RENDERED: JUNE 16, 2022 TO BE PUBLISHED
Supreme Court of Kentucky 2021-SC-0161-DG
VERSAILLES FARM HOME AND GARDEN, APPELLANT LLC
ON REVIEW FROM COURT OF APPEALS V. NO. 2020-CA-0626 WOODFORD CIRCUIT COURT NO. 14-CI-00202
HARVEY HAYNES AND APPELLEES JERRY RANKIN
OPINION OF THE COURT BY JUSTICE VANMETER
AFFIRMING
Under Article 9 of the Uniform Commercial Code, priority of claims as
between two secured creditors is determined by order of filing or perfection,
provided that each had an appropriate security interest that has attached and
that covered the collateral in question and any proceeds. The question we
resolve in this case is whether the Woodford Circuit Court erred in its
determination that the security agreement between Harvey Haynes, the debtor,
covered future advances made by Jerry Rankin d/b/a Farmers Tobacco
Warehouse (“Farmers”) so as to have priority over the security interest claimed
by Versailles Farm Home and Garden, LLC (“Versailles Farm”) in Haynes’ 2013
tobacco crop. We hold that the trial court did not err and therefore affirm its judgment and the Court of Appeals’ opinion, albeit on different grounds than
as stated in that opinion.
I. Factual and Procedural Background.
In 2012, Haynes and Farmers signed a simple security agreement with
respect to Haynes’ 2012 tobacco crop.1 Although the written agreement did not
explicitly provide for future advances, Farmers periodically made advances to
Haynes after execution of the 2012 security agreement with the advances
typically being evidenced by Haynes’ promissory notes to Farmers referring to
the security agreement. Farmers perfected its security interest by filing a
financing statement with the Kentucky Secretary of State on October 30,
2012.2 Versailles Farm makes no argument as to the sufficiency of Farmers’
financing statement and concedes that Farmers was the first to file.3 Following
the sale of Haynes’ 2012 crop, and as of June 25, 2013, Haynes’ indebtedness
to Farmers was $181,401.86.
On that date, Haynes signed another security agreement granting
Farmers a security interest in his 2013 tobacco crop, stating “I the above
debtor in exchange for value received, do grant to the secured party a security
interest in the following property: 100 acres of burley tobacco and any
1 This security agreement was dated June 22, 2012 and granted a security interest in “100% of 90 acres of burley tobacco and any insurance proceeds from the crop and the attached list of farm equipment.” 2 Farmers also filed financing statements with the Kentucky Secretary of State in 2011, 2013 and 2014. 3 Following the filing of its brief, Farmers moved to correct a misstatement therein as to the date its financing statement was filed. Because all parties agree that Farmers filed its financing statement first, its misstatement is inconsequential.
2 insurance proceeds from the crop.”4 As found by the trial court, Farmers
advanced approximately $213,200 to Haynes between June 25 and December
31, 2013. These advances were evidenced by demand promissory notes which
provided, “This note and all sums payable hereunder are secured by a Security
Agreement on certain personal property from Debtor dated _______, 2013.” The
trial court identified 23 such promissory notes.
On July 1, 2013, Haynes obtained a $75,000 loan from Versailles Farm.
In doing so, he signed a Promissory Note and a Collateral Security Agreement
identifying the collateral as “the 2013 crops grown on . . . Backer Farm . . . 80
acres of tobacco . . . Farm at Iron Works Pike and Hwy 25 . . . 16 acres of
tobacco . . . and the proceeds of sale of said crops, and any and all crop
insurance proceeds. . . .” Versailles Farm filed its financing statement with the
Kentucky Secretary of State on August 29, 2013. In November 2013, Versailles
Farm also notified Farmers of its perfected security interest but did not receive
any proceeds of sale.5 Haynes subsequently defaulted on his obligation with
Versailles Farm.
