Request By:
Hon. Franklin Drake
Attorney at Law
Mapother and Mapother
160 Legal Arts Building
200 South Seventh Street
Louisville, KY 40202
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Kathleen F. Beyer, Assistant Attorney General
You request the opinion of this office regarding the applicability of the Kentucky Going-Out-of-Business statute, KRS 365.410 to 365.480, to foreclosure sales conducted by financial institutions.
Facts
A financial institution present and doing business in Kentucky takes a security interest in a debtor's inventory and goods on hand. The debtor is a retail merchant selling to the public generally. The debtor defaults, and the financial institution takes possession of the goods. All applicable provisions of the Uniform Commercial Code (KRS Chapter 355) and other state and federal laws are complied with.
The financial institution, as a secured party, then seeks to dispose of the goods in a public sale advertised as a "liquidation sale." The sale circulars and advertisements plainly state that the sale is conducted by the secured party, not by the defaulting merchant. The sale is held solely for the liquidation of the collateral and the debtor is given proper credit for the proceeds of the sale pursuant to KRS 355.9-504(1)(a-c).
Issue
The question presented is this: Must the financial institution, in conducting the "liquidation sale," comply with the provisions of KRS 365.410-365.480 relating to going-out-of-business sales?
Discussion
The goals of the financial institution in seeking an exemption from the Going-Out-of-Business statute are obvious. Such creditors seek to avoid the licensing, bonding, and inventory-listing requirements imposed by the statute. These provisions would place a considerable burden upon a secured party conducting a foreclosure sale.
In your discussion of authorities, you maintain that the statute has no application to such foreclosure sales for several reasons. One of these is that since the secured party must comply with Part V of Article IX of the Uniform Commercial Code, as enacted in KRS 355.9-501 et seq., it need not comply with the Going-Out-of-Business statute. We believe that the protections afforded by these two statutes are very different. As explained in OAG 75-434, the policy behind the Going-Out-of-Business statute is to curb abuses in which advertisers lead the public to believe that a reduction in price is being made because of a bona fide fire sale, going-out-of-business sale, etc., when such is not the case. Thus, the Going-Out-of-Business statute protects the individual consumer. On the other hand, compliance with KRS 355.9-501 et seq. protects an entirely different type of interest. KRS 355.9-504(3) contains liberal rules for the disposition of collateral so as to encourage the secured party to seek the most advantageous resale price and thus reduce the possibility and amount of any deficiency. See White & Summers, Uniform Commercial Code 1108-1109 (2nd Ed. 1980). Therefore, while compliance with KRS 355.9-504 may protect the secured party and the debtor, it contains no provisions which protect an individual consumer, and compliance therewith is no reason for the non-application of the Going-Out-of-Business statute to foreclosure sales. You further argue that a creditor will not hold repetitive liquidation sales covering the same merchant. It seems that this may or may not be true. If a creditor has made numerous loans to the same debtor, and the debtor defaults on all of these loans, the creditor would be permitted to hold a series of foreclosure sales. See KRS 355.9-504(3). Thus, this argument does not indicate that the policy behind the Going-Out-of-Business sale statute is inapplicable to liquidation sales.
You also contend that because the creditor seeks to sell everything at once, it is unlikely that it will acquire goods from elsewhere to attract customers, thereby increasing the inventory of the liquidation sale. This is somewhat persuasive in that it is usually true that a secured party will seek to sell collateral which consists of a lot of goods as an entire lot, but this is not required by KRS 355.9-504(3).
The most cogent argument which you present is that the definition of "sale" exempts secured parties conducting foreclosure sales from the requirements of the statute. KRS 365.410(2) defines a "sale" as a
. . . transfer of goods from the seller to the buyer for a price less than that for which the goods were originally offered to the public by the person conducting a sale hereunder.
You interpret this definition as indicating the intent of the statute to regulate a sale of goods by a seller for a price less than the amount for which the same seller originally offered them to the public. Because the secured party has not originally offered the goods for sale to the public, it is not participating in a sale as defined by the statute, and, therefore, the statute does not apply to it. Under KRS 365.410(6), a "person" includes an ". . . association of two (2) or more persons havig a joint or common persons having a joint or common interest. " Although it may be argued that a secured party has a common interest with the debtor in collateral, and thus the subsequent foreclosure sale conducted by the secured party could be construed to be a "sale" as defined by KRS 365.410(2) because the secured party is a "person" as defined by KRS 365.410(6), we believe that, given the entity and the practices which are the targets of the statute, the best interpretation is that the definition of a "sale" in KRS 365.410(2) excludes secured parties from the coverage of the statute.
Another persuasive argument against the application of the Going-Out-of-Business statute to liquidation sales conducted by secured parties is that the bond required by KRS 365.420(7) must be held for three years from the final date of the sale. KRS 365.440. Therefore, if the secured party conducted, for example, a dozen foreclosure sales per year it would have to put $12,000 in what will essentially be an escrow arrangement for three years. While this is not an unusually large amount of money, such a requirement seems oppressive.
A further reason for the non-application of the Going-Out-of-Business statute to the "liquidation sales" described here is that the Commonwealth does not totally surrender its right to regulate the conduct of such sales. If any unfair, false, misleading or deceptive acts or practices occur in the advertising or conduct of such "liquidation sales," the Attorney General may take action pursuant to KRS 367.190 and private parties may act as well pursuant to KRS 367.220.
Conclusion
To conclude, it is our opinion that the Going-Out-of-Business statute does not apply to the foreclosure sale which you propose to conduct. The definition of "sale" as contained in KRS 365.410(2) seems to exclude persons such as a secured party; the bonding requirements seem oppressive; and the Commonwealth does not surrender its remedies against unethical practices in the conduct of such sales.