Versailles Farm, Home and Garden, LLC v. Harvey Haynes ( 2021 )

RENDERED: FEBRUARY 12, 2021; 10:00 A.M.
TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2020-CA-0626-MR
VERSAILLES FARM, HOME AND APPELLANT
GARDEN, LLC
APPEAL FROM WOODFORD CIRCUIT COURT
v. HONORABLE BRIAN K. PRIVETT, JUDGE
ACTION NO. 14-CI-00202
HARVEY HAYNES; AND JERRY APPELLEES
RANKIN, d/b/a FARMERS TOBACCO
WAREHOUSE
OPINION
AFFIRMING
** ** ** ** **
BEFORE: CLAYTON, CHIEF JUDGE; GOODWINE AND KRAMER,
JUDGES.
KRAMER, JUDGE: Versailles Farm, Home and Garden, LLC (“VFHG”) appeals
from an order of the Woodford Circuit Court granting summary judgment to Jerry
Rankin, d/b/a Farmers Tobacco Warehouse (“FTW”).1 We affirm the order
1
The circuit court granted summary judgment in favor of VFHG and against defendant Harvey
Haynes on July 13, 2016. Although Haynes was named in this appeal, that order is not before us.
granting summary judgment in favor of FTW but for different reasons than those
of the circuit court.2
Factual and Procedural Background
The record before us shows that FTW began advancing funds to
Harvey Haynes as early as 2012. Numerous security agreements were executed
between Haynes and FTW in which various crops and farm equipment were listed
as collateral. On June 1, 2013, Haynes executed and delivered a promissory note
to VFHG in the amount of $75,000.00. A collateral security agreement was also
executed that granted VFHG a security interest in Haynes’ 2013 tobacco crop,
among other sources of collateral. On June 25, 2013, Haynes executed a security
agreement that gave FTW a security interest in “100 acres of burley tobacco and
any insurance proceeds from the crop” (“the June 25 security agreement”).
Although the record before us does not contain the Uniform Commercial Code
(“UCC”) financing statement filed with the Secretary of State by FTW perfecting
its security interest, VFHG does not dispute that FTW was the first to file its
financing statement and had priority on the proceeds from the sale of Haynes’ 2013
tobacco crop.3,4
2
“If the summary judgment is sustainable on any basis, it must be affirmed.” Fischer v. Fischer,
197 S.W.3d 98, 103 (Ky. 2006).
3
VFHG filed its financing statement on August 29, 2013.
4
See Kentucky Revised Statute (KRS) 355.9-322.
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In November 2013, VFHG’s attorney sent a letter to FTW advising of
VFHG’s perfected security interest in the 2013 crop and requesting that VFHG be
included “as payee on any proceeds check(s) issued relative to a sale(s) of the
above-referenced crops.” VFHG never received payment for sale of the tobacco
crop. On June 30, 2014, VFHG filed suit against Haynes in Woodford Circuit
Court, claiming it was owed $59,329.25. The parties engaged in discovery, and
Haynes produced receipts showing his 2013 tobacco crop had been sold for the
sum total of $217,960.12. Haynes also disclosed that FTW received insurance
proceeds for the same crop in the amount of $37,500.00. Additionally, Haynes
produced demand notes and security agreements executed by Haynes to FTW
dating back to 2012. The June 25 security agreement was among those documents.
Based on the documents produced by Haynes in discovery, VFHG
was granted leave to file an amended complaint in the circuit court. The amended
complaint named FTW as a defendant and alleged conversion of the proceeds of
the sale of Haynes’ 2013 tobacco crop by FTW. The parties filed competing
motions for summary judgment. The circuit court denied VFHG’s motion and
granted that of FTW. This appeal followed. Further facts will be developed as
necessary.
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Standard of Review
When a trial court grants a motion for summary judgment, the
standard of review for the appellate court is de novo because only legal issues are
involved. Hallahan v. The Courier Journal, 138 S.W.3d 699, 705 (Ky. App.
2004). We must consider the evidence of record in the light most favorable to the
non-movant (i.e., VFHG) and determine whether the circuit court correctly found
there were no genuine issues as to any material fact and that the moving party was
entitled to judgment as a matter of law. Scifres v. Kraft, 916 S.W.2d 779, 781 (Ky.
App. 1996).
Summary judgment is appropriate where “the pleadings, depositions,
answers to interrogatories, stipulations, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any material fact and
that the moving party is entitled to a judgment as a matter of law.” Kentucky Rule
of Civil Procedure (CR) 56.03. The movants bear the initial burden of
demonstrating that there is no genuine issue of material fact in dispute. The party
opposing the motion then has the burden to present “at least some affirmative
evidence showing that there is a genuine issue of material fact for trial.” Steelvest,
Inc. v. Scansteel Service Center, Inc., 807 S.W.2d 476, 482 (Ky. 1991). A party
responding to a properly supported summary judgment motion cannot merely rest
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on the allegations in his pleadings. Continental Casualty Co. v. Belknap Hardware
& Manufacturing Co., 281 S.W.2d 914, 916 (Ky. 1955).
Analysis
VFHG’s arguments on appeal focus on the lack of a future advances
clause in the June 25 security agreement between Haynes and FTW pursuant to
KRS 355.9-204(3). VFHG argues that the circuit erred (1) in its interpretation of
KRS 355.9-204(3) that a security agreement does not have to include a future
advances clause to secure future advances; (2) in its interpretation of the June 25
security agreement; and (3) by finding that a future advances clause was within the
contemplation of Haynes and FTW. For reasons stated below, we need not reach
the merits of VFHG’s arguments.
We agree with VFHG’s assertion that the official comments to the
UCC represent the legislative intent of Kentucky’s General Assembly. KRS
355.1-103(3) states:
Official comments to the Uniform Commercial Code, as
published from time to time by the National Conference
of Commissioners on Uniform State Laws, represent the
express legislative intent of the General Assembly and
shall be used as a guide for interpretation of this chapter,
except that if the text and the official comments conflict,
the text shall control.
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Accordingly, we turn to Official Comment 2 to UCC § 9-502 (see
KRS 355.9-502 for Kentucky’s corresponding statute), which pertains to the filing
of financing statements and reads as follows:
“Notice Filing.” This section adopts the system of
“notice filing.” What is required to be filed is not, as
under pre-UCC chattel mortgage and conditional sales
acts, the security agreement itself, but only a simple
record providing a limited amount of information
(financing statement). The financing statement may be
filed before the security interest attaches or thereafter.
See subsection (d). See also Section 9-308(a)
(contemplating situations in which a financing statement
is filed before a security interest attaches).
The notice itself indicates merely that a person may have
a security interest in the collateral indicated. Further
inquiry from the parties concerned will be necessary to
disclose the complete state of affairs. Section 9-210[5]
provides a statutory procedure under which the secured
party, at the debtor’s request, may be required to make
disclosure. However, in many cases, information may be
forthcoming without the need to resort to the formalities
of that section.
Notice filing has proved to be of great use in financing
transactions involving inventory, accounts, and chattel
paper, because it obviates the necessity of refiling on
each of a series of transactions in a continuing
arrangement under which the collateral changes from day
to day. However, even in the case of filings that do not
necessarily involve a series of transactions (e.g., a loan
secured by a single item of equipment), a financing
statement is effective to encompass transactions under a
security agreement not in existence and not contemplated
at the time the notice was filed, if the indication of
5
See KRS 355.9-210 for Kentucky’s equivalent statute.
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collateral in the financing statement is sufficient to cover
the collateral concerned. Similarly, a financing statement
is effective to cover after-acquired property of the type
indicated and to perfect with respect to future advances
under security agreements, regardless of whether after-
acquired property or future advances are mentioned in
the financing statement and even if not in the
contemplation of the parties at the time the financing
statement was authorized to be filed.
(Emphasis added.)
As previously stated herein, VFHG does not dispute that FTW
perfected its security agreement and was first to file its financing statement. The
effect of FTW’s financing statement was to put other creditors, including VFHG,
on notice that it had a security interest in the collateral stated therein (i.e., Haynes’
2013 tobacco crop). However, the record before us, including the letter sent by
VFHG’s attorney to FTW in November 2013, gives no indication that VFHG took
any steps to make itself aware of FTW’s prior-filed financing statement or the June
25 security agreement.6 In short, the record before us indicates that VFHG did not
investigate the state of the collateral prior to lending $75,000.00 to Haynes.
6
Paragraph 9 of VFHG’s initial complaint, filed June 30, 2014, states, “It is [VFHG’s] belief that
the 80 acres of tobacco on the Becker Farm in Versailles, KY and 16 acres of tobacco on the
farm at Iron Works Pike, Georgetown, KY, as referenced in the Note and [Security] Agreement,
have been sold; however, [VFHG] received no proceeds of said sale, nor does [VFHG] know
where such tobacco was sold, or any other particulars regarding such sale.” On page 2 of its
brief to this Court, VFHG states, in relevant part, “[a]ware that Haynes sold portions of his
tobacco at FTW, on or about November 18, 2013 VFHG notified FTW via certified mail, return
receipt requested, that VFHG was a secured party as to Haynes’ 2013 tobacco crop and that any
proceeds of sale from the crop were subject to VFHG’s properly perfected security interest[.]”
At no point in the record or in its brief to this Court does VFHG give any indication that it was
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VFHG argues that, because the June 25 security agreement does not
contain a future advances clause, it covers only what was owed by Haynes to FTW
prior to that date, but VFHG’s argument misses the mark. Because VFHG did not
investigate the state of the collateral based on FTW’s financing statement, VFHG
was wholly unaware how much Haynes was indebted to FTW or how much credit
FTW intended to advance to Haynes as a result of the June 25 security agreement.
KRS 355.9-210 would have allowed Haynes to request an accounting from FTW to
present to VFHG, but the record before us does not indicate that such a request was
made, either formally pursuant to the statute or informally.
