the financial institution holding said funds. All of the interest, dividends, increases, or accretions of whatever nature earned by the funds deposited in a trust account shall remain with the principal of such account and become a part thereof, subject to all of the regulations concerning the principal of said fund herein contained.
  2. All trust funds mentioned in this section shall be deposited in the name of the person making said deposits, with the financial institution as trustee, and shall be held together with the interest, dividends, or accretions thereon, in trust, subject to the provisions of KRS 367.932 to 367.974 and 367.991 . The person at the time of making deposit or investment shall furnish to the financial institution the name of each payor, and the amount of payment on each account for which the deposit or investment is being made.
  3. Forty percent (40%) of all payments, not including interest or finance charges, made under the agreement, contract, or plan are and shall remain trust funds with the financial institution, until the financial institution receives a sworn affidavit from the depositor stating one of the following:
    1. That the delivery of all merchandise by attachment to the realty, or permanent installation of the merchandise has been completed and that there has been full performance of all services called for by the agreement, contract or plan; or
    2. That there has been delivery of all of the merchandise called for by the agreement by storing the same in a bonded warehouse with the receipt of ownership issued by the manufacturer in the name of the purchaser and transmitted to the purchaser. Upon receiving said affidavit, the financial institution shall remit the funds on deposit for the performed contract, plus interest, to the depositor. Release of funds may also be made pursuant to a request for a refund or cancellation under KRS 367.932 to 367.974 and 367.991 .
  4. In the event that a purchaser is in default of a preneed cemetery merchandise contract, the financial institution shall release to the depositor the funds, plus interest, deposited on behalf of the defaulted contract upon receiving from the depositor a sworn affidavit stating that the purchaser is in default of the preneed cemetery merchandise agreement, the date of the default, an explanation of the default, and that the depositor has mailed a copy of the affidavit to the purchaser’s last known address at least thirty (30) days prior to said request for release.
  5. Deposits to such funds and the amounts deposited may be commingled, but the accounting records shall establish a separate account for each prepaid contract and shall show amounts deposited and the income and loss occurring thereon with respect to each contract.
  6. The trustee may rely upon all certifications and affidavits made pursuant to or required by the provisions of KRS 367.932 to 367.974 and 367.991 , and shall not be liable to any person for such reliance.
  7. In lieu of the trust fund deposits required herein, the person may post with the Attorney General, Division of Consumer Protection, a good and sufficient bond by a surety company licensed to do business in Kentucky and in an amount sufficient to cover all payments made by or on account of purchasers who have not received the purchased property and services. This bond shall be held for the benefit of a purchaser, or his or her heir or assign or duly authorized representative, who suffers a loss of money paid pursuant to a preneed cemetery merchandise contract entered into after July 13, 1984, due to the insolvency of the registrant, or failure to provide the cemetery merchandise called for by contract that has been paid in full and not provided after a ninety (90) day request in writing to do so. If a bond is posted, the Attorney General’s office shall receive sixty (60) days’ written notice in the event of cancellation. On or before the cancellation date, the person shall comply with the trust fund requirements herein or post another good and sufficient bond.
  8. Any person selling a preneed cemetery merchandise contract shall pay to the Attorney General five dollars ($5), for each said contract entered into and all of which fees shall be remitted by the person collecting them to the Attorney General at least once each month, and such funds shall be used by the Attorney General in administering this chapter.

History. Enact. Acts 1984, ch. 116, § 14, effective July 13, 1984.

367.956. Return of deposits, plus income thereon, in cases of default on part of seller.

  1. If for any reason a person who has entered into a contract for the sale of cemetery merchandise which is paid in full and has made deposits to the trust fund herein required to be made cannot or does not provide the cemetery merchandise called for by the contract after a ninety (90) day request in writing to do so, the purchaser or his heirs or assigns or duly authorized representatives shall be entitled to receive the following: the deposit to the credit of that particular contract, all income those funds have earned; and from the cemetery, the remainder, if any, of the purchase price paid.
  2. Written instructions to the trustee to refund the amount of money on deposit, or an affidavit by either the purchaser or one (1) of his heirs or assigns or duly authorized representative, stating that the cemetery merchandise contract is paid in full and after a written request the merchandise was not provided, shall be sufficient authority for the trustee to make refund of the deposit moneys to the person submitting the affidavit. The trustee shall not be held responsible for any such refunds made on account of the person’s written direction or an affidavit submitted in accord with this section. However, nothing herein contained shall relieve any person from any liability for nonperformance of the contract terms. Except, however, in the event such person cannot deliver the cemetery merchandise sold because of a national emergency, the provision of this section shall not apply.

History. Enact. Acts 1984, ch. 116, § 15, effective July 13, 1984; 1986, ch. 331, § 50, effective July 15, 1986.

367.958. Sale of mausoleum or underground crypts or columbaria.

  1. Every person before engaging in a sale, contract for sale, reservation for sale or agreement for sale of a mausoleum crypt within a mausoleum, underground crypt within a crypt section, or columbarium niche within a mausoleum prior to the completion of the construction thereof, shall give notice in writing to the Attorney General of the commencement of such sale at least thirty (30) days prior thereto and register with the Attorney General. Such registration shall be on forms provided by the Attorney General.
  2. Every person engaged in the sale of a mausoleum crypt, underground crypt or columbarium niche shall commence construction thereof within twenty-four (24) months of the date of such sale and shall complete such construction within sixty (60) months of the date of such sale. A delay caused by strike, national emergency, shortage of materials, civil disorder, natural disaster or any like occurrence beyond the control of such person shall extend the time of such commencement and completion by the length of such delay. This subsection shall not apply to the sale of mausoleum crypts, underground crypts or columbarium niches if there has been any sale in the same project prior to July 13, 1984. Prior projects shall have commenced construction thereof within thirty-six (36) months of the date of such sale and shall complete construction within seventy-two (72) months of the date of such sale.
  3. Every person who plans to offer for sale space in a section of a mausoleum or bank of underground crypts prior to its construction shall establish a preconstruction trust account. The trust account shall be administered and operated in the same manner as the merchandise trust account provided for in this chapter and shall be exclusive of the merchandise trust account or such other trust accounts or funds that may be required by law.
  4. Every person shall place thirty-six percent (36%), not including interest or finance charges, of all payments of money made to any person pursuant to any agreement, contract or any series or combination of agreements or contracts which are for the purchase of sections in a mausoleum, columbarium, or any kind of underground crypt which at the time of the payment of money have not been completely and totally constructed, in a trust fund account in a financial institution within thirty (30) days after each calendar quarter of operations. Excepted therefrom, however, are persons who have constructed in the past their own mausoleum using primarily equipment owned by the self-constructing person and their own personnel with a minimum of subcontracting, and in that event there shall be deposited a minimum of twenty percent (20%) of all payments of money, subject, however, to the actual cost. If, from project to project, their actual cost is in excess of twenty percent (20%), the full cost percentage shall be deposited from project to project, not to exceed thirty-six percent (36%). At the time of notification to the Attorney General’s office the self-constructing mausoleum person shall also notify the Attorney General that he intends to self-construct and the percentage of contribution of trust that is required.
  5. All trust funds mentioned in this section shall be deposited in the name of the person depositing said funds, with the financial institution as trustee, and shall be held together with the interest, dividends, or accretions thereon, in trust, subject to the provisions of KRS 367.932 to 367.974 and 367.991 . The person at the time of making deposit or investment shall furnish to the financial institution the name of each payor, and the amount of payment on each account for which the deposit or investment is being made.
  6. Deposits to such funds and the amounts deposited may be commingled, but the accounting records shall establish a separate account for each prepaid contract and shall show amounts deposited and the income and loss occurring thereon with respect to each contract.
  7. All payments made to the preconstruction trust fund account shall remain in the trust fund with the financial institution until the financial institution receives a certified statement from the depositor stating that the particular project for which the preconstruction trust fund has been established is totally completed. During the construction stage, trust funds may be withdrawn by presenting the trustee with appropriate evidence of expenditure for construction cost. The trustee shall thereupon disburse moneys from the trust fund to pay for the expenses of construction presented for payment.
  8. A trustee may rely upon all certifications and affidavits made pursuant to or required by the provisions of KRS 367.932 to 367.974 and 367.991 , and shall not be liable to any person for such reliance.
  9. If a mausoleum section or bank of underground crypts is not completed within the time limits set out in KRS 367.932 to 367.974 and 367.991 , the financial institution acting as trustee, if any, may contract for and cause said project to be completed and paid therefor from the trust account funds deposited to the project’s account, paying any balance, less cost and expenses, to the depositor. In the event there is no corporate trustee, or the trustee chooses not to serve in the capacity to complete construction, the Attorney General shall appoint a committee to serve as trustees to trust account funds deposited to the project’s account, paying any balance, less cost and expenses, to the cemetery company.
  10. If it is determined by the trustee after the expiration of the time of construction set out above that there is not enough money in the trust fund account to complete the project, the trustee shall make a refund of all moneys held to all purchasers, or his heirs or assigns, in the amount of the deposit to the credit of their particular contract and all income those funds have earned. The purchasers shall be entitled to receive any remainder of the purchase price paid from the depositor. However, nothing herein contained shall relieve any person from any liability for nonperformance of the contract terms.
  11. If temporary entombment or inurnment is not used, upon written notification to the seller, the personal representative or any purchaser of such space who dies before completion of construction shall be entitled to a refund of all moneys paid into the preconstruction trust fund for such space, including any income earned thereon, and from the seller, the remainder of the purchase price paid.
  12. In lieu of the trust fund deposits required herein, the person may post with the Attorney General, Division of Consumer Protection, a good and sufficient bond by a surety company licensed to do business in Kentucky and in an amount sufficient to cover all payments made by or on account of purchasers who have not received the purchased property and services. This bond shall be held for the benefit of any purchaser, or his or her heir or assign or duly authorized representative, who suffers a loss of money paid for a preconstructed mausoleum crypt or niche or underground crypt after July 13, 1984, due to the insolvency of the registrant, or failure to construct within the time limits set out herein. If a bond is posted, the Attorney General’s office shall receive sixty (60) days’ written notice in the event of cancellation. On or before the cancellation date, the person shall comply with the trust fund requirements herein or post another good and sufficient bond.
  13. Any person selling preconstruction mausoleum, columbarium or underground crypt contracts shall pay to the Attorney General five dollars ($5) for each sale of said contract and all of which fees shall be remitted by the person collecting them to the Attorney General at least once each month, and such funds shall be used by the Attorney General in administering this chapter.

History. Repealed, reenact. and amend. Acts 1984, ch. 116, § 16, effective July 13, 1984.

Compiler’s Notes.

This section was formerly compiled as KRS 307.170 but was repealed, reenacted and amended as this section by Acts 1984, ch. 116, § 16, effective July 13, 1984.

367.960. Temporary facilities.

Every cemetery company offering for sale any mausoleum crypt, underground crypt or columbarium niche shall provide facilities for temporary entombment or inurnment at the cemetery in which the crypt or niche purchased is to be located.

History. Repealed, reenact. and amend. Acts 1984, ch. 116, § 17, effective July 13, 1984.

Compiler’s Notes.

This section was formerly compiled as KRS 307.180 but was repealed, reenacted and amended as this section by Acts 1984, ch. 116, § 17, effective July 13, 1984.

367.962. Allocation of payments — Increase of gross sale price prohibited.

  1. Whenever any contract for sale shall be entered into in which items of cemetery merchandise and rights to interment, inurnment or entombment are included, without allocation of the gross sale price among the items sold, the application of payments received under the contract shall be allocated, first to the right to interment, inurnment or entombment, second to items of cemetery merchandise relating to memorialization and third, to items relating to the disposition of the remains of a dead human being, including preneed funeral merchandise and services, unless some other allocation is clearly provided in the contract.
  2. Any person engaging in a combination sale which involves the sale of any item in addition to the sale of cemetery merchandise or a combination sale which involves the sale of any item in addition to the sale of rights to interment, inurnment or entombment shall be prohibited from increasing the gross sales price of those items which require the lesser trust fund deposit with the purpose of allocating a lesser gross sales price to items which require a higher trust fund requirement.

History. Repealed, reenact. and amend. Acts 1984, ch. 116, § 18, effective July 13, 1984.

Compiler’s Notes.

This section was formerly compiled as KRS 307.160 but was repealed, reenacted and amended as this section by Acts 1984, ch. 116, § 18, effective July 13, 1984.

