Business Lexington, October 2014
Authored by Robert E. Maclin
Breeding and raising a Thoroughbred racehorse is an expensive process. It requires the involvement of a multitude of people outside of the owners, including stud farms, vets, trainers, consignors and sales companies. Each of these expends money in getting the racehorse from foal to finish line.
All too often these individuals go unpaid for their services. When the horse finally brings in money through winnings or sales, which of these providers gets to collect their debt first? Answering this requires creditors tohave a basic understanding of how liens and security interests are created and perfected.
Although there are several categories of equine liens, the most prevalent are (i) those arising under the Uniform Commercial Code (Article 9 security interests and agricultural liens) and (ii) statutory liens. The distinction between these liens and the applicable priority rules under Kentucky's Uniform Commercial Code ("UCC") determines a creditor's rights.
Article 9 Security Interests & Agricultural Liens
Article 9 of the UCC[1] applies to any (1) "transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract," and (2) "an agricultural lien." An Article 9 security interest is created when a creditor uses an interest in a horse to secure payment or performance of an obligation.
Agricultural liens are of a different breed. KRS §355.9-102(e) defines an agricultural lien, in relevant part, as an interest (other than a security interest) in farm products:
(1) Which secures payment or performance of an obligation for:
(a) Goods or services furnished in connection with a debtor's farming operation...
2. Which is created by statute in favor of a person that:
(a) In the ordinary course of its business furnished goods or services to a debtor in connection with a debtor's farming operation...
3. Whose effectiveness does not depend on the person's possession of the personal property.
Kentucky's UCC expands the definition of "farm products" to include horses and equine interests without regard to whether the debtor is engaged in farming. KRS §355.9-102(ah)(5). Under Kentucky's UCC, an agricultural lien is a non-possessory lien.
Kentucky's Statutory Liens
Kentucky has three statutory liens in favor of those who commonly provide services to horses, two of which will be discussed herein:
(1) The Agister's Lien;[2] and,
(3) The Stallion Service Lien.[3]
An Agister's Lien arises in favor of anyone that provides the "caring for, feeding and grazing" of a horse in exchange for compensation. The lien attaches regardless of whether the horse is permanently or temporarily boarded and lasts for one year after the horse's removal. The definition therefore affords protection not only to farms, but to consignors who temporarily board horses for an auction.
On its face, the Agister's Lien statute permits, without regard to the existence of other liens, use of the "self-help" provision in KRS 376.400(2), provided that the creditor has possession of the horse and the board bill is at least forty-five days past due. Under this provision, an agister can cause a sale of the horse and take possession of the proceeds. As discussed below, the propriety of this provision is doubtful when other liens and security interests exist.
The Stallion Service Lien arises in favor of a stallion's owner to secure stud fee payment. This lien is enforceable for one year after the birth of the foal. To enforce the lien, the stallion keeper may file a lawsuit for enforcement or use the same affidavit/warrant process permitted by the Agister's Lien.
Competing Liens
Securing a lien on a horse is only the first step in recovering debt. While the above liens are sufficient to establish a creditor's interest, that interest remains unperfected (and thus subordinate) as to other creditors unless and until the creditor goes the extra mile.
By virtue of Kentucky's provision classifying "equine interests" as "farm products," Kentucky's statutory liens fall within the scope of Article 9's agricultural lien definition. As such, they are subject to Article 9 perfection and priority requirements.
Pursuant to KRS 355.9-322, conflicting perfected security interests and agricultural liens rank in priority according to the time of filing or perfection. Perfecting an Article 9 or statutory equine lien can be accomplished by filing a financing statement with the Secretary of State. An un-filed, unperfected security interest or agricultural lien will come behind a perfected security interest - regardless of when the underlying obligation arose.
It merits mention that the applicability of the first to file or perfect rule with respect to the Agister's Lien appears at odds with the literal language of the Agister's Lien statute. Although KRS 376.400(2) expressly permits debt recovery through a sale of the horse, in practical effect this could improperly place an otherwise unperfected or subordinate agister ahead of prior-perfected liens or security interests. This contradiction remains an unresolved issue in this field, however there is at least one Fayette Circuit Court ruling in which a judge deemed the first to file or perfect rule controlling.
Priority is more clearly defined between competing statutory liens. The Stallion Service Lien statute expressly states that it is inferior to an Agister's Lien. An Agister's Lien will therefore always prevail over a Stallion Service Lien, regardless of when or if they are filed or perfected in relation to one another. In practice, however, stud farm owners are often first to recover their debt because of their ability to withhold the Stallion Service Certificate. A stud farm owner will generally not release the certificate if there is an outstanding stud fee.
A Winning Strategy
For a safe bet, always file a financing statement with the Kentucky Secretary of State. Doing so ensures that an interest is placed in line with other competing interests. Moreover, whereas statutory liens only provide a one-year effective period, Article 9 financing statements last five years. A financing statement also resolves due process concerns that accompany the self-help sale method permitted by the Agister's Lien. This is one arena where the outcome is best not left to chance.
Robert E. Maclin, III, Member at McBrayer law. Mr. Maclin's practice is concentrated in the areas of insurance defense, commercial and banking litigation, and association management representation. He also operates in the equine law area and has proven success in all aspects of mergers and acquisitions. He can be reached at remaclin@mcbrayerfirm.com or (859) 231-8780, ext. 1301.
[1] KRS Chapter 355.9 et. seq..
[2] KRS 376.400-376.410.
[3] KRS 376.420.
