Article courtesy of Jeff Dutson of King & Spalding
Overturning prior appellate court precedent, the Kentucky Supreme Court upheld the trial court’s and Court of Appeals’ determination that the Kentucky UCC does not require future advances be explicitly stated in a security agreement in order to be secured by such security agreement so long as future advances were contemplated by the parties as evidenced by their course of performance, course of dealing or usage of trade.
Versailles Farm Home and Garden, LLC v. Haynes et al., 647 S.W.3d 205 (Ky. Supp. Ct. 2022)
Harvey Haynes, a Kentucky tobacco farmer (“Haynes”), obtained in 2012 a secured loan from Jerry Rankin d/b/a Farmers Tobacco Warehouse, an individual lender (“FTW”) which was secured by the 2012 tobacco crop and perfected by the filing of a financing statement in October 2012. The 2012 security agreement between Haynes and FTW was evidenced by a writing signed by Haynes, but it did not explicitly provide for future advances. Despite this lack of reference, FTW made periodic advances to Haynes thereafter. A second security agreement between Haynes and FTW that also did not include any language regarding future advances was entered into on June 25, 2013 to cover the 2013 tobacco crop; on that date Haynes owed $181,401.86 to FTW. The 2013 security agreement was perfected by the October 2012 financing statement. Again, FTW made advances to Haynes after the entry of the 2013 security agreement totaling to $213,200 and such advances were evidenced by notes which provided, “This note and all sums payable hereunder are secured by a Security Agreement on certain personal property from Debtor dated _______, 2013.”
On July 1, 2013 Haynes obtained a loan from Versailles Farm Home and Garden, LLC (“Versailles Farm”) also secured by the 2013 tobacco crop. Versailles Farm perfected its security interest by filing a financing statement in August of 2013. The 2013 crop was sold, with approximately $255,460.12 of the proceeds going to FTW and none to Versailles Farm. Haynes later defaulted on his obligation to Versailles Farm. Versailles Farm filed suit against Haynes and FTW claiming conversion of proceeds and asserting that FTW’s debt was only partially secured up to $181,401.86 and that payment on the unsecured portion violated priority rules. Versailles argued that since the 2013 security agreement failed to specifically mention future advances then under ITT Indus. Credit Co. v. Union Bank & Trust Co., 615 S.W.2d 2 (Ky. App. 1981), future advances could not be secured by such agreement. There was no dispute that any secured claim that FTW did have would have priority over Versailles Farm’s claim; the dispute centered on what the amount of FTW’s secured claim should be.
The trial court found that the UCC does not require future advances be explicitly stated in a security agreement and that the course of dealing between Haynes and FTW over 2012 and 2013 established that future advances were within the contemplation of their agreement. Thus, all future advances made by FTW to Haynes were secured by the 2013 security agreement between them. Versailles Farm appealed to the Kentucky Court of Appeals which upheld the trial court, and then to the Kentucky Supreme Court. After analyzing Kentucky Revised Statutes 355.9-201, 203, and 204, KRS 355.1-102 and 103 and KRS 355.1-303, the Kentucky Supreme Court agreed with the trial court and found that, when read together, these provisions do not require a future advance clause be explicitly included in a written security agreement and that such provisions require that courts look to both the language used by the parties and the parties’ actions, read and interpreted in the light of commercial practices and other surrounding circumstances. Accordingly, FTW’s entire debt was secured and had first priority over Versailles Farm’s claim.
