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KANSAS COMMENT, 1996

The Kansas Comments 1996 to Article 9 include a discussion of the more significant cases which have been decided in Kansas since the Kansas Comment 1983. The Official UCC Comments and the Kansas Comments 1965 have references to preexisting statutory and case law, as do the Official UCC and Kansas Comments 1983 for significant statutory and case law developments to that date. These comments will attempt to amplify the Official UCC Comments and to identify those holdings where there are significant differences in interpretation of the law. In addition, these Comments will indicate where Article 9 is modified by other laws, such as the Kansas Consumer Credit Code (K.S.A. 16a-1-101 et seq.).

General reference works on Article 9 include Clark, The Law of Secured Transactions Under the Uniform Commercial Code (1980, supplemented semi-annually) and White and Summers, Uniform Commercial Code, Practition Treatise Series, 4 Vols, (4th ed. 1995). A portion of the Kansas Comments 1983 to Article 9 is adapted from case analysis originally appearing in The Law of Secured Transactions under the Uniform Commercial Code © 1980 by Warren, Gorham & Lamont Inc. and the 1982 Cumulative Supplement No. 2 © 1982. Adapted with permission. All rights reserved.

Revisor's Note:

Former section 84-9-101 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

"To Be (Transformed) or Not to Be: The Transformation Versus Dual-Status Rules for Purchase-Money Security Interest Under Kansas' Former and Revised Article 9," Christopher Harry, 50 K.L.R. 1095 (2002).

Attorney General's Opinions:

Record of mortgage can be filed as a financing statement covering fixtures with the register of deeds in the county where the collateral is located if such record complies with the fixture filing requirements without using a UCC-1 form. 2009-19.

CASE ANNOTATIONS

1. Referred to; bankruptcy proceedings; secured note past due transferred; holder's claim not secured. E. F. Corporation v. Smith, 491 F.2d 826.

2. Where lease agreements were intended to create security interests under K.S.A. 84-1-201(37)(b), provisions of Article 9 of UCC applicable. CIT Financial Services, Inc. v. Gott, 5 Kan. App. 2d 224, 229, 231, 615 P.2d 774.

3. Lease of truck to debtor was true lease and not meant to be security; under facts, lessor could reclaim. In Re Intern. Plastics, Inc., 18 B.R. 583, 584 (1982).

4. Patent and trademark office filing system entirely preempts UCC with respect to patent assignments. In re Otto Fabric, Inc., 55 B.R. 654, 657 (1985).

5. Cited; code provisions to be construed to promote underlying purposes noted. Maxl Sales Co. v. Critiques, Inc., 796 F.2d 1293, 1296, 1297, 62 B.R. [168] [171] (1986).

6. Cited; action for failing to disclose existence of prior security interest, statute of limitations examined. Borg Warner Acceptance Corp. v. Kansas Secretary of State, 240 Kan. 598, 599, 731 P.2d 301 (1987).

7. Cited; preemption of state law governing secured transactions by federal statutes examined. Rural Gas, Inc. v. North Central Kan. Prod. Cred. Corp., 243 Kan. 109, 755 P.2d 529 (1988).

8. Federal filing as not required to perfect security interest in patents against trustee in bankruptcy examined. City Bank and Trust Co. v. Otto Fabric, Inc., 83 B.R. 780, 783 (1988).

9. Resolution of priority dispute between holders of nonpossessory statutory liens and security interest not governed by Article 9. National Supply Co. v. Case Oil & Gas, Inc., 13 Kan. App. 2d 430, 431, 772 P.2d 1255 (1989).

10. Agreement between small business association borrower and tractor seller was contract for sale/security agreement subject to UCC under facts stated. U.S. v. Ables, 739 F. Supp. 1439, 1445 (1990).

11. Statute applies to any transaction, regardless of the transaction's form, that creates a security interest in personal property or fixtures by contract. Born v. Born, 304 Kan. 542, 555, 374 P.3d 624 (2016).

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KANSAS COMMENT, 1996

This section, which conforms to the 1995 Official Text, is the "positive scope" section of Article 9, just as 84-9-104 is the "negative scope" section. While this section tells us what transactions are covered, 84-9-104 expressly excludes many transactions which might otherwise be covered. In determining whether a particular transaction is covered by Article 9, the two sections should always be read together, together with 84-1-201(37).

Subsection (1). Subsection (1)(a) extends the rules of Article 9 to all transactions intended to create a security interest in personal property and fixtures. Substance rules over form. In order to give a sense of the breadth of coverage, Official Comment 5 delineates and catalogues the types of personal property covered by Article 9: accounts, chattel paper, documents, instruments, general intangibles, and goods. Official Comment 5 is extremely useful because it indexes all types of collateral, and includes a roadmap on how to perfect a security interest in each type, as well as applicable priority rules and special provisions governing default for each of the types of collateral.

Perhaps the first rule of coverage is that form is irrelevant. There are no more distinctions based upon whether the transactions are a "chattel mortgage," a "conditional sale," or an "assignment of accounts receivable." There is only a unitary "security interest," although no penalty attaches to using the pre-UCC terminology. Another threshold rule is that transfers "absolute" in form may be disguised security interests and thus subject to Article 9. Pre-UCC Kansas cases so held (see, e.g., Boam v. Cohen, 94 K. 42, 145 P.559 (1915) and Home Finance v. Cox, 190 K. 553, 376 P.2d 884 (1962)), and more recent decisions under the UCC reinforce the point. Perhaps the best case is In re Joseph Kanner Hat Co., 482 F.2d 937 (2d Cir. 1973), where a bank failed to file a UCC financing statement covering the "absolute assignment" of a relocation claim. The court concluded that the assignment was really intended as security for a loan, so that failure to file was fatal in the debtor's bankruptcy.

The critical term "security interest" is defined in 84-1-201(37) (note the Definitional Cross Reference) to include leases intended as security. "Whether a lease is intended as security is to be determined by the facts of each case..." 84-1-201(37). The subsection essentially defines a lease as intended as a security interest when it is not terminable and extends beyond the useful life of the leased property, or when the lessee can acquire the property without consideration or for nominal consideration. The accounting or tax treatment of the lease is not controlling, and it can still be considered a security interest for Article 9 purposes if it meets those definitions. Therefore, the "lessor" will be required to file a financing statement in order to reclaim the property in case the "lessee" sells it, grants a security interest in it to another creditor, suffers a levy against it, or goes bankrupt.

Kansas adopted an optional provision, 84-1-209, suggested by New York drafters, that an agreement with a debtor or with an other creditor subordinating a creditor's right of payment to other creditors, is not a security interest. Such subordination is permitted by 84-9-316. Given the broad scope of Article 9, there had been some question whether a subordination agreement created a "general intangible" subject to the filing requirements of Article 9. 84-1-209, which was added by the Kansas Legislature in 1967, puts the matter to rest.

A somewhat related scope question involves a surety's right of subrogation. Is this right a "security interest" under this section, so that the surety should file a financing statement in order to obtain protection against competitors such as account assignees? In U.S. Fidelity & Guaranty Co. v. First State Bank, 208 K. 738, 494 P.2d 1149 (1972), a contractor's surety, who by reason of his performance was subrogated to the rights of either laborers and materialmen or the owner, was held to have an interest in retained funds in the hands of the owner which was superior to the rights of a bank which loaned money to the contractor after the bond was executed, even though the bank took as security for its loan an assignment of the contractor's rights. The court held that, since a surety's subrogation rights are creatures of equity and not consensual, the surety is not required to file an Article 9 financing statement to attain priority over the bank as an Article 9 assignee. In short, a surety's right of subrogation is not a "security interest" within the meaning of this subsection, and has priority. This Kansas decision is consistent with others throughout the country.

The Kansas Supreme Court has held that a bank's right of setoff is subject to a perfected security interest in proceeds. Bank of Kansas v. Hutchinson Health Services, Inc., 13 K.A. 2d 421, 773 P.2d 660 (1989). Some courts have held that a bank's right of setoff is subject to any Article 9 security interest under 9-201. National Acceptance Co. of America v. Virginia Capital Bank, 498 F. Supp. 1078 (E.D. Va. 1980).

Subsection (1)(b) extends the scope of Article 9 to the outright sale of accounts and chattel paper, even though such transactions are not "security interests" in the pure sense. They are covered because third parties would be misled if no financing statement was filed covering accounts (or possession given when chattel paper is sold). Making them subject to Article 9 puts third parties on notice. The "factoring" of accounts from a dealer to a bank or finance company requires the factor to file a financing statement showing itself as the secured party and the dealer as the debtor. If no financing statement is filed and the dealer goes bankrupt, the factor will probably lose the accounts. See 84-9-301(1)(b), 11 U.S.C. § 544, and Daly v. Shrimplin, 610 P.2d 397 (Wyo. 1980). Similarly, the sale and delivery of chattel paper (defined in 84-9-105(1)(b)) essentially to mean installment contracts) is covered by Article 9, and the financing agency should take possession of the paper in order to perfect. For the Kansas supreme Court's recognition that an outright sale of chattel paper is covered by Article 9, see United American State Bank & Trust Co. v. Wild West Chrysler Plymouth, Inc., 221 K. 523, 561 P.2d 792 (1977). On the other hand, the outright sale of a television set or a piece of equipment would not be covered by Article 9, and no filing would be necessary. By comparison, of course, an outright conveyance of real estate by warranty deed requires a recording to protect the right of the buyer against third parties without notice. K.S.A. 58-2221.

Subsection (2). This subsection makes it clear that Article 9 applies to transactions which are in substance security interests regardless of what they are called in the documentation, or how they might have been styled under pre-UCC law. Article 9 does not apply to statutory liens such as the repairman's lien found in K.S.A. 58-201, because such liens create security interests by statute, as a matter of public policy, and not by private contract. The statutory lien claimant need file no financing statement. Article 9 only covers consensual liens. However, 84-9-310 does set forth priority rules which govern the rights of a statutory lien claimant as against a competing Article 9 security interest. For example, under 84-9-310, a feedlot's lien for unpaid feed bills (K.S.A. 58-207) would probably have priority over a prior perfected security interest in the livestock, at least if the requirements of that section were met. See Kansas Comment 1983 to 84-9-310.

Subsection (3). This subsection warns that Article 9 may still apply to a secured obligation even though the obligation is itself secured by collateral outside the scope of Article 9. The best example is the pledge of a real estate mortgage note; the note itself is an Article 9 "instrument" which can only be perfected by possession, even though the underlying asset (that which gives the note most of its value) is real estate, which is outside the scope of Article 9. See 84-9-104(j). This example is set forth in Official Comment 4 as an illustration of the "two-tiered" perfection problem which runs throughout Article 9. The illustration indicates why the Official Comments are so useful for the practitioner and should always be consulted right after reading the text of a section and its definitional cross references. Another example of "two-tiered" perfection is presented in Madison National Bank v. Newrath, 275 A.2d 495 (Md. 1971), where a partnership interest in a shopping center was held to be personal property subject to the filing requirements of Article 9 (probably a "general intangible"), even though the underlying asset—the shopping center—was real estate. A mortgage on the shopping center itself would be excluded from Article 9 by 9-104(j), but an assignment of the partner's interest was covered. A third example, especially relevant in Kansas, would be the assignment of a vendor's interest under an installment land contract; the assignment would probably be subject to Article 9 as a "general intangible" even though the underlying real estate would be outside the scope of Article 9. See In re Freeborn, 617 P.2d 424 (Wash. 1980)(failure of assignee of vendor's interest to file financing statement fatal in assignor's bankruptcy). For a Kansas bankruptcy case which appears to hold the same thing, see In re Southworth, 34 U.C.C. Rep. 1372 (D. Kan. (Bankr.), 1982), 22 B.R. 376.

Revisor's Note:

Former section 84-9-102 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Section was also amended by L. 2007, ch. 90, § 65, but that version was repealed by L. 2007, ch. 195, § 60.

Law Review and Bar Journal References:

"Floor plan financing" under article 9 of UCC, Charles H. Oldfather, 14 K.L.R. 571, 588 (1966).

Secured transactions with the farmer, Van Smith, 35 J.B.A.K. 299, 338 (1966).

Subsection (1) discussed in "Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 16 K.L.R. 437, 439 (1968).

Real estate lease in Kansas, Richard L. Zinn, 17 K.L.R. 707, 721, 722 (1969).

Cited in article concerning sureties, Larry A. Withers, 10 W.L.J. 356, 357, 370 (1971).

Legislative survey, "Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 220, 221, 222 (1976).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 27 K.L.R. 301, 305 (1979).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 355 (1984).

"Commercial Law—Commercially Unreasonable Foreclosure Sales in the Context of a Surety Relationship—United States v. Lattauzio," John S. Clifford, 34 K.L.R. 175, 182 (1985).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 775, 780, 781, 782, 784, 787, 789, 790, 792, 794, 795, 796, 803, 804, 805, 813, 831 (2003).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

"Kansas's Unique Treatment of Agricultural Liens," Keith G. Meyer, 53 K.L.R. 1141 (2005).

Attorney General's Opinions:

Mortgage registration; instruments subject thereto. 86-137.

Access to filing information. 87-50.

Record of mortgage can be filed as a financing statement covering fixtures with the register of deeds in the county where the collateral is located if such record complies with the fixture filing requirements without using a UCC-1 form. 2009-19.

CASE ANNOTATIONS

1. Subrogation pursuant to surety contract not a "security interest" within meaning of statute. United States Fidelity & Guaranty Co. v. First State Bank, 208 Kan. 738, 749, 494 P.2d 1149.

2. Action for breach of warranty in assignment clause of security agreement governed by subsection (1) (b) of this section. United American State Bank & Trust Co. v. Wild West Chrysler Plymouth, Inc., 221 Kan. 523, 526, 561 P.2d 792.

3. Where "lease" agreements were intended to create security interests under K.S.A. 84-1-201(37)(b), provisions of Article 9 of UCC applicable. CIT Financial Services, Inc. v. Gott, 5 Kan. App. 2d 224, 228, 615 P.2d 774.

4. Lease of truck to debtor was true lease and not meant to be security; under facts, lessor could reclaim. In Re Intern. Plastics, Inc., 18 B.R. 583, 584, 585 (1982).

5. Assignment of payments from realty deed governed by Article 9 of UCC; trustee had priority over unperfected bank. In Re Southworth, 22 B.R. 376, 377, 379 (1982).

6. No perfected security interest in real estate contract as intangible personal property. Garnett State Savings Bank v. Tush, 232 Kan. 447, 452, 657 P.2d 508 (1983).