Versailles Farm then brought this action in 2014 against Haynes to
collect on the balance due under his note.6 During the course of discovery,
4 In addition, Haynes also signed another security agreement with Farmers on April 4, 2013 granting a security interest in “[a]ll farm machinery.” 5 Prior to making its loan, Versailles Farm apparently did not check the U.C.C. records at the Secretary of State’s office, nor inquire of Farmers as to its interest in Haynes’ 2013 tobacco crop. 6 In its brief, Versailles Farms claims a principal balance of $59,329.25, plus
interest, costs and attorney’s fees.
3 Versailles Farm discovered Farmers had retained sale proceeds and insurance
proceeds from the sale of Haynes’ 2013 tobacco crop totaling $255,460.12.
The trial court granted Versailles Farm’s motion to join Farmers as a party to
assert its claim against Farmers for conversion to the extent Farmers retained
any proceeds in excess of $181,401.86. As stated in its brief,
The basis of [Versailles Farm]’s claim is that, in the absence of a future advance clause in [Farmers]’s June 25 Security Agreement, the loans it made to Haynes after June 25, 2013 were unsecured. Since [Versailles Farm] held a perfected security interest in the crop, [its] right to the proceeds after payment of [Farmers]’ secured claim was superior to [Farmers]’ unsecured claim under the priority rules of KRS 355.9 (Kentucky’s Article 9).
Farmers’ answer admitted selling a portion of Haynes’ 2013 tobacco crop,
retaining the proceeds, but denied doing so in contravention of Versailles
Farm’s security interest. It further asserted a cross-claim against Haynes
claiming a first and superior lien in Haynes’ 2013 tobacco crop pursuant to the
2012 and 2013 security agreements as perfected by its financing statement.
The trial court granted Versailles Farm’s motion for summary judgment
against Haynes. Versailles Farm and Farmers filed cross-motions for summary
judgment as to their respective priorities. The trial court denied Versailles
Farm’s motion and granted Farmers’. In so ruling, the trial court rejected
Versailles Farm’s argument that a future advance clause must be explicitly set
out in the parties’ written security agreement and held that, because the
U.C.C.7 defines “agreement” as “the bargain of the parties in fact, as found in
7 Uniform Commercial Code. Kentucky’s version of the U.C.C. is codified at
KRS Chapter 355.
4 their language or inferred from other circumstances, including performance,
course of dealing and usage of trade[,]” KRS8 355.1-201, Farmers’ and Haynes’
course of dealing over 2012 and 2013 established that future advances were
within the contemplation of their agreement. Regarding the agreement between
Haynes and Farmers, the record contains Tommy Kirkpatrick’s and Jerry
Rankin’s affidavits, on Farmers’ behalf, stating that they had substantial
meetings and conversations with Haynes at the time the June 25, 2013,
security agreement was signed. Both men averred that Haynes had been
selling tobacco at Farmers since 2011 and that Farmers had been “extending
secured credit . . . to him for production and operating expenses that entire
time.” In addition, the parties agreed the agreement “would secure not only
Haynes’ prior outstanding indebtedness . . ., but . . . was being executed
primarily for the purpose of securing future advances . . . with regard to
Haynes’ future expenses incurred in connection with the harvesting of Haynes’
2013 tobacco crop (and credit for other purposes).” The trial court
subsequently denied Versailles Farm’s motion to alter, amend or vacate.
Versailles Farm then appealed to the Court of Appeals, which affirmed
the trial court’s judgment. While the Court of Appeals agreed with Versailles
Farm that Farmers’ security agreement did not contain a future advance
clause, it reasoned that Versailles Farm could not rely on the absence of such a
clause because it was unaware of that security agreement or Farmers’
8 Kentucky Revised Statutes.
5 financing statement when it, Versailles Farm, made its loan to Haynes.
Versailles Farm moved for discretionary review, which we granted.9
II. Standard of Review.
This matter is subject to the oft-stated rule that “summary judgment is
proper only where the movant shows that the adverse party cannot prevail
under any circumstances.” Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807
S.W.2d 476, 479 (Ky. 1991). Furthermore, CR10 56.03 states that summary
judgment is appropriate if the evidence demonstrates “no genuine issue as to
any material fact and that the moving party is entitled to a judgment as a
matter of law.” The movant bears the initial burden of demonstrating the
absence of disputed material facts; the opposing party then must present “at
least some affirmative evidence showing . . . a genuine issue of material fact for
trial.” 807 S.W. at 482. A party responding to a properly supported summary
judgment motion cannot merely rest on the allegations in its pleadings.
