Request By:
Mr. Damon A. Vaughn
Attorney at Law
525 North Main Street
Henderson, Kentucky 42420
Opinion
Opinion By: Robert F. Stephens, Attorney General; Elizabeth E. Blackford, Assistant Attorney General
You have written to ask what liens KRS 186.230(9) applies to. KRS 186.230(9) provides:
"No person shall be permitted to sell, trade or transfer ownership of a motor vehicle if evidence is presented to the county clerk that any lien exists on the motor vehicle. "
This office has opined that the statute applies to any lien which is noted on the face of the registration receipt or certificate of title of the motor vehicle. 1 OAG 79-31, 78-461, copies enclosed. Because security interests created pursuant to KRS Chapter 355.9 are synonymous with liens in that they operate as an encumbrance on property and because the terms are used interchangeably in certain portions of the statute and in everyday language, we are of the opinion that the term "lien" in KRS 186.230(9) applies to security interests as well as to statutory, common law or other liens. 2 See KRS 382.675; KRS 186.230(8).
In light of its broad application, you have asked whether the statute is constitutional. 3 Before we answer this question we must warn that all statutes are presumed constitutional, and that the opinions of this office cannot change the law. Therefore, while we believe that the reasoning utilized herein is sound and that it would support a court judgment reaching the same conclusion, it will not have the impact of a decision of the court. With this in mind, it is the opinion of this office that KRS 186.230(9) is unconstitutional. 4 Consequently, it is the opinion of this office that the statute is void ab initio and that it should not be enforced.
Pursuant to its police power, the state may regulate the use and registration of cars, and may regulate the relationship between the remedies of creditors and debtors. See, for example,
McKenzie v. Oliver, Ky.App. 571 S.W.2d 102 (1978). However, as with all legislation enacted pursuant to the state's police power, the legislation must be reasonably calculated to promote and/or protect the public safety, morals, health and welfare.
Schoo v. Rose, Ky., 270 S.W.2d 940 (1954). The legislation may not be unreasonable and arbitrary.
Beacon Liquors v. Martin, 279 Ky. 468, 131 S.W.2d 446 (1939);
City of Louisville v. Kuhn, 284 Ky. 684, 145 S.W.2d 851 (1940);
McCown v. Gose, 244 Ky. 402, 51 S.W.2d 251 (1932);
Pendleton v. Pendleton, Ky., 560 S.W.2d 538 (1977).
In determining whether such legislation is constitutional it is first necessary to find out whether the legislation promotes a legitimate public interest.
City of Louisville v. Kuhn, supra;
Rudolph v. Rudolph, Ky.App. 556 S.W.2d 152 (1977). After examining KRS 186.230(9) and the changes it makes upon traditional operation and function of liens, we have concluded that the statute does not promote any legitimate public interest.
Traditionally a creditor's rights in collateral were protected by the fact that the perfected non-possessory lien followed the collateral into the hands of any subsequent purchaser. Absent an enforceable contractual obligation not to sell, the debtor was free to transfer the collateral. The subsequent purchaser took subject to the lien. Should foreclosure or execution become necessary, a creditor with a perfected non-possessory lien could trace the collateral to the current owner and enforce the lien against the collateral. Costs incurred in tracing the collateral were charged against the price received in the sale.
In light of the fact that the creditor's rights were already fully protected, one must ask what KRS 186.230(9) does. The statute simply makes it easier for a creditor to find the car, should repossession become necessary. The state has no legitimate interest in facilitating creditor access to a car where, in so doing, it has instituted a system which is more destructive of the public interest at large than beneficial. See
City of Louisville v. Kuhn, supra.
The state certainly has an interest in protecting a creditor's rights in collateral in order to insure that those with money to lend will feel safe to do so. Under the pre-KRS 186.230(9) system the creditor's rights were fully protected though transfers of the encumbered vehicle were permitted. Permitting free transfers of the encumbered vehicle promoted the public interest by enhancing the free flow of commerce and exchange. The system allowed for increased spending, prepayment of contractual liens, and, in the years of steadily increasing interest rates, refinancing or financing at higher rates on new cars acquired in part with trade-ins or sales of encumbered care.
The practical effect of KRS 186.230(9) is to lock the debtor to any car purchased on credit until such time as the lien is fully paid off, for the only other alternative would be to have a closing (to borrow a term from real estate) at the time of sale or transfer. Because the total amount involved in most transfers of cars is relatively small, and because the car continues to depreciate in value so that its intrinsic value could never absorb the cost of the closing, the cost of a closing would foreclose any possibility of transfers or sales of encumbered cars as a practical matter. Neither the seller nor the purchaser could afford this price. Because the majority of cars are purchased on credit, this would certainly have a dampening effect on the free flow of commerce.
