Article courtesy of Jeff Dutson of King & Spalding
The lack of a future advances clause in a security agreement did not entitle junior creditor to a portion of the proceeds from the sale of tobacco crops.
Versailles Farm, Home & Garden, LLC v. Haynes, No. 2020-CA-0626-MR, 2021 WL 519722 (Ky. Ct. App. Feb. 12, 2021).
To finance his tobacco farming operations, a borrower entered into a series of lending transactions with a creditor dating back to 2012 (the “Senior Creditor”). The Senior Creditor and the borrower executed several security agreements in which various crops and equipment were pledged as collateral. On June 1, 2013, the borrower received $75,000 from a different lender (the “Junior Creditor”). The obligation was represented by a promissory note in favor of the Junior Creditor, and the borrower pledged, among other things, his 2013 tobacco crop as collateral. But on June 25, 2013, the borrower and the Senior Creditor executed a security agreement that pledged the same tobacco crop as collateral. The Senior Creditor perfected its security interest shortly thereafter and before the Junior Creditor perfected its security interest.
The borrower sold the tobacco crop for a total of $217,960.12, but the Junior Creditor did not receive payment. The Junior Creditor sued the borrower in Kentucky state court for the remaining loan balance. After discovery, the Junior Creditor amended its complaint and named the Senior Creditor as a defendant. The Junior Creditor alleged the Senior Creditor converted the tobacco sale proceeds. The basis for the claim was the lack of a future advances clause in the June 25 security agreement.
The Kentucky Court of Appeals affirmed the trial court’s award of summary judgment in favor of the Senior Creditor. The court found that the Junior Creditor decided to lend money to the borrower without investigating the state of the collateral, the Senior Creditor’s prior filed financing statement, or the June 25 security agreement. The court explained that the Senior Creditor’s filing of a financing statement put the Junior Creditor on notice that it had a security interest in the collateral, and while the statute governing a request for an accounting allowed the borrower to request an accounting from the Senior Creditor to present to the Junior Creditor, there was no indication that such a request was made. Moreover, based on the record before the court, there was no evidence the Junior Creditor lent money to the borrower because it relied on the absence of a future advances clause. Indeed, the record was clear the Junior Creditor made no effort to investigate the state of the collateral prior to advancing the $75,000.
