Stakes are high when it comes to horse racing. Part of the lure of the track is testing one's luck; you can win big or lose it all. When it comes to the business side of the Thoroughbred industry, however, risk is not nearly as appealing.

Breeding and raising a Thoroughbred racehorse is an expensive process. The life cycle of a typical racehorse requires the involvement of a multitude of people outside of the owners, including stud farms, vets, trainers, consignors and sales companies. Each of these expends time and money in getting the racehorse from foal to finish line.

All too often (and much more so following the financial crisis) these individuals go unpaid for their services. When the horse finally brings in money through winnings or sales, which of these providers gets to collect their debt first? Answering this question requires creditors to have a basic understanding of how liens and security interests are created and perfected.

Although there are several categories of equine liens, the most prevalent (and most litigated) are (i) those arising under the Uniform Commercial Code (Article 9 security interests and agricultural liens) and (ii) statutory liens. The distinction between these equine liens and the applicable priority rules under Kentucky's Uniform Commercial Code ("UCC") determines a creditor's rights.

Article 9 Security Interests & Agricultural Liens

Article 9 of the UCC[1] applies to any (1) "transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract," and (2) "an agricultural lien." In its most basic form, an Article 9 security interest is created when a creditor uses an interest in a horse to secure payment or performance of an obligation.

Agricultural liens are of a different breed. KRS §355.9-102(e) defines an agricultural lien, in relevant part, as an interest (other than a security interest) in farm products:

(1) Which secures payment or performance of an obligation for:

(a) Goods or services furnished in connection with a debtor's farming operation...

2. Which is created by statute in favor of a person that:

(a) In the ordinary course of its business furnished goods or services to a debtor in connection with a debtor's farming operation...

3. Whose effectiveness does not depend on the person's possession of the personal property.

Kentucky's UCC contains a special provision that expands the definition of "farm products" to specifically include horses and equine interests without regard to whether the debtor is engaged in farming. KRS §355.9-102(ah)(5). Under Kentucky's UCC, an agricultural lien is a non-possessory lien.

Kentucky's Statutory Liens

Most states, including Kentucky, have statutory liens in favor of those who commonly provide services to horses. Kentucky recognizes three such liens, two of which will be elaborated on in this article:

(1) The Agister's Lien;[2]

(2) The Veterinarian's Lien;[3] and,

(3) The Stallion Service Lien.[4]

An Agister's Lien arises in favor of anyone that provides the "caring for, feeding and grazing" of a horse in exchange for compensation. The lien attaches regardless of whether the horse is permanently or temporarily boarded with the caregiver and lasts for one year after removal of the horse. The definition therefore affords protection not only to farms, but to consignors who temporarily board horses in connection with an auction.

On its face, the Agister's Lien statute permits, without regard to the existence of other liens, use of the "self-help" provision in KRS 376.400(2), provided that the creditor has possession of the horse and the board bill is at least forty-five days past due. Under this provision, an agister can, ostensibly, cause a sale of the horse and take possession of the proceeds. As discussed below, however, the propriety of this provision is doubtful when other liens and security interests exist.

The Stallion Service Lien arises in favor of a stallion's owner to secure payment of the stud fee. This lien does not attach to the mare and is enforceable for one year after the birth of the foal. To enforce the lien, the stallion keeper may file a lawsuit for enforcement or use the same affidavit/warrant process permitted by the Agister's Lien.

Competing Liens

Securing a lien on a horse is only the first step in recovering debt. While the above liens are sufficient to establish a creditor's interest, that interest remains unperfected (and thus subordinate) as to other creditors unless and until the creditor goes the extra mile to secure its place in line.

By virtue of Kentucky's provision classifying "equine interests" as "farm products," Kentucky's statutory liens fall within the scope of Article 9's definition of an agricultural lien. As such, they are subject to the requirements set out in Article 9 relating to perfection and priority.

Pursuant to KRS 355.9-322, conflicting perfected security interests and agricultural liens rank in priority according to the time of filing or perfection. Perfecting an equine lien, whether it be an Article 9 or statutory lien, can be accomplished by filing a financing statement with the Secretary of State. An un-filed, unperfected security interest or agricultural lien will come behind a perfected security interest - regardless of when the underlying obligation arose.

It merits mention that the applicability of the first to file or perfect rule with respect to the Agister's Lien appears at odds with the literal language of the Agister's Lien statute. To that end, although KRS 376.400(2) expressly permits recovery of debt through a sale of the horse, in practical effect this could improperly place an otherwise unperfected or subordinate agister in front of prior-perfected liens or security interests. This contradiction remains an unresolved issue in this field, however we are aware of at least one Fayette Circuit Court ruling in which a judge has deemed the first to file or perfect rule controlling.

As between competing statutory liens, the answer to priority disputes is more clearly defined. In that regard, the Stallion Service Lien statute expressly states that it is inferior to an Agister's Lien. An Agister's Lien will therefore always prevail over a Stallion Service Lien, regardless of when or if they are filed or perfected in relation to one another. In practice, however, and contrary to the statute, stud farm owners are often first to recover their debt by virtue of their ability to withhold the Stallion Service Certificate. A stud farm owner will generally not release the Stallion Service Certificate if there is an outstanding stud fee.

A Winning Strategy

For a safe bet, always file a financing statement with the Kentucky Secretary of State. Doing so ensures that an interest is placed in line with other competing interests. Moreover, whereas statutory liens only provide a one-year effective period, Article 9 financing statements are effective for five years. A filed financing statement will also resolve the due process concerns that accompany the self-help sale method permitted by the Agister's Lien.

As you can see, loans and costs incurred on a horse's behalf are subject to a complex set of rules; it often takes experienced legal counsel to discern who gets paid first when a horse brings in money. This is definitely one arena where the outcome is best not left to chance.