7. Cited; lease-purchase agreement under economic development revenue bond act (K.S.A. 12-1740 et seq.) not complete sale; filing requirements inapplicable. In re Petition of City of Moran, 238 Kan. 513, 519, 522, 713 P.2d 451 (1986).

8. Cited; certain formal requirements that must be met before security interest may be enforced against debtor examined. Maxl Sales Co. v. Critiques, Inc., 796 F.2d 1293, 1297, 62 B.R. [168] [172] [173] (1986).

9. Cited; applicability of Kansas law on unauthorized removal from state and sale of secured collateral examined. Farmers State Bank v. Production Cred. Ass'n of St. Cloud, 243 Kan. 87, 96, 755 P.2d 518 (1988).

10. Priority between right of setoff and perfected security interest examined. Bank of Kansas v. Hutchinson Health Services, Inc., 13 Kan. App. 2d 421, 426, 773 P.2d 660 (1989).

11. Perfection of security interest in instrument, mortgagee's assignment of notes and mortgages as security, relative priority of interests examined. Army Nat'l Bank v. Equity Developers, Inc., 245 Kan. 3, 14, 774 P.2d 919 (1989).

12. Agreement between small business association borrower and tractor seller was contract for sale/security agreement subject to UCC under facts stated. U.S. v. Ables, 739 F. Supp. 1439, 1445 (1990).

13. Article 9 inapplicable to priority dispute between two creditors concerning surplus proceeds from foreclosure sale of real estate. Kinsley State Bank v. Waters, 18 Kan. App. 2d 413, 417, 854 P.2d 311 (1993).

14. Cited where holder of security interest in personal property granted coverage as mortgage holder under loss-payee clause. Union State Bank v. St. Paul Fire & Marine Ins. Co., 18 Kan. App. 2d 466, 475, 856 P.2d 174 (1993).

15. Whether priority interest of purchase money security interest holder in fixtures extends to attached real estate fixtures examined. Capitol Fed'l Savings & Loan Ass'n v. Hoger, 19 Kan. App. 2d 1052, 1055, 880 P.2d 281 (1994).

16. Whether mineral income assignment amounts to an outright sale of an account pursuant to section examined. Oxy USA, Inc. v. Colorado Interstate Gas Co., 20 Kan. App. 2d 69, 76, 883 P.2d 1216 (1994).

17. Whether holder in due course immune to defense that transaction is illegal and nullified by other law examined. U.S.D. No. 207 v. Northland Nat'l Bank, 20 Kan. App. 2d 321, 331, 887 P.2d 1138 (1994).

18. Whether waiver of defenses contract provision is enforceable examined. Benedictine College v. Century Office Products, 853 F. Supp. 1315, 1320 (1994).

19. Whether lessor may acquire security interest in accounts receivable to protect ownership interest in leased property examined. Baldwin v. Hays Asphalt Constr., Inc., 20 Kan. App. 2d 853, 854, 893 P.2d 275 (1995).

20. Interest of estate in proceeds of crops planted held free of any claim or lien of creditor. In re Stout, 284 B.R. 511, 513 (2002).

21. Mentioned; UCC provides that security interest generally subordinate to judicial lien before the security interest is perfected. In re Barker, 358 B.R. 399, 406 (2007).

22. Bankruptcy trustee's attempted avoidance of lien on modular home denied; court distinguishes modular homes from mobile homes. In re Brouillette, 389 B.R. 214, 221 (2008).

23. Bank had lien in mortgagor's mobile home under Kansas' version of the Uniform Commercial Code. In re Brooks, 452 B.R. 809 (Bkrtcy. D. Kan. 2011).

24. Membership units in limited liability company which were not traded on any market were in nature of "general intangibles" for attachment and perfection under the facts of the case. In re Brown, 479 B.R. 112 (Bkrtcy. D. Kan. 2012).

25. Upon recharacterization of a transaction, a court must look beyond language of agreement to determine true nature of the interest granted. In re Brooke Capital Corp., 588 F. Appx. 834, 843 (10th Cir. 2014).

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KANSAS COMMENT, 1996

This section does not vary from the 1995 Official Text, and has partially rewritten the 1972 Official Text. 84-9-103 creates two basic rules for determining whose law applies when more than one jurisdiction has contact with the debtor and the collateral. Generally, in those situations in which the situs of the collateral is deemed to be controlling, the law of the jurisdiction of the situs will control. Where the drafters determined that the law of the situs was not as important as the location of the debtor, because the collateral moved or because the collateral was an intangible, the law of the jurisdiction where the debtor is located is considered controlling.

Where the location of the collateral is deemed controlling, a problem can arise if the situs of the collateral can or has moved. Many of the provisions look to the law of the situs of the collateral at the time the "last event" on which perfection is asserted. To paraphrase the rule, perfection is usually asserted when a security interest has attached and the proper filing has taken place, or when the security interest has attached and the secured party is in possession pursuant to agreement of the parties. Thus the "last event" will be the last of all the events necessary for asserting that the security interest has attached and any additional events necessary for perfection have occurred. There are usually four things that take place for perfection.

Attachment is controlled by 84-9-203(1) and requires three events. The first, 84-9-203(1)(a), is that the collateral is in the possession of the secured party pursuant to agreement, or that the debtor has signed a security agreement describing the collateral (and the land, if the collateral is crops). The second, (b), is the agreed upon value has been given (the consideration supporting the contract — the security agreement creating a security interest). This is normally the loan to the debtor. The third, (c), is that the debtor has rights in the collateral. If the debtor already owns the collateral, this event has occurred first. If the loan is made to allow the debtor to acquire the collateral, this event will have occurred when the debtor has rights in the collateral.

Perfection, the fourth event, is controlled by 84-9-303. It provides that the security interest is perfected when it has attached and the steps required for perfection have been taken. The usual steps for perfection are duly filing a financing statement, 84-9-302, or taking possession of the collateral, 84-9-305. Occasionally, perfection is automatic, as in 84-9-302(1)(d).

The four events which must usually have occurred for there to be a claim of perfection are: a security agreement or the agreed possession of the collateral, the value (consideration) has been given, the debtor has rights in the collateral, and fourth, the acts for perfection (a proper filing or possession by the secured party). The last event—collateral situs rule of 84-9-103 provides that the law of the state where the collateral is when the last of those events occurs, controls.

Choice-of-law provisions in the security agreement cannot control how to perfect a security interest, because third parties are involved. See 84-1-105(2). For example, if the debtor's ordinary factory equipment is located in Nebraska and is to remain there at the time the security agreement is entered into and the loan is made in Kansas, perfection must be accomplished by filing in Nebraska, using Nebraska's filing rules, not Kansas, even though the debtor may be headquartered here. This is because the equipment is in Nebraska when the last event on which the assertion of perfection is based, filing. In conclusion, the rule in multistate transactions is choosing whose law controls the place of filing to perfect, and the conflict of laws rules in this section generally take that matter out of the hands of the parties themselves.

Subsection (1). Paragraph (1)(b) codifies the "last event" rule. The place to file is determined by the state where the situs of the collateral is located when the last event occurs on which is based the assertion that the security interest is perfected. In the case described above, the filing should be accomplished in Nebraska using the rules under its 9-401 because the equipment is located in Nebraska.

Paragraph (1)(c) is a limited exception to the situs rule for the situation where a secured party is financing the purchase of collateral in one state and where it is contemplated it will then be removed and located in another state. For example, if ABC Corp., located in Kansas, purchases a new piece of machinery from a dealer in Missouri, a Kansas bank finances the purchase by a direct loan, but ABC, the Kansas debtor, plans to bring the machinery back to its plant in Kansas following preparation of the unit, the proper place for the bank to file is with the secretary of state in Topeka, using the rule in Kansas' 84-9-401 and not in Missouri, at least so long as the machinery will be coming home to Kansas within 30 days after the loan is made. For a case applying this rule, see In re Kokomo Times Publishing & Printing Corp., 301 F. Supp. 529 (S.D. Ind. 1968). If the creditor has any doubt whether the collateral will be removed from Missouri and brought to Kansas within the 30 day period, the Kansas bank should file financing statements in both states, in Kansas, using the rule in (1)(c) and in Missouri, using the last event rule in (1)(b). It should be noted the 30 day period runs from the time the debtor receives possession of the collateral.

Paragraph (1)(d) contains the four month rule, which controls when the debtor, or any one else such as a purchaser from the debtor, removes collateral from the original state. The rule is that a security interest perfected in another state, for example Missouri, continues perfected for four months after the collateral arrives in this state, Kansas. Subparagraph (i) provides that the perfection will lapse, however, if filing or possession is required to perfect the security interest in Kansas, and if that action is not taken within the four month period. It will also lapse if the perfection expires in Missouri, for failure to file a timely continuation statement, for example. If the perfection lapses, the lapse is retroactive and the interest is deemed to have been unperfected as to "purchasers" after removal from Missouri. "Purchase" and "purchaser" are defined in 84-1-201(32) and (33) and include virtually any voluntary transaction creating an interest in the property, not just sales. Thus an innocent purchaser, another secured creditor or the trustee in bankruptcy would prevail over the original secured party. Subparagraph (ii) provides that if the necessary action, such as filing, is taken within the four month period, the security interest continues perfected and there is no lapse and no gap in perfection. Subparagraph (iii) provides that a consumer buyer from a consumer seller where the goods have been brought into this state is subject to the same rules.

Paragraph (1)(d) uses the expression "but if action is required by part 3 of this article [the 84-9-300's, especially 84-9-302 and 84-9-304 to 84-9-306] to perfect the security interest...." For most security interests, there must be either a filing or possession to be perfected. For some types of transactions, however, there is automatic perfection, the primary examples being a purchase money security interest in consumer goods costing $1000 or less and security interests in some types of proceeds under 84-9-306. Because these security interests are automatically perfected in Kansas, no action would be required to perfect the security interest and the Missouri security interest will continue to be automatically perfected even if the collateral is brought to Kansas.

If the removal of the collateral is prohibited by the security agreement, the secured party would have a cause of action against the debtor, and there will often be a cause of action against others who dealt with and removed the collateral.

If refiling is accomplished within the four month period, the security interest is continuously perfected, as indicated above. If refiling is not accomplished until after the four month grace period, the security interest is newly perfected but will be subject to any intervening interests which have priority over an unperfected security interest. If refiling is not accomplished until after the four month period, it will be effective as a perfected security interest against third parties whose interests arise after the reperfection, but there may still be problems. For example, if ABC removed the machinery to Nebraska, the Kansas bank did not refile in Nebraska until five months after arrival in Nebraska, and ABC filed for bankruptcy six months after arrival, the trustee would not prevail as a lien creditor because of the reperfection. See 11 U.S.C. § 544(a). Since bankruptcy took place within 90 days after reperfection, however, the trustee would probably prevail under 11 U.S.C. § 547 because the reperfection would constitute a "transfer" of the machinery to the bank for antecedent debt and within 90 days of bankruptcy and would be a "voidable preference."

Subsection (2). This subsection deals with titled vehicles in a multistate setting. Since virtually all states now have statutes which require that liens be noted on the certificate of title (see K.S.A. 8-135) including the neighboring state of Oklahoma (which was one of the last to adopt it) most motor vehicle cases in the future will be decided under this subsection. Under subsection (2)(b), a security interest perfected by notation of the lien on the title remains perfected when the vehicle is taken to another state and not retitled, even beyond the four-month period which would apply under the prior subsection. See, e.g., In re Smith, 311 F. Supp. 900 (W.D. Va. 1970), aff'd sub nom. Callaghan v. Commercial Credit Corp., 437 F.2d 898 (4th Cir. 1971); In re Foster, 611 P.2d 232 (Okla. 1980). In the normal case, a debtor who changes residence from one state to another will get a new title issued in the new state, and the lien from the former state will be noted on the new title, thus assuring continued perfection. But if the debtor fraudulently gets a new "clean" title issued in the state of removal, who prevails as between the lender's lien in the original state, and an innocent purchaser claiming through the "clean" title in the state of removal?

The first sentence of paragraph 84-9-103(2)(b) provides "Except as otherwise provided in this subsection [84-9-103(2)], perfection and the effect of perfection or nonperfection of the security interest are governed by the law (including the conflict of laws rules) of the jurisdiction issuing the certificate [a]until four months after the goods are removed from that jurisdiction and [b] thereafter until [c] the goods are registered in another jurisdiction, [d] but in any event not beyond surrender of the certificate." The rule provides that the originating state's law (and perfection by notation on that state's certificate of title) will continue:

a. for four months following the removal of the goods;

b. it will continue to be controlling thereafter if the goods are not reregistered;

c. i. if the goods are reregistered thereafter and the title shows the lien, the security interest is perfected in the new state, ii. if the goods are reregistered thereafter and the title does not show the lien, the security interest is no longer perfected; iii. if the goods are registered within the four month period by surrendering a counterfeit "clean" certificate of title, the originating state's law will continue to control until the expiration of four months; and

d. in any event, the four month grace period will be shortened and the originating state's law does not control if the true certificate of title is surrendered, even if four months have not passed. At that point the new state's law controls. If the true certificate is surrendered and the new certificate does not show the lien, the new state's law controls and the secured party is no longer perfected. If the true certificate is surrendered and the new certificate shows the lien, the secured party is perfected by the new state's law.

If clean title is issued by the new state, some innocent buyers are protected by 84-9-103(2)(d). Paragraph (2)(d) provides that, if the buyer in the new state is not in the business of selling goods of that kind, the innocent buyer prevails under the clean new title over the old state secured party. The buyer can therefore be a consumer or a business, as long as it is using the vehicle and is not a dealer in vehicles of that kind. If the new, competing interest in the vehicle covered by the certificate of title is not such a buyer, but is a used car dealer, a bank making a loan against the second title, or the debtor's trustee in bankruptcy, paragraph (2)(d) does not control and the matter is thrown back into subsection (2)(b).

Subsection (3). In which state should the secured party file if the collateral is an intangible with no physical situs or if the collateral is goods normally moved from one jurisdiction to another but is not subject to the certificate of title law? Under Paragraph (3)(b), the proper place to file the financing statement is the "location" of the debtor, which means the debtor's place of business or chief executive office if it has more than one place of business. Paragraph (3)(d). The creditor must determine whether the goods are "mobile" and "normally used in more than one jurisdiction." The courts have held that this definition fits self-propelled oil drilling rigs (Ray v. City Bank & Trust Co. of Natchez, 358 F. Supp. 630 (S.D. Ohio 1973)) and excavating equipment (Westinghouse Credit Corp. v. Rovi Property & Management Corp., 607 S.W.2d 682 (Ky. App. 1980)), but not coal mining equipment (Ingersoll-Rand Financial Corp. v. Nunley, 31 U.C.C. Rep. 1114 (W.D. Va. 1981)). Given the uncertainty of the definition, a careful creditor will perfect both ways, under the law of the location of the debtor for mobile goods and the law of the location of the collateral for ordinary tangible collateral.

