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This article outlines some of the options available to
companies seeking to secure payment for work which
they have completed on refurbished industrial
machines.  There are two primary methods of securing
such payment.  The first method involves the creation of
the UCC.  The second method involves proper filing and
perfection of a valid statutory mechanics lien.  

I.  Secured Interest under the UCC - General

Kentucky’s version of the UCC can be found at KRS
355.9-101 et al.  KRS 355.9-109 (1) a states that “this
article applies to; (a) a transaction regardless of its form
that creates a security interest in personal property or
fixtures by contract”.  While the UCC generally governs
the sale of goods, KRS 355.9-109 (2) states that “the
application of this article to the security interest in a
secured obligation is not affected by the fact that the
obligation is itself secured by a transaction or interest to
which this article does not apply”.  Thus the fact that a
refurbisher of industrial machinery would be providing
services rather than goods, as defined under the UCC,
would not prevent the creation and enforcement of the
security interest which secures payments for those
services.  The quickest, easiest, and most effective way
to secure payment for services rendered would be to
enter into a written agreement which contains a
provision creating a security interest in the proposed
collateral property.  The financing statement (UCC-1)
should be prepared and filed with the office of the
Secretary of State in every state that that machinery is
likely to be relocated.  

II.  Secured Interest under the UCC –
Subordination, Accessions

If the machinery to be serviced has already been set
forward as collateral for other obligations, there are a
couple of protections that the UCC provides to
subsequent lien holders.  KRS 355.9-339 provides that
“this article does not preclude subordination by
agreement by a person entitled to priority.”  Thus, the
service provider could approach the parties holding the
priority interests and enter into a subordination
agreement with them.  

If that option is not available, KRS 355.9-335 provides
that a security interest can be created in an accession,
and that that security interest will continue in the
accession collateral even after it is included in a piece of
property with a prior lien attached.  An accession would
be a part or mechanism that has been added to another
piece of property.  For example, if an auto mechanic
replaced an engine in an automobile, the engine would
become an accession once it was included in the
automobile.  In other words, an accession is an active
working part that is included in a greater whole.  
A refurbisher of industrial machinery is likely to add
various components and mechanisms into a refurbished
machine.  New electrical wiring, newly machined parts,
etc. would no doubt be required to complete the project.

The refurbisher can acquire a security interest in the
parts which it includes in the original machine, and
thereby secure its interest, at least in part.  For
machines which are governed by the certificate of title
statute (KRS 355.9-311 (2) automobiles, mobile homes,
etc.) the lien will have to be added to the certificate of
title for that property.  While a security interest in an
accession is subordinate to a security interest in the
original whole property which was filed prior, the
accession provision of the UCC gives the lien holder the
legal right to go in and at least remove property added
by the lien holder in the event of default.  Thus, some
expense may be recouped, even if the machine cannot
be possessed or sold as a whole.

III.  Statutory Mechanics Liens

The second method of securing payment available to
the service provider is to obtain a mechanic’s lien on the
equipment and machinery refurbished or repaired.  KRS
376.440 provides that “any person engaged in the
business of selling, repairing, or furnishing accessories
or supplies for any kind of equipment or machinery …
shall have a lien on the equipment, machine, machinery,
or motor for the reasonable or agreed charges for
repair, work done, accessories, parts, and supplies
furnished for the equipment, machine, machinery, or
motor until the reasonable or agreed charged therefore
has been paid….[T] therefore if the lien shall be
asserted within three months by filing in the office of the
county clerk a statement showing the amount and cost
of materials furnished or labor performed on the
equipment, machine, machinery, or motor,” the lien shall
be effective.  

In order to secure the lien, the perspective lien holder
needs to file the lien in the office of the county clerk of
the county in which the owner of the equipment or
machinery resides within three months of the time the
service is provided.  In the event that the owner is a
nonresident of Kentucky, the lien should be filed in the
office of the county clerk in the county where the
machine is being kept at the time the lien is filed.  The
perspective lien holder can attach this lien regardless of
whether or not the equipment is on his premises at the
time the lien is being filed, but every effort should be
made to secure the lien before the property is removed
from the state.  

