Request By:
Hon. William R. Mapother
Mapother and Mapother
160 Legal Arts Building
200 South Seventh Street
Louisville, Kentucky 40202
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Charles W. Runyan, Asst. Deputy Attorney General
You refer, in your letter, to OAG 68-407, in which we pointed out that a financing statement as such cannot be recorded as a real estate mortgage. The financing statement in question was not in the form of a chattel mortgage or a real estate mortgage. The statute, KRS 355.9-401, contemplates only a filing with the proper county clerk, if the instrument qualifies as a financing statement under KRS 355.9-402. What constitutes filing is dealt with in KRS 355.9-403.
The financing statement in that opinion involved personalty that was to become a fixture. Under KRS 355.9-402, when the financing statement covers crops growing or to be grown or goods which are to become fixtures, the statement must also contain a description of the real estate concerned. KRS 355.9-401(1)(b) provides that when the collateral is goods which at the time the security interest attaches are or are to become fixtures, the security agreement or financing statement must be filed [not recorded] in the clerk's office where a mortgage on the real estate concerned would be filed and recorded. These two provisions, however, do not convert a mere financing statement into a formal real estate mortgage. Those two provisions of Chapter 355 merely deal with requisites of a financing statement and the place of filing a financing statement. See OAG 77-708, copy enclosed, of related interest.
The conclusion was reached in OAG 68-407 that if the secured party desires to establish a lien on real estate, the real estate mortgage formalities of KRS 382.270 (requiring an acknowledgment) and 382.330 (date and maturity of the obligations) must be observed. A document qualifying only as a financing statement would not meet the necessary requirements of a real estate mortgage.
It is true, as was observed in Lincoln Bank and Trust Co. v. Queenan, Ky., 344 S.W.2d 383 (1961), that where a financing statement, as such, has the formal requisites of KRS 355.9-402 it may be filed, since in the narrow field of secured transactions covered by the Uniform Commercial Code it is plenary.
Note that the questions in Lincoln Bank and Trust Company concerned whether the recording [Judge Palmore undoubtedly meant "filing] of a financing statement was dependent upon the formalities treated in KRS 382.270, 382.330 and 382.675.
KRS 382.270 in 1961 at the time of the Queenan case provided that no mortgage of real "or personal property" would be valid without an acknowledgment, etc. (Emphasis added.) KRS 382.330 in 1961 provided that no mortgage shall be recorded unless it states the date and maturity of the obligations thereby secured.
However, in 1962, the year following the Queenan case, the General Assembly amended KRS 382.270 (1962 Acts, Ch. 83, § 16) by deleting the phrase "or personal property. " The same Act (Ch. 83, § 17) amended KRS 382.330 by adding this language: "covering real property."
Thus the technical requirements for recording a valid real estate mortgage are contained in those two statutes and must be observed.
As Queenan holds, a financing statement meeting the requirements of KRS 355.9-402 does not require that it contain a formal acknowledgment and does not require the date and maturity of the obligations to be disclosed. However, the 1962 amendments of KRS 382.270 and 382.330, coming on the heels of Queenan, clearly indicates the will of the General Assembly to resolve any doubts about the necessity for observing the above statutory formalities in KRS Chapter 382 where a party is claiming in effect a real estate lien or mortgage, as contrasted with a lien on personalty or on the fixture structure itself. See Butcher v. Adams, 310 Ky. 205, 220 S.W.2d 398 (1949) 400, observing that "It is an elementary rule of statutory interpretation that whenever in the statutes on any particular subject there are apparent conflicts which cannot be reconciled, the later statute controls."
The Code does not define "fixtures, " but leaves that to other law. KRS 355.9-313, relating to priority of security interests in fixtures, does say that fixtures would not include goods incorporated into a structure in the manner of lumber, bricks, tile, cement, glass, metal work and the like, and no security interest in them exists unless the structure remains personal property under applicable Kentucky law. The statute also states that law of Kentucky other than this chapter determines whether and when other goods become fixtures. The statute provides that "This chapter does not prevent creation of an encumbrance upon fixtures or real estate pursuant to the law applicable to real estate. " (Emphasis added.) As Mr. William Davenport and Ray Henson wrote in their monograph on "Secured Transactions" (U.C.C. Practice Handbooks 1-6) at p. 17, "nothing in the Code prevents encumbering fixtures as a part of the real estate when a mortgage is entered into, and when a real estate mortgage includes fixtures, no purpose is served by filing a separate financing statement under the Code."
It is our view that the statement in KRS 355.9-313, that Chapter 355 does not prevent the creation of an encumbrance upon fixtures or real estate pursuant to the Kentucky law applicable to real estate, eloquently attests to the legislative will that the real estate mortgage or lien concept and the existing statutory formalities of Chapter 382 remain inviolate and unchanged.
It is important to keep in mind that a security interest in a fixture [which cannot involve bricks, tile, cement, under KRS 355.9-313(1)] involves the fixture, but not the real estate. A fixture is described, in Tarter v. Turpin, Ky., 291 S.W.2d 547 (1956): "A permanent fixture is properly fixed to the realty so that it becomes a part or parcel of the realty, giving the owner of the realty the same rights to it as the soil itself." See the three tests of a fixture in that case. However, KRS 355.9-313 makes it clear that a security interest in real estate upon which the fixture is attached must follow the law applicable to real estate.