An excellent example of mobile goods, and one which is set forth expressly in the paragraph (3)(a) is commercial harvesting machinery. For example, if the debtor is a custom cutter headquartered in Wichita, Kansas would be the proper place to file the financing statement even though the harvesting machinery goes from Texas to North Dakota during the cutting season. Paragraph (3)(a) also provides that the debtor's chief place of business is also the place to file where the collateral is accounts or general intangibles. For example, a Kansas lender should file the financing statement in Utah under Utah law if the borrower is a Utah-based corporation with a branch plant in Kansas and the collateral is accounts receivable.

Subsections (4) and (5). Subsection (4) states that the rules of subsection (1) apply to possessory security interests in chattel paper, while the rules in subsection (3) apply to nonpossessory security interests in chattel paper. Subsection (5) makes it clear that a security interest covering extracted minerals (primarily oil and gas), as well as the accounts arising from sale at the wellhead, should be perfected by filing according to the law in the state where the well is located. If the well is located in Kansas, 84-9-401(1)(b) makes it clear that local filing, not central filing, is required. See also 84-9-402(5) and 84-9-403(7).

Subsection (6). This new subsection states the normal choice of law rules for investment properties and parallels the rules for chattel paper. Most methods of perfection involve a. control of the asset or b. control of the entity which owes the asset to the debtor, such as a mutual fund, or c. filing or d. automatic perfection. Perfection and its consequences for certificated securities is normally controlled by the jurisdiction where the security is located, while for uncertificated securities, the law of the issuer's jurisdiction controls. Perfection and its consequences for a security entitlement (defined in 84-8-501 as an account with a securities intermediary) or security account (defined in 84-8-501) are governed by the law of the jurisdiction in which the securities intermediary (defined in 84-8-102(14) as the clearing corporation or broker that has the account) is located. This is a form of the situs of the underlying obligor rule. Commodity contracts and commodity accounts (both of which are defined in 84-9-115(1)) are also governed by the commodity intermediary's jurisdiction. Paragraph (f) is a special rule governing automatic perfection and perfection by filing under 84-9-115. Both of these are governed by the law of the debtor's location.

Revisor's Note:

Former section 84-9-103 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Security interests on farm products, Van Smith, 35 J.B.A.K. 299, 338 (1966).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 16 K.L.R. 437, 441 (1968).

Legislative survey, "Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 221, 222, 223 (1976).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 134 (1975).

Survey of contracts, UCCC and UCC, Franklin E. Lynch and Larry Schneider, 15 W.L.J. 324, 333, 334, 335 (1976).

"Right of Secured Party to Recover Proceeds Commingled in Debtor's Bank Account," Kristen D. Balloun, 28 K.L.R. 325, 328 (1980).

"Agricultural Credit and The Uniform Commercial Code: A Need for Change?" Keith G. Meyer, 34 K.L.R. 469, 493 (1986).

"Clear Title: A Buyer's Bonus, A Lender's Loss—Repeal of UCC § 9-307(1) Farm Products Exception by Food Security Act § 1324 [7 U.S.C. § 1631]," Mark V. Bodine, 26 W.L.J. 71, 77, 95 (1986).

"To Be (Transformed) or Not to Be: The Transformation Versus Dual-Status Rules for Purchase-Money Security Interest Under Kansas' Former and Revised Article 9," Christopher Harry, 50 K.L.R. 1095 (2002).

"Conflict of Laws in Kansas: A Guide to Navigating the Dismal Swamp," Terri Savely Bezek, 71 J.K.B.A. No. 8, 21 (2002).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 773, 853 (2003).

CASE ANNOTATIONS

1. Chief place of business of purchasers of truck tractors used in interstate commerce was Kansas; lien required to be perfected hereunder; security interest unprotected. In re Dobbins, 371 F. Supp. 141, 143, 144, 145.

2. Four-month period is not grace period; absolute period of protection; failure to determine whether Kansas sale occurred within period, error. American State Bank v. White, 217 Kan. 78, 79, 80, 81, 82, 83, 84, 85, 86, 535 P.2d 424.

3. Collateral brought into Kansas subject to perfected security interest in another state remains subject to that security interest for period provided in other state or 4 months after removal, whichever is lesser; secured party must perfect interest in this state as provided in K.S.A. 84-9-302 et seq. Victory Nat'l Bank of Nowata v. Stewart, 6 Kan. App. 2d 847, 850, 851, 853, 636 P.2d 788 (1981).

4. Oklahoma bank did not perfect security interest in motor vehicle; its interest was subordinate to Kansas purchaser. Victory Nat'l Bank of Nowata v. Stewart, 6 Kan. App. 2d 847, 850, 851, 853, 636 P.2d 788 (1981).

5. Buyer not in ordinary course of business without actual knowledge of security interest (K.S.A. 84-9-301(1)(c)) has priority over unperfected interest. Broadway National Bank v. G & L Athletic Supplies, Inc., 10 Kan. App. 2d 43, 45, 46, 691 P.2d 400 (1984).

6. Unperfected secured creditor may recover from auction company for unauthorized sale of encumbered collateral. First Nat. Bank of Amarillo v. SW Livestock, Inc., 616 F. Supp. 1515, 1516, 1521 (1985).

7. Cited; applicability of other states' laws regarding perfection or nonperfection therein, unsecured knowledgeable creditor disqualified as purchaser examined. Farmers State Bank v. Production Cred. Ass'n of St. Cloud, 243 Kan. 87, 95, 97, 755 P.2d 518 (1988).

8. Auction house agent liable for conversion where owner lacked authority to sell, notwithstanding lack of knowledge of security interest. First Nat. Bank v. Southwestern Livestock, Inc., 859 F.2d 847, 848 (10th Cir. 1988).

9. Law of jurisdiction issuing title governs perfection of security interest until four months after removal. In re Ball, 281 B.R. 706, 708 (2002).

10. Creditor's security interest no longer noted on vehicle's certificate of title held unperfected. In re Trible, 290 B.R. 838, 547 (2003).

11. Mentioned; purchase money character of the obligation was not lost through refinancings. In re Jackson, 358 B.R. 412, 417 (2007).

12. Bankruptcy case involving vehicle financing; a security interest may be part purchase-money and part non-purchase money. Citifinancial Auto v. Hernandez-Simpson, 369 B.R. 36, 45, 46 (2007).

13. In absence of agreement, payments are allocated first to nonpurchase-money debt of trade-in vehicle then to purchase money debt. In re Kellerman, 377 B.R. 302 (2007).

14. Creditor's purchase money security interest secures financed negative equity used to pay off debt on trade-in vehicle; bankruptcy case. In re Ford, 387 B.R. 827, 831, 832 (2008).

15. Negative equity in vehicle trade-in is not a purchase money obligation; bankruptcy case. In re Padgett, 389 B.R. 203, 210 (2008).

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KANSAS COMMENT, 1996

This section, which should be read together with 84-9-102, excludes a number of secured transactions from the scope of Article 9. It does not vary from the 1995 Official Text.

Subsection (a). Subsection (a) recognizes that security interests regulated by federal statutes are excluded from Article 9 to the extent that the federal statute governs the rights of the parties. Although the subsection expressly mentions the Ship Mortgage Act of 1920, this federal statute will not make many waves in Kansas until the Kaw River is made navigable for ocean-going vessels. A federal statute of greater relevance is the FAA Act of 1958, which establishes a special recordation system for security interests in aircraft, as well as replacement engines, propellers and accessories. 49 U.S.C. § 1403. The secured party is required to file a notice of its lien with the FAA central office in Oklahoma City; filing a financing statement under Article 9 is a useless act.

However, although Article 9 recognizes this filing preemption both in this subsection and in 84-9-302(3)(a), aircraft security interests are not entirely excluded from the scope of Article 9. In fact, priority and default problems should continue to be resolved under the UCC, since the federal statute does not purport to occupy this portion of the law of secured transactions. For example, the weight of authority holds that a buyer in the ordinary course of business from an aircraft dealer takes free of a security interest in the aircraft properly filed with the FAA, under the priority rule of 84-9-307(1). Aircraft Trading and Services, Inc. v. Braniff, Inc., 819 F.2d 1227 (2nd Cir. 1987); Idabel National Bank v. Tucker, 544 P.2d 1287 (Okla. App. 1975); Haynes v. GECC, 582 F.2d 869 (4th Cir. 1978); Sanders v. M.D. Aircraft Sales, Inc., 575 F.2d 1086 (3d Cir. 1978); contra: Dowell v. Beech Acceptance Corp., 476 P.2d 401 (Cal. 1970), cert. denied 404 U.S. 823. Other federal statutes which preempt UCC filing but not necessarily the other aspects of Article 9, such as priorities and rights upon default, include the Interstate Commerce Commission Act relating to filing security interests against railroad rolling stock (49 U.S.C. § 20(c)); the federal statute establishing a special certificate of title apparatus for commercial motor vehicles governed by the ICC (49 U.S.C. § 313); the 1976 Copyright Act, which authorizes the recording of copyright assignments in the federal copyright office (17 U.S.C. § 205); the federal trademark statute (15 U.S.C. § 1060) relating to assignment of trademarks; and the federal patent statute (35 U.S.C. § 261) authorizing the assignment of patents.

Although the federal statutes mentioned above preempt Article 9 insofar as its filing requirements are concerned, federal agencies which occupy the role of secured creditor are not exempt from the filing rules of Article 9 if the statutes set forth above do not apply. For example, the SBA or the FmHA must play by the same rules as commercial banks, finance companies, credit unions, and other private lenders. See United States v. Kimbell Foods, Inc., 440 U.S. 715 (1979).

Subsection (b). Landlord's liens are excluded from the scope of Article 9 because they are nonconsensual and are intimately involved in realty. Because such liens are not for "services and materials with respect to goods," they are not subject to the special priority rule found in 84-9-310. Thus, when an Article 9 security interest is in competition with a landlord's claim, 9-201 generally provides that the Article 9 claimant prevails. Any security interest contained in the lease agreement is subject to Article 9, and failure to perfect can be fatal. Residential liens are restricted by K.S.A. 58-2565 and 58-2567. K.S.A. 58-227 provides for a lien on mobile or manufactured homes, and additional liens may be enacted in the future.

Subsection (c). Liens for services or materials given by statute or common law are excluded from Article 9, like landlord's liens, because they are nonconsensual. Unlike landlord's liens, however, priority conflicts between a lien under this subsection and an Article 9 security interest are governed by 84-9-310; the nonconsensual lien claimant normally comes out the winner, either by the terms of the statutory lien or under the language of 84-9-310. See Kansas Comment 1996 to 84-9-310. Lien claimants should check with the provisions of K.S.A. 58-201 et seq. regarding individual liens, because its provisions are more relaxed than the requirements of 84-9-310.The same result might well obtain in Kansas, where a feeder's lien is provided in K.S.A. 58-207.

Subsection (d). This subsection recognizes that wage assignments as security for consumer debt raise special social problems and thus would not be covered by Article 9. In Kansas, most wage assignments are outlawed under the Uniform Consumer Credit Code, K.S.A. 16a-3-305. Thus, they could not be used for security purposes anyway. However, if the "earnings" are not true wages, the UCCC may not prohibit the assignment and it may not be excluded from Article 9 under this subsection. For example, in Massachusetts Mutual Life Insurance Co. v. Central Penn National Bank, 372 F.Supp. 1027 (E.D. Pa. 1974) aff'd mem. 510 F.2d 970 (3d Cir. 1975), a general agent for a life insurance company assigned to a bank his right to renewal commissions. The court held that such an assignment was covered by Article 9, on the ground that renewal commissions are more in the nature of accounts receivable than "wages, salary or other compensation of an employee." In such a case, the lender must file a financing statement in order to retain perfected status.

Subsection (e). A transfer by a government or governmental agency as security for a public debt is a highly specialized transaction, and thus excluded from Article 9. One example might be the assignment of future rents from dormitories pledged by a public building commission under a revenue bond indenture. Such a transaction would be governed by the enabling legislation but not Article 9.

Subsection (f). This subsection excludes from Article 9 certain transfers of accounts and chattel paper which have little to do with commercial financing transactions. For example, incidental sales of accounts or chattel paper are excluded. Although transfer of more than a single account would be covered by Article 9 and might trigger its filing requirements. See Kansas Comment 1996 to 84-9-302.

Subsection (g). If a debtor assigns to his bank the cash surrender value of his whole life insurance policy as collateral for a loan, the assignment would not fall within the scope of Article 9 and the bank would not need to file a financing statement in order to perfect its interest. Instead, the bank would normally notify the insurance company of its interest. On the other hand, if the creditor's interest in the insurance policy is merely "derivative," as when it claims a cash payout as proceeds of collateral following a casualty loss, Article 9 comes back into play by way of 84-9-306.

Subsection (h). If X obtains a personal judgment against Y (even though the judgment might be reversed on appeal), and then assigns the right to collect on the judgment as collateral for a loan, this subsection exempts the assignment from the scope of Article 9. As a practical matter, the assignee is not required to file a financing statement in order to remain perfected as against other creditors of the judgment creditor. On this point, see In re Law Research Service, Inc., 498 F.2d 836 (2d Cir. 1974). However, an assignment made before a judgment is obtained could constitute an account, instrument, chattel paper, document or general intangible, depending on the source of the claim, still subject to the filing requirements of Article 9. See Estate of Hill, 557 P.2d 1367 (Ore. App. 1976).

Subsection (i). Kansas recognizes both common law setoff and setoff given to banks by statute. K.S.A. 9-1206. From either source, the right of setoff is excluded from Article 9 because it is essentially nonconsensual, available since the days of Rome as a creature of equity. Merely adding "consensual security interest" language to a bank deposit agreement should not make the filing requirements of Article 9 apply, particularly since deposit accounts are independently excluded under subsection (1). Thus, a bank relying on setoff or consensual lien against a customer's checking or savings account upon default on a loan need not concern itself with Article 9. If the customer files bankruptcy, failure of the bank to file a financing statement covering its potential right of setoff will not be fatal. On the other hand, exclusion from Article 9 in no way waters down the common-law requirements of mutuality of debt and the necessity of maturity of debt before setoff is exercised. For a general discussion of bank setoff, see Clark, "Bank Exercise of Setoff: Avoiding the Pitfalls," 98 Bank L.J. 196 (1981).