Continental Cas. Co. v. Belknap Hardware & Mfg. Co., 281 S.W.2d 914, 916
(Ky. 1955).
In addition, this case also turns on the issue of contract formation—
which is a question of law to be reviewed de novo, when, as here, the relevant
facts are undisputed. Baumann Paper Co. v. Holland, 554 S.W.3d 845, 848
(Ky. 2018); see also Ky. Shakespeare Festival, Inc. v. Dunaway, 490 S.W.3d
9 While Haynes has been included in the Notice of Appeal and the Motion for Discretionary Review, he has not participated in the appellate proceedings. 10 Kentucky Rules of Civil Procedure.
6 691, 695 (Ky. 2016) (holding that “[t]he interpretation of a contract, including
determining whether a contract is ambiguous, is a question of law to be
determined de novo on appellate review[]”).
And, to the extent we are asked to interpret statutes, specifically here the
provisions of Kentucky’s version of the U.C.C., KRS Chapter 355, “we give the
words of the statute their literal meaning and effectuate the intent of the
legislature.” Samons v. Ky. Farm Bureau Mut. Ins. Co., 399 S.W.3d 425, 429
(Ky. 2013). Our statutory analysis “is also a matter for de novo review,
Cumberland Valley Contractors, Inc. v. Bell Cnty. Coal Corp., 238 S.W.3d 644,
647 (Ky. 2007), and accordingly, we look anew at this issue, respectfully
considering the opinions of the lower courts but without deference to their legal
conclusions.” Lee v. Kentucky Dep’t of Corr., 610 S.W.3d 254, 257 (Ky. 2020).
III. Analysis.
As argued by Versailles Farm, the June 25, 2013, security agreement
between Haynes and Farmers failed to include a permitted future advance
clause. Versailles Farm cites our recent decision in Mostert v. Mostert Group,
LLC, 606 S.W.3d 87 (Ky. 2020), for the proposition that contracts are to be
interpreted according to their clear and unambiguous terms, and resort to
extrinsic evidence is permissible only if the terms are ambiguous. Id. at 91.
Since the parties failed to include an explicit future advance clause, as
permitted by KRS 355.9-204, Versailles Farm argues, none existed and
therefore future advances were not covered under the agreement. The result,
Versailles Farm argues, is that Farmers’ advances after June 25, 2013, never
7 attached to the security interest, were unsecured, and thus had no priority.
We disagree.
As an initial matter, we reaffirm our holding in Mostert. Parties are
bound by the clear and unambiguous terms in their contracts. The issue in
Mostert, however, involving the construction of two documents, a Contribution
Agreement and a Security Agreement, id. at 91, did not involve interpretation of
the U.C.C. or priorities thereunder. Instead, issues arose because collateral
subject to the agreements was variously described as “software” or “source
codes” and the dispute concerned which of two parties had breached the
Contribution Agreement. By contrast, interpretation of the U.C.C. is directly
involved in this case.
The U.C.C. provides that “a security agreement is effective according to
its terms between the parties, against purchasers of collateral, and against
creditors.” KRS 355.9-201(1). Attachment and enforceability of a security
interest is set out in KRS 355.9-203. Under its first subsection, “[a] security
interest attaches to collateral when it becomes enforceable against the debtor
with respect to the collateral[.]” KRS 355.9-203(1). Its next subsection defines
when the security interest is enforceable against the debtor and third parties
with respect to the collateral: when value has been given; the debtor has rights
in the collateral; and the debtor has authenticated a security agreement that
provides a description of the collateral. KRS 355.9-203(2)(a)-(c). And “[a]
security agreement may provide that collateral secures . . . future advances or
other value, whether or not the advances or value are given pursuant to
8 commitment.” KRS 355.9-204(3) (emphasis added). Under the commentary to
this last subsection, “[d]etermining the obligations secured by collateral is
solely a matter of construing the parties’ agreement under applicable law.”