367.964. Consumer security account.

  1. Any person selling preneed cemetery merchandise contracts or preconstruction mausoleums, columbarium or underground crypt contracts shall pay to the Attorney General five dollars ($5) for each said contract entered into of which the gross sales price as defined in KRS 367.932 to 367.974 and 367.991 is five hundred dollars ($500) or less and ten dollars ($10) for each said contract entered into of which the gross sales price is over five hundred dollars ($500), to be paid into a special income earning account known as “Consumer security account.” The above said fees shall be remitted to the Attorney General at least once each month.
  2. The funds in said account shall be used solely for the purpose of providing restitution to consumers who have suffered pecuniary loss in the purchase of a preneed cemetery merchandise contract or a preconstruction mausoleum, columbarium or underground crypt contract. The fund shall be applied only to restitution that is ordered by Circuit Court in a lawsuit brought under KRS 367.932 to 367.974 and 367.991 by the Attorney General and which is determined by the Attorney General to be noncollectible from the judgment debtor.
  3. Whenever restitution is paid by the fund, the fund shall be subrogated to the amount of such restitution, and the Attorney General shall engage in all reasonable post judgment collection steps to collect said restitution from the judgment debtor and reimburse the fund.
  4. The fund shall not be applied toward any restitution for losses in any lawsuit initiated by the Attorney General prior to July 13, 1984.
  5. Notwithstanding any other provision of this section, the payment of restitution from the fund shall be a matter of grace and not of right and no person shall have any vested rights in the fund as a beneficiary or otherwise.

History. Enact. Acts 1984, ch. 116, § 19, effective July 13, 1984.

367.966. Contract waiving statutory provisions null and void.

Any provision of a contract which purports to waive any provision of KRS 367.932 to 367.974 and 367.991 shall be null and void.

History. Enact. Acts 1984, ch. 116, §§ 8, 20, effective July 13, 1984.

367.968. Liability of officers, owners, directors and shareholders of companies subject to KRS 367.932 to 367.974 and 367.991.

  1. Officers, owners, directors and shareholders of companies subject to the provisions of KRS 367.932 to 367.974 and 367.991 who knew of failure to comply with any of the trust provisions of KRS 367.932 to 367.974 and 367.991 and who fail to take prompt and reasonable actions to correct, including notification to the Attorney General’s office, shall be personally liable, jointly and severally, for the deficiency existing in the trust funds and for any other civil remedy allowed by law.
  2. In addition to the liabilities declared, the person who brings suit and recovers from an owner, officer, director, or shareholder of a company, shall also recover his reasonable attorney’s fees, the amount to be fixed and adjudged by the court before whom the case is tried.

History. Enact. Acts 1984, ch. 116, § 21, effective July 13, 1984.

367.970. Ninety-day completion date on installing foundations — Excusable delay.

Any cemetery company that receives a foundation order shall complete the foundation installation within ninety (90) days, without discrimination, providing, however, that any delay caused by inclement weather, strike, shortage of materials, civil disorder, natural disaster or any like occurrence beyond the control of such person shall extend the time of such completion by the length of such delay.

History. Enact. Acts 1984, ch. 116, § 22, effective July 13, 1984.

367.972. Powers of Attorney General.

  1. All of the remedies, powers, and the duties provided for the Attorney General by KRS 367.190 to 367.300 and KRS 367.990 pertaining to acts declared unlawful by KRS 367.170 shall apply with equal force and effect to acts declared unlawful by KRS 367.932 to 367.974 and KRS 367.991 and the preneed funeral laws existing prior to KRS 367.932 to 367.974 and KRS 367.991 .
  2. Nothing in KRS 367.932 to 367.974 and KRS 367.991 shall be construed to limit or restrict the exercise of powers or the performance of the duties of the Attorney General which he is authorized to exercise or perform under any other provision of law including direct court action to obtain injunctive relief and revocation of license. The Attorney General has the power to establish such rules and regulations as are necessary to carry out these provisions.

History. Enact. Acts 1984, ch. 116, § 23, effective July 13, 1984; 1992, ch. 305, § 6, effective July 14, 1992.

Legislative Research Commission Note.

(1984) In subsection (1) of this section the words “and the cemetery laws” were inadvertently omitted following the words “the preneed funeral laws.”

367.973. Disciplinary powers of Attorney General — Hearing — Appeal.

  1. The Attorney General may deny, suspend, or revoke any license granted under KRS 367.940 or levy civil penalties not to exceed five hundred dollars ($500) or both or place the licensee on probation for up to twelve (12) months for any of the following causes:
    1. Obtaining a license through false statement or misrepresentation;
    2. Conducting, or undertaking a substantial step toward conducting his business in an unfair, false, misleading, or deceptive manner;
    3. Entry of a final civil judgment against the licensee for a violation of KRS 367.934 to 367.974 , or for entry of a final judgment of conviction for a violation of KRS 367.991 ;
    4. Entry of a final judgment of conviction against the licensee for any crime involving moral turpitude; or
    5. Violating any of the provisions of KRS 367.932 to 367.974 or any lawful order or administrative regulation made or promulgated under KRS 367.932 to 367.974.
  2. The Attorney General shall, before denying, suspending, or revoking a license or imposing fines, file a complaint alleging the grounds upon which the licensee may have his license denied, revoked, or suspended or have fines imposed. A copy of the complaint, together with any exhibits, shall be served upon the defendant licensee at the licensee’s last known address. The complainant shall show certification that there has been service by writing to the last known address. The answer shall be returned to the Attorney General’s office within twenty (20) days of receipt of the complaint by the defendant licensee. Upon receipt of an answer to a complaint, an administrative hearing shall be conducted in accordance with KRS Chapter 13B.
  3. Any person aggrieved by a final order issued under authority of this section shall have the right of an appeal by filing a petition with the Franklin Circuit Court in accordance with KRS Chapter 13B.

History. Enact. Acts 1992, ch. 305, § 5, effective July 14, 1992; 1996, ch. 318, § 351, effective July 15, 1996.

367.974. Disposition of fees collected under KRS 367.932 to 367.972.

All fees and charges collected and paid into the State Treasury under the provisions of KRS 367.932 to 367.972 shall be credited to a revolving trust or agency fund account for the Attorney General and shall be used for the administration of KRS 367.932 to 367.972 . This section does not apply to the consumer security account.

History. Enact. Acts 1984, ch. 116, § 26, effective July 13, 1984.

Crematoria and Crematory Operators

367.97501. Definitions for KRS 367.97501 to 367.97537.

As used in KRS 367.97501 to 367.97537 , unless the context requires otherwise:

  1. “Authorizing agent” means the person legally entitled to order the cremation of the human remains.
  2. “Casket” means a rigid container which is designed for the encasement of human remains constructed of wood, metal, or other material.
  3. “Closed container” means a sealed container or urn in which cremated remains are placed and enclosed in a manner that prevents leakage or spillage of cremated remains or the entrance of foreign material.
  4. “Cremated remains” means the fragments remaining after the cremation process has been completed.
  5. “Cremation” means the heating process that reduces human remains to bone fragments through combustion and evaporation.
  6. “Cremation authorization form” means a form promulgated by administrative regulation of the Attorney General that expresses consent to the decedent’s cremation. The form shall include information concerning the parties’ rights and responsibilities.
  7. “Cremation chamber” means an enclosed space designed and manufactured for the purpose of cremating human remains.
  8. “Cremation container” means a container in which human remains may be delivered to a crematory for cremation that is:
    1. Rigid enough to support the weight of the corpse, closed, and leakproof;
    2. Composed of a combustible material or other material approved by the crematory authority; and
    3. A proper and dignified covering for the human remains.
  9. “Crematory authority” means the legal entity which is licensed by the Attorney General to operate a crematory and conduct cremations. Crematory authority does not include state university health science centers.
  10. “Crematory” means a fixed building or structure that contains one (1) or more cremation chambers for the reduction of bodies of deceased persons to cremated remains. “Crematory” includes crematorium.
  11. “Crematory operator” means the person in charge of a licensed crematory authority.
  12. “Declaration” has the same meaning as in KRS 367.93101 .
  13. “Holding facility” means an area designated for the retention of human remains prior to cremation.
  14. “Human remains” means the body of a deceased person or part of a body or limb that has been removed from a living person, in any state of decomposition, prior to cremation.
  15. “Pathological waste” means human tissues, organs, and blood or body fluids, in liquid or semiliquid form that are removed from a person for medical purposes. “Pathological waste” does not include amputations.
  16. “Processed remains” means the end result of pulverization, by which the residual from the cremation process is reduced and cleaned leaving only fragments reduced to unidentified dimensions.
  17. “Retort operator” means a person operating a cremation chamber.
  18. “Scattering area or garden” means an area which may be designated by a cemetery and located on a dedicated cemetery property where cremated remains which have been removed from their container can be mixed with or placed on top of the soil or ground cover.
  19. “Temporary container” means a receptacle for cremated remains, usually made of plastic, cardboard, ceramics, plastic film, wood, or metal, designed to prevent the leakage of processed remains or the entrance of foreign materials which will hold the cremated remains until an urn or other permanent container is acquired.

History. Enact. Acts 1994, ch. 140, § 1, effective July 15, 1994; 2016 ch. 59, § 12, effective July 15, 2016.

NOTES TO DECISIONS

1.Priority for Disposition of Body.

When the decedent died under the then applicable version of the statute, the priority for the disposition of his body was first to be determined by his preneed cremation authorization, and then the surviving spouse followed by surviving adult children; the cremation authorization was considered an expression of the decedent's wishes and should be given precedence over the undated note he signed, and in any event, the widow's authority as surviving spouse was still superior to that of the decedent's adult daughter. Harrod v. Caney, 547 S.W.3d 536, 2018 Ky. App. LEXIS 94 (Ky. Ct. App. 2018).

367.97504. Crematory authority license — Fees — Operations procedures — Records — Annual report.

  1. Every crematory operator and every person, firm, partnership, association, and corporation desiring to operate a crematory authority shall obtain a crematory authority license from the Attorney General at least thirty (30) days prior to opening for the purpose of conducting cremations. Every crematory operator and every person, firm, partnership, association, and corporation in existence and unlicensed as of July 15, 1994, which conducts cremations shall apply for a crematory authority license from the Attorney General within one hundred eighty (180) days thereafter. The license shall be displayed in a conspicuous place in the crematory. Application for a license shall be made in writing on the form prescribed by the Attorney General by administrative regulation. The application shall be accompanied by a one (1) time fee of one hundred dollars ($100) and shall show that the applicant owns or is actively operating a crematory in this Commonwealth or that the applicant is in a position to commence operating a crematory. The fees from the application shall be placed in a trust and agency account to be used by the Attorney General for the administration of KRS 367.97501 to 367.97537 .
    1. In addition to any other information required by the Attorney General, an application for a license shall contain the full name and address of the applicant and, in the case of a business entity, of every member, officer, and director. Any license issued pursuant to the application shall be valid only at the address stated in the application.
    2. Upon receipt of the application and the payment of the license fee the Attorney General shall issue a license unless he determines that the applicant:
      1. Has made false statements or representations in the application;
      2. Is insolvent, has conducted, is about to conduct business in a fraudulent manner; or
      3. Is not duly authorized to transact business in this Commonwealth.
  2. Changes in the persons, firm, partnership, ownership, association, or corporate structure as originally named on the application for a crematory authority license renders the license void. The crematory authority shall file a new application before the changes shall be official.
  3. No crematory authority shall require that human remains be placed in a casket before cremation or that human remains be cremated in a casket, nor shall a crematory authority refuse to accept human remains for cremation because they are not in a casket. A crematory may require the cremation container not show evidence of leakage.
  4. It is unlawful for any licensee under this section to cremate the remains of anything other than dead human bodies, including pathological waste, in the same cremation chambers licensed under this section. This prohibition does not apply to a dead human fetus, which may be cremated.
  5. Each crematory authority shall maintain a record of each cremation of human remains, disclosing the name of the person cremated, the name of the person authorizing the cremation, the date the body was received, the date the cremation was performed, and any other information the Attorney General may require by administrative regulation. The records shall be kept at the crematory for a period of not less than ten (10) years for inspection by the Attorney General.
  6. Each crematory authority shall file annually with the Attorney General a report in the form prescribed by the Attorney General by administrative regulation. A ten dollar ($10) fee shall be paid to the Attorney General by each crematory authority filing an annual report. The fees from these reports shall be placed in a trust and agency account to be used by the Attorney General for the administration of KRS 367.97501 to 367.97537 .

History. Enact. Acts 1994, ch. 140, § 2, effective July 15, 1994.

367.97507. Identification requirements.

  1. Materials identifying the human remains placed in the custody of a crematory authority shall contain the following information:
    1. Name of decedent;
    2. Date and time of death;
    3. Place of death;
    4. Name and relationship of authorizing agent;
    5. Name of person engaging crematory services; and
    6. Signature of the person making the identification.
  2. Appropriate identification shall be placed upon the exterior of the cremation container.

History. Enact. Acts 1994, ch. 140, § 3, effective July 15, 1994.

367.97511. Holding restrictions.

  1. A crematory authority shall not accept human remains for cremation unless the human remains are contained within a closed cremation container.
  2. A crematory authority shall not accept for holding a cremation container from which there is any evidence of leakage of the body fluids from the human remains therein.
  3. Human remains that are not embalmed may not be held at a crematory that does not have a refrigerated holding facility.
  4. The crematory authority shall ensure that holding facilities are secure from access by anyone other than crematory authority personnel.

History. Enact. Acts 1994, ch. 140, § 4, effective July 15, 1994.

367.97514. Processing procedures and restrictions.

  1. The simultaneous cremation of the remains of more than one (1) individual within the same cremation chamber is specifically declared unlawful. The fact that incidental and unavoidable residue remains in the cremation chamber or other equipment or any container used in a prior cremation is not a violation of this section.
  2. No human remains delivered to a crematory shall be removed from the cremation container, and the cremation container shall be cremated with the human remains. The identification from the outside of the cremation container shall be removed and placed near the cremation chamber control panel where it shall remain in place until the cremation process is complete.
  3. A body shall not be cremated with a pacemaker or other potentially hazardous implant, including any toxic or explosive-type sealed implants, in place. If the authorizing agent is the decedent, the declarant shall disclose the existence of any pacemaker or other hazardous implants to the crematory authority, or in the event there is no declaration, then the next class of authorizing agent in the order set forth in KRS 367.97501(1) shall be responsible for disclosing the existence of any pacemaker or other hazardous implants to the crematory authority.
  4. No crematory authority or any person employed by or acting on behalf of a crematory authority shall remove or possess dental gold or dental silver from any human remains. The fact that there is incidental and unavoidable dental gold or dental silver remains in the cremation chamber, in other equipment, or in any container used in a prior cremation is not a violation of this section.
  5. The crematory or crematorium shall be secure from access by unauthorized persons.
  6. The crematory retort operator shall have at least forty eight (48) hours of on the job training supervised by the crematory operator, with verification of this training having been filed with the Attorney General.

History. Enact. Acts 1994, ch. 140, § 5, effective July 15, 1994; 2016 ch. 59, § 13, effective July 15, 2016.

367.97517. Disposition of cremated remains.

  1. Upon completion of the cremation, all residual of the cremation process shall be removed insofar as is possible, from the cremation chamber. The residual shall be placed within a container or tray that will ensure against commingling with other cremated remains; and the identification removed from the control panel area and attached to the container or tray to await final processing.
  2. The residual shall be manually cleaned of identifiable foreign objects, other than those used for identification, or as may be requested by the authorizing agent. The residual of the cremation process may undergo pulverization as a part of final processing.
  3. All body prosthesis, bridgework, or similar items removed from the cremated remains shall be disposed of by the crematory authority unless authority to do otherwise is specifically granted in writing.

History. Enact. Acts 1994, ch. 140, § 6, effective July 15, 1994.

367.97521. Closed container for cremated remains — Temporary container.

  1. Cremated remains shall be placed in a closed container. Except for objects used for identification, cremated remains shall not be contaminated with foreign material unless specific authorization has been received.
  2. If cremated remains within the closed container do not adequately fill the container’s interior dimensions, the extra space may be filled with appropriate filling material which shall not come in direct contact with the cremated remains; and the lid or top shall then be securely closed.
  3. If the entire processed remains do not fit within the dimensions of the designated receptacle, the remainder shall be returned in a separate container.
  4. When a temporary container is used, the outside of the container shall be clearly identified with the name of the deceased person whose cremated remains are contained therein.

History. Enact. Acts 1994, ch. 140, § 7, effective July 15, 1994.

367.97524. Cremation authorization form required — Disposal or delivery of cremated remains — Unclaimed cremated remains — Limitation of liability.

  1. A crematory authority shall not conduct any cremations, nor accept a body for cremation, unless it has a cremation authorization form signed by the authorizing agent clearly stating the disposition to be made of the cremated remains.
  2. Cremated remains shall be disposed of by placing them in a grave, crypt, or niche; by scattering them in a scattering area; or in any manner on the private property of a consenting owner. The crematory authority or funeral director as defined in KRS 316.010 may deliver, either in person or by a method that has an internal tracking system that provides a receipt signed by the person accepting delivery, the cremated remains to the designated individual specified on the cremation authorization form. Upon receipt of the cremated remains, the individual receiving them may keep or transport them in any manner in this Commonwealth without a permit. After delivery, the crematory authority or funeral home shall be discharged from any legal obligation or liability concerning the cremated remains relative to disposition.
  3. If the cremated remains have remained unclaimed for a period of at least two (2) years, a funeral director may inter, bury, entomb, or place the cremated remains in a columbarium or may deliver the cremated remains to a bona fide religious society, veterans organization, or civic group in person or by a delivery method that utilizes an internal tracking system that provides a receipt signed by the individual accepting delivery, for the sole purpose of interment, burial, entombment, or placement in a columbarium. If such a delivery is made, the funeral director or crematory authority shall maintain records of the delivery for at least ten (10) years from the date of delivery.
  4. A crematory authority or a licensed funeral director arranging a cremation shall not be held liable for good faith reliance on representations made by the authorizing agent regarding the authority to cremate.
  5. A crematory authority or licensed funeral director shall not be held liable for delivering cremated remains that have been in their possession for two (2) years or more to a bona fide religious society, veterans group, or civic organization for the sole purpose of interment, burial, entombment, or placement in a columbarium.

History. Enact. Acts 1994, ch. 140, § 8, effective July 15, 1994; 2000, ch. 171, § 1, effective July 14, 2000; 2014, ch. 37, § 1, effective July 15, 2014; 2016 ch. 59, § 14, effective July 15, 2016; 2019 ch. 98, § 1, effective June 27, 2019.

367.97527. Funeral planning declaration directing cremation.

  1. A person may authorize his or her own cremation and the final disposition of his or her cremated remains, by executing a declaration. The original declaration directing cremation shall be retained by the entity with which the arrangements are made. A copy of the declaration shall be provided to the person signing the preneed arrangements. The person prearranging his own cremation shall have the right to transfer or cancel the declaration at any time prior to death, by notifying the entity with which the declaration is filed by certified mail.
  2. In the event that no different or inconsistent instructions are provided to the crematory authority at the time of death, the crematory authority shall release or dispose of the cremated remains as indicated in the cremation authorization or declaration.
  3. Neither the crematory authority nor a licensed funeral director arranging a cremation shall be held liable for the crematory authority’s or the funeral director’s good faith reliance on representations made by the declaration or authorizing agent regarding the authority or decision to cremate.

History. Enact. Acts 1994, ch. 140, § 9, effective July 15, 1994; 2000, ch. 171, § 2, effective July 14, 2000; 2016 ch. 59, § 15, effective July 15, 2016.

NOTES TO DECISIONS

1.Priority for Disposition of Body.

When the decedent died under the then applicable version of the statute, the priority for the disposition of his body was first to be determined by his preneed cremation authorization, and then the surviving spouse followed by surviving adult children; the cremation authorization was considered an expression of the decedent's wishes and should be given precedence over the undated note he signed, and in any event, the widow's authority as surviving spouse was still superior to that of the decedent's adult daughter. Harrod v. Caney, 547 S.W.3d 536, 2018 Ky. App. LEXIS 94 (Ky. Ct. App. 2018).

367.97531. Facsimile-transmitted cremation authorization form.

If the authorizing agent is not available in person to execute the cremation authorization form, then the authorizing agent may send the crematory a notarized facsimile transmission stating that the person is legally entitled to authorize the cremation and stating the name, address, and relationship of the sender to the decedent. The crematory authority may rely upon the facsimile-transmitted cremation authorization form to perform the cremation without liability. The facsimile-transmitted cremation authorization form shall be followed by the original delivered by certified mail.

History. Enact. Acts 1994, ch. 140, § 10, effective July 15, 1994; 2016 ch. 59, § 16, effective July 15, 2016.

367.97534. Denial, suspension, or revocation of license — Hearing — Appeal — Availability of Consumer Protection Act remedies — Authority of Attorney General under other laws and to promulgate administrative regulations.

  1. The Attorney General may deny, suspend, or revoke any license granted under KRS 367.97504 or levy civil penalties not to exceed five hundred dollars ($500), or both, or place the licensee on probation for up to twelve (12) months for any of the following causes:
    1. Obtaining a license through false statement or misrepresentation;
    2. Conducting or undertaking business in an unfair, false, misleading, or deceptive manner;
    3. Entry of a final judgment or conviction for any crime involving moral turpitude; or
    4. Violating any of the provisions of KRS 367.97501 to 367.97537 or any administrative regulation promulgated or order made pursuant to KRS 367.97501 to 367.97537 .
  2. The Attorney General shall, before denying, suspending, or revoking a license or imposing civil penalties, issue a complaint alleging the grounds upon which the licensee may have its license denied, revoked, or suspended, or have civil penalties imposed. A copy of the complaint, together with any exhibits, shall be served upon the defendant licensee at the licensee’s last know address. The licensee shall file an answer with the Attorney General’s office within twenty (20) days of receipt of the complaint. Upon receipt of an answer to a complaint, an administrative hearing shall be conducted in accordance with KRS Chapter 13B.
  3. Any party aggrieved by the final order of the Attorney General in denying, suspending, or revoking a license, or imposing civil penalties may appeal the final order to Franklin Circuit Court in accordance with KRS Chapter 13B.
  4. All of the remedies, powers, and duties provided for the Attorney General by KRS 376.190 to 367.300 and KRS 367.990 pertaining to acts declared unlawful by KRS 367.170 shall apply with equal force and effect to violations of KRS 367.97501 to 367.97537 .
  5. Nothing in KRS 367.97501 to 367.97537 shall be construed to limit or restrict the exercise of powers or the performance of the duties of the Attorney General, which he is authorized to exercise or perform under any other provision of law including direct court action to obtain injunctive relief and revocation of license. The Attorney General has the authority to promulgate any administrative regulations necessary to carry out the provisions of KRS 367.97501 to 367.97537 .

History. Enact. Acts 1994, ch. 140, § 11, effective July 15, 1994; 1996, ch. 318, § 352, effective July 15, 1996.

Legislative Research Commission Note.

(7/15/94, revised 7/15/96). The reference to “KRS 376.190 to 367.300 ” in subsection (4) of this statute is clearly erroneous. It would appear that “KRS 367.110 to 367.300 ,” an established range of statutes, may have been intended. Subsection (4) was formerly subsection (7) of this statute. See 1996 Ky. Acts ch. 318, sec. 352.

367.97537. Crematory licensure and regulation fund.

There is hereby created a trust and agency account in the State Treasury to be known as the “Crematory Licensure and Regulation Fund,” which shall consist of all moneys received from fees under KRS 367.97504 , from civil penalties assessed under this section, and from earnings on investments of these fees and civil penalties. The funds in this account shall not lapse and shall be continuously appropriated to the Attorney General for the administration of KRS 367.97501 to 367.97537 .

History. Enact. Acts 1994, ch. 140, § 12, effective July 15, 1994.