Who has priority as between a bank's right of setoff and an Article 9 security interest in the bank accounts as identifiable cash proceeds under 84-9-306? The weight of authority around the country gives priority to the Article 9 security interest either by invoking the general priority rule of UCC § 9-201 (see, e.g., Citizens National Bank of Whitley County v. Mid-States Development Co., 380 N.E.2d 1243 (Ind. App. 1978)), or on a theory of mutuality of debt (see, e.g., Commercial Discount Corp. v. Milwaukee Western Bank, 214 N.W.2d 33 (Wis. 1974)). See Balloun, "Right of Secured Party to Recover Proceeds Commingled in Debtor's Bank Account," 28 K.L.R. 325 (1980). In Tuloka Affiliates, Inc. v. Security State Bank, 229 K. 544, 627 P.2d 816 (1981), the Kansas supreme court, in a 4-3 decision, held that a bank's right to receive funds held in an account as payment of a debt prevailed over a competing Article 9 creditor's claim to the account as identifiable cash proceeds of an inventory loan under 84-9-306. The bank's application of the account was expressly held not to be a seizure of funds through setoff, and was carefully distinguished by the court on that ground. The bank's application of funds was against the account of Corporation X, when the borrower in default was Corporation Y, with both corporations being owned by the same individual. Bank of Kansas v. Hutchinson Health Services, Inc., 246 Kan. 83, 785 P.2d 349 (Kan. 1990), specifically recognized that a perfected security interest in proceeds has priority over a bank's claim of set off. There is also authority that an unperfected security interest would prevail by the force of 84-9-201 over a bank's right of setoff. National Acceptance Co. of America v. Virginia National Bank, 498 F. Supp. 1098 (E.D. Va. (1980).

Subsection (j). Perhaps the most important exclusion in 84-9-104 is "the creation or transfer of an interest in or lien on real estate, including a lease or rents thereunder." To a large extent, the exemption in this subsection is a reflection of the general scope provision in 84-9-102, that Article 9 only applies to security interests in personal property and fixtures. If a mortgage on Greenacre is involved, the lender must record under the Kansas real estate mortgage statute (K.S.A. 58-2221). The same is true for real estate leases and assignments of rent under the lease; these are expressly excluded from the scope of Article 9. See In re Bristol Associates, Inc., 505 F.2d 1056 (3d Cir. 1974). In Kansas, the assignment of an oil and gas leasehold interest is real estate for recording purposes, so that the assignment must be recorded under the real estate statute rather than Article 9. Ingram v. Ingram, 214 K. 415, 521 P.2d 254 (1974). See Nelson, "Mineral Lease Exemptions from UCC Coverage for Security Purposes," 23 K.L.R. 267 (1975). The rationale in Ingram would presumably extend to the assignment of royalty interests as security for a loan. On the other hand, the Kansas court of appeals has suggested that a partner's share of the proceeds flowing from an oil and gas contract is personal property subject to Article 9. Wellsville Bank v. Nicolay, 7 K.A.2d 172, 638 P.2d 975 (1982).

K.S.A. 84-9-319 should be consulted regarding the statutory perfected security interest in the production and proceeds from the first purchaser. See 84-9-319 and Kansas Comment 1996.

Other types of collateral are closely related to real estate but in fact constitute personal property. A classic example is a vendor's interest in an installment land contract. See Kansas Comment 1983 to 84-9-102. If the creditor has any question whether a particular interest is realty or personal property, he should perfect both ways.

Subsection (k). The assignment of a tort claim as security for a loan is rather far removed from ordinary commercial financing and is thus excluded from the scope of Article 9 under this subsection. This means that the creditor need not file a financing statement in order to perfect. However, if a particular tort claim is never described in the security document, the omission can be fatal in spite of the exclusion. See, e.g., In re Ore Cargo, Inc., 544 F.2d 80 (2d Cir. 1976).

Subsection (l). This subsection excludes a transfer of any interest in a "deposit account." This would include the pledge of a savings passbook, for example. Such a pledge would not be governed by the rules of Article 9; instead, the creditor must look to the common law or any special statute on point. The leading Kansas case is Walton v. Piqua State Bank, 204 K. 741, 466 P.2d 316 (1970), where the court held that the pledge of a savings passbook was excluded from Article 9 by virtue of this subsection but still could be the subject of a common law pledge. Alternatively, the court suggested that the lender could take a formal assignment of the passbook without taking possession, although the court never addressed the question of who would prevail as between a pledgee and another creditor claiming under a written assignment. In either case, however, the transfer would be outside the scope of Article 9.

The exclusion in this subsection only applies to a deposit account claimed as original collateral; if the deposit account is proceeds obtained from disposition of Article 9 collateral such as goods, 84-9-306 comes into play.

The definition of "deposit account" in 84-9-105(1)(e) does not include certificates of deposit. These pieces of paper would constitute "instruments" under 84-9-105(1)(i), which are legitimate Article 9 collateral. For cases upholding this point, see Wightman v. American National Bank of Riverton, 610 P.2d 1001 (Wyo. 1980) and Southview Corp. v. Kleberg First National Bank, 512 S.W.2d 817 (Tex. Civ. App. 1974).

Subsection (m). This provision is new to the 1995 Official Text, and was added by the 1995 amendments. The rights to proceeds of a written letter of credit can be made subject to a security interest, but the transfer of the letter of credit is not subject to Article 9.

Revisor's Note:

Former section 84-9-104 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Subsection (a) mentioned in reference to code not applying to security interests in airplanes since congress has preempted the field, J. Eugene Balloun, 16 K.L.R. 437, 440 (1968).

Subsection (j) mentioned in discussion of real estate lease in Kansas, Richard L. Zinn, 17 K.L.R. 707, 722 (1969).

Cited in article concerning sureties, Larry A. Withers, 10 W.L.J. 356, 370 (1971).

Mineral lease exemptions from UCC coverage for security purposes, Bryan E. Nelson, 23 K.L.R. 367 (1975).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 132 (1975).

Legislative survey, "Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 220 (1976).

"Right of Secured Party to Recover Proceeds Commingled in Debtor's Bank Account," Kristen D. Balloun, 28 K.L.R. 325 (1980).

"Commercial Law—Problems with Identifiable Proceeds and Transfers in Ordinary Course in Floor Plan Financing," Richard L. Cram, 30 K.L.R. 478, 485 (1982).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 354, 355, 360 (1984).

"Agricultural Credit and The Uniform Commercial Code: A Need for Change?" Keith G. Meyer, 34 K.L.R. 469, 502 (1986).

"Clear Title: A Buyer's Bonus, A Lender's Loss—Repeal of UCC § 9-307(1) Farm Products Exception by Food Security Act § 1324 [7 U.S.C. § 1631]," Mark V. Bodine, 26 W.L.J. 71, 72 (1986).

"Taxation: Credit Union Share Accounts Subject to Federal Tax Levy [ United States v. Bell Credit Union , 860 F.2d 365 (10th Cir. 1988)]," Donna F. Bohn, 28 W.L.J. 442, 454 (1989).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

Attorney General's Opinions:

Access to filing information. 87-50.

CASE ANNOTATIONS

1. Common-law pledge is given recognition hereunder with respect to any deposit, savings, passbook or like account maintained with a bank, savings and loan association, credit union or like organization. Walton v. Piqua State Bank, 204 Kan. 741, 753, 754, 466 P.2d 316.

2. Applied with other sections of code; assignment of oil and gas lease excluded from provisions; enforcement of unrecorded lease. Ingram v. Ingram, 214 Kan. 415, 417, 418, 422, 423, 521 P.2d 254.

3. Bank's application of funds in debtor's account to antecedent debt should not be considered transaction in ordinary course of business to defeat perfected security interest (dissenting opinion). Toluka Affiliates, Inc. v. Security State Bank, 229 Kan. 544, 553, 627 P.2d 816.

4. Considered in action by creditor under floor plan arrangement to recover moneys debited from checking account. Tuloka Affiliates, Inc. v. Security State Bank, 229 Kan. 544, 627 P.2d 816 (1981).

5. UCC does not apply to interests in or liens upon real estate. Garnett State Savings Bank v. Tush, 232 Kan. 447, 452, 657 P.2d 508 (1983).

6. Exclusion under (f) must include both delegation of duty and assignment of right to payment to same person; assignment of rights in contract not transfer of deposit account under (l). First Nat'l Bank of Gaylord v. Autrey, 9 Kan. App. 2d 96, 97, 673 P.2d 448 (1984).

7. Cited; lease-purchase agreement under economic development revenue bond act (K.S.A. 12-1740 et seq.) not complete sale; filing requirements inapplicable. In re Petition of City of Moran, 238 Kan. 513, 519, 522, 713 P.2d 451 (1986).

8. Subsection (i) construed to mean that bank exercising setoff need not comply with article 9 requirements to assert right. Bank of Kansas v. Hutchinson Health Services, Inc., 12 Kan. App. 2d 87, 92, 93, 735 P.2d 256 (1987).

9. Secured party has no interest in lease to real estate holding property subject to security interest. Riley State Bank v. Spillman, 242 Kan. 696, 702, 703, 750 P.2d 1024 (1988).

10. Cited; preemption of state law governing secured transactions by federal statutes examined. Rural Gas, Inc. v. North Central Kan. Prod. Cred. Corp., 243 Kan. 109, 115, 755 P.2d 529 (1988).

11. Federal filing as not required to perfect security interest in patents against trustee in bankruptcy examined. City Bank and Trust Co. v. Otto Fabric, Inc., 83 B.R. 780, 782 (1988).

12. Priority between right of setoff and perfected security interest examined. Bank of Kansas v. Hutchinson Health Services, Inc., 13 Kan. App. 2d 421, 426, 773 P.2d 660 (1989).

13. Resolution of priority dispute between holders of nonpossessory statutory liens and security interest not governed by Article 9. National Supply Co. v. Case Oil & Gas, Inc., 13 Kan. App. 2d 430, 431, 772 P.2d 1255 (1989).

14. Perfection of security interest in instrument, mortgagee's assignment of notes and mortgages as security, relative priority of interests examined. Army Nat'l Bank v. Equity Developers, Inc., 245 Kan. 3, 14, 774 P.2d 919 (1989).

15. Assignment to right to payments under annuity contract is subject to filing provisions of code. In re Vinzant, 108 B.R. 752, 755, 756, 757 (1989).

16. Priority between bank's perfected security interest and state agency's right of setoff examined. Bank of Kansas v. Hutchinson Health Services, Inc., 246 Kan. 83, 85, 785 P.2d 1349 (1990).

17. Certificate of deposit marked "nontransferable" noted as deposit account under K.S.A. 84-9-105(e); lien on deposit account excluded from article nine. Bank IV Topeka v. Topeka Bank & Trust Co., 15 Kan. App. 2d 341, 349, 807 P.2d 686 (1991).

18. Rent assignment clause in real estate mortgage did not create lien in rents. In re Stanley Station Associates, L.P., 139 B.R. 990 (1992).

19. Security interest in crops given by owner attaches only owner's share under crop-share lease. Colorado Nat'l Bank-Longmont v. Fegan, 16 Kan. App. 2d 662, 665, 827 P.2d 796 (1992).

20. Conservation reserve program payments properly characterized as rents; not farm products; FDIC's filing ineffective. In re Zweygardt, 149 B.R. 673, 674, 675 (1992).

21. Article 9 inapplicable to priority dispute between two creditors concerning surplus proceeds from foreclosure sale of real estate. Kinsley State Bank v. Waters, 18 Kan. App. 2d 413, 417, 854 P.2d 311 (1993).

22. Whether priority interest of purchase money security interest holder in fixtures extends to attached real estate fixtures examined. Capitol Fed'l Savings & Loan Ass'n v. Hoger, 19 Kan. App. 2d 1052, 1055, 880 P.2d 281 (1994).

23. Whether the KUCC requires any mention of specific obligation secured examined. Baldwin v. Hays Asphalt Constr., Inc., 20 Kan. App. 2d 853, 856, 893 P.2d 275 (1995).

24. Lien created under K.S.A. 58-201 has priority over perfected security interest created under article 9 of UCC. Security Benefit Life Ins. Corp. v. Fleming Companies, Inc., 21 Kan. App. 2d 833, 840, 908 P.2d 1315 (1995).

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KANSAS COMMENT, 1996

This section, which does not vary from the 1995 Official Text, defines and explains certain key terms used in Article 9. The use of terms applicable to pre-UCC security forms might imply that prior law referable to that form is still applicable to Article 9. Consequently, terms have been selected which have no common law or statutory roots associating them to a particular form of security transaction. Other key definitions are found in 84-9-106 to 84-9-109 and in 84-1-201, and often as part of the substantive section involved. Since the UCC relies heavily on "words of art," which the drafters have defined, it is imperative that the practitioner be sensitive to the statutory definitions which apply in a given case. Sometimes Noah Webster would be shocked. For example, the term "buyer" in 84-1-201(9) is not broad enough to include a lender, while the term "purchaser" in 84-1-201(32) and (33) is broad enough, and can include any voluntary transferee, even donees. UCC cases often stand or fall on such fine definitional distinctions.

With respect to the definitions found in this section, several points should be made. The transaction which gave rise to the term is often part of the definition. The definition of "account debtor" includes only persons liable on accounts, chattel paper or other intangibles. Other persons owing money arising from other transactions are not account debtors. "Account debtor" in subsection (1)(a) becomes applicable primarily in 84-9-318 and 84-9-502. The definition of "chattel paper" included in subsection (1)(b) becomes critical to an understanding of the priority rule of 84-9-308. The definition of "debtor" in subsection (1)(d) is broad enough to include guarantors, accommodation parties, co-makers, other persons who owe performance, such as performance on a contract, and person's who provide collateral to insure payment of the debtor's obligation. This can have a major impact on who is entitled to notice in an Article 9 foreclosure. See Kansas Comment 1996 to 84-9-504. The definition of "deposit account" in paragraph (1)(e) excludes certificates of deposit, as described in the Kansas Comment 1996 to the previous section. The definition of "encumbrance" in paragraph (1)(g) deals with realty interests and becomes important in handling fixture priority problems under 84-9-313. The definition of "goods" in (1)(h) includes fixtures. It is also useful in defining all the seven types of intangible personal property which are commonly collateral, but which are not "goods," namely documents, instruments, investment property, commodity contracts, accounts, chattel paper and general intangibles. The definition of "instrument" (from which "investment property" was removed in 1996) in subsection (1)(i) tells us what pieces of paper require possession for perfection under 84-9-304, 84-9-305 and priority is dealt with in 84-9-309.