KRS 355.9-204 Official Comment 5.
As recognized by the trial court, of first import is determination of what
constitutes the parties’ “security agreement.” KRS 355.9-102(1)(bv) defines
“security agreement” as “an agreement that creates or provides for a security
interest[.]” Significantly, the Official Comment states,
The definition of “security agreement” is substantially the same as under the former Section 9-105—an agreement that creates or provides for a security interest. However, the term frequently was used colloquially in former Article 9 to refer to the document or writing that contained a debtor’s security agreement. This article eliminates that usage, reserving the term for the more precise meaning specified in the definition.”
KRS 355.9-102 Official Comment 3.b. (emphasis added).
Article One of the U.C.C. sets out general provisions applicable to other
articles of the U.C.C. See KRS 355.1-102 (stating “‘[t]his article applies to a
transaction to the extent that it is governed by another article of the Uniform
Commercial Code[]”). In the following section, KRS 355.1-103(2) sets forth the
general rule that “[u]nless displaced by the particular provisions of the [U.C.C.],
the principles of law and equity . . . supplement its provisions.” Stated another
way, express provisions of the U.C.C. control.
KRS 355.1-201(2)(c) defines “agreement” as follows: “‘[a]greement’ as
distinguished from ‘contract,’ means the bargain of the parties in fact, as found
in their language or inferred from other circumstances, including course of
9 performance, course of dealing, or usage of trade as provided in KRS 355.1-
303[.]” KRS 355.1-201(2)(c) (emphasis added).11 The referenced statute sets
forth definitions and rules for course of performance, course of dealing, and
usage of trade:
(1) A “course of performance” is a sequence of conduct between the parties to a particular transaction that exists if: (a) The agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and (b) The other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection. (2) A “course of dealing” is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct. (3) A “usage of trade” is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law. (4) A course of performance or course of dealing between the parties or usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware is relevant in ascertaining the meaning of the parties' agreement, may give
11 Under the comments, As used in the Uniform Commercial Code, the word [“agreement”] is intended to include full recognition of usage of trade, course of dealing, course of performance and the surrounding circumstances as effective parts thereof, and of any agreement permitted under the provisions of the Uniform Commercial Code to displace a stated rule of law. Whether an agreement has legal consequences is determined by applicable provisions of the Uniform Commercial Code and, to the extent provided in Section 1-103, by the law of contracts. KRS 355.1-201, Official Comment ¶ 3 (emphasis added).
10 particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement. A usage of trade applicable in the place in which part of the performance under the agreement is to occur may be so utilized as to that part of the performance.
KRS 355.1-303.
Read together, these sections, KRS 355.9-203(2), 355.9-204(3), 355.1-
201(2)(c), and 355.1-303 do not require that a future advance clause be
explicitly included in a written security agreement. In fact, these provisions
carry out the liberal construction intended by the drafters of the U.C.C. and
our legislature, as required by KRS 355.1-103(1), as also contemplated by the
commentary to KRS 355.1.303:
The Uniform Commercial Code rejects both the “lay-dictionary” and the “conveyancer’s” reading of a commercial agreement. Instead the meaning of the agreement of the parties is to be determined by the language used by them and by their action, read and interpreted in the light of commercial practices and other surrounding circumstances. The measure and background for interpretation are set by the commercial context, which may explain and supplement even the language of a formal or final writing.
KRS 355.1-303, Official Comment ¶ 1 (emphasis added).12
Thus, a security agreement, properly construed, requires only
authentication by the debtor and a description of the collateral. KRS 355.9-
203(2). As stated in the commentary, the authentication of a security
agreement “compli[es] with an evidentiary requirement in the nature of the
Statute of Frauds[,]” and “represents the most basic of the evidentiary
12 See also KRS 355.2-202(1) (final written agreement under U.C.C. Article 2 “may be explained or supplemented: [b]y course of performance, course of dealing, or usage of trade[]”).