KRS 376.445 indicates that the lien statement to be filed
with the county clerk should consist of “a statement in
writing in which it is stated the amount due the claimant
with all just credits and set-offs known to him, together
with a description of the property intended to be covered
by the lien sufficiently accurate to identify it and the
name of the owner.”  This statement needs to be
subscribed and sworn to by the person who is filing the
lien.  KRS 376.450 provides that a perspective lien
holder may file a statement showing that he expects to
furnish certain labor, material, or parts in advance of the
actual provision of said services.  Of course, the
mechanics lien secured will not take precedence over
prior filed liens and mortgages etc.; however, the earlier
the lien may be filed, the better chance the perspective
lien holder has of betting out other parties who may be
asserting their own secured interest in the property.  
KRS 376.455 also provides a mechanism for the sale of
equipment or machinery, which has been repaired or
refurbished when the owner of said equipment or
machinery fails to pay for those services and fails to
take possession of the machinery.  It should be noted
that the mechanics lien discussed above applies only
within the state of Kentucky.  Thus if the machinery is
removed from Kentucky before the lien is filed with the
county clerk, the perspective lien holder will need to
consult the statutes of the state in which the equipment
is relocated in order to determine whether a similar
statutory mechanism exists within that jurisdiction.

IV.  Which Law Applies?

As to the question of which state’s law will apply in a
given situation, this analysis is simply too fact specific to
make a general analysis.  Each state generally has
varying approaches to resolving conflict of law
questions, and each state’s method usually requires a
detailed analysis of the transaction itself.  Therefore it is
impossible to say how states such as Indiana would
determine which law to apply in the event of contractual
dispute without knowing the precise facts of that specific
transaction.  It is equally impossible to say how the laws
of Indiana or Ohio may differ from the laws of Michigan
or Kentucky.  

However, this issue can be addressed contractually
much like the security interest issue discussed above.  
By including in the general service contract a provision
designating the courts of X County, Kentucky as the
proper venue, and the laws of Kentucky as the proper
standard for interpreting disputes, issues concerning
which law to apply and where a suit must be brought can
be rather easily resolved.  State and federal courts are
very willing to uphold such contractual provisions.  This
makes it much easier to determine where and by what
standard disputes will be resolved.  

V.  Conclusion

As discussed above, a party engaged in the business of
refurbishing industrial equipment has two options to
secure payment for services rendered under the laws of
Kentucky.  The first method involves usage of the
provisions of Kentucky’s version of the UCC to gain a
contractual security interest in that property in advance
of completion of the work.  The second method entails
usage of the Kentucky mechanic’s lien statutes which
may be applied before, during, or after the service is
completed (but only while either the owner or the
property is located in Kentucky).  

Either of these methods will probably be somewhat
useful in any state in which the service provider does
business.  Most states have variations on the mechanic’
s lien statutes that can be researched as the need
arises.  All fifty states in the US have adopted the
revised version of the UCC with minor variations so that
this method may be used throughout the country.  
Choice of law issues may only be resolved on a fact
specific basis; however, just as with the creation of a
contractual security interest, issues concerning choice
of law and choice of forum can be resolved between the
parties contractually before the transaction is

IV.  Outline of Recommendations

In the final analysis, the following actions are

1. The service provider must insist on a written service
agreement signed by the customer before service

2. All written service agreements must include a
provision listing Kentucky law as the proper standard of
interpretation and the state and federal courts of Kenton
County, Kentucky as the proper venue for resolving any
conflicts arising under the service agreement.

3. The written agreement must include a contractual
provision granting the service provider a secured
interest in the property to be refurbished.  

4. The service provider must file all required UCC
documents (UCC-1, etc.) with the office of the Secretary
of State in each and every state to which that equipment
is remotely likely to be removed.  

5. In the event that the general security interest fails or if
other secured parties have priority, then the service
provider should take steps to gain a security interest in
all parts and accessories that will become accessions to
the original collateral by proper filing of UCC documents
for each component used.

6. The service provider should not rely solely on the
mechanic lien method of securing their interest; such
reliance should be avoided except in cases where no
contractual security interest can be gained or where a
UCC security interest has failed.  

7. If a mechanic lien is to be applied, the service
provider’s application must be filed in the proper county
within three months of providing the service, and it
should always be done before the equipment leaves the
service provider’s property.

If you feel that you could benefit from the use of these  
or other related security measures in your business
dealings, please call the Law Office of Eric L. Crump,
PLLC, for a consultation today.   We'd love to see how
these tools can be put to use for your specific needs.
Copyright The Law Office of Eric L. Crump, PLLC, 2007, All rights reserved
620 South Third Street, Louisville, Kentucky 40202
Phone: (502) 540-9958; Fax: (502) 540-9957