Subsections (2) and (3) are a handy cross reference to other definitions often used in Article 9.

Revisor's Note:

Former section 84-9-105 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Paragraph (h) cited in discussion of chattel security under the UCC, David Dewey, 34 J.B.A.K. 189, 190 (1965).

Definition of certain terms; provision of UCC concerning "floor plan financing," Charles H. Oldfather, 14 K.L.R. 571, 572, 573, 580, 588 (1966).

Definition of "goods" mentioned in "Some Secured Transactions With the Farmer," Van Smith, 35 J.B.A.K. 299 (1966).

Subsection (1) (b) discussed in "Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 16 K.L.R. 437, 438 (1968).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 132, 172 (1975).

Legislative survey, "Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 219, 221, 222, 223 (1976).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 27 K.L.R. 301, 304 (1979).

"Right of Secured Party to Recover Proceeds Commingled in Debtor's Bank Account," Kristen D. Balloun, 28 K.L.R. 325, 326, 327 (1980).

"Secured Transactions: The Priority of Future Advances," Jennifer A. Strus, 21 W.L.J. 717 (1982).

"Clear Title: A Buyer's Bonus, A Lender's Loss—Repeal of UCC § 9-307(1) Farm Products Exception by Food Security Act § 1324 [7 U.S.C. § 1631]," Mark V. Bodine, 26 W.L.J. 71, 73 (1986).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 812 (2003).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

Attorney General's Opinions:

Credit agreements; required notice. 89-19.

Banks; trust powers; investment of public moneys by governmental subdivisions, units and entities; repurchase agreements. 92-9.

CASE ANNOTATIONS

1. Description of collateral insufficient to give protection as secured creditor in bankruptcy. In re Fuqua, 330 F. Supp. 1050, 1051.

2. Mentioned in considering assignment by one partner of benefits under contract for sale of partnership assets. Wellsville Bank v. Nicolay, 7 Kan. App. 2d 172, 178, 638 P.2d 975 (1982).

3. Credit company's perfected purchase money security interest in vehicles has priority over banks security interest; vehicles not sold to a buyer in ordinary course of business. First National Bank and Trust Co. v. Ford Motor Credit Co., 231 Kan. 431, 438, 646 P.2d 1057 (1982).

4. Cited; bank not good faith purchaser when enriched by refusing to complete agreement with defaulting bank customer and plaintiff. Dick Hatfield Chevrolet, Inc. v. Bob Watson Motors, Inc., 238 Kan. 41, 45, 46, 708 P.2d 494 (1985).

5. Defense of commercial reasonableness cannot be waived; impairment of collateral rule applicable between guarantor and secured party with collateral. U.S. v. Hunter, 652 F. Supp. 774, 778, 781 (1987).

6. Cited; voluntary transfer of professional corporation stock to one not "qualified" (K.S.A. 17-2707) held null and void under K.S.A. 17-2712. Central State Bank v. Albright, 12 Kan. App. 2d 175, 179, 180, 737 P.2d 65 (1987).

7. PIK certificates as nonnegotiable, creditor's protection of security interest therein, right to proceeds therefrom determined. In re George, 85 B.R. 133, 134, 144 (1988).

8. Priority between right of setoff and perfected security interest examined. Bank of Kansas v. Hutchinson Health Services, Inc., 13 Kan. App. 2d 421, 425, 773 P.2d 660 (1989).

9. Instrument defined; mortgagee's transfer and assignment of notes and mortgages as security for borrowing, relative priority of interests examined. Army Nat'l Bank v. Equity Developers, Inc., 245 Kan. 3, 12, 774 P.2d 919 (1989).

10. Priority between bank's perfected security interest and state agency's right of setoff examined. Bank of Kansas v. Hutchinson Health Services, Inc., 246 Kan. 83, 90, 785 P.2d 1349 (1990).

11. Certificate of deposit which states on its face "nontransferable" is not an "instrument" hereunder. Bank IV Topeka v. Topeka Bank & Trust Co., 15 Kan. App. 2d 341, 349, 807 P.2d 686 (1991).

12. Security interest in wife's interest in equipment unperfected; financing statement not listing her name seriously misleading. In re Griffin, 141 B.R. 207, 208, 213 (1992).

13. Whether lessor may acquire security interest in accounts receivable to protect ownership interest in leased property examined. Baldwin v. Hays Asphalt Constr., Inc., 20 Kan. App. 2d 853, 855, 893 P.2d 275 (1995).

14. Where party to security agreement executed in Kansas disposes of collateral out-of-state venue proper in county agreement executed. State v. Jurdan, 258 Kan. 848, 852, 893 P.2d 267 (1995).

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KANSAS COMMENT, 1996

This section, which does not vary from the 1995 Official Text, defines two of the more important types of "intangible" collateral. The term "account" would include not only traditional accounts receivable for goods sold and delivered and services rendered, but also many executory contract rights, such as the proceeds from a plumbing contract under which the work has not yet been performed. The right to the payment is an "account" if it has not been reified into an instrument or chattel paper. The 1972 Official Text combined the definitions of "accounts" and "contract rights." As the Official Comments make clear, accounts may include many ancillary covenants that will not prevent an item from being classified as an account. Accounts are also notable for the many rights to receive money that are not "accounts." Any right to payment that is not for goods sold or leased or services rendered or to be rendered is not an account. If the underlying transaction is a sale of realty, sale of an intangible or is a loan, for example, the right to payment would not be an account but some other intangible, often a general intangible.

The term "general intangibles" continues to be a catch-all to pick up collateral which does not fit any other Article 9 category. It would include, for example, an expected recovery from a condemnation action (Board of County Comm'rs v. Berkeley Village, 580 P.2d 1251 (Colo. App. 1978)), a tax refund, computer software, patent rights, trademarks, goodwill, a vendor's interest in an installment land contract, certain partnership interests in commercial real estate (Madison National Bank v. Newrath, 275 A.2d 495 (Md. 1971)), a liquor license (In re Matto's Inc., 30 U.C.C. Rep. 1684 (E.D. Mich. (Bankr.) 1981)), and other off-beat intangible collateral. When the secured party is not sure how to categorize intangible collateral, either the collateral should be described by item, or the description should use all reasonable types, and the filing(s) should be made accordingly.

Revisor's Note:

Former section 84-9-106 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 16 K.L.R. 437, 438 (1968).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 132 (1975).

Legislative survey, "Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 220, 221 (1976).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 355 (1984).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

CASE ANNOTATIONS

1. Subrogation pursuant to surety contract not a "security interest" within meaning of statute. United States Fidelity & Guaranty Co. v. First State Bank, 208 Kan. 738, 749, 494 P.2d 1149.

2. Even if credit memo obtained by debtor was not proceeds, it was perfected account by filing with Secretary of State. In Re SMS, Inc., 15 B.R. 496, 499 (1981).

3. Right to receive payments under a contract for deed is a "general intangible"; must be perfected by filing with secretary of state. In re Southern, 32 B.R. 761, 762, 765 (1983).

4. Filing of financing statement required to perfect security interest. First Nat'l Bank of Gaylord v. Autrey, 9 Kan. App. 2d 96, 98, 673 P.2d 448 (1984).

5. PIK payments in the nature of executory contracts or accounts rather than general intangibles. In re Lions Farms, Inc., 54 B.R. 241, 244 (1985).

6. Patent and trademark office filing system as preempting UCC with respect to patent assignments examined. In re Otto Fabric, Inc., 55 B.R. 654, 656 (1985).

7. Right to payment from commodities futures trading account included in definition of general intangibles. In re Bucyrus Grain Co., Inc., 67 B.R. 336, 340 (1986).

8. Cited; computer software operational programs held taxable as tangible personal property; application programs held intangible property not subject thereto. In re Tax Protest of Strayer, 239 Kan. 136, 142, 143, 716 P.2d 588 (1986).

9. Cited; voluntary transfer of professional corporation stock to one not qualified (K.S.A. 17-2707) held null and void under K.S.A. 17-2712. Central State Bank v. Albright, 12 Kan. App. 2d 175, 179, 180, 737 P.2d 65 (1987).

10. Cited; disposition of vendor's interest in contract for deed (K.S.A. 60-2401, 60-2406) examined. City of Arkansas City v. Anderson, 12 Kan. App. 2d 490, 494, 749 P.2d 505 (1988).

11. PIK certificates as nonnegotiable, creditor's protection of security interest therein, right to proceeds therefrom determined. In re George, 85 B.R. 133, 134, 145 (1988).

12. Unpaid PIK diversion payments as right under executory contracts classified as accounts examined. In re Schneider, 864 F.2d 683, 685, 94 B.R. [40], [42] (1988).

13. Priority between right of setoff and perfected security interest examined. Bank of Kansas v. Hutchinson Health Services, Inc., 13 Kan. App. 2d 421, 425, 773 P.2d 660 (1989).

14. Security agreement and financing statements covering general intangibles included copyrights, trademarks and patents. In Re Topsy's Shoppes, Inc. of Kansas, 118 B.R. 797, 800 (1990).

15. Article 9 inapplicable to priority dispute between two creditors concerning surplus proceeds from foreclosure sale of real estate. Kinsley State Bank v. Waters, 18 Kan. App. 2d 413, 417, 854 P.2d 311 (1993).

16. Whether annuity contract purchased for debtor's benefit in personal injury settlement qualified as spendthrift trust examined. In re Hayes, 168 B.R. 717, 724, 727 (1994).

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KANSAS COMMENT, 1996

This section, which does not vary from the 1995 Official Text, defines the important term "purchase money security interest." This definition is important because, under Article 9, a purchase money security interest has special priority over earlier-filed financing statements which can cover the collateral under an after-acquired property clause or a later-executed security agreement. See especially 84-9-312(3) for priorities given to purchase money security interests in inventory and 84-9-312(4) other collateral, usually equipment. Other examples of the priority given to purchase money security interests include crop production loans under 84-9-312(2), statutory liens under 84-9-310, fixtures under 84-9-313, accessions under 84-9-314, and commingled goods under 84-9-315. The purchase money claimant is given superpriority status even though its interest arises later because the debtor would never have acquired the collateral were it not for the purchase money credit extended.

This section sets forth two types of purchase money security interests. Under subsection (a), the seller who retains a security interest in the goods as security for their price has a purchase money interest. An assignee of the purchase money secured seller would have the same interest. Under subsection (b), purchase money status also belongs to a direct third-party financier who advances value or incurs an obligation to enable the debtor to purchase the collateral from a seller. Often the big problem is one of proof that the loan was for the purpose of acquiring that collateral, and was in fact so used. A seller (or the seller's assignee) can almost always trace the source of its security interest as purchase money. This is not so easy for the direct third-party lender, who must show that the loan proceeds were in fact used to purchase the collateral. The laying of a paper trail becomes imperative, and can often be arranged by a check payable to the seller and an agreement that the check must be used for that purpose.

For a case illustrating an effective way for a non-seller financier to guarantee it has a purchase money security interest and that the debtor buyer uses the proceeds as agreed, see Kansas State Bank v. Overseas Motosport, Inc., 222 K. 26, 563 P.2d 414 (1977), further described in Kansas Comment 1996 to 84-9-203.

On the question of whether purchase money priority should be given to a lender where the loan proceeds were used by the debtor to pay off an open account, see North Platte State Bank v. Production Credit Association, 200 N.W.2d 1 (Neb. 1972). The test should be whether the availability of a direct loan take-out was a factor in negotiating the original sale on open account. Another issue which has arisen is whether purchase money status is lost if the creditor later extends more credit (non-purchase money) under a future advance clause. In general, the courts are holding that purchase money status is lost when the future advance is made because the collateral then purports to secure debt other than its own price. See, e.g., In re Manuel, 507 F.2d 990 (5th Cir. 1975) (case involving loss of automatic perfection of purchase money security interest in consumer goods). The loss of purchase money status can hurt the creditor in a priority battle under 84-9-312, and it can lead to a wipeout of a security interest in certain exempt consumer goods in bankruptcy. See 11 U.S.C. § 522(f).

Revisor's Note:

* Reference to 84-5-114(a) should be to 84-5-114(c).

Former section 84-9-107 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

"Floor plan financing," Charles H. Oldfather, 14 K.L.R. 571, 572, 581, 582, 588 (1966).

"Official UCC Comment" and definition of "purchase money security interest" in footnotes to "Some Secured Transactions With the Farmer," Van Smith, 35 J.B.A.K. 299, 301 (1966).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

CASE ANNOTATIONS

1. Credit company's perfected purchase money security interest in vehicles has priority over bank's security interest; vehicles not sold to a buyer in ordinary course of business. First National Bank and Trust Co. v. Ford Motor Credit Co., 231 Kan. 431, 435, 646 P.2d 1057 (1982).

2. In lien avoidance case, a lien is purchase money until purchase price paid out applying first-in, first-out payment method. In Re Gibson, 16 B.R. 257, 258, 269 (1981).

3. Prior perfected security interest in modular home takes precedence over real estate mortgage; no need to re-perfect through a fixture filing when home was attached to ground. Prairie State Bank v. Superior Housing, Inc., 30 Kan. App. 2d 273, 40 P.3d 336 (2002).

4. Mentioned; purchase money character of the obligation was not lost through refinancings. In re Jackson, 358 B.R. 412, 417 (2007).

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KANSAS COMMENT, 1996

This section, which does not vary from the 1995 Official Text, determines when a secured party's interest in after-acquired collateral is deemed taken for "new value" and not as security for antecedent debt. Two tests must be met for an interest in after-acquired property to be one not taken for antecedent debt: (1) "new value" must have been given; and (2) the after-acquired collateral must come either in the ordinary course of the debtor's business or as an acquisition under a contract of purchase entered into within a reasonable time after the giving of new value and pursuant to the security agreement.

The original purpose of this section was to protect the Article 9 "floating lien" from attack as a voidable preference in bankruptcy. Without the section, the trustee could argue that collateral acquired by the debtor shortly before bankruptcy was taken for "antecedent debt," and was thus voidable as a preference under section 60 of the 1898 Bankruptcy Act. With enactment of the Bankruptcy Reform Act of 1978, this section has generally been rendered academic. The new bankruptcy law expressly provides that a "transfer" of property from debtor to secured party is not made "until the debtor has acquired rights in the property transferred." 11 U.S.C. § 547(e)(3). Thus, the determination of when a transfer is made for antecedent debt is mandated by federal law, which would clearly preempt any attempt by this section to bring about a different result. For example, if a lender took a security interest in "all equipment now owned or hereafter acquired by the debtor," filed its financing statement under Article 9, and the debtor later went bankrupt, any equipment acquired by the debtor within 90 days of bankruptcy would probably not be allowed to feed the lender's security interest; instead, it would have to be given back to the trustee for the benefit of all creditors. This section would not protect the lender in such a case. However, § 547 of the Bankruptcy Code contains special protection for a secured party whose loan "enables" the debtor to acquire the new equipment, i.e., a purchase money security interest. See 11 U.S.C. § 547(c)(3). Moreover, special rules now apply to determine the extent to which an Article 9 lender can claim after-acquired inventory (which includes crops and livestock) and accounts under a "floating lien." In general, the lender must return as preferential any "improvement in position" acquired by comparing its collateral position 90 days before bankruptcy with its position on the day bankruptcy is filed. See 11 U.S.C. § 547(c)(5).