Rental-Purchase Agreements

367.976. Definitions for KRS 367.976 to 367.985.

As used in KRS 367.976 to 367.985 , unless the context otherwise requires:

  1. “Advertisement” means a commercial message in any medium that aids, promotes, or assists directly or indirectly a rental-purchase agreement, excluding in-store merchandising aids.
  2. “Cash price” means the price at which the lessor would have sold the property to the consumer for cash on the date of the rental-purchase agreement.
  3. “Consumer” means a natural person who rents personal property under a rental-purchase agreement.
  4. “Consummation” means the time a consumer becomes contractually obligated on a rental-purchase agreement.
  5. “Division” means the Division of Consumer Protection in the Office of the Attorney General.
  6. “Lessor” means a person who, in the ordinary course of business, regularly leases, offers to lease, or arranges for the leasing of property under a rental-purchase agreement.
  7. “Rental-purchase agreement” means an agreement for the use of personal property by a natural person primarily for personal, family, or household purposes, for an initial period of four (4) months or less, whether or not there is any obligation beyond the initial period, that is automatically renewable with each payment and that permits the consumer to become the owner of the property. The term rental-purchase agreement shall not be construed to be, nor be governed by, any of the following:
    1. A lease or agreement which constitutes a credit sale as defined in 12 C.F.R. part 226.2(a)(16) and Section 1602(g) of the Truth in Lending Act, 15 U.S.C. secs. 1601 et seq.;
    2. A lease which constitutes a consumer lease as defined in 12 C.F.R. part 213.2(a)(6);
    3. Any lease for agricultural, business, or commercial purposes;
    4. Any lease made to an organization;
    5. A lease or agreement which constitutes a retail installment transaction or retail installment contract as defined in KRS 371.210 ;
    6. A security interest as defined in KRS 355.1-201 (37); or
    7. A home solicitation sale as that term is defined in KRS 367.410 .

History. Enact. Acts 1990, ch. 196, § 1, effective July 13, 1990; 1990, ch. 304, § 1, effective July 13, 1990.

Legislative Research Commission Note.

(7/13/90). This section was created by two separate 1990 Acts which are identical and have therefore been compiled together.

NOTES TO DECISIONS

1.In General.

The debtor’s Chapter 13 plan erroneously treated three rent-to-own contracts as installment sales contracts, rather than as executory contracts, in contravention of 11 USCS § 365. The contracts, which required the debtor to make monthly payments to keep a washer and dryer, a personal computer, and a bedroom suite the creditor provided, but allowed the debtor to apply those payments to the purchase price of those items if she decided to obtain title to the property, fit within the definition of a “rental-purchase agreement” under KRS 367.976(7)(f) and complied with other state statutory directives governing rental-purchase agreements. In re Williams, 2007 Bankr. LEXIS 2208 (Bankr. W.D. Ky. June 25, 2007).

367.977. Necessary disclosures for rental-purchase agreement.

  1. For each rental-purchase agreement, the lessor shall disclose the following items as applicable:
    1. A brief description of the leased property, sufficient to identify the property to the consumer and lessor;
    2. The number, amount, and timing of all lease payments necessary to acquire ownership of the property;
    3. The maximum amount of all initial and periodic payments and other charges to acquire ownership of the property pursuant to the ownership provision of the rental-purchase agreement;
    4. A statement that the consumer will not own the property until the consumer has made the number of payments and the total of payments necessary to acquire ownership;
    5. A statement that the total of payments does not include other charges such as late payment, default, pickup, and reinstatement fees, and that the consumer should see the contract for an explanation of these charges;
    6. If applicable, a statement that the consumer is responsible for the fair market value of the property if it is lost, stolen, damaged, or destroyed;
    7. A statement indicating whether the property is new or used; however, a statement that indicates new property is used is not a violation of KRS 367.976 to 367.985 ;
    8. A statement of the cash price of the property. If the agreement involves a lease for five (5) or more items, a statement of the aggregate cash price of all items shall satisfy this requirement;
    9. The total of initial payments required to be paid before consummation of the agreement or delivery of the property, whichever is later;
    10. A statement clearly summarizing the terms of the consumer’s options to purchase;
    11. A statement identifying the party responsible for maintaining or servicing the property while it is being leased, together with the description of that responsibility and a statement that, if any part of a manufacturer’s express warranty covers the leased property at the time the consumer acquires ownership of the property, it will be transferred to the consumer, if allowed by the terms of the warranty; and
    12. The date of the transaction and the identities of the lessor and consumer.
  2. With respect to matters specifically governed by the Federal Consumer Credit Protection Act, compliance with that act shall satisfy the requirements of this section.
  3. Subsection (1) of this section shall not apply to a lessor who complies with the disclosure requirements of Section 182 of the Federal Consumer Credit Protection Act, 15 U.S.C.A. 1667a, 90 Stat. 250, with respect to a rental-purchase agreement entered into with a consumer.

History. Enact. Acts 1990, ch. 196, § 2, effective July 13, 1990; 1990, ch. 304, § 2, effective July 13, 1990.

Legislative Research Commission Note.

(7/13/90). This section was created by two separate 1990 Acts which are identical and have therefore been compiled together.

367.978. Form of disclosures — Receipts for payments made by cash or money order.

  1. The lessor shall disclose to the consumer the information required by KRS 367.976 to 367.985 . In a transaction involving more than one (1) consumer, a lessor shall disclose only to one (1) of the consumers who are primarily obligated. In a transaction involving more than one (1) lessor, only one (1) lessor need make the required disclosures.
  2. The disclosures required under KRS 367.976 to 367.985 shall be made no later than the time the lessor delivers the merchandise to the consumer, or upon consummation of the rental-purchase agreement, whichever is earlier.
  3. The disclosures shall be made using words and phrases of common meaning in a form that the consumer may keep. The disclosures required under KRS 367.977 shall be made a part of the rental-purchase agreement or provided on a separate form. The required disclosures shall be set forth clearly and conspicuously. The disclosures shall be placed all together, on the front side of the rental-purchase agreement or on a separate form. The form setting forth the required disclosures shall contain spaces for the consumer’s signature and the date immediately below the disclosures. The requirements of this subsection shall not have been complied with unless the consumer signs the statement and receives at the time disclosures are made a legible copy of the signed statement. The inclusion in the required disclosures of a statement that the consumer received a legible copy of those disclosures shall create a rebuttable presumption of receipt thereof.
  4. Information required to be disclosed may be given in the form of estimates and shall be identified as such when the lessor does not know the exact information.
  5. If a disclosure becomes inaccurate as the result of any act, occurrence, or agreement after delivery of the required disclosures, the resulting inaccuracy shall not be a violation of KRS 367.976 to 367.985 .
  6. At the lessor’s option, information in addition to that required by KRS 367.977 may be disclosed if the additional information is not stated, utilized, or placed in a manner which will contradict, obscure, or distract attention from the required information.
  7. A lessor shall make available a written receipt for each payment made by cash or money order.

History. Enact. Acts 1990, ch. 196, § 3, effective July 13, 1990; 1990, ch. 304, § 3, effective July 13, 1990.

Legislative Research Commission Note.

(7/13/90). This section was created by two separate 1990 Acts which are identical and have therefore been compiled together.

367.979. Prohibited provisions.

A rental-purchase agreement shall not contain a provision:

  1. Requiring a confession of judgment;
  2. Requiring a garnishment of wages;
  3. Granting authorization to the lessor of a person acting on the lessor’s behalf to enter unlawfully upon the consumer’s premises or to commit any breach of the peace in the repossession of goods;
  4. Requiring the consumer to waive any defense, counterclaim or right of action against the lessor or a person acting on the lessor’s behalf in collection of payment under the lease or in the repossession of goods; or
  5. Requiring purchase of insurance from the lessor to cover the merchandise.

History. Enact. Acts 1990, ch. 196, § 4, effective July 13, 1990; 1990, ch. 304, § 4, effective July 13, 1990.

Legislative Research Commission Note.

(7/13/90). This section was created by two separate 1990 Acts which are identical and have therefore been compiled together.

367.980. Required provisions.

  1. Each rental-purchase agreement shall:
    1. Provide that the consumer may terminate the agreement without penalty by voluntarily surrendering or returning the merchandise upon expiration of any lease term; and
    2. Contain a provision for reinstatement which, at a minimum permits a consumer who fails to make a timely rental payment to reinstate the agreement, without losing any rights or options which exist under the agreement, by the payment of all past due rental charges, the reasonable costs of pickup, redelivery, any refurbishing and any applicable late fee within five (5) days of the renewal date if the consumer pays monthly, or within two (2) days of the renewal date if the consumer pays more frequently than monthly.
  2. If a lessee returns the property to the lessor during the times stated in subsection (1) of this section, the reinstatement period shall be extended for an additional thirty (30) days from the date of return.
  3. Nothing in this section shall prevent a lessor from attempting to repossess property during the reinstatement period, but that repossession shall not affect the consumer’s right to reinstate. Upon reinstatement, the lessor shall provide the consumer with the same property or substitute property of comparable quality and condition.

History. Enact. Acts 1990, ch. 196, § 5, effective July 13, 1990; 1990, ch. 304, § 5, effective July 13, 1990.

Legislative Research Commission Note.

(7/13/90). This section was created by two separate 1990 Acts which are identical and have therefore been compiled together.

367.981. Renegotiation of rental-purchase agreement.

  1. A renegotiation shall occur when an existing rental-purchase agreement is satisfied and replaced by a new lease agreement undertaken by the same consumer. A renegotiation shall be a new agreement covered by KRS 367.976 to 367.985 . However, events such as the following shall not be treated as a renegotiation:
    1. The addition or return of property in a multiple item agreement or the substitution of lease property, if in either case the average payment allocable to a payment period is not changed by more than twenty-five percent (25%);
    2. A deferral or extension of one (1) or more periodic payments, or portions of a periodic payment;
    3. A reduction in charges in the agreement;
    4. An agreement involving a court proceeding; or
    5. Any other event described in administrative regulations prescribed by the division.
  2. No disclosures shall be required for any extension of a rental-purchase agreement.

History. Enact. Acts 1990, ch. 196, § 6, effective July 13, 1990; 1990, ch. 304, § 6, effective July 13, 1990.

Legislative Research Commission Note.

(7/13/90). This section was created by two separate 1990 Acts which are identical and have therefore been compiled together.

367.982. Advertisement for rental-purchase agreement.

  1. If an advertisement for a rental-purchase agreement refers to or states the amount of any payment or the right to acquire ownership for any specific item, the advertisement also shall state clearly and conspicuously the following items, as applicable:
    1. That the transaction advertised is a rental-purchase agreement;
    2. The total of payments necessary to acquire ownership; and
    3. That the consumer acquires no ownership rights if the total amount necessary to acquire ownership is not paid.
  2. Any owner or personnel of any medium in which an advertisement appears or through which it is disseminated shall not be liable under this section.
  3. Subsection (1) of this section shall not apply to an advertisement:
    1. Which does not refer to a specific item of merchandise;
    2. Which does not refer to or state the amount of any payment; or
    3. Which is published in the yellow pages of a telephone directory or any similar directory of business.
  4. With respect to matters specifically governed by the Federal Consumer Credit Protection Act, compliance with that act shall satisfy the requirements of this section.

History. Enact. Acts 1990, ch. 196, § 7, effective July 13, 1990; 1990, ch. 304, § 7, effective July 13, 1990.

Compiler’s Notes.

The Consumer Credit Protection Act, referred to in subsection (4), may be found as 15 USCS § 1601 et seq.

Legislative Research Commission Note.

(7/13/90). This section was created by two separate 1990 Acts which are identical and have therefore been compiled together.

367.983. Civil remedies for consumers injured by violations of KRS 367.976 to 367.985.

  1. A lessor who fails to comply with a requirement imposed in KRS 367.977 , 367.978 , 367.979 , or 367.980 with respect to a consumer shall be liable to the consumer in an amount equal to the greater of:
    1. The actual damages sustained by the consumer as a result of the violation, plus the costs of the action and reasonable attorneys’ fees;
    2. In the case of an individual action, twenty-five percent (25%) of the total of payments necessary to acquire ownership but not less than one hundred dollars ($100) nor greater than one thousand dollars ($1,000), plus the costs of the action and reasonable attorneys’ fees; or
    3. In the case of a class action, the amount the court determines to be appropriate with no minimum recovery as to each member, plus the costs of the action and reasonable attorneys’ fees. The total recovery in any class action or series of class actions arising out of the same violation shall not be more than the lesser of five hundred thousand dollars ($500,000), plus the costs of the action and reasonable attorneys’ fees or one percent (1%) of the net worth of the lessor, plus the costs of the action and reasonable attorneys’ fees. In determining the amount of any award in a class action, the court shall consider, among other relevant factors, the amount of actual damages awarded, the frequency and persistence of the violation, the lessor’s resources, and the extent to which the lessor’s violation was intentional.
  2. In the case of an advertisement, any lessor who fails to comply with the requirements of KRS 367.982 with regard to any person shall be liable to that person for actual damages suffered from the violation, the costs of the action, and reasonable attorneys’ fees.
  3. If there are multiple lessors, liability shall be imposed only on the lessor who made the disclosures. If no disclosures have been given, liability shall be imposed on all lessors.
  4. If there are multiple consumers in a rental-purchase agreement, there shall be only one (1) recovery of damages under subsection (1) of this section for a violation of KRS 367.976 to 367.985 .
  5. Multiple violations in connection with a rental-purchase agreement shall entitle the consumer to a single recovery under this section.
  6. A consumer shall not take any action to offset any amount for which a lessor is potentially liable under subsection (1) of this section against any amount owed by the consumer, unless the amount of the lessor’s liability has been determined by judgment of a court of competent jurisdiction in an action in which the lessor was a party. This subsection shall not bar a consumer then in default on the obligation from asserting a violation of KRS 367.976 to 367.985 as an original action, or as a defense or counterclaim to an action brought by lessor to collect amounts owed by the consumer.
  7. In connection with any transaction covered under KRS 367.976 to 367.985 , the lessor shall preserve evidence of compliance with the provisions of KRS 367.976 to 367.985 for not less than two (2) years from the date of consummation of the agreement.

History. Enact. Acts 1990, ch. 196, § 8, effective July 13, 1990; 1990, ch. 304, § 8, effective July 13, 1990.

Legislative Research Commission Note.

(7/13/90). This section was created by two separate 1990 Acts which are identical and have therefore been compiled together.

367.984. Limitation of actions.

A civil action under KRS 367.976 to 367.985 may be brought in any court of competent jurisdiction within one (1) year of the date of the occurrence of any violation or within six (6) months of the time the rental-purchase agreement, together with any renewals or extensions thereof, ceases to be in effect, whichever is greater. Notwithstanding the above, a civil action under KRS 367.976 to 367.985 may be maintained by way of recoupment or counterclaim in an action brought against the consumer by the lessor or its assignee.

History. Enact. Acts 1990, ch. 196, § 9, effective July 13, 1990; 1990, ch. 304, § 9, effective July 13, 1990.

Legislative Research Commission Note.

(7/13/90). This section was created by two separate 1990 Acts which are identical and have therefore been compiled together.

367.985. Effect of unintentional violation and timely adjustment of error.

  1. A lessor shall not be liable under KRS 367.983 for a violation of KRS 367.976 to 367.985 if the lessor shows by a preponderance of the evidence that the violation was not intentional and resulted from a bona fide error, such as a clerical miscalculation, computer malfunctions, programming error, or printing error, even though the lessor maintained procedures reasonably adapted to avoid such an error. An error of legal judgment with respect to requirements of this title shall not be considered a bona fide error.
  2. A lessor shall not be liable under KRS 367.983 for any act done or omitted in good faith in conformity with any administrative regulation or interpretation promulgated by the Attorney General or by the division or by an official duly authorized by the Attorney General or by the division. This rule shall apply even if, after the act or omission has occurred, the regulation or interpretation is amended, rescinded, or determined by judicial or other authority to be invalid for any reason.
  3. A lessor shall not be liable under KRS 367.983 for any error if, before the thirty-first day after the date the merchant discovers the error and before an action against the lessor has been filed or written notice of the error received by the lessor, the lessor gives the consumer written notice of the error and makes adjustments in the consumer’s account as necessary to assure that the consumer will not be required to pay an amount in excess of the amount disclosed and that the agreement otherwise complies with KRS 367.976 to 367.985 .

History. Enact. Acts 1990, ch. 196, § 10, effective July 13, 1990; 1990, ch. 304, § 10, effective July 13, 1990.

Legislative Research Commission Note.

(7/13/90). This section was created by two separate 1990 Acts which are identical and have therefore been compiled together.

Penalties

367.990. Penalties.

  1. Any person who violates the terms of a temporary or permanent injunction issued under KRS 367.190 shall forfeit and pay to the Commonwealth a civil penalty of not more than twenty-five thousand dollars ($25,000) per violation. For the purposes of this section, the Circuit Court issuing an injunction shall retain jurisdiction, and the cause shall be continued, and in such cases the Attorney General acting in the name of the Commonwealth may petition for recovery of civil penalties.
  2. In any action brought under KRS 367.190 , if the court finds that a person is willfully using or has willfully used a method, act, or practice declared unlawful by KRS 367.170 , the Attorney General, upon petition to the court, may recover, on behalf of the Commonwealth, a civil penalty of not more than two thousand dollars ($2,000) per violation, or where the defendant’s conduct is directed at a person aged sixty (60) or older, a civil penalty of not more than ten thousand dollars ($10,000) per violation, if the trier of fact determines that the defendant knew or should have known that the person aged sixty (60) or older is substantially more vulnerable than other members of the public.
  3. Any person with actual notice that an investigation has begun or is about to begin pursuant to KRS 367.240 and 367.250 who intentionally conceals, alters, destroys, or falsifies documentary material is guilty of a Class A misdemeanor.
  4. Any person who, in response to a subpoena or demand as provided in KRS 367.240 or 367.250 , intentionally falsifies or withholds documents, records, or pertinent materials that are not privileged shall be subject to a fine as provided in subsection (3) of this section.
  5. The Circuit Court of any county in which any plan described in KRS 367.350 is proposed, operated, or promoted may grant an injunction without bond, upon complaint filed by the Attorney General to enjoin the further operation thereof, and the Attorney General may ask for and the court may assess civil penalties against the defendant in an amount not to exceed the sum of five thousand dollars ($5,000) which shall be for the benefit of the Commonwealth of Kentucky.
  6. Any person, business, or corporation who knowingly violates the provisions of KRS 367.540 shall be guilty of a violation. It shall be considered a separate offense each time a magazine is mailed into the state; but it shall be considered only one (1) offense for any quantity of the same issue of a magazine mailed into Kentucky.
  7. Any solicitor who violates the provisions of KRS 367.513 or 367.515 shall be guilty of a Class A misdemeanor.
  8. In addition to the penalties contained in this section, the Attorney General, upon petition to the court, may recover, on behalf of the Commonwealth a civil penalty of not more than the greater of five thousand dollars ($5,000) or two hundred dollars ($200) per day for each and every violation of KRS 367.175 .
  9. Any person who shall willfully and intentionally violate any provision of KRS 367.976 to 367.985 shall be guilty of a Class B misdemeanor.
    1. Any person who violates the terms of a temporary or permanent injunction issued under KRS 367.665 shall forfeit and pay to the Commonwealth a penalty of not more than five thousand dollars ($5,000) per violation. For the purposes of this section, the Circuit Court issuing an injunction shall retain jurisdiction, and the cause shall be continued, and in such cases the Attorney General acting in the name of the Commonwealth may petition for recovery of civil penalties. (10) (a) Any person who violates the terms of a temporary or permanent injunction issued under KRS 367.665 shall forfeit and pay to the Commonwealth a penalty of not more than five thousand dollars ($5,000) per violation. For the purposes of this section, the Circuit Court issuing an injunction shall retain jurisdiction, and the cause shall be continued, and in such cases the Attorney General acting in the name of the Commonwealth may petition for recovery of civil penalties.
      1. The Attorney General may, upon petition to a court having jurisdiction under KRS 367.190 , recover on behalf of the Commonwealth from any person found to have willfully committed an act declared unlawful by KRS 367.667 a penalty of not more than five thousand dollars ($5,000) per violation. (b) 1. The Attorney General may, upon petition to a court having jurisdiction under KRS 367.190 , recover on behalf of the Commonwealth from any person found to have willfully committed an act declared unlawful by KRS 367.667 a penalty of not more than five thousand dollars ($5,000) per violation.
      2. In addition to any other penalties provided for the commission of the offense, any person found guilty of violating KRS 367.667(1)(c):
        1. Shall be punished by a fine of no less than five hundred dollars ($500) for the first offense and no less than five thousand dollars ($5,000) for any subsequent offense; and
        2. Pay restitution of any financial benefit secured through conduct proscribed by KRS 367.667(1)(c).
      3. The Office of the Attorney General or the appropriate Commonwealth’s attorney shall have concurrent enforcement powers as to fines, felonies, and misdemeanors under this paragraph.
    2. Any person who knowingly violates any provision of KRS 367.652 , 367.653 , 367.656 , 367.657 , 367.658 , 367.666 , or 367.668 or who knowingly gives false or incorrect information to the Attorney General in filing statements or reports required by KRS 367.650 to 367.670 shall be guilty of a Class D felony.
  10. Any dealer who fails to provide a statement under KRS 367.760 or a notice under KRS 367.765 shall be liable for a penalty of one hundred dollars ($100) per violation to be collected in the name of the Commonwealth upon action of the Attorney General.
  11. Any dealer or manufacturer who falsifies a statement under KRS 367.760 shall be liable for a penalty not exceeding one thousand dollars ($1,000) to be collected in the name of the Commonwealth upon action by the Attorney General.
  12. Any person who violates KRS 367.805 , 367.809(2), 367.811 , 367.813(1), or 367.816 shall be guilty of a Class C felony.
  13. Either the Attorney General or the appropriate Commonwealth’s attorney shall have authority to prosecute violations of KRS 367.801 to 367.819 .
  14. A violation of KRS 367.474 to 367.478 and 367.482 is a Class C felony. Either the Attorney General or the appropriate Commonwealth’s attorney shall have authority to prosecute violators of KRS 367.474 to 367.478 and 367.482 .
  15. Any person who violates KRS 367.310 shall be guilty of a violation.
  16. Any person, partnership, or corporation who violates the provisions of KRS 367.850 shall be guilty of a Class A misdemeanor.
  17. Any dealer in motor vehicles or any other person who fraudulently changes, sets back, disconnects, fails to connect, or causes to be changed, set back, or disconnected, the speedometer or odometer of any motor vehicle, to effect the sale of the motor vehicle shall be guilty of a Class D felony.
  18. Any person who negotiates a contract of membership on behalf of a club without having previously fulfilled the bonding requirement of KRS 367.403 shall be guilty of a Class D felony.
  19. Any person or corporation who operates or attempts to operate a health spa in violation of KRS 367.905(1) shall be guilty of a Class A misdemeanor.
    1. Any person who violates KRS 367.832 shall be guilty of a Class C felony; and (21) (a) Any person who violates KRS 367.832 shall be guilty of a Class C felony; and
    2. The appropriate Commonwealth’s attorney shall have authority to prosecute felony violations of KRS 367.832.
    1. Any person who violates the provisions of KRS 367.855 or 367.857 shall be guilty of a violation. Either the Attorney General or the appropriate county health department may prosecute violators of KRS 367.855 or 367.857 . (22) (a) Any person who violates the provisions of KRS 367.855 or 367.857 shall be guilty of a violation. Either the Attorney General or the appropriate county health department may prosecute violators of KRS 367.855 or 367.857.
    2. The provisions of this subsection shall not apply to any retail establishment if the wholesaler, distributor, or processor fails to comply with the provisions of KRS 367.857.
  20. Notwithstanding any other provision of law, any telemarketing company, telemarketer, caller, or merchant shall be guilty of a Class D felony when that telemarketing company, telemarketer, caller, or merchant three (3) times in one (1) calendar year knowingly and willfully violates KRS 367.46955(15) by making or causing to be made an unsolicited telephone solicitation call to a telephone number that appears in the current publication of the zero call list maintained by the Office of the Attorney General, Division of Consumer Protection.
  21. Notwithstanding any other provision of law, any telemarketing company, telemarketer, caller, or merchant shall be guilty of a Class A misdemeanor when that telemarketing company, telemarketer, caller, or merchant uses a zero call list identified in KRS 367.46955(15) for any purpose other than complying with the provisions of KRS 367.46951 to 367.46999 .
    1. Notwithstanding any other provision of law, any telemarketing company, telemarketer, caller, or merchant that violates KRS 367.46951 to 367.46999 shall be assessed a civil penalty of not more than five thousand dollars ($5,000) for each offense. (25) (a) Notwithstanding any other provision of law, any telemarketing company, telemarketer, caller, or merchant that violates KRS 367.46951 to 367.46999 shall be assessed a civil penalty of not more than five thousand dollars ($5,000) for each offense.
    2. The Attorney General, or any person authorized to act in his or her behalf, shall initiate enforcement of a civil penalty imposed under paragraph (a) of this subsection.
    3. Any civil penalty imposed under paragraph (a) of this subsection may be compromised by the Attorney General or his or her designated representative. In determining the amount of the penalty or the amount agreed upon in compromise, the Attorney General, or his or her designated representative, shall consider the appropriateness of the penalty to the financial resources of the telemarketing company, telemarketer, caller, or merchant charged, the gravity of the violation, the number of times the telemarketing company, telemarketer, caller, or merchant charged has been cited, and the good faith of the telemarketing company, telemarketer, caller, or merchant charged in attempting to achieve compliance, after notification of the violation.
    4. If a civil penalty is imposed under this subsection, a citation shall be issued which describes the violation which has occurred and states the penalty for the violation. If, within fifteen (15) working days from the receipt of the citation, the affected party fails to pay the penalty imposed, the Attorney General, or any person authorized to act in his or her behalf, shall initiate a civil action to collect the penalty. The civil action shall be taken in the court which has jurisdiction over the location in which the violation occurred.
  22. Any person who violates KRS 367.500 shall be liable for a penalty of two thousand five hundred dollars ($2,500) per violation. Either the Attorney General or the appropriate Commonwealth’s attorney may prosecute violations of KRS 367.500 .

