Request By:
Mr. Robert H. Newberry
Executive Vice President
Kentucky Automobile Dealers Assn. Inc.
123 Walnut Street
Frankfort, Kentucky 40602
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Elizabeth E. Blackford, Assistant Attorney General
In your letter of June 2 you requested the opinion of this office on the legality of the amendment to KRS 186.045(3) passed in the recent session of the Legislature in HB 247 § 5. The amendment has changed the penalty to be assessed against a secured party who fails to comply with filing requirements of KRS 186.045(2)(a) within the time prescribed therein.
KRS 186.045(2)(a) was originally enacted in 1964 as follows:
Whenever a financing statement required by KRS chapter 355 relating to any vehicle registered or required to be registered in Kentucky . . . is presented to a county clerk for filing, such clerk shall also immediately note information required by the department . . . on the owner's copy of the registration or transfer receipt issued for current registration period . . . which the secured party must obtain and present to the county clerk, along with the financing statement, within 10 days after execution of the security agreement. . . . For filing the financing statement the clerk shall collect a fee of four dollars . . . and . . . for noting the security interest on the required receipts, the clerk shall collect . . . a fee of one dollar. . .
KRS 186.045(3), as originally enacted in 1964, provided:
For failure to present both the current receipt and financing statement within the time prescribed by (2)(a), the secured party shall pay a penalty of two dollars to the county clerk as a prerequisite for noting the security interest on the current receipt.
Pursuant to HB 247 § 5, KRS 186.045(2)(a) has been amended to give the secured party 15 days in which to obtain and present a financing statement and current certificate of registration and ownership or transfer receipt. The fees to be charged for filing the financing statement and noting the security interest on the certificate of registration and ownership or transfer receipt have been changed.
HB 247 § 5 has amended KRS 186.045(3) to read:
For failure to present both the current receipt and financing statement within the time period prescribed by (2)(a) the secured party shall not be allowed thereafter to file the financing statement in order to perfect the security interest thereon. [Emphasis added.]
The problem is clear. KRS 186.045(3) originally charged an additional penalty fee for late compliance, but allowed the secured party to perfect his security interest in the motor vehicle. Amended KRS 186.045(3) cuts off the secured party's ability to perfect his security interest under chapter 355 and 186 if the secured party does not comply within 15 days from the date the security agreement was executed.
For reasons discussed below, it is the opinion of this office that KRS 186.045(3) as amended is at best a mistake which is not truly indicative of the legislative intent.
In 1960, Kentucky adopted the Uniform Commercial Code (hereinafter the Code) in KRS chapter 355. One of the major purposes of the Code is to provide uniformity throughout the states in handling secured transactions. "Its adoption in this state signifies a legislative policy to join with the other states in achieving uniformity. " Lincoln Bank & Trust Company v. Queenan, Ky., 344 S.W.2d 383, 385 (1961). In light of this policy, the Kentucky courts have adopted as a rule of construction that the Code is plenary and exclusive except where the Legislature has clearly indicated otherwise. Queenan, supra.
Under the Code, perfection of most nonpossessory security interests in consumer goods is achieved by filing a financing statement in the appropriate place. See KRS 355.9-203, 355.9-302, 355.9-401, 355.9-402. The Code establishes special time limits during which security shall be perfected without filing. It establishes the length of time for which a filed financing statement shall act to continue perfection of a security interest. And, it establishes priorities among otherwise equal perfected security interests by order of filing. See KRS 355.9-103, 355.9-403, 355.9-312(5). Nowhere does the Code establish a time during which the secured party must file in order to perfect a security interest. The absence of such a time limit is conspicious. It gives rise to only one possible conclusion. It is clearly the drafter's intent that under the Code a secured party shall be able to perfect a security interest at any time during the life of the secured transaction.
Secured transactions involving motor vehicles are subject to the Code and to KRS 186.045. The financing statement referred to in KRS 186.045 is the financing statement which must be filed under Chapter 355 to perfect a security interest. Thus, by cutting short the secured party's ability to file and perfect a security interest after 15 days, KRS 186.045(3) as amended comes into direct conflict with the Code. Under Queenan the question becomes whether the amended KRS 186.045(3) is a clear indication of legislative intent sufficient to remove secured transactions involving a motor vehicle from the operation of the Code such that the ability to perfect at any time during the life of the secured transaction may be cut short. It is the opinion of this office that it is not.
Both the Code and KRS 186.195, the precursor of KRS 186.045 [186.195 was repealed in 1964 Acts, Ch. 59, § 5 and 186.045 was enacted in § 2], were enacted in 1960. KRS 355.9-302(3) provides that security transactions subject to a statute of this state requiring the security interest to be noted on a certificate of title are exempt from the filing requirements of the Code. KRS 355.9-302(4) says such security interests may be perfected only by means of such notation. KRS 186.195 required a security interest to be noted on the face of the current registration or transfer receipt. Thus, a question arose as to the operation and interaction of KRS 186.195 and the Code. That question was decided in 1961 by the Queenan case, supra. It is the opinion of this office that the decision therein is equally applicable to KRS 186.045 as the successor to 186.195.
In Queenan the court said KRS 186.195 was intended to effect the benefits of the "certificate of title" laws prevailing in other states without removing the fee business from the county clerks. KRS 186.195 was not intended as the means of perfecting a security interest in a motor vehicle. Therefore, the court concluded that motor vehicles subject to KRS 186.195 were not removed from the purview of the Code. The means of perfecting a security interest in motor vehicles is by filing a financing statement according to the Code.
The Court went on to say that though a security interest in a motor vehicle was perfected by filing under the Code, independently of execution of the duties imposed by KRS 186.195, KRS 186.195 was meant to compliment the recording provisions of the Code by giving a prospective buyer or lender two sources of protective notice. Because compliance with KRS 186.195 "would not make the secured party's problem more difficult" or impede the commerce of credit financing, the Court could see no reason, "even of convenience", why the secured party should not fulfill the obligations of KRS 186.195 and the Code at the same time.
The Queenan case provides the foundation for our opinion that KRS 186.045(3) as amended is merely a mistake and not the true intent of the Legislature. The Court said KRS 186.195, now 186.045, is intended to compliment the Code. In cutting short the secured party's ability to perfect a security interest at any time during the life of the secured transaction, KRS 186.045(3) is amended does not compliment the Code. Rather, it supplants the Code.
The Court also stressed that compliance with KRS 186.195, now 186.045, would not make it more inconvenient or difficult for the secured party, and would not impede the commerce of credit financing. Credit agreements on motor vehicles are commonly sold to banks or financing companies well after the execution of the security agreement by the seller and credit buyer. The party executing the security agreement does not, in common practice, perfect the security interest arising under the security agreement before selling it to the banks or financing companies. Thus, in reality, banks and financing companies, as the secured parties who are ultimately interested in perfecting their security interests, could not possibly obtain the documents necessary to comply with KRS 186.045(2)(a) within the prescribed time period as they probably will not even have purchased the security interest until some time after the 15-day period has passed. Therefore, compliance with KRS 186.045 as amended would not only be inconvenient, but impossible as well. Furthermore, as amended, KRS 186.045 creates a serious impediment to credit financing.
In Queenan the court also stated that KRS 186.195, now 186.045, was intended to give the benefits of the "certificate of title" laws while preserving fee business for the county clerks. The purpose of HB 247 is clearly that of updating the fees to be charged by the county clerks for the various services they perform. Every revision effected in HB 247, other than those relating to KRS 186.045, relate only to fee changes. Would the Legislature intentionally enact a major change in the Code by means of a revised sentence buried deep within a bill updating the fees to be charged by county clerks? We think not.
If the Legislature intended to work such a major change in the Code, KRS 186.045 would surely be included in KRS 355.9-203(2). That section is an express list of those KRS chapters which shall prevail over the Code. KRS 186.045 has not been listed in KRS 355.9-203 in the past, and was not placed therein in this session of the Legislature.
For these reasons, it is the opinion of this office that KRS 186.045(3) does not meet the test of clear legislative intent established by Queenan. Therefore, KRS 186.045(3) as amended is, at best, a mistake.