Revisor's Note:

Former section 84-9-108 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Effect of "failure to file" in "floor plan financing" discussed, Charles H. Oldfather, 14 K.L.R. 571, 591 (1966).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 789, 804 (2003).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

CASE ANNOTATIONS

1. Mischaracterization in financing statement of membership units in limited liability company was not "seriously misleading" where statement described number of units and identified parties by name under the facts of the case. In re Brown, 479 B.R. 112 (Bkrtcy. D. Kan. 2012).

2. Retailers' sales slips are security agreements under the facts of the case. In re Cunningham, 489 B.R. 602 (Bkrtcy. D. Kan. 2013).

3. A consumer transaction involving consumer goods renders a generic collateral description. In re Gracy, 522 B.R. 686, 692 (2015).

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KANSAS COMMENT, 1996

The classification of the all inclusive four types of goods is important in a number of situations, such as to determine questions of priority (84-9-312), the proper place to file a financing statement (84-9-401), and the rights of persons who buy from a debtor goods subject to a security interest (84-9-307). This section, which does not vary from the 1995 Official Text, employs a "primary use" of the debtor test. For example, if a doctor uses a television set in the office waiting room five days a week and takes it home for the weekend, the television set would constitute "equipment" rather than "consumer goods." The key to the classification of goods is the identity of the debtor and the use to which that debtor puts the goods, not any inherent quality of the goods themselves. A television set in the hands of a manufacturer or dealer is inventory under subsection (4). In a hospital or office, it is equipment under subsection (2). The same set in the hands of the ultimate consumer is consumer goods under subsection (1). If the secured party guesses wrong, the place of filing will probably be improper, the description in the security agreement or in the financing statement, or both, may be wrong, and the security interest will be unperfected. When in doubt, it is wise to require the debtor to covenant the intended use and define a breach of that covenant as a default. It may also help to make multiple filings. Note, however, that a change in primary use does not render unperfected a security interest which was properly perfected to begin with. 84-9-401(3).

The most interesting Kansas decision to date involving the categorization of goods is Garden City Production Credit Association v. International Cattle Systems, 32 U.C.C. Rep. 1207 (D. Kan. 1981). In that case, cattle were placed by the owner in a feedlot. The secured lender had filed locally as to "farm products," but not centrally as to "inventory." [84-9-401 has since been amended to require almost all commercial filings be made in the secretary of state's office.] The court held that the cattle were not "in the possession of a debtor . . .engaged in farming operations" under subsection (3), and that the cattle constituted inventory for which central filing was required. Therefore, the secured lender was subordinated to competing lenders, lien creditors and purchasers. In the alternative, the court concluded that, since the cattle constituted inventory, the packing houses which bought them from the feedlot took free from the lender's security interest in any case under 84-9-307(1).

It should be emphasized that inventory includes goods held for lease, under subsection (4). Thus, if a Kansas bank is financing the operations of a computer leasing company, the collateral will be inventory and it will be necessary to file a financing statement with the secretary of state in Topeka. See 84-9-401. Moreover, if the computers are under lease in jurisdictions other than Kansas, it may well be necessary to file financing statements in the state where each lessee is located, as well as to take possession of the leases themselves as "chattel paper." For a good case where the financier forgot to touch all the bases for such a debtor, see In re Leasing Consultants, Inc., 486 F.2d 367 (2d Cir. 1972). In addition, inventory includes goods consumed in the business, which can create difficult distinctions for very short lived machinery.

In John Deere Co. v. Butler County Implement, Inc., 232 K. 273 (1982), 625 P.2d 124, the Kansas supreme court held that a security agreement description of a farm implement dealer's inventory as "equipment" passed muster in spite of the misclassification. The court looked to the common commercial understanding that the term "equipment" is frequently used to describe the type of merchandise an implement dealer normally sells at retail. It would be safer to describe the collateral by UCC type —inventory—or by item, and name the specified items. The secured party had mixed the descriptions by describing the collateral as all "inventory" and then described some of the inventory as farm equipment.

Revisor's Note:

Former section 84-9-109 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Cited as to definitions of "inventory" and "consumer goods," Charles H. Oldfather, 14 K.L.R. 571, 572, 576 (1966).

Classification of goods discussed in "Some Secured Transactions With the Farmer," Van Smith, 35 J.B.A.K. 299, 300, 302 (1966).

"Beefing Up Product Warranties: A New Dimension In Consumer Protection," Barkley Clark, Michael J. Davis, 23 K.L.R. 567, 607 (1975).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 27 K.L.R. 301, 302, 309 (1979).

"Comparative Fault and Strict Products Liability in Kansas: Reflections on the Distinction Between Initial Liability and Ultimate Loss Allocation," William Edward Westerbeke and Hal D. Meltzer, 28 K.L.R. 25, 97 (1979).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 355, 356, 363, 366, 368 (1984).

"Clear Title: A Buyer's Bonus, A Lender's Loss—Repeal of UCC § 9-307(1) Farm Products Exception by Food Security Act § 1324 [7 U.S.C. § 1631]," Mark V. Bodine, 26 W.L.J. 71, 74, 83, 86 (1986).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 773, 774, 777, 782 (2003).

Attorney General's Opinions:

Corporate swine and poultry confinement facilities; not exempt from ad valorem taxation. 87-35.

Coal and gas of public utility; system of taxation; classification; exemption. 89-85.

CASE ANNOTATIONS

1. Chief place of business of purchasers of truck tractor used in interstate commerce was Kansas; lien required to be perfected hereunder; security interest unprotected. In re Dobbins, 371 F. Supp. 141, 144.

2. Description of farm equipment in financing statement as "all equipment now owned or hereafter acquired by debtor," held not in compliance with statutes (K.S.A. 84-9-109(2), 84-9-110, 84-9-402). In re Werth, 443 F. Supp. 738.

3. Cattle held by cattle feeder held to be "farm products" under (3), not "inventory" under (4). Financing statement properly filed with register of deeds. Security Natl. Bank v. Belleville Livestock, 619 F.2d 840, 850.

4. Description of collateral contained in security agreement sufficient to include after-acquired inventory. John Deere Co. v. Butler County Implement, Inc., 232 Kan. 273, 278, 281, 282, 655 P.2d 124 (1982).

5. Where priority of federal tax lien is question, state UCC not applicable. Adkisson v. Fallier, 565 F. Supp. 850, 855 (1983).

6. Severed crops are farm products, not "growing crops"; if in farm debtor's possession, financing statement needs no property description. In re Roberts, 38 B.R. 128, 129, 132, 133 (1984).

7. Cited in holding additional digit in vehicle identification number not fatal to security interest. Dick Hatfield Chevrolet, Inc. v. Bob Watson Motors, Inc., 10 Kan. App. 2d 350, 354, 699 P.2d 566 (1985).

8. Cited; no requirement that livestock description include location; covenant to keep at specific location no limitation on security interest. First Nat'l Bank & Tr. Co. v. Atchison County Auction Co., 10 Kan. App. 2d 382, 385, 699 P.2d 1032 (1985).

9. Farm creditor's oral consent at outset of loan, permitting sales conditioned on remitting proceeds, constitutes consent waiving security interest. Peoples Nat'l Bank & Trust v. Excel Corp., 236 Kan. 687, 689, 695 P.2d 444 (1985).

10. Cited; test to determine whether goods are inventory examined; not essential to include term "inventory" in consignment security agreement. Maxl Sales Co. v. Critiques, Inc., 796 F.2d 1293, 1298, 62 B.R. [168] [172] [173] (1986).

11. Conservation reserve program payments properly characterized as rents; not farm products; FDIC's filing ineffective. In re Zweygardt, 149 B.R. 673, 674, 678 (1992).

12. Creditor filing under federal food security act (7 U.S.C. 1631(e)(1)) has priority over (K.S.A. 84-9-307) farm products exception. First Nat'l Bank & Tr. v. Miami Co. Co-op Ass'n, 257 Kan. 989, 992, 897 P.2d 144 (1995).

13. Creditor claiming security interest in airplane for parts properly perfected interest precluding financing statement filing. In re Arcentral, Inc., 289 B.R. 170, 172 (2003).

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KANSAS COMMENT, 1996

This section, which should be read together with 84-9-203 concerning the description of the collateral in the security agreement, and with 84-9-402 regarding the description of the collateral in the financing statement, varies from the 1995 Official Text in its addition of the "except" clause relating to fixtures. The requirement of description (both in the security agreement under 84-9-203 and in the financing statement under 84-9-402) is to make identification of the personal property or fixtures possible; the test of sufficiency is whether it makes possible the identification of the thing described for the benefit of third parties searching the files. The drafters have rejected a "serial number" test, thus changing pre-UCC Kansas case law. See Trapani v. Universal Credit Co. 151 K. 715, 100 P.2d 735 (1940). Even though the filing lacks details, if it gives clues sufficient that third persons by reasonable care and diligence may ascertain the property covered, the courts should uphold the description. Pre-UCC Kansas law is in substantial accord. See, e.g., Griffiths v. Wheeler & Barber, 31 K. 17, 2 P. 842 (1883); Security State Bank v. Jones, 121 K. 396, 247 P. 862 (1926); Martinek v. Carlson, 125 K. 434, 264 P. 735 (1928); Union Stockyards Bank v. Hamilton, 246 F. 580 (6th Cir. 1917).

There are two situations where the creditor can get into special trouble. First, the Kansas version of this section requires a full-blown legal description of real estate on which fixtures are located. See 84-9-402(5). Moreover, if crops are involved, both the security agreement (84-9-203(1)(a)) and the financing statement (84-9-402(1)) must contain a description of the land concerned, though not a full-blown legal description. In Chanute Production Credit Association v. Weir Grain and Supply, Inc., 201 K. 181, 499 P.2d 517 (1972), a financing statement which described the realty in a crop loan as "land owned or leased by the debtor in Cherokee County, Kansas" was held insufficient to perfect a security interest in the crops. The real estate description was simply too general. See Kansas Comment to 84-9-402. Second the creditor can get into trouble by using a description of personal property which is so broad as to be meaningless. For example, describing the collateral as "all personal property" of the debtor may not satisfy the "reasonable identification" test of this section unless the security agreement is very clear. See In re Fuqua, 461 F.2d 1186 (10th Cir. 1972). Compare In re Werth, 443 F. Supp. 738 (D. Kan. 1977), which has been overruled by a unique Kansas amendment to 84-9-402(1), as discussed in Kansas Comment 1983 to that section. Thus, a long shadow is cast over a pre-UCC case like Emick v. Swafford, 107 K. 209, 191 P. 490 (1920), where the court upheld a description of "all personal property" of the debtor in a certain county.

One Kansas supreme court decision which goes far in protecting the creditor under the "reasonable identification" test of this section is John Deere Co. v. Butler County Implement, Inc., 232 K. 273 (1982), 655 P.2d 124. In that case, the creditor described an implement dealer's inventory as "equipment". The court upheld the description in spite of the apparent misclassification, on the ground that the two terms are synonymous in the trade, discussed in the Kansas Comment to 84-9-109.

Revisor's Note:

Former section 84-9-110 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Section embodies one of distinctive features of UCC, Charles H. Oldfather, 14 K.L.R. 571, 575 (1966).

Collateral in farm financing discussed, Van Smith, 35 J.B.A.K. 299, 300 (1966).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 16 K.L.R. 437, 438 (1968).

Requirements of filing, sufficiency of description and notice discussed in "Survey of Kansas Law: Secured Transactions," Gerald D. Hagg, 21 K.L.R. 107, 109 (1972).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 27 K.L.R. 301, 302, 303 (1979).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 356 (1984).

"Agricultural Credit and The Uniform Commercial Code: A Need for Change?" Keith G. Meyer, 34 K.L.R. 469, 497 (1986).

"Clear Title: A Buyer's Bonus, A Lender's Loss—Repeal of UCC § 9-307(1) Farm Products Exception by Food Security Act § 1324 [7 U.S.C. § 1631]," Mark V. Bodine, 26 W.L.J. 71, 89 (1986).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 785 (2003).

CASE ANNOTATIONS

1. Description of collateral insufficient to give protection as secured creditor in bankruptcy. In re Fuqua, 330 F. Supp. 1050, 1052.

2. In proceeding to review finding of bankruptcy referee, held that financing statement covering "all personal property" did not meet statutory requirement of description. In re Fuqua, 461 F.2d 1186, 1187, 1188.

3. Financing statement inadequate; did not constitute required notice; insufficient description of real estate. Chanute Production Credit Association v. Weir Grain and Supply, Inc., 210 Kan. 181, 182, 499 P.2d 517.

4. Mentioned in discussion of commercial security interest priority over federal tax liens; circumstances necessary for priority. Donald v. Madison Industries, Inc., 483 F.2d 837, 843.

5. Description of farm equipment in financing statement as "all equipment now owned or hereafter acquired by debtor" held not in compliance with statutes (K.S.A. 84-9-109(2), 84-9-110, 84-9-402). In re Werth, 443 F. Supp. 738.

6. Mentioned in considering assignment by one partner of benefits under contract for sale of partnership assets. Wellsville Bank v. Nicolay, 7 Kan. App. 2d 172, 177, 638 P.2d 975 (1982).

7. Description of collateral contained in security agreement sufficient to include after-acquired inventory. John Deere Co. v. Butler County Implement, Inc., 232 Kan. 273, 279, 282, 655 P.2d 124 (1982).

8. Parol evidence inadmissible to add mobile home to security agreement when contract unambiguous. In Re Swearinger, 27 B.R. 379, 380, 384 (1983).

9. Where financing statement contained no description of real estate, security interest in debtor's growing crops not perfected. In re Roberts, 38 B.R. 128, 129, 130, 131 (1984).

10. Real estate description in financing statement adequate although not exactly correct. In re McMannis, 39 B.R. 98, 99, 101 (1983).