By the same token, the statute hurts all voluntary creditors by reducing the market into which excess capital may be funneled and by cutting off a substantial market for refinancing at increasingly higher rates
It is obvious that KRS 186.230(9) is more destructive of the interest of the public at large than it is beneficial. Therefore, the statute is arbitrary and unreasonable.
City of Louisville v. Kuhn. supra. And, because the statute does not provide any essential protection to the rights of creditors, but does severely restrict the individual's use and disposition of his property, the statute is an unconstitutional infringement upon the right to acquire and protect property and to be free from any unreasonable restraint upon the use of property. Kentucky Constitution §§ 1 and 2.
McCown v. Gose, supra.
In addition, the statute is unconstitutional because the classification set out therein is arbitrary. See
Schoo v. Rose, supra:
Beacon Liquors v. Martin, 279 Ky. 468, 131 S.W.2d 446 (1939);
Walter v. Binder, Ky., 454 S.W.2d 464 (1968); Kentucky Constitution §§ 2 and 59. As a starting point for this discussion it is apropriate to note that the only statute prohibiting the sale of encumbered items is KRS 186.230(9). Neither realty nor other goods which may be the subject of non-possessory liens are statutorially restricted in this fashion, though a closing is held as a matter of practice to clear the title in most transfers of real estate. The only conceivable reason for enacting a statute such as KRS 186.230(9) is that the highly mobile nature of motor vehicles may make it difficult for the creditor to find and get possession of the car should a repossession or execution become necessary.
If it is the high mobility factor which caused the enactment of KRS 186.230(9), we must ask why the statute doesn not apply to other equally mobile items that may be the subject of non-possessory liens such as airplanes, stereos and kitchen utilities. We can conceive of no logical distinction which would warrant the prohibition on the sale or transfer of encumbered motor vehicles while permitting the sale or transfer of an airplane, where the lien is contractual, a TV or a stereo. And yet, where the lien is contractual, the airplane, the TV and the stereo are expressly transferable despite the encumbrance. KRS 355.9-311. True, the motor vehicle registration pursuant to the police power, but then, so is the airplane. See KRS Chapter 183. True, the motor vehicle moves under its own power, but so does the airplane. Thus, it is clear that there is no reason for preventing the sale of the encumbered motor vehicle while expressly permitting the sale of the encumbered airplane.
Obviously then, there are no natural reasons which support or induce the burden placed upon the class of owners of encumbered cars by KRS 186.230(9).
Schoo v. Rose, supra;
Walters v. Binder, supra. Conversely, if there is a substantial reason for having the prohibition imposed by KRS 186.230(9), it should apply to all forms of collateral that are highly mobile. Cf.
Beacon Liquors v. Martin, supra;
Schoo v. Rose, supra. It does not. The classification contained in KRS 186.230(9) is arbitrary. Therefore, the statute is unconstitutional. Consequently, it is void ab initio and should not be enforced to prohibit the sale or transfer of any encumbered motor vehicle. (Overruling OAG 78-461, to the extent that that opinion is inconsistent herewith.) Rather, the sale or transfer should be permitted, and the clerk should note any existing lien on the transfer receipt as per the mandate of KRS 186.045(5).
Footnotes
Footnotes
1 "Motor vehicle" encompasses all forms of mobile transportation which are subject to the registration requirements of KRS Chapter 186. However, for the sake of convenience I will use the word "car" instead of and as a synonym to the term "motor vehicle. "
2 Hereinafter we will use only the word "lien". Wherever that word is used it will include security agreements, statutory and other liens. Likewise, the word "creditor" will be used hereafter to refer to the party which holds the lien, or to a creditor who holds a security interest.
3 Because you did not ask for an interpretation of this statute in light of other statutes dealing with contractural liens on motor vehicles, we will not discuss the topic in depth. However, it is appropriate to note that the prohibition imposed by KRS 186.230(9) stands in complete contrast to the implicit sanction of the sale or transfer of incumbered motor vehicles set out in KRS 186.045(5) and (6) and the explicit sanction of the sale of other items upon which contractural non-possessory liens may be created pursuant to KRS Chapter 355.9 by KRS 355.9-311.
4 This opinion does not in any way deal with KRS 186.193 both because that statute is not yet in effect and because your request did not ask that we consider that statute. Thus, the opinion is not to be considered a reflection upon the constitutionality of KRS 186.193.