• Lenders Beware: Kentucky's Wage Lien Might Prime Your Security Interest
  • September 30, 2009 | Author: Michael J. O'Grady
  • Law Firm: Frost Brown Todd LLC - Office
  • Some state laws provide lien rights to certain creditors that would otherwise be unsecured creditors. Common “statutory liens” include mechanics’ liens and landlord liens. State laws vary substantially with regard to the types of statutory liens recognized and the scope and priority of such liens. A number of states have also enacted statutory liens that protect employees.

    Kentucky law grants an employee a lien to secure unpaid wages and other amounts due to the employee by the employer. This lien attaches to both real and personal property of the employer and can, in some cases, prime a lender’s prior perfected security interest or mortgage on the employer’s assets.

    Lenders that extend credit to businesses with operations in Kentucky should carefully consider the scope and priority of the Kentucky wage lien when underwriting a loan.

    Kentucky Revised Statutes Section 376.150 grants to the employee of a failing business “a lien upon the property and effects which have been involved in the business and upon the accessories connected therewith, including any interest in real property used in carrying on the business.” From a lender’s perspective, there are five key considerations in evaluating the impact of the lien upon the lender’s interest in the assets of the business.

    Beneficiaries. Only employees are granted the lien. Independent contractors are not within its scope. In addition, the directors, stockholders, president and chief executive officer are not granted lien rights.

    Scope. While often referred to as the “wage lien”, the law grants an employee a lien for all amounts owed to the employee. There is some debate about what exactly constitutes “wages” under Kentucky law, which could include items such as bonuses, overtime pay, vacation pay and commissions. Notwithstanding the broad scope of the lien, the priority of the lien is limited.

    Priority. Even though the lien secures all amounts owed to the employee, the lien only has priority over a lender’s prior perfected security interest or mortgage for unpaid wages which became due to the employee within six months prior to the closing of the business. All other amounts owed to the employee do not have priority over a lender’s prior perfected security interest or mortgage but would have priority over a lender’s subsequent perfected security interest or mortgage.

    Process. Employees may enforce the Kentucky wage lien individually or through a class action. They must file a court action to enforce the lien within 60 days after the earlier of: (a) the date of the appointment of a receiver, trustee or assignee for the benefit of creditors, or (b) the date that the business is stopped, suspended or sold. Alternatively, an employee may file a claim with a person appointed to receive and report such claims, such as a receiver, trustee or assignee, within 60 days after such appointment.

    Receivers and Trustees. The Kentucky law places limits on a receiver or trustee who continues to operate a business after being appointed. The receiver or trustee is permitted to pay current expenses and governmental obligations and to reserve up to 20% of the remaining balance of the revenue of the business for contingent expenses, but then must pay employee wage claims prior to other expenses or debts.

    The Kentucky wage lien gives employees priority over a lender’s prior perfected security interest or mortgage on the assets of the employer; however, the priority of the lien is limited. Lenders with customers operating in Kentucky should consider strategies to mitigate the risk associated with the lien. For example, an asset-based lender could establish a reserve against the customer’s borrowing availability based on the customer’s weekly payroll amount. Taking precautions such as this should help to reduce the risk of loss for a lender due to the Kentucky wage lien.