11. Additional digit in vehicle identification number not fatal to security interest. Dick Hatfield Chevrolet, Inc. v. Bob Watson Motors, Inc., 10 Kan. App. 2d 350, 354, 699 P.2d 566 (1985).

12. Cited; no requirement that livestock description include location; covenant to keep at specific location no limitation on security interest. First Nat'l Bank & Tr. Co. v. Atchison County Auction Co., 10 Kan. App. 2d 382, 385, 699 P.2d 1032 (1985).

13. Pre-UCC Kansas cash sale case law changed; later security agreement containing error encompassed by original financing statement. Dick Hatfield Chevrolet, Inc. v. Bob Watson Motors, Inc., 238 Kan. 41, 44, 708 P.2d 494 (1985).

14. Where nature of property changes daily, financing statement accurately describing property sufficient although reference to after-acquired property omitted. United Cooperatives v. Libel Oil Co., 10 Kan. App. 2d 427, 428, 429, 699 P.2d 1040 (1985).

15. Sufficiency of description of land in financial statement covering growing crops examined. In re Lions Farms, Inc., 54 B.R. 241, 243 (1985).

16. References to townships in security agreement and financing statement adequate for crops on land owned by debtor; inadequate as to land leased. In re Law, 54 B.R. 434, 436 (1985).

17. Cited; neither owner's name nor specific tract in section required in land description for financing statement covering growing crops. United States v. Collingwood Grain, Inc., 792 F.2d 972, 973 (1986).

18. Cited; test to determine whether goods are inventory examined; not essential to include term "inventory" in consignment security agreement. Maxl Sales Co. v. Critiques, Inc., 796 F.2d 1293, 1298, 62 B.R.[168] [172] [173] (1986).

19. Cited; secured party's lack of interest in lease to real estate (K.S.A. 84-9-104) holding property subject to security interest examined. Riley State Bank v. Spillman, 242 Kan. 696, 703, 750 P.2d 1024 (1988).

20. Land description in financing statement covering crops sufficient for security interest to maintain conversion action for unauthorized sale. U.S. v. Smoky Valley Bean, Inc., 673 F. Supp. 1551, 1554 (1987).

21. PIK certificates as nonnegotiable, creditor's protection of security interest therein, right to proceeds therefrom determined. In re George, 85 B.R. 133, 145 (1988).

22. Financing statement applicable to government payments pertaining to wheat crop was adequate to describe "Payment in Kind" certificates. In Re George, 119 B.R. 800, 804 (1990).

23. Failure to specify particular piece of land on which crops are growing will not destroy land description in security agreement; included land of adjoining owner. In Re Coones, 954 F.2d 596 (1992).

24. Cited where court finds no authority for merging security interest and financing statement; countywide location not a reasonable identification. Garst Seed Co. v. Wilson, 17 Kan. App. 2d 130, 132, 833 P.2d 138 (1992).

25. Whether financing statement's collateral description reasonably identifies what is described examined. In re Kruckenberg, 160 B.R. 663, 672 (1993).

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OFFICIAL UCC COMMENT

Prior Uniform Statutory Provision:

None.

Purposes:

Under the definition of Section 9-105, in any provisions of the Article dealing with the collateral the term "debtor" means the owner of the collateral even though he is not the person who owes payment or performance of the obligation secured. The section covers several situations in which the implications of this definition are specifically set out.
The duties which this section imposes on a secured party toward such an owner of collateral are conditioned on the secured party's knowledge of the true state of facts. Short of such knowledge he may continue to deal exclusively with the person who owes the obligation. Nor does the section suggest that the secured party is under any duty of inquiry. It does not purport to cut across the law of conversion or of ultra vires. Whether a person who does not own property has authority to encumber it for his own debts and whether a person is free to encumber his property as collateral for the debts of another, are matters to be decided under other rules of law and are not covered by this section.
The section does not purport to be an exhaustive treatment of the subject. It isolates certain problems which may be expected to arise and states rules as to them. Others will no doubt arise: their solution is left to the courts.

This section, which does not vary from the 1995 Official Text, prescribes the duties of the secured party where the owner of the collateral is not the obligor. For the related definition of "debtor," which is broad enough to contemplate the owner of collateral used as collateral for another's debt, see 84-9-105(1)(d). The duties set forth in subsections (a) through (e) are conditioned on the secured party's knowledge that the person who owes the obligation is not the owner of the collateral. The secured party apparently is under no duty of inquiry, but under the provisions of 84-9-203 the security agreement must be signed by the debtor and the debtor must have rights in the collateral. The security agreement would reveal the owner of the collateral in most conceivable cases, absent a subsequent covert sale. This section establishes the governing rules among the third party owner, the true debtor, and the secured party. Most of the duties spelled out in this section relate to the primary obligor's default. The collateral owner gets any surplus from a foreclosure sale, has a right to redeem the collateral, may recover penalties for creditor misbehavior, and gets notification if the secured party proposes to retain the collateral in satisfaction of the debt under 84-9-505. Curiously, this section does not list the right to receive notice of any foreclosure sale under 84-9-504(3), but this omission should be seen as a drafting oversight rather than a limit on the broad definition of "debtor" under 84-9-105(1)(d). For a good case holding that the foreclosing creditor has a duty to notify the hypothecator, see Rushton v. Shea, 423 F. Supp. 468 (D. Del. 1976).

     Cross References:

     Sections 9-105, 9-208 and Part 5.

     Definitional Cross References:

     "Collateral". Section 9-105.
     "Debtor". Section 9-105.
     "Notice". Section 1-201.
     "Person". Section 1-201.
     "Receive notice". Section 1-201.
     "Right". Section 1-201.
     "Secured party". Section 9-105.

Revisor's Note:

Former sections 84-9-112 through 84-9-116 were repealed by L. 2000, ch. 142, § 155.

KANSAS COMMENT, 1996

This section, which does not vary from the 1995 Official Text, prescribes the duties of the secured party where the owner of the collateral is not the obligor. For the related definition of "debtor," which is broad enough to contemplate the owner of collateral used as collateral for another's debt, see 84-9-105(1)(d). The duties set forth in subsections (a) through (e) are conditioned on the secured party's knowledge that the person who owes the obligation is not the owner of the collateral. The secured party apparently is under no duty of inquiry, but under the provisions of 84-9-203 the security agreement must be signed by the debtor and the debtor must have rights in the collateral. The security agreement would reveal the owner of the collateral in most conceivable cases, absent a subsequent covert sale. This section establishes the governing rules among the third party owner, the true debtor, and the secured party. Most of the duties spelled out in this section relate to the primary obligor's default. The collateral owner gets any surplus from a foreclosure sale, has a right to redeem the collateral, may recover penalties for creditor misbehavior, and gets notification if the secured party proposes to retain the collateral in satisfaction of the debt under 84-9-505. Curiously, this section does not list the right to receive notice of any foreclosure sale under 84-9-504(3), but this omission should be seen as a drafting oversight rather than a limit on the broad definition of "debtor" under 84-9-105(1)(d). For a good case holding that the foreclosing creditor has a duty to notify the hypothecator, see Rushton v. Shea, 423 F. Supp. 468 (D. Del. 1976).

CASE ANNOTATIONS

1. One not privy to security agreement not personally liable for debt. Clark Jewelers v. Satterthwaite, 8 Kan. App. 2d 569, 571, 662 P.2d 1301 (1983).

2. Interest as lessee in growing crops not the same as owner of collateral being foreclosed for third party's debts. First Nat'l Bank v. Milford, 239 Kan. 151, 155, 718 P.2d 1291 (1986).

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KANSAS COMMENT, 1996

This section, which is a basic priority rule belonging in Part 3 of Article 9, does not vary from the 1995 Official Text and has not been amended since the UCC was adopted. It establishes that security agreements (which must be in writing under 84-9-203, unless a pledge is involved) are valid and effective between the immediate parties and against third parties, except as otherwise provided by the Code. Because of this default rule—the secured party prevails unless otherwise provided by the Code—priority contests under Article 9 consist of looking for a provision that provides that the secured party loses to the debtor or to a third party.

Pursuant to 84-9-201, a security agreement covering equipment allows the secured party to foreclose upon the debtor's default, and gives the secured party priority as to the equipment over the debtor's general unsecured creditors. Perfection is generally irrelevant between the secured party and the debtor. If the security interest is not perfected, however, the equipment could be lost to purchasers and lien creditors. See 84-9-301. It could also be lost to competing secured creditors. See 84-9-312. The 9-300's, generally, are a series of definitions of cases in which secured parties, or perfected secured parties, will be subordinate to specific third party claims. Thus the "except" clause in this section is an enormous exception to the general rule.

This section does recognize freedom of contract as the base line for priority, and if no third party (such as a purchaser, a judgment creditor, another secured creditor, or the debtor's trustee in bankruptcy) intervenes, the security agreement is enforceable against the debtor and general creditors. This ability to liquidate specific collateral is what separates the secured creditor from the general unsecured creditor, who generally must obtain a judgment and execute it against the recalcitrant debtor's property.

Secured creditors too often forget that a security agreement is indeed enforceable against the debtor even though the security interest is not perfected (by filing or possession). Kansas has a leading case on point, Kansas State Bank v. Overseas Motosport, Inc., 222 K. 26, 563 P.2d 414 (1977). In that case a bank made a purchase money direct loan to enable the debtor to buy a motorcycle. The debtor executed a security agreement in favor of the bank. The dealer to whom the loan proceeds check was made payable expressly agreed to make sure that the bank had a "recorded first lien" on the certificate of title. The dealer erred and never got the bank's lien noted on the title; instead, the dealer's own name was shown as lienholder. The debtor went AWOL and was in default, but a bank official located him and tried to repossess the motorcycle. The official gave up when the debtor showed the official that the bank was not on the certificate of title. The bank then sued the dealer for breach of contract in failing to get the bank's lien noted on the title. The supreme court held for the dealer, holding the bank had no damages. There was no third party in the picture, and the bank's security interest was fully enforceable against the debtor whether or not it was on the certificate of title. The bank could have repossessed the cycle, but mistakenly assumed it had no rights because its name did not appear on the title. The bank had a valid security interest in the cycle and the dealer's breach of contract was not the proximate cause of the bank's injury and the action was dismissed. (Although the court never reached the issue, it would seem that the bank did have a perfected security interest, by way of subrogation to the dealer's lien because the dealer's lien was noted on the title and the dealer had agreed to subordinate itself to the bank. Compare 84-9-504(5), 84-9-316 and 84-9-405.)

The moral of the Overseas Motosport case is that the secured party should not give up just because its security interest is not perfected; a written security agreement remains enforceable against the debtor and failure to perfect becomes relevant only if a third party claims an interest in the collateral. For another Kansas case which makes the same point, see Farmers State Bank of Oakley v. Cooper, 227 K. 547, 608 P.2d 929 (1980).

The second sentence of this section eliminates any claim of conflict between the UCC and the Kansas Uniform Consumer Credit Code (K.S.A. 16a-1-101 et seq.); the latter controls when the two statutes are in conflict. To the same effect is 84-9-203(4).

Revisor's Note:

Former section 84-9-201 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Warranty violations in tripartite finance lease agreements, Winton A. Winter, Jr., 25 K.L.R. 573, 583 (1977).

Perfecting security interests in mobile homes, 18 W.L.J. 708, 710 (1979).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 27 K.L.R. 301, 303 (1979).

"Right of Secured Party to Recover Proceeds Commingled in Debtor's Bank Account," Kristen D. Balloun, 28 K.L.R. 325, 337 (1980).

"Commercial Law—Problems with Identifiable Proceeds and Transfers in Ordinary Course in Floor Plan Financing," Richard L. Cram, 30 K.L.R. 478, 484, 488 (1982).

"Is the Agricultural Security Interest Legally Healthy?" David A. Lander, 34 K.L.R. 505, 511 (1986).

"Clear Title: A Buyer's Bonus, A Lender's Loss—Repeal of UCC § 9-307(1) Farm Products Exception by Food Security Act § 1324 [7 U.S.C. § 1631]," Mark V. Bodine, 26 W.L.J. 71, 83 (1986).

CASE ANNOTATIONS

1. Bankruptcy proceeding; past due secured note; to determine whether impermissible preference given, date of transfer was date value given; claim not secured. E. F. Corporation v. Smith, 496 F.2d 826, 828.

2. Cited in holding enforceable lien existed between original parties; no action for damages for breach of contract when damage not a result of such breach. Kansas State Bank v. Overseas Motosport, Inc., 222 Kan. 26, 28, 29, 563 P.2d 414.

3. Unperfected security agreement valid and effective between parties to note according to its terms. Farmers State Bank v. Cooper, 227 Kan. 547, 554, 608 P.2d 929.

4. Bank's application of funds in debtor's account to antecedent debt should not be considered transaction in ordinary course of business to defeat perfected security interest (dissenting opinion). Tuloka Affiliates, Inc. v. Security State Bank, 229 Kan. 544, 553, 627 P.2d 816.

5. Credit company's perfected purchase money security interest in cars has priority over bank's security interest; cars not sold to a buyer in ordinary course of business. First National Bank and Trust Co. v. Ford Motor Credit Co., 231 Kan. 431, 435, 646 P.2d 1057 (1982).

6. Notation of lien on certificates of title was adequate notice to trustee as hypothetical lien creditor. In Re Key Truck Leasing, Inc., 9 B.R. 837, 838, 840, 841 (1981).

7. Security agreement effective between parties and against purchasers of collateral. Clark Jewelers v. Satterthwaite, 8 Kan. App. 2d 569, 571, 662 P.2d 1301 (1983).

8. If properly employed, UCC protects unpaid sellers in variety of ways. Holiday Rambler Corp. v. First Nat. Bank and Trust, 723 F.2d 1449, 1453 (1983).

9. Cited; unperfected secured creditor may recover from auction company for unauthorized sale of encumbered collateral. First Nat. Bank of Amarillo v. SW Livestock, Inc., 616 F. Supp. 1515, 1520, 1521 (1985).

10. Perfected security interest in proceeds has priority over bank's right of setoff. Bank of Kansas v. Hutchinson Health Services, Inc., 12 Kan. App. 2d 87, 93, 94, 735 P.2d 256 (1987).

11. In absence of authorization to sell, transferee of proceeds takes subject to security interest of secured party. Farmers State Bank v. Production Cred. Ass'n of St. Cloud, 243 Kan. 87, 98, 755 P.2d 518 (1988).

12. Auction house agent liable for conversion where owner lacked authority to sell, notwithstanding lack of knowledge of security interest. First Nat. Bank v. Southwestern Livestock, Inc., 859 F.2d 847, 848 (10th Cir. 1988).