History. Enact. Acts 1972, ch. 4, §§ 17(1), (2), 20(1), (2); 1972, ch. 23, § 2; 1972, ch. 55, § 5; 1974, ch. 281, § 6, effective July 1, 1974; 1976, ch. 136, § 22; 1976, ch. 216, § 6; 1976, ch. 330, § 2; 1978, ch. 315, § 11, effective June 17, 1978; 1978, ch. 316, § 10(2), (3), effective June 17, 1978; 1980, ch. 49, §§ 1, 10, 11, effective July 15, 1980; 1982, ch. 21, § 7, effective July 15, 1982; 1982, ch. 298, § 8, effective July 15, 1982; 1982, ch. 315, § 2, effective July 15, 1982; 1986, ch. 184, § 4, effective July 15, 1986; 1988, ch. 142, § 3, effective July 15, 1988; 1990, ch. 196, § 11, effective July 13, 1990; 1990, ch. 304, § 11, effective July 13, 1990; 1992, ch. 463, § 42, effective July 14, 1992; 1994, ch. 151, § 12, effective July 15, 1994; 1994, ch. 329, § 8, effective July 15, 1994; 1998, ch. 502, § 1, effective July 15, 1998; 2002, ch. 21, § 8, effective July 15, 2002; 2007, ch. 115, § 6, effective June 26, 2007; 2007, ch. 134, § 2, effective June 26, 2007; 2019 ch. 105, § 4, effective June 27, 2019.

NOTES TO DECISIONS

1.In General.

Because the allegations the Attorney General raised against the insurance company could, if proven, amount to a violation of the Consumer Protection Act, and because remedies other than damages are potentially available, the trial court erred by dismissing the Attorney General’s complaint. Commonwealth ex rel. Chandler v. Anthem Ins. Cos., 8 S.W.3d 48, 1999 Ky. App. LEXIS 50 (Ky. Ct. App. 1999).

Trial court correctly found that a misleading advertisement could constitute a willful violation of the Kentucky Consumer Protection where there was proof of a conscious wrong or evil purpose on part of the act, or at least inexcusable carelessness whether the act is right or wrong. Am. Nat'l Univ. of Ky., Inc. v. Commonwealth ex rel. Beshear, 2019 Ky. App. LEXIS 103 (Ky. Ct. App. June 14, 2019).

Trial court’s conclusion that the Kentucky Consumer Protection Act (KCPA) claims need only be proven by a preponderance of evidence was affirmed as a clear and convincing standard was contrary to the judicial directives relating to the KCPA’s remedial purpose. Am. Nat'l Univ. of Ky., Inc. v. Commonwealth ex rel. Beshear, 2019 Ky. App. LEXIS 103 (Ky. Ct. App. June 14, 2019).

Trial court abused its discretion by employing a per day method of calculating Kentucky Consumer Protection Act violations where the legislature was clearly aware of its ability to authorize sanctions on a per day basis in excess of $5,000, but declined to do so and expressly placed limits on the monetary sanction that can be imposed per violation. Am. Nat'l Univ. of Ky., Inc. v. Commonwealth ex rel. Beshear, 2019 Ky. App. LEXIS 103 (Ky. Ct. App. June 14, 2019).

In addition to the original publication, additional Kentucky Consumer Protection Act (KCPA) violations may be found whenever a defendant edits or adds substantive material to a website that is related to the information originally found to run afoul of the KCPA. Am. Nat'l Univ. of Ky., Inc. v. Commonwealth ex rel. Beshear, 2019 Ky. App. LEXIS 103 (Ky. Ct. App. June 14, 2019).

Trial court correctly found that a misleading advertisement could constitute a willful violation of the Kentucky Consumer Protection where there was proof of a conscious wrong or evil purpose on part of the act, or at least inexcusable carelessness whether the act is right or wrong. Am. Nat'l Univ. of Ky., Inc. v. Commonwealth ex rel. Beshear, 2019 Ky. App. LEXIS 103 (Ky. Ct. App. June 14, 2019).

Trial court’s conclusion that the Kentucky Consumer Protection Act (KCPA) claims need only be proven by a preponderance of evidence was affirmed as a clear and convincing standard was contrary to the judicial directives relating to the KCPA’s remedial purpose. Am. Nat'l Univ. of Ky., Inc. v. Commonwealth ex rel. Beshear, 2019 Ky. App. LEXIS 103 (Ky. Ct. App. June 14, 2019).

Trial court abused its discretion by employing a per day method of calculating Kentucky Consumer Protection Act violations where the legislature was clearly aware of its ability to authorize sanctions on a per day basis in excess of $5,000, but declined to do so and expressly placed limits on the monetary sanction that can be imposed per violation. Am. Nat'l Univ. of Ky., Inc. v. Commonwealth ex rel. Beshear, 2019 Ky. App. LEXIS 103 (Ky. Ct. App. June 14, 2019).

In addition to the original publication, additional Kentucky Consumer Protection Act (KCPA) violations may be found whenever a defendant edits or adds substantive material to a website that is related to the information originally found to run afoul of the KCPA. Am. Nat'l Univ. of Ky., Inc. v. Commonwealth ex rel. Beshear, 2019 Ky. App. LEXIS 103 (Ky. Ct. App. June 14, 2019).

Research References and Practice Aids

Cross-References.

Class C felony, sentence, KRS 532.060 .

Kentucky Bench & Bar.

Stamm, The Attorney General Goes to Market, Vol. 41, No. 2, April 1977, Ky. Bench & Bar 14.

Baxter, Private Right of Action Under the Consumer Protection Act — New Avenues for Recovery, Vol. 43, No. 4, October 1979, Ky. Bench & Bar 8.

Kentucky Law Journal.

Comments, Precomplaint Investigations Under the Kentucky Consumer Protection Act: Validity and Scope of the Civil Investigation Demand, 65 Ky. L.J. 169 (1976-77).

The Kentucky Law Survey, Peltier and Coleman, Commercial Law, 67 Ky. L.J. 523 (1978-79).

367.991. Penalty for violation of KRS 367.932 to 367.974.

Any person or corporation which is subject to the provisions of KRS 367.932 to 367.974 and willfully violates the trust provision found in this chapter shall be guilty of a Class C felony. Each violation of any trust provision of this chapter shall be deemed a separate offense. Either the Attorney General or the appropriate Commonwealth’s attorney may prosecute violators.

History. Enact. Acts 1984, ch. 116, § 24, effective July 13, 1984.

367.992. Penalty for violation of KRS 367.826.

  1. Violation of KRS 367.826 shall be a Class A misdemeanor.
  2. In addition to subsection (1) of this section, all of the remedies, powers, and duties provided for the Attorney General by KRS 367.190 through 367.300 and 367.990 , pertaining to acts declared unlawful by KRS 367.170 , shall apply with equal force and effect to acts declared unlawful by KRS 367.826 .

History. Enact. Acts 1988, ch. 313, § 3, effective July 15, 1988.

367.993. Penalty for violations of KRS 367.4774 and 367.381.

  1. Any person who knowingly violates or causes to be violated any provision of KRS 367.4774 shall be guilty of a Class C felony.
  2. Any person who knowingly violates or causes to be violated any provision of KRS 367.381 shall be guilty of a Class C felony.

History. Enact. Acts 1992, ch. 209, § 8, effective July 14, 1992; 1992, ch. 301, § 7, effective July 14, 1992.

Legislative Research Commission Note.

(7/14/92). This section was enacted by two 1992 Acts which do not appear to be in conflict and have been compiled together.

CHAPTER 368 Check Cashing [Renumbered]

368.010. Definitions for KRS 368.010 to 368.120 and KRS 368.990. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1992, ch. 213, § 1, effective July 14, 1992; 1992, ch. 341, § 1, effective July 14, 1992; 1998, ch. 601, § 1, effective April 14, 1998) was renumbered as KRS 286.9-010 effective July 12, 2006.

368.020. Requirement of license. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1992, ch. 213, § 2, effective July 14, 1992; 1992, ch. 341, § 2, effective July 14, 1992; 1998, ch. 601, § 2, effective April 14, 1998) was renumbered as KRS 286.9-020 effective July 12, 2006.

368.030. Exemptions from applicability of KRS 368.010 to 368.120. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1992, ch. 213, § 3, effective July 14, 1992; 1992, ch. 341, § 3, effective July 14, 1992; 1998, ch. 601, § 3, effective April 14, 1998) was renumbered as KRS 286.9-030 effective July 12, 2006.

368.040. Qualifications for license. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1992, ch. 213, § 4, effective July 14, 1992; 1992, ch. 341, § 4, effective July 14, 1992; 1998, ch. 601, § 4, effective April 14, 1998) was renumbered as KRS 286.9-040 effective July 12, 2006.

368.050. Manner of application for license — Form. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1992, ch. 213, § 5, effective July 14, 1992; 1992, ch. 341, § 5, effective July 14, 1992) was renumbered as KRS 286.9-050 effective July 12, 2006.

368.060. Materials to accompany application — Investigation fee. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1992, ch. 213, § 6, effective July 14, 1992; 1992, ch. 341, § 6, effective July 14, 1992; 1998, ch. 601, § 5, effective April 14, 1998) was renumbered as KRS 286.9-060 effective July 12, 2006.

368.070. Investigation by department — Issuance of license — Posting of license — License period — Licensee’s duty to notify department. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1992, ch. 213, § 7, effective July 14, 1992; 1992, ch. 341, § 7, effective July 14, 1992; 1998, ch. 601, § 6, effective April 14, 1998) was renumbered as KRS 286.9-070 effective July 12, 2006.

368.075. Complaints filed against licensees — Investigative powers of commission. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 601, § 12, effective April 14, 1998) was renumbered as KRS 286.9-075 effective July 12, 2006.

368.080. Renewal of license. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1992, ch. 213, § 8, effective July 14, 1992; 1992, ch. 341, § 8, effective July 14, 1992; 1998, ch. 601, § 7, effective April 14, 1998) was renumbered as KRS 286.9-080 effective July 12, 2006.

368.090. Authority to promulgate administrative regulations — Compliance examination and fee. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1992, ch. 213, § 9, effective July 14, 1992; 1992, ch. 341, § 9, effective July 14, 1992; 1998, ch. 601, § 8, effective April 14, 1998) was renumbered as KRS 286.9-090 effective July 12, 2006.

368.100. Procedures to be followed by licensees. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1992, ch. 213, § 10, effective July 14, 1992; 1992, ch. 341, § 10, effective July 14, 1992; 1998, ch. 601, § 9, effective April 14, 1998) was renumbered as KRS 286.9-100 effective July 12, 2006.

368.102. Requirements of disclosure by licensees — Fees and service charges — Acceptance, payment, and deposit of checks. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 601, § 14, effective April 14, 1998) was renumbered as KRS 286.9-102 effective July 12, 2006.

368.104. Annual reports filed by licensees with commissioner. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 601, § 13, effective April 14, 1998) was renumbered as KRS 286.9-104 effective July 12, 2006.

368.110. Revocation or suspension of license. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1992, ch. 213, § 11, effective July 14, 1992; 1992, ch. 341, § 11, effective July 14, 1992; 1998, ch. 601, § 10, effective April 14, 1998) was renumbered as KRS 286.9-110 effective July 12, 2006.

368.120. Hearing for denial, suspension, or revocation of license. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1992, ch. 213, § 12, effective July 14, 1992; 1992, ch. 341, § 12, effective July 14, 1992; 1996, ch. 318, § 353, effective July 15, 1996; 1998, ch. 601, § 11, effective April 14, 1998) was renumbered as KRS 286.9-120 effective July 12, 2006.

Title Pledge Lending

368.200. Definitions for KRS 368.200 to 368.285 and KRS 368.991. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 1, effective July 15, 1998) was renumbered as KRS 286.10-200 effective July 12, 2006.

368.205. Licensed title pledge lender — Limitation of action on title pledge agreement. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 2, effective July 15, 1998) was renumbered as KRS 286.10-205 effective July 12, 2006.

368.210. Prohibition against engaging in business without license. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 3, effective July 15, 1998) was renumbered as KRS 286.10-210 effective July 12, 2006.

368.215. Qualifications for license. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 4, effective July 15, 1998) was renumbered as KRS 286.10-215 effective July 12, 2006.

368.220. Application for title pledge lending license. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 5, effective July 15, 1998) was renumbered as KRS 286.10-220 effective July 12, 2006.

368.225. Verification — Granting of license — Renewal. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 6, effective July 15, 1998) was renumbered as KRS 286.10-225 effective July 12, 2006.

368.230. Inspection by commissioner — Presence of officer. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 7, effective July 15, 1998) was renumbered as KRS 286.10-230 effective July 12, 2006.

368.235. Nonliability of examiner to pledgor. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 8, effective July 15, 1998) was renumbered as KRS 286.10-235 effective July 12, 2006.

368.240. Confidentiality of examination — Exceptions. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 9, effective July 15, 1998) was renumbered as KRS 286.10-240 effective July 12, 2006.

368.245. Fee for examination. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 10, effective July 15, 1998) was renumbered as KRS 286.10-245 effective July 12, 2006.

368.250. Record of agreement — Contents — Signature requirement — Location of records. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 11, effective July 15, 1998) was renumbered as KRS 286.10-250 effective July 12, 2006.

368.255. Lender’s security interest. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 12, effective July 15, 1998) was renumbered as KRS 286.10-255 effective July 12, 2006.

368.260. Applicability of KRS 288.530 — Compliance with Federal Truth in Lending Act — Rollover period — Renewals of agreements. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 13, effective July 15, 1998) was renumbered as KRS 286.10-260 effective July 12, 2006.

368.265. Release of security interest and lien. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 14, effective July 15, 1998) was renumbered as KRS 286.10-265 effective July 12, 2006.

368.270. Expiration of title pledge agreement — Taking possession of titled personal property upon default. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 15, effective July 15, 1998) was renumbered as KRS 286.10-270 effective July 12, 2006.

368.275. Repossession — Sale of repossessed property. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 16, effective July 15, 1998) was renumbered as KRS 286.10-275 effective July 12, 2006.

368.280. Change in title of repossessed property. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 17, effective July 15, 1998) was renumbered as KRS 286.10-280 effective July 12, 2006.

368.285. Prohibited conduct by title pledge lenders. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 18, effective July 15, 1998) was renumbered as KRS 286.10-285 effective July 12, 2006.

368.990. Penalty for violation of KRS 368.010 to 368.120. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1992, ch. 213, § 13, effective July 14, 1992; 1992, ch. 341, § 13, effective July 14, 1992) was renumbered as KRS 286.10-990 effective July 12, 2006.

368.991. Penalties for KRS 368.200 to 368.285 and KRS 368.991 — Revocation or suspension of license of title pledge lender. [Renumbered.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 242, § 19, effective July 15, 1998) was renumbered as KRS 286.10-991 effective July 12, 2006.

CHAPTER 369 Information Technology

Use of Electronic Records and Electronic Signatures

369.010. Legislative intent of KRS 369.010 to 369.030. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 363, § 1, effective July 15, 1998) was repealed by Acts 2000, ch. 301, § 21, effective August 1, 2000. For present law, see KRS 369.101 et seq.

369.020. Definitions for KRS 369.010 to 369.030. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 363, § 2, effective July 15, 1998) was repealed by Acts 2000, ch. 301, § 21, effective August 1, 2000. For present law, see KRS 369.101 et seq.

369.030. Use of electronic record or electronic signature — Construction and scope of KRS 369.010 to 369.030. [Repealed.]

Compiler’s Notes.

This section (Enact. Acts 1998, ch. 363, § 3, effective July 15, 1998) was repealed by Acts 2000, ch. 301, § 21, effective August 1, 2000. For present law, see KRS 369.101 et seq.

Uniform Electronic Transactions Act

369.101. Short title for KRS 369.101 to 369.120.

KRS 369.101 to 369.120 may be cited as the Uniform Electronic Transactions Act.

History. Enact. Acts 2000, ch. 301, § 1, effective August 1, 2000.

Compiler’s Notes.

Section 22 of Acts 2000, ch. 301, effective August 1, 2000, read: “Sections 1 to 20 of this Act [KRS 369.101 to 369.120 ] applies to contracts created or renegotiated on and after the effective date of this Act. To the extent that Sections 1 to 20 of this Act may be inconsistent, and notwithstanding the repeal of KRS 369.010 to 369.030 contained in Section 21 of this Act, contracts based on those statutes shall continue in force under their terms until they expire or are renegotiated, and the application of those statutes to such contracts shall continue as if the specified statutes had not been repealed.”

369.102. Definitions for KRS 369.101 to 369.120.

As used in KRS 369.101 to 369.120 , unless the context requires otherwise:

  1. “Agreement” means the bargain of the parties in fact, as found in their language or inferred from other circumstances and from rules, regulations, and procedures given the effect of agreements under laws otherwise applicable to a particular transaction;
  2. “Automated transaction” means a transaction conducted or performed, in whole or in part, by electronic means or electronic records, in which the acts of records of one (1) or both parties are not reviewed by an individual in the ordinary course in forming a contract, performing under an existing contract, or fulfilling an obligation required by the transaction;
  3. “Computer program” means a set of statements or instructions to be used directly or indirectly in an information processing system in order to bring about a certain result;
  4. “Contract” means the total legal obligation resulting from the parties’ agreement as affected by KRS 369.101 to 369.120 and other applicable law;
  5. “Electronic” means relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities;
  6. “Electronic agent” means a computer program or an electronic or other automated means used independently to initiate an action or respond to electronic records or performances in whole or in part, without review or action by an individual;
  7. “Electronic record” means a record created, generated, sent, communicated, received, or stored by electronic means;
  8. “Electronic signature” means an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record;
  9. “Governmental agency” means an executive, legislative, or judicial agency, department, board, commission, authority, institution, or instrumentality of the federal government or of a state or of a county, municipality, or other political subdivision of a state;
  10. “Information” means data, text, images, sounds, codes, computer programs, software, databases, or the like;
  11. “Information processing system” means an electronic system for creating, generating, sending, receiving, storing, displaying, or processing information;
  12. “Person” means an individual, corporation, business or statutory trust, estate, trust, partnership, limited partnership, limited liability company, association, limited cooperative association, joint venture, governmental agency, public corporation, or any other legal or commercial entity;
  13. “Record” means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form;
  14. “Security procedure” means a procedure employed for the purpose of verifying that an electronic signature, record, or performance is that of a specific person or for detecting changes or errors in the information in an electronic record. The term includes a procedure that requires the use of algorithms or other codes, identifying words or numbers, encryption, or callback or other acknowledgment procedures;
  15. “State” means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States. The term includes an Indian tribe or band, or Alaskan native village, which is recognized by federal law or formally acknowledged by a state; and
  16. “Transaction” means an action or set of actions occurring between two (2) or more persons relating to the conduct of business, commercial, or governmental affairs.

History. Enact. Acts 2000, ch. 301, § 2, effective August 1, 2000; 2015 ch. 34, § 62, effective June 24, 2015.

Research References and Practice Aids

Kentucky Bench & Bar.

Bishop & Arvin, Equine Law: Agent Beware., Vol. 71, No. 3, May 2007, Ky. Bench & Bar 21.

369.103. Scope of KRS 369.101 to 369.120.

  1. Except as otherwise provided in subsection (2) of this section, KRS 369.101 to 369.120 applies to electronic records and electronic signatures relating to a transaction.
  2. KRS 369.101 to 369.120 does not apply to a transaction to the extent it is governed by:
    1. A law governing the creation and execution of wills, codicils, or testamentary trusts;
    2. KRS Chapter 355 other than KRS 355.1-107 and 355.1-206 , and Articles 2 and 2A of KRS Chapter 355; and
    3. A law governing the creation or transfer of any negotiable instrument or any instrument establishing title or an interest in title to a motor vehicle and governed by KRS Chapter 186 or 186A.
  3. KRS 369.101 to 369.120 applies to an electronic record or electronic signature otherwise excluded from the application of KRS 369.101 to 369.120 under subsection (2) of this section to the extent it is governed by a law other than those specified in subsection (2) of this section.
  4. A transaction subject to KRS 369.101 to 369.120 is also subject to other applicable substantive law.

HISTORY: Enact. Acts 2000, ch. 301, § 3, effective August 1, 2000; 2019 ch. 86, § 38, effective January 1, 2020.

Research References and Practice Aids

Kentucky Bench & Bar.

Bishop & Arvin, Equine Law: Agent Beware., Vol. 71, No. 3, May 2007, Ky. Bench & Bar 21.

369.104. Prospective application of KRS 369.101 to 369.120.

KRS 369.101 to 369.120 applies to any electronic record or electronic signature created, generated, sent, communicated, received, or stored on or after August 1, 2000.

History. Enact. Acts 2000, ch. 301, § 4, effective August 1, 2000.

369.105. Use of electronic records and electronic signatures — Variation by agreement.

  1. KRS 369.101 to 369.120 does not require a record or signature to be created, generated, sent, communicated, received, stored, or otherwise processed or used by electronic means or in electronic form.
  2. KRS 369.101 to 369.120 applies only to transactions between parties each of which has agreed to conduct transactions by electronic means. Whether the parties agree to conduct a transaction by electronic means is determined from the context and surrounding circumstances, including the parties’ conduct.
  3. A party that agrees to conduct a transaction by electronic means may refuse to conduct other transactions by electronic means. The right granted by this subsection may not be waived by agreement.
  4. Except as otherwise provided in KRS 369.101 to 369.120 , the effect of any of its provisions may be varied by agreement. The presence in certain provisions of KRS 369.101 to 369.120 of the words “unless otherwise agreed,” or words of similar import, does not imply that the effect of other provisions may not be varied by agreement.
  5. Whether an electronic record or electronic signature has legal consequences is determined by KRS 369.101 to 369.120 and other applicable law.

History. Enact. Acts 2000, ch. 301, § 5, effective August 1, 2000.

369.106. Construction and application of KRS 369.101 to 369.120.

KRS 369.101 to 369.120 must be construed and applied:

  1. To facilitate electronic transactions consistent with other applicable law;
  2. To be consistent with reasonable practices concerning electronic transactions and with the continued expansion of those practices; and
  3. To effectuate its general purpose to make uniform the law with respect to the subject of KRS 369.101 to 369.120 among states enacting it.

History. Enact. Acts 2000, ch. 301, § 6, effective August 1, 2000.

369.107. Legal recognition of electronic records, electronic signatures, and electronic contracts.

  1. A record or signature may not be denied legal effect or enforceability solely because it is in electronic form.
  2. A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.
  3. If a law requires a record to be in writing, an electronic record satisfies the law.
  4. If a law requires a signature, an electronic signature satisfies the law.

History. Enact. Acts 2000, ch. 301, § 7, effective August 1, 2000.

Research References and Practice Aids

Kentucky Bench & Bar.

Bishop & Arvin, Equine Law: Agent Beware., Vol. 71, No. 3, May 2007, Ky. Bench & Bar 21.

369.108. Provision of information in writing — Presentation of records.

  1. If parties have agreed to conduct a transaction by electronic means and a law requires a person to provide, send, or deliver information in writing to another person, the requirement is satisfied if the information is provided, sent, or delivered, as the case may be, in an electronic record capable of retention by the recipient at the time of receipt. An electronic record is not capable of retention by the recipient if the sender or its information processing system inhibits the ability of the recipient to print or store the electronic record.
  2. If a law other than KRS 369.101 to 369.120 requires a record to be posted or displayed in a certain manner, to be sent, communicated, or transmitted by a specified method, or to contain information that is formatted in a certain manner, the following rules apply:
    1. The record must be posted or displayed in the manner specified in the other law.
    2. Except as otherwise provided in subsection (4)(b) of this section, the record must be sent, communicated, or transmitted by the method specified in the other law.
    3. The record must contain the information formatted in the manner specified in the other law.
  3. If a sender inhibits the ability of a recipient to store or print an electronic record, the electronic record is not enforceable against the recipient.
  4. The requirements of this section may not be varied by agreement, but:
    1. To the extent a law other than KRS 369.101 to 369.120 requires information to be provided, sent, or delivered in writing but permits that requirement to be varied by agreement, the requirement under subsection (1) of this section that the information be in the form of an electronic record capable of retention may also be varied by agreement; and
    2. A requirement under a law other than KRS 369.101 to 369.120 to send, communicate, or transmit a record by United States mail may be varied by agreement to the extent permitted by the other law.

History. Enact. Acts 2000, ch. 301, § 8, effective August 1, 2000.

369.109. Attribution and effect of electronic record and electronic signature.

  1. An electronic record or electronic signature is attributable to a person if it was the act of the person. The act of the person may be shown in any manner, including a showing of the efficacy of any security procedure applied to determine the person to which the electronic record or electronic signature was attributable.
  2. The effect of an electronic record or electronic signature attributed to a person under subsection (1) of this section is determined from the context and surrounding circumstances at the time of its creation, execution, or adoption, including the parties’ agreement, if any, and otherwise as provided by law.

History. Enact. Acts 2000, ch. 301, § 9, effective August 1, 2000.

369.110. Effect of change or error.

If a change or error in an electronic record occurs in a transmission between parties to a transaction, the following rules apply:

  1. If the parties have agreed to use a security procedure to detect changes or errors and one (1) party has conformed to the procedure, but the other party has not, and the nonconforming party would have detected the change or error had that party also conformed, the conforming party may avoid the effect of the changed or erroneous electronic record.
  2. In an automated transaction involving an individual, the individual may avoid the effect of an electronic record that resulted from an error made by the individual in dealing with the electronic agent of another person if the electronic agent did not provide an opportunity for the prevention or correction of the error and, at the time the individual learns of the error, the individual:
    1. Promptly notifies the other person of the error and that the individual did not intend to be bound by the electronic record received by the other person;
    2. Takes reasonable steps, including steps that conform to the other person’s reasonable instructions, to return to the other person or, if instructed by the other person, to destroy the consideration received, if any, as a result of the erroneous electronic record; and
    3. Has not used or received any benefit or value from the consideration, if any, received from the other person.
  3. If neither subsection (1) of this section nor subsection (2) of this section applies, the change or error has the effect provided by other law, including the law of mistake, and the parties’ contract, if any.
  4. Subsections (2) and (3) of this section may not be varied by agreement.

History. Enact. Acts 2000, ch. 301, § 10, effective August 1, 2000.

369.111. Notarization and acknowledgment.

If a law requires a signature or record to be notarized, acknowledged, verified, or made under oath, the requirement is satisfied if the electronic signature of the person authorized to perform those acts, together with all other information required to be included by other applicable law, is attached to or logically associated with the signature or record.

History. Enact. Acts 2000, ch. 301, § 11, effective August 1, 2000.

369.112. Retention of electronic records — Originals.

  1. If a law requires that a record be retained, the requirement is satisfied by retaining an electronic record of the information in the record which:
    1. Accurately reflects the information set forth in the record after it was first generated in its final form as an electronic record or otherwise; and
    2. Remains accessible for later reference.
  2. A requirement to retain a record in accordance with subsection (1) of this section does not apply to any information the sole purpose of which is to enable the record to be sent, communicated, or received.
  3. A person may satisfy subsection (1) of this section by using the services of another person if the requirements of that subsection are satisfied.
  4. If a law requires a record to be presented or retained in its original form, or provides consequences if the record is not presented or retained in its original form, that law is satisfied by an electronic record retained in accordance with subsection (1) of this subsection.
  5. If a law requires retention of a check, that requirement is satisfied by retention of an electronic record of the information on the front and back of the check in accordance with subsection (1) of this subsection.
  6. A record retained as an electronic record in accordance with subsection (1) of this section satisfies a law requiring a person to retain a record for evidentiary, audit, or like purposes, unless a law enacted after August 1, 2000, specifically prohibits the use of an electronic record for the specified purpose.
  7. This section does not preclude a governmental agency of this state from specifying additional requirements for the retention of a record subject to the agency’s jurisdiction.

History. Enact. Acts 2000, ch. 301, § 12, effective August 1, 2000.

369.113. Admissibility in evidence.

In a proceeding, evidence of a record or signature may not be excluded solely because it is in electronic form.

History. Enact. Acts 2000, ch. 301, § 13, effective August 1, 2000.

369.114. Automated transaction.

In an automated transaction, the following rules apply:

  1. A contract may be formed by the interaction of electronic agents of the parties, even if no individual was aware of or reviewed the electronic agents’ actions or the resulting terms and agreements.
  2. A contract may be formed by the interaction of an electronic agency and an individual, acting on the individual’s own behalf or for another person, including by an interaction in which the individual performs actions that the individual is free to refuse to perform and which the individual knows or has reason to know will cause the electronic agent to complete the transaction or performance.
  3. The terms of the contract are determined by the substantive law applicable to it.

History. Enact. Acts 2000, ch. 301, § 14, effective August 1, 2000.

369.115. Time and place of sending and receipt.

  1. Unless otherwise agreed between the sender and the recipient, an electronic record is sent when it:
    1. Is addressed properly or otherwise directed properly to an information processing system that the recipient has designated or uses for the purpose of receiving electronic records or information of the type sent and from which the recipient is able to retrieve the electronic record;
    2. Is in a form capable of being processed by that system; and
    3. Enters an information processing system outside the control of the sender or of a person that sent the electronic record on behalf of the sender or enters a region of the information processing system designated or used by the recipient which is under the control of the recipient.
  2. Unless otherwise agreed between a sender and the recipient, an electronic record is received when:
    1. It enters an information processing system that the recipient has designated or uses for the purpose of receiving electronic records or information of the type sent and from which the recipient is able to retrieve the electronic record; and
    2. It is in a form capable of being processed by that system.
  3. Subsection (2) of this section applies even if the place the information processing system is located is different from the place the electronic record is deemed to be received under subsection (4) of this section.
  4. Unless otherwise expressly provided in the electronic record or agreed between the sender and the recipient, an electronic record is deemed to be sent from the sender’s place of business and to be received at the recipient’s place of business. For purposes of this subsection, the following rules apply:
    1. If the sender or recipient has more than one (1) place of business, the place of business of that person is the place having the closest relationship to the underlying transaction.
    2. If the sender or the recipient does not have a place of business, the place of business is the sender’s or recipient’s residence, as the case may be.
  5. An electronic record is received under subsection (2) of this section even if no individual is aware of its receipt.
  6. Receipt of an electronic acknowledgment from an information processing system described in subsection (2) of this section establishes that a record was received but, by itself, does not establish that the content sent corresponds to the content received.
  7. If a person is aware that an electronic record purportedly sent under subsection (1) of this section, or purportedly received under subsection (2) of this section, was not actually sent or received, the legal effect of the sending or receipt is determined by other applicable law. Except to the extent permitted by the other law, the requirements of this subsection may not be varied by agreement.

History. Enact. Acts 2000, ch. 301, § 15, effective August 1, 2000.

369.116. Transferable records.

  1. In this section, “transferable record” means an electronic record that:
    1. Would be a note under Article 3 of KRS Chapter 355 or a document under Article 7 of KRS Chapter 355 if the electronic record were in writing; and
    2. The issuer of the electronic record expressly has agreed is a transferable record.
  2. A person has control of a transferable record if a system employed for evidencing the transfer of interests in the transferable record reliably establishes that person as the person to which the transferable record was issued or transferred.
  3. A system satisfies subsection (2) of this section, and a person is deemed to have control of a transferable record, if the transferable record is created, stored, and assigned in such a manner that:
    1. A single authoritative copy of the transferable record exists which is unique, identifiable, and, except as otherwise provided in paragraphs (d), (e), and (f) of this subsection, unalterable;
    2. The authoritative copy identifies the person asserting control as:
      1. The person to which the transferable record was issued; or
      2. If the authoritative copy indicates that the transferable record has been transferred, the person to which the transferable record was most recently transferred;
    3. The authoritative copy is communicated to and maintained by the person asserting control or its designated custodian;
    4. Copies of revisions that add or change an identified assignee of the authoritative copy can be made only with the consent of the person asserting control;
    5. Each copy of the authoritative copy and any copy of a copy is readily identifiable as a copy that is not the authoritative copy; and
    6. Any revision of the authoritative copy is readily identifiable as authorized or unauthorized.
  4. Except as otherwise agreed, a person having control of a transferable record is the holder, as defined in KRS 355.1-201 (20), of the transferable record and has the same rights and defenses as a holder of an equivalent record or writing under KRS Chapter 355, including, if the applicable statutory requirements under KRS 355.3-302 (1), 355.7-501 , or 355.9-330 are satisfied, the rights and defenses of a holder in due course, a holder to which a negotiable document of title has been duly negotiated, or a purchaser, respectively. Delivery, possession, and indorsement are not required to obtain or exercise any of the rights under this subsection.
  5. Except as otherwise agreed, an obligor under a transferable record has the same rights and defenses as an equivalent obligor under equivalent records or writing under KRS Chapter 355.
  6. If requested by a person against which enforcement is sought, the person seeking to enforce the transferable record shall provide reasonable proof that the person is in control of the transferable record. Proof may include access to the authoritative copy of the transferable record and related business records sufficient to review the terms of the transferable record and to establish the identity of the person having control of the transferable record.

History. Enact. Acts 2000, ch. 301, § 16, effective August 1, 2000; 2000, ch. 301, § 23, effective July 1, 2001.

369.117. Creation and retention of electronic records by governmental agencies — Conversion of written records by governmental agencies.

Each governmental agency of this Commonwealth shall determine whether, and the extent to which, it will create electronic records. The Kentucky Department for Libraries and Archives shall determine whether, and the extent to which, the Commonwealth will retain electronic records and convert written records to electronic records.

History. Enact. Acts 2000, ch. 301, § 17, effective August 1, 2000.

369.118. Acceptance and distribution of electronic records by governmental agencies.

  1. Except as otherwise provided in KRS 369.112(6), each governmental agency of this state, in compliance with standards established by the Commonwealth Office of Technology, shall determine whether, and the extent to which, it will send and accept electronic records and electronic signatures to and from other persons and otherwise create, generate, communicate, store, process, use, and rely upon electronic records and electronic signatures.
  2. To the extent that a governmental agency uses electronic records and electronic signatures under subsection (1) of this section:
    1. The Commonwealth Office of Technology, giving due consideration to security, may specify the manner and format in which the electronic records must be created, generated, sent, communicated, received, and stored and the systems established for those purposes;
    2. If electronic records must be signed by electronic means, each governmental agency, giving due consideration to security, may specify the type of electronic signature required, the manner and format in which the electronic signature must be affixed to the electronic record, and the identity of, or criteria that must be met by, any third party used by a person filing a document to facilitate the process;
    3. The Commonwealth Office of Technology and the Department for Libraries and Archives, giving due consideration to security, may specify control processes and procedures as appropriate to ensure adequate preservation, disposition, integrity, security, confidentiality, and auditability of electronic records; and
    4. Each governmental agency, giving due consideration to security, may specify any other required attributes for electronic records which are specified for corresponding nonelectronic records or reasonably necessary under the circumstances.
  3. Except as otherwise provided in KRS 369.112(6), KRS 369.101 to 369.120 does not require a governmental agency of this state to use or permit the use of electronic records or electronic signatures.

History. Enact. Acts 2000, ch. 301, § 18, effective August 1, 2000; 2005, ch. 85, § 693, effective June 20, 2005.

369.119. Interoperability.

The Commonwealth Office of Technology, which adopts standards pursuant to KRS 369.118(2)(a), may encourage and promote consistency and interoperability with similar requirements adopted by other governmental agencies of this and other states and the federal government and nongovernmental persons interacting with governmental agencies of this state. If appropriate, those standards may specify differing levels of standards from which governmental agencies of this state may choose in implementing the most appropriate standard for a particular application.

History. Enact. Acts 2000, ch. 301, § 19, effective August 1, 2000; 2005, ch. 85, § 694, effective June 20, 2005.

369.120. Severability of provisions.

If any provision of KRS 369.101 to 369.120 or its application to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of KRS 369.101 to 369.120 which can be given effect without the invalid provision or application, and to this end the provisions of KRS 369.101 to 369.120 are severable.

History. Enact. Acts 2000, ch. 301, § 20, effective August 1, 2000.