11 alternatives, under which the debtor must authenticate a security agreement
that provides a description of the collateral.” KRS 355.9-203, Official Comment
¶ 3; see also Continental Can Co. Inc., v. Owensboro Canning Co. Inc. (In re
Owensboro Canning Co.), 82 B.R. 450, 453-54 (W.D. Ky. 1988) (applying
Kentucky law and holding that letter agreement granting lien on described
collateral and signed by debtor was sufficient to constitute security agreement,
and that no requirement existed “that the amount secured or a maturity date
be shown[]”); New West Fruit Corp. v. Coastal Berry Corp., 1 Cal.App.4th 94, 97-
98 (1991) (holding that security agreement does not need to specify the value of
the loan or the debtor’s obligation and “as long as the formalities of section [9-
203] are met, any payment or performance obligation covered by the security
agreement may be secured[]”); Baldwin v. Hays Asphalt Constr., Inc., 893 P.2d
275 (Kan. Ct. App. 1995) (citing U.C.C. section 9-203 and holding that
“[n]othing requires the security agreement to reference the underlying
obligation . . . before the security will attach[]”).
The record demonstrates the basic evidentiary requirement that Haynes
authenticated a security agreement granting a security interest in his 2013
tobacco crop to Farmers. The parties’ course of performance and course of
dealing supplemented that writing, demonstrating their agreement with respect
to the production credit to be advanced by Farmers to Haynes, i.e., the future
advances, over the ensuing months of 2013 were to be secured by Haynes’
2013 tobacco crop. Kirkpatrick and Rankin so testified. And the parties’
previous course of dealing as to advances and repayment when tobacco was
12 sold confirm the agreement. This evidence was sufficient to establish the
“bargain of the parties in fact, as found in their language or inferred from other
circumstances, including course of performance, course of dealing, or usage of
trade.” KRS 355.1-201(2)(c). The record is devoid of any contrary evidence.
Because the parties’ agreement covered Farmers’ advances made after June 25,
2013, its security interest attached and was perfected by its October 30, 2012,
financing statement filed with the Secretary of State, which in turn gave it
priority over Versailles Farm’s claim.13
Versailles Farms argues that this result is contrary to the holding in ITT
Indus. Credit Co. v. Union Bank & Trust Co., 615 S.W.2d 2 (Ky. App. 1981). The
facts in that case were that a debtor, in 1973, purchased a trencher, a large
piece of equipment, which it financed through ITT by giving a security
agreement. The security agreement and a financing statement were properly
filed. In 1975, the debtor bought a new trencher and gave a security interest in
both the old and new trencher to a bank, a different creditor. Again, a
financing statement was properly filed. In September 1977, the debtor paid off
the first debt to ITT, but no termination statement was filed as to that security
interest. A month later, the debtor bought more equipment, and gave a
13 While we might agree that the better course is to set out all the particulars of
a security agreement in a more detailed written document, a clear understanding of the Uniform Commercial Code, specifically the interactions of Article 1 and 9, does not so require in every case. That noted, the facts of this case may present the unusual situation in which the course of performance and course of dealing between the parties was sufficient to establish their bargain in fact.
13 security interest to ITT in this equipment as well as the original 1973 trencher.
The question arose as to who had priority with respect to the 1973 trencher.
The court noted that if the security agreement is intended to protect
future advances, the security agreement should so specify, and “[a] security
agreement does not extend to future advances where the security agreement
does not so provide.” Id. at 4 (quoting 4 R. Anderson, Uniform Commercial
Code § 9-204:1(8)(2d ed. 1971)). The court, in the following paragraph, stated
“‘whether a particular future advance is protected by a security interest
depends upon whether it was within the contemplation of the parties that the
advance be made and secured by the security interest.’” Id. (quoting 4 R.
Anderson, Uniform Commercial Code § 9-204:16)). The court then noted, as
“certainly not apparent[,] that ITT and [the debtor] contemplated the future
advance at the time the original loan was made.” Id. (emphasis added). To
this point, the ITT Industrial opinion is consistent with our opinion today.
However, the court also added comments supportive of a subsequent creditor’s
failure to inquire of the prior perfected creditor’s security interest, id.,14 which
ignored that a filed financing statement, then as now, did not require any
indication as to the existence of future advances, id.; see KRS 355.9-402(1),(3)
14 While we believe the Court of Appeals erred both in a) failing to properly analyze whether Farmers’ security agreement covered future advances and b) denying priority based on a failure to inquire into a prior security interest, we understand the latter error based on ITT Industrial. As pointed out by the amici, lenders are on notice of filings made pursuant to KRS 355.9-501. Failure to exercise due diligence means that lenders move forward at their peril. Following a proper examination that discloses a prior security interest, lenders have choices: (i) refuse to extend credit; (ii) accept a subordinate position; (iii) insist on alternate collateral; or (iv) obtain a termination statement or subordination agreement from the prior lender.
14 (1973) (financing statement required names and addresses of debtor and
secured party, description of collateral and signatures of both parties), and
required written provision for future advances in security agreement. Id. at 4-5
(this requirement also ignored the then provisions of KRS 355.1-201(3) (1973)
which defined “agreement” the same as it currently does).15
As pointed out by the amici, the decision in ITT Industrial has been
justifiably criticized by several commentators, specifically on the grounds that
it ignored the mandated priority set forth in KRS 355.9-312(5)(a) (first-to-file
rule)16 based on the court’s equitable considerations. Harold R. Weinberg,
Louise Everett Graham & Thomas J. Stipanowich, Modernizing Kentucky’s
Uniform Commercial Code, 73 Ky. L. J. 515, 547-48 (1984); Richard H. Nowka,
Commercial Law, 72 Ky. L. J. 337, 342-52 (1983). Accordingly, we today
expressly overrule ITT Industrial.
Versailles Farm finally argues that the security agreement between
Haynes and Farmers only cited “in exchange for value received” as the
consideration and thus could only be considered as encompassing past due
amounts owed by Haynes to Farmers. Again, we disagree.
As defined in the U.C.C.,
Except as otherwise provided in Articles 3, 4, and 5 of this chapter, a person gives value for rights if the person acquires them: (1) in return for a binding commitment to extend credit or for the extension of immediately available credit, whether or not drawn
15 This final failure likely was the result of the transaction between ITT and its
debtor having been drafted in a more comprehensive manner than that in the instant case. 16 The first-to-file rule is now codified at KRS 355.9-322.
15 upon and whether or not a charge-back is provided for in the event of difficulties in collection; (2) as security for, or in total or partial satisfaction of, a preexisting claim[.]
KRS 355.1-204. This section refutes Versailles Farm’s argument. Farmer’s
commitment to extend credit to Haynes, as shown by their agreement,
previously addressed, constituted “value” under this section. No other
interpretation is possible.
Because the foregoing resolves the issues in this case, we do not address
the parties’ remaining arguments regarding the Court of Appeals’ opinion.
IV. Conclusion.
For the foregoing reasons, we affirm the Woodford Circuit Court’s
summary judgment in favor of Jerry Rankin d/b/a Farmers Tobacco
Warehouse.
All sitting. All concur.
COUNSEL FOR APPELLANT:
Cassie Wells Barnes Hoffman & Barnes
COUNSEL FOR APPELLEE, HARVEY HAYNES:
Harvey Haynes, Pro se
COUNSEL FOR APPELLEE, JERRY RANKIN:
Lisa Koch Bryant Tilford Dobbins & Schmidt PLLC
16 COUNSEL FOR AMICUS, COMMERCIAL LAW AMICUS INITIATIVE:
John T. McGarvey M. Thurman Senn Kami E. Griffith Morgan Pottinger McGarvey
COUNSEL FOR AMICUS, KENTUCKY BANKERS ASSOCIATION:
John T. McGarvey M. Thurman Senn Kami E. Griffith Morgan Pottinger McGarvey
Debra Kaye Stamper Vice President and General Counsel Kentucky Bankers Association