13. Priority between right of setoff and perfected security interest examined. Bank of Kansas v. Hutchinson Health Services, Inc., 13 Kan. App. 2d 421, 426, 773 P.2d 660 (1989).

14. Whether mineral income assignment creates a security interest in property of assignor or in money from gas sales examined. Oxy USA, Inc. v. Colorado Interstate Gas Co., 20 Kan. App. 2d 69, 76, 883 P.2d 1216 (1994).

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KANSAS COMMENT, 1996

This section, which does not vary from the 1995 Official Text or earlier versions of the UCC, applies only to secured transactions, and does not determine whether the title or lien theory should be followed when the applicability of some other rule of law (e.g., tax on the "legal" owner) depends upon who has title. See, e.g., Foy v. Comanche County, 69 K. 206, 76 P. 859 (1904). One of the beauties of Article 9 is that it replaces form with function. It concentrates on the single concept of the security interest as defined in 84-1-201(37). No longer does the mystical location of "title" determine how priority conflicts will be determined. The concept of "title" led many states, including Kansas, to enact separate statutes governing chattel mortgages and conditional sales. In place of this welter, Article 9 is centered around the concept of a unitary security interest where "title" plays a minimal role.

Revisor's Note:

Former section 84-9-202 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

CASE ANNOTATIONS

1. Cited; priority dispute between competing security interests to be resolved under Article 9, not article 2. J.I. Case Credit Corp. v. Foos, 11 Kan. App. 2d 185, 189, 717 P.2d 1064 (1986).

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KANSAS COMMENT, 1996

This section, which varies from the 1995 Official Text only in its specific reference to the Kansas Uniform Consumer Credit Code in subsection (4), sets forth the requirements for a security interest to attach and be enforceable against the debtor and general creditors. It is quite close to the prior provision. It should be read in conjunction with 84-9-201.

Subsections (1) and (2). These subsections combine the concepts of "attachment" and "enforceability" and provide that a security interest attaches to collateral and thus becomes enforceable against the debtor and general unsecured creditors if the following three criteria are met: (1) the collateral must be in the possession of the secured party pursuant to a pledge agreement, or the debtor must have signed a written security agreement describing the collateral (see 84-9-110 for general description requirements), but note that a security agreement covering crops must contain a description of the land, though not necessarily a legal description; (2) value must have been given by the secured party, normally in the form of a loan or credit sale; and (3) the debtor must have "rights in the collateral."

With respect to the security agreement, substance generally rules over form. Even though the agreement is styled "assignment" or "lease," if it basically grants a security interest in personal property it is a security agreement for purposes of Article 9. See 84-1-201(37) and Kansas Comment 1983 thereto. This section does not change the rule that a bill of sale, absolute in form, may be shown by the debtor to have been a transfer for security only, even though this must be shown by parol evidence. Boam v. Cohen, 94 K. 42, 145 P. 559 (1915). Kansas has gone further, and holds that a bill of sale may be shown to be a security instrument by either of the parties, even against third persons with notice. Home Finance Corp. v. Cox, 190 K. 553, 376 P.2d 884 (1962).

The first requirement (event, in the words of 84-9-103) is a signed security agreement or possession pursuant to agreement. If there is a security agreement, it is vital that the debtor "sign" the security agreement, but there is no requirement of acknowledgment or verification. See the liberal definition of "signed" in 84-1-201(39). The security agreement should contain words of "grant," such as "The debtor hereby grants a security interest to the secured party in the following described property," or words of retention of a security interest by a purchase money seller (see 84-9-107), such as "Seller hereby retains a security interest in...." Transport Equipment Co. v. Guaranty State Bank, 518 F.2d 377 (10th Cir. 1975) (applying Kansas law). The financing statement can serve as a security agreement, but only if it contains the formal requisites set forth in this section. See the Transport Equipment decision supra. The typical security agreement used by creditors in Kansas contains (1) words of grant of a security interest from debtor to secured party; (2) a broad description of the obligations secured often including future advances as authorized by 84-9-204; (3) a description of the collateral, frequently including an after-acquired property clause as authorized by 84-9-204; (4) assorted warranties and covenants running from debtor to secured party regarding the collateral and the status of the debtor; (5) a comprehensive list of the "events of default," including an "insecurity-acceleration" clause as authorized by 84-1-208, except as limited by the Kansas Uniform Consumer Credit Code; and (6) general provisions such as an anti-waiver clause and a provision that the duties imposed upon multiple debtors shall be joint and several. Of course many security agreements are tailored to the particular transaction involved. It should be emphasized that, while a pledge does not require a written security agreement, there must be an oral agreement that the property is held as security (see the broad definition of "agreement" in 84-1-201(3)). In most cases, the creditor also uses a written pledge agreement. For a leading Kansas supreme court decision holding that a security agreement covering inventory must include an after-acquired property clause, and that coverage of after-acquired inventory will not be implied, see John Deere Co. v. Butler County Implement, Inc., 232 K. 273, 655 P.2d 124 (1982). Occasionally the courts have been able to "cobble together" a security agreement from various separate documents generated during negotiations, but this invites litigation and uncertainty. See In re Bollinger Corp., 614 F.2d 924 (3rd Cir. 1980)

As an alternative to a security agreement, the pledge, possession by the secured party pursuant to an agreement, is permissible. It would be wise to have this in writing to avoid problems of proof. The crucial element to the pledge is that the secured party, or an agent, have control of the collateral, and not the debtor. This can be an escrow agent, but it is wise to spell out the terms of the agreement in writing to avoid disputes and clarify the relationship between the parties. See Norwest Bank St. Paul, N.A. v. Bergquist, 823 F.2d 198 (8th Cir. 1987). (It should be noted that the possession often also serves as the act for perfection under 84-9-305.)

The second criterion for attachment and enforceability is that the secured party has given "value." The broad definition of "value" in 84-1-201(44) would include collateral given as security for an antecedent debt and a forbearance of a right to sue to collect it. On the other hand, an optional future advance clause would not constitute value until some funds were loaned.

The third criterion for attachment is that the debtor have "rights in the collateral." This is a restatement of the rule that you can't alienate what you don't own. For example, a farmer who is grazing someone else's livestock cannot give a security interest in the livestock. If the borrower has no good title to a motor vehicle under the Kansas certificate of title law (K.S.A. 8-135), he cannot grant an enforceable security interest. For a decision involving this last example, see Gicinto v. Credithrift of America, 219 K. 766, 549 P.2d 870 (1976).

In many cases the secured creditor may turn to Article 2 of the UCC to measure the debtor's "rights" with respect to collateral. For example, if a seller delivers equipment to the debtor on open account and then discovers that the buyer is insolvent, the seller can reclaim the equipment if he demands its return within ten days of delivery. 84-2-702(2). However, the seller's right of reclamation is cut off by a good faith "purchaser" under 84-2-702(3), which would include the buyer's bank claiming the goods under Article 9. See the broad definition of "purchase" in 84-1-201(32) and (33). Similarly, a cash seller of goods is subordinated to a bank financing the buyer if the check given for the goods is dishonored and the bank is in good faith. See 84-2-403(1); Central Nat. Bank of Mattoon v. Worden-Martin, Inc., 413 N.E.2d 539 (Ill. App. 1980); Gicinto v. Credithrift of America, supra. In these cases, the debtor has no rights in the collateral as against the seller, but he does have the power to pass good title to the financing bank as good faith purchaser, so that the security interest attaches under this section. To this extent, "title" as a relative concept is still alive under Article 9.

If the debtor has rights in the collateral, however, those rights can support a security interest. The debtor does not have to have fee simple absolute title. Examples of lesser interests include long term leases of equipment, buying personal property on a contract for deed, and security interests in other people's property, such as using chattel paper as collateral.

In 1994, the provisions returning a security interest in investment property were returned to Article 9, from Article 8, where they had previously been placed. 84-9-115 and 84-9-116, discussed in the Kansas Comments 1996 to those sections, control the attachment and perfection requirements for those provisions.

Subsection (2). Attachment occurs on the completion of the last of the three events. The events do not need to occur in any particular order, although a secured party would be wise to structure the transaction so that giving the agreed value is the last event. Perfection (84-9-303(1)) usually requires a fourth event, filing, although there are exceptions. It is common and generally preferable to file the financing statement, making sure the debtor has rights in the collateral first, and then to give the agreed value. In a purchase money situation, the value and the debtor getting rights in the collateral are often the same, a credit sale. See Kansas Comment 1996 to 84-9-312(3). These four events, the three for attachment and usually a fourth for perfection, are the events referred to in 84-9-103(1)(b).

Subsection (3). Prior to enactment of the 1972 Official Text it was necessary to mention "proceeds" in the security agreement. It was also necessary to check the "proceeds box" in the financing statement, under 84-9-402. These requirements were eliminated, so that a security agreement covering designated collateral will automatically pick up identifiable proceeds, as authorized by 84-9-306. Nor is it any longer necessary to check a proceeds box in the financing statement. Of course many security agreements and financing statements still refer to proceeds, and there is nothing in Article 9 which precludes this practice. Moreover, a reference to proceeds in the security agreement may be important under the Bankruptcy Code, 11 U.S.C. § 552(b)(1) 1996 Supp. West. Because the security interest, and many times the perfected security interest, extends to proceeds, later secured parties or creditors have to be aware that the collateral they are relying on may be a prior secured party's proceeds. See the Kansas Comment 1996 to 84-9-306.

Subsection (4). This subsection makes it clear that in any secured transaction subject to Article 9 which is also subject to the Kansas Uniform Consumer Credit Code (KUCCC), the KUCCC controls in case of any conflict. For example, there is no limit in Article 9 on a security interest which may be taken by a dealer selling consumer goods on time. However, K.S.A. 16a-3-301 generally limits the dealer to a purchase money security interest in the goods sold to the consumer. Another example is the KUCCC limit on certain deficiency judgments. Compare 84-9-504(2) with K.S.A. 16a-5-103. In such conflicts, the KUCCC clearly controls. On the other hand, there are situations where this article expressly contemplates specific consumer legislation, and thus dovetails nicely with the KUCCC. The best example is elimination of the holder in due course doctrine as applied to consumer credit contracts. See 84-9-206 and K.S.A. 16a-3-404.

Revisor's Note:

Former section 84-9-203 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Paragraph (2) mentioned in discussion of impact of the Uniform Consumer Credit Code upon Kansas, Barkley Clark, 18 K.L.R. 277, 296 (1970).

"Close Corporations and the Kansas General Corporation Code of 1972," Edwin W. Hecker, Jr., 22 K.L.R. 489, 535 (1974).

Mineral lease exemptions from UCC coverage for security purposes, Bryan E. Nelson, 23 K.L.R. 367, 372 (1975).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 134 (1975).

Tenth Circuit survey on Contracts, U.C.C. and U.C.C.C., Martin R. Ufford, 15 W.L.J. 541, 545 (1976).

"Secured Transactions: The Priority of Future Advances," Jennifer A. Strus, 21 W.L.J. 717, 718 (1982).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 352 (1984).

"Agricultural Credit and The Uniform Commercial Code: A Need for Change?" Keith G. Meyer, 34 K.L.R. 469, 497 (1986).

"Is the Agricultural Security Interest Legally Healthy?" David A. Lander, 34 K.L.R. 505, 508, 511, 512 (1986).

"Bank's Right of Setoff—Iola State Bank v. Bolan," SueAnn S. Bradford, 33 K.L.R. 569, 571, 578 (1985).

"Clear Title: A Buyer's Bonus, A Lender's Loss—Repeal of UCC § 9-307(1) Farm Products Exception by Food Security Act § 1324 [7 U.S.C. § 1631]," Mark V. Bodine, 26 W.L.J. 71, 73, 75, 89 (1986).

"Commercial Law: Identifiable Proceeds and the Knowledge Factor [Farmers State Bank v. Production Credit Association, 243 Kan. 87, 755 P.2d 518 (1988)]," Mahesh I. Patel, 28 W.L.J. 295, 305 (1988).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 788, 789, 790, 791, 793 (2003).

CASE ANNOTATIONS

1. Assignment of oil and gas lease for security purposes not subject to provisions of code. Ingram v. Ingram, 214 Kan. 415, 418, 423, 521 P.2d 254.

2. Section construed; financing statement not security agreement absent language specifically granting a security interest. Transport Equipment Co. v. Guaranty State Bank, 518 F.2d 377, 380, 382.

3. Applied; replevin action; seller entitled to possession of automobiles and damages. Gicinto v. Credit-thrift of America, 219 Kan. 766, 769, 549 P.2d 870.

4. Cited in holding enforceable lien existed between original parties; no action for damages for breach of contract when damage not a result of such breach. Kansas State Bank v. Overseas Motosport, Inc., 222 Kan. 26, 28, 29, 563 P.2d 414.

5. Plaintiff's possession of the instrument of assignment executed by the assigning partner did not create a possessory security interest, but was a valid security agreement. Wellsville Bank v. Nicolay, 7 Kan. App. 2d 174, 176, 178, 638 P.2d 975 (1982).

6. Credit company's security interest had priority over bank's security interest; debtor's signature was forged; reversed. First National Bank and Trust Co. v. Ford Motor Credit Co., 231 Kan. 431, 439, 646 P.2d 1057 (1982).

7. Credit company's security interest had priority over bank's security interest; debtor's signature was forged. First National Bank and Trust Co. v. Ford Motor Credit Co., 231 Kan. 431, 432, 439, 646 P.2d 1057 (1982).

8. Security interest attaches when debtor signs security agreement, value is given, and debtor has rights in collateral. In Re Gibson, 16 B.R. 257, 264 (1981).

9. Parol evidence inadmissible to add mobile home to security agreement when contract unambiguous. In Re Swearinger, 27 B.R. 379, 380, 384 (1983).

10. Security interest cannot attach or be enforced until debtor has rights in collateral; mere knowledge that goods unpaid for does not invalidate otherwise legitimate security interest. Holiday Rambler Corp. v. First Nat. Bank and Trust, 723 F.2d 1449, 1451 (1983).

11. Absent any event of attachment, security interest is not perfected. First Nat'l Bank of Gaylord v. Autrey, 9 Kan. App. 2d 96, 98, 673 P.2d 448 (1984).

12. Rights of creditor and debtor may be changed by UCCC; where UCC and UCCC conflict, UCCC controls. Kelley v. Commercial National Bank, 235 Kan. 45, 51, 678 P.2d 620 (1984).

13. Bank, with security interest, was purchaser obtaining voidable title to grain held by debtor later defeated by sale to good faith purchasers. Iola State Bank v. Bolan, 235 Kