That troubled business credit in Kentucky is slowly but surely winding its way through your workout roadmap. Despite your generous extension, efforts to broker a refinancing have failed. Your borrower stops making payments. Your borrower resists discussing a friendly liquidation. Pretty soon, your borrower stops returning your calls altogether. You reach out to counsel. What can your lawyer do to help you enforce and collect that defaulted Kentucky business loan?
(As an aside, one thing your lawyer definitely cannot do is to challenge your borrower to a duel. To this day, pursuant to its Constitution, all members of the Kentucky bar must swear an oath that they have not fought, or seconded, a duel with deadly weapons.)
While dueling is no longer one of them, Kentucky law does provides a number of useful tools for lenders to collect business debt. Which ones to utilize, and in what sequence to utilize them, depend on the circumstances, but here is a high-level overview:
Real Estate Collection:
- Mortgage Foreclosure – if a loan is secured by real estate, a lender may only liquidate that real estate judicially. Technically, Kentucky law “forbids” mortgage foreclosure, but that prohibition does not mean what it sounds like, and prohibits only “strict foreclosure” under which the borrower had no right of redemption. Modern foreclosure suits in Kentucky are styled as equitable actions to quiet title in favor of the lienholder. Such actions are typically brought in Circuit court where the land is located, and are generally referred to a Master Commissioner, a county-elected official that supervises the lawsuit, coordinates the appraisal, and conducts the judicial sale. A receiver may be appointed to operate the property pending the sale.
- Revised Article 9 – Kentucky has adopted Revised Article 9 of the Uniform Commercial Code, including its enforcement provision such as peaceable self-help repossession, and direct collection of pledged accounts receivable.
- Writ of Possession – This is Kentucky’s version of a Writ of Replevin, and is an order issued by a court directing the sheriff to take possession of certain specified property in which the movant has an interest. This tool is typically used as a secured creditor’s prejudgment remedy to recover personal property collateral when peaceable self-help repossession is not possible or practical. A movant is required to post a bond at twice the value of the property subject to the writ.
- Writ of Attachment – Courts in Kentucky are authorized to issue a prejudgment Writ of Attachment under the right circumstances. This is a tool typically utilized by an unsecured (or partially secured) creditor to reach non-collateral assets. The circumstances justifying this writ include that the defendant is a foreign entity, that the defendant has fled the jurisdiction, that the defendant has, or is likely to, remove property from the jurisdiction, or that, in a contract action, the defendant will not have enough property to satisfy the plaintiff’s demand.
- Writ of Execution – A Writ of Execution may be issued 10 days after judgment and directs the county sheriff to seize and sell assets of the judgment debtor to satisfy the judgment. Only non-exempt assets of a judgment debtor may be seized and sold, and judgment debtors may challenge the Writ by submitting an affidavit. This is typically used to encumber and sell personal property of a judgment debtor.
- Garnishment – Judgment creditors may obtain a garnishment – an order directing third parties to pay money owed to the judgment debtor directly to the judgment creditor. One form is used for non-wage garnishment, and a separate form is used for wage garnishment. This is typically used to interrupt a revenue stream running in favor of a judgment debtor. Non-wage garnishments operate on a “snapshot” rule, and should be reissued periodically, especially if issued to financial institutions. Wage garnishments, on the other hand, are continuous.
- Notice of Judgment Lien – Judgment creditors should also consider filing a Notice of Judgment Lien in any county in which the judgment debtor is reasonably believed to own real estate. The effect of this notice is to encumber any such real estate.