Request By:
Hon. Franklin Drake
Attorney at Law
Mapother and Mapother
801 W. Jefferson St.
Louisville, KY 40202
Opinion
Opinion By: Kathleen B. Dorman, Assistant Attorney General, Consumer Protection Division and David L. Armstrong, Attorney General
In 1981, you requested the opinion of this office regarding the applicability of KRS 365.410-.480, the Kentucky Going-Out-of-Business Sale Law, to foreclosure sales conducted by financial institutions. The question you presented was originally addressed in OAG 81-384. The present opinion is being issued in order to amend the conclusions reached in OAG 81-384 and to clarify the legal issues presented therein.
The fact situation which OAG 81-384 addressed was as follows:
A financial institution in Kentucky takes a security interest in a debtor's inventory. The debtor is a retail merchant selling to the public generally. The debtor defaults, and the financial institution takes possession of the goods. 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 advertisements plainly state that the sale is conducted by the secured party, not by the defaulting merchant.
You asked whether the financial institution, in conducting the "liquidation sale," must comply with the provisions of KRS 365.410-.480 relating to going-out-of-business sales.
In OAG 81-384 we reached the conclusion that KRS 365.410-.480 did not apply to the type of foreclosure sale which you described. We based this conclusion primarily on the argument that the definition of "sale" contained in KRS 365.410(2) exempted secured parties conducting foreclosure sales from the requirements of the statute.
KRS 365.410(2) defines a "sale" (for the purposes of KRS 365.410-.480) 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." In OAG 81-384, we interpreted 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 the goods to the public. Because the secured party had not originally offered the goods for sale to the public, it was not participating in a sale as defined by the statute and, therefore, the provisions of the act did not apply to it.
We are now persuaded that this interpretation of the statute is erroneous. We believe the true intent of the definition is to ensure that goods offered for sale in a sale regulated by the statute are indeed offered at reduced prices so that the consumer realizes a true savings. The definition seeks to prohibit deceptive pricing in the regulated sales by establishing a guideline similar to that contained in the Federal Trade Commission Guides Against Deceptive Pricing, i.e. for merchandise to be considered on "sale," it must have been openly and actively offered for sale at the before-discount price for a reasonably substantial period of time in the recent, regular course of business. (16 C.F.R. Part 233)
Although the language of the statute, when literally construed, may support the former interpretation, we believe that application of such a literal construction serves to undermine the very protections which the legislature intended to create. KRS 446.080(1) provides that "All statutes of this state shall be liberally construed with a view to promote their objects and carry out the intent of the legislature . . ." Similarly, Kentucky case law has held that when interpreting a statute, the courts are not restricted to the language of a particular section but may consider the act as a whole as well as prior or contemporaneous circumstances which may throw light on the legislature's intention.
Baker v. White, 251 Ky. 691, 65 S.W.2d 1022 (1933). The experience of recent years has shown that restricting the applicability of the Going-Out-of-Business Sale Act to persons who have previously offered the goods for sale creates a loophole whereby secured creditors, frequently in conjunction with professional liquidators, are permitted to conduct such sales free of the constraints imposed by the statute for the protection of consumers. We believe that this result was neither contemplated nor intended by the drafters of the legislation.
On the contrary, the provisions of KRS 365.415 and 365.450 indicate that the legislature intended sales conducted by secured creditors to fall within the purview of the act. KRS 365.415 provides that:
No person shall advertise, represent, or hold out to the public that any sale of goods is an insurance, bankruptcy, mortgage foreclosure, insolvent's, assignee's executor's, administrator's, receiver's, trustee's, removal sale, going-out-of-business sale, or fire sale, unless he first obtains a license to conduct the sale from the county clerk of the county in which he proposes to conduct the sale.
Clearly, a sale designated as an "assignee's sale," a "receiver's sale," an "executor's sale," etc., would most likely be conducted by a person or entity other than a person who had previously offered the goods for sale. Indeed, KRS 365.450 prohibits anyone from advertising or conducting an assignee's or insolvent's sale except where there has been a bona fide assignment for the benefit of creditors. Yet the statute quoted above expressly subjects such sales to the provisions of the Act.
For the reasons stated herein, we are of the opinion that a secured creditor in the situation which you describe is participating in a "sale" as defined by KRS 365.410(2) and would therefore be subject to the provisions of KRS 365.410-.480. Although a secured creditor conducting a sale regulated by the Act would not previously have offered the goods for sale to the public, it could comply with the Act by offering the goods for sale at a price less than that for which the goods were originally offered by the defaulting merchant, and by generally adhering to the guidelines set out in 16 C.F.R. Part 233 described above.
To the extent that OAG 81-384 is inconsistent with this opinion, it is hereby withdrawn.