Kentucky Attorney General offers protection for secured lenders

Uniform Commercial Code Article 9 (Secured Transactions), which is codified in the Kentucky Revised Statutes, is an important body of law for banks and other financial institutions wishing to secure repayment of lender financing. It creates a comprehensive scheme for regulating financing transactions where an interest in personal property or fixtures secures an obligation. However, Article 9 specifically excludes financing transactions where real estate is the collateral at issue. Due to a clerical error in the text of Senate Bill 97 (2012), which contained several amendments to UCC Article 9, the Kentucky General Assembly unintentionally created confusion as to the application and effectiveness of this important body of uniform law.

On July 3, 2012, Kentucky Attorney General Jack Conway issued Opinion 12-010, determining that the Kentucky Legislative Research Commission (LRC) has the power to correct manifest clerical error in the reference numbers of a uniform act. This opinion, coupled with the LRC’s revised Legislative Notes, seems likely to avert the concern that amendments to UCC Article 9 already became effective on July 12, 2012, instead of becoming effective on the uniform effective date of July 1, 2013, as intended by the committee of UCC drafters.

The 2010 Amendments to UCC Article 9

On April 11, 2012, Governor Steve Beshear signed SB 97, which included the 2010 Amendments to Article 9 of the Uniform Commercial Code. The 2010 Amendments were proposed by the National Conference of Commissioners on Uniform State Laws and the American Law Institute to clarify certain issues that had arisen in the law of secured transactions since the implementation of Revised Article 9 in 2001. The 2010 Amendments are not expected to have the same far-reaching effects as the 2001 act, but there are some important and substantive changes, including provisions affecting names of debtor individuals and trusts for purposes of UCC financing statements – as well as clarifications and new commentary to supplement the text.

Senate Bill 97’s Unintended Consequences

Like its predecessor, Revised Article 9, the 2010 Amendments were intended to have a nationwide, uniform effective date to minimize the conflicts of law issues that would result from having different versions of the statute in effect in different states. The intended effective date for the 2010 Amendments is July 1, 2013. However, when the LRC prepared Section 91 of Senate Bill 97, it erroneously limited the uniform effective date to the transition provisions, and did not apply the intended July 1, 2013 effective date to the entire bill.

In the absence of a proper effective date for these missed provisions, the default effective date of July 12, 2012 was arguably applicable. This would lead to the absurd result that the substantive provisions of the 2010 Amendments go into effect on July 12, 2012 while the transition provisions would go into effect nearly a year later on July 1, 2013. This also would mean that Kentucky’s 2010 Amendments would inadvertently go into effect nearly a year before any other state’s 2010 Amendments, creating ambiguity and dissonance in the carefully orchestrated nationwide transition to the new uniform law.

In his July 3 opinion, the Kentucky Attorney General determined that the cross-referencing mistake was a “manifest clerical error” and LRC had the authority to correct it under KRS 7.136. Following the issuance of the opinion, the LRC adopted a new Legislative Note to the affected statutes that referred to the AG’s determination that Section 91 contained a manifest error and should instead have provided for the entire group of 2010 Amendments to take effect on July 1, 2013, as intended by the General Assembly.

Conclusion

Although Kentucky AG opinions do not have the force of law, the AG’s action and the LRC’s response do provide needed comfort that businesses and financial institutions can wait until 2013 to comply with the act, as well as persuasive authority to any court that must deal with the effective date issue prior to that time.

A copy of OAG 12-010 is posted on the Kentucky Attorney General’s website at http://ag.ky.gov/civil/opinions/Pages/2012.aspx