Likewise, VFHG’s legal arguments are wholly unpersuasive. In ITT
Industrial Credit Company v. Union Bank and Trust Company, 615 S.W.2d 2 (Ky.
App. 1981), this Court held that a perfected security interest evidenced by a
security agreement without a future advances clause has no priority in relation to a
subsequent creditor with a perfected interest in the same collateral, after the
obligation of the first security agreement is fully paid and the original creditor
makes a new loan secured by new and different collateral, while taking a new
security agreement and naming the original items as additional collateral. VFHG
aware of FTW’s prior-filed financing statement when it advanced funds to Haynes. Finally, page
3 of VFHG’s brief to this Court discloses that VFHG did not see the June 25 security agreement
until discovery commenced in this action.
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argues that ITT stands for the proposition that a security agreement must contain a
future advances clause. This Court
conclude[d] that it is better practice, and more equitable
in this situation, to require the original creditor to provide
in his agreement for future advances, if there is an
agreement between the debtor and the creditor for such
advances. In our opinion, the statute [requires] this
statement, and such a statement provides actual notice of
the intention to a would-be subsequent creditor.
Furthermore, equitably speaking, it would have behooved
ITT to have done a little checking before making its new
loan. Any lender who makes a future advance without
also investigating the state of the collateral at the time of
the advance is asking for trouble.
Id. at 5.
The flaw in VFHG’s argument is that ITT assumes that any
subsequent creditor reviewed the security agreement in question. Indeed, our
analysis would be completely different had VFHG secured its loan to Haynes with
the 2013 tobacco crop as collateral because it saw no future advances clause within
the June 25 security agreement. But that is simply not the case here. Indeed, ITT
supports this reasoning:
We have already pointed out why we believe a
subsequent creditor should not be required to contact the
original creditor when there is no written provision or
indication that the security agreement covers future
advances.
Id. at 4.
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We agree with VFHG that the June 25 security agreement does not
contain a future advances clause. VFHG argues if future advances are within the
contemplation of the parties, a security agreement must have a future advances
clause pursuant to KRS 355.9-204(3) and Official Comment 5 to UCC § 9-204.7
However, VFHG does not make that argument because it relied upon the absence
of a future advances clause in the June 25 security agreement in lending funds to
Haynes. Indeed, VFHG was not aware of the security agreement at all prior to
filing the instant action. The actual notice of possible future advances to any
would-be subsequent creditor is provided by the future advances clause appearing
in the security agreement rather than the financing statement. First National Bank
of Grayson v. Citizens Deposit Bank and Trust, 735 S.W.2d 328, 331 (Ky. App.
7
Official Comment 5 to UCC § 9-204 reads:
Future Advances; Obligations Secured. Under subsection (c)
collateral may secure future as well as past or present advances if
the security agreement so provides. This is in line with the policy
of this Article toward security interests in after-acquired property
under subsection (a). Indeed, the parties are free to agree that a
security interest secures any obligation whatsoever. Determining
the obligations secured by collateral is solely a matter of
construing the parties’ agreement under applicable law. This
Article rejects the holdings of cases decided under former Article 9
that applied other tests, such as whether a future advance or other
subsequently incurred obligation was of the same or a similar type
or class as earlier advances and obligations secured by the
collateral.
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1987).8 The record before us indicates that, not only was VFHG unaware of
FTW’s prior-filed financing statement, but as a result, VFHG also made no attempt
to obtain any security agreement between Haynes and FTW or otherwise
investigate the state of the collateral. Pursuant to ITT, such inaction was to
VFHG’s peril. We are accordingly unpersuaded by VFHG’s attempt to argue the
necessity of a future advances clause in hindsight.
Conclusion
“If the summary judgment is sustainable on any basis, it must be
affirmed.” Fischer, 197 S.W.3d at 103. Stated differently, if we agree with the
circuit court’s ultimate conclusion, but not the reasoning or legal basis behind that
conclusion, we may affirm on any basis supported by the record. Such is the case
here. VFHG failed to investigate the state of Haynes’ tobacco crop as collateral
prior to issuing the loan. Its legal arguments after the fact are without merit and
8
See Official Comment 7 to UCC § 9-204, which provides that a future advances clause need not
be included in a financing statement:
Financing Statements. The effect of after-acquired property and
future advance clauses as components of a security agreement
should not be confused with the requirements applicable to
financing statements under this Article’s system of perfection by
notice filing. The references to after-acquired property clauses and
future advance clauses in this section are limited to security
agreements. There is no need to refer to after-acquired property or
future advances or other obligations secured in a financing
statement.
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cannot correct this error. Accordingly, the judgment of the Woodford Circuit
Court is affirmed.
ALL CONCUR.
BRIEFS FOR APPELLANT: BRIEF FOR APPELLEE JERRY
RANKIN, d/b/a FARMERS
Cassie W. Barnes TOBACCO:
Versailles, Kentucky
Lisa Koch Bryant
Louisville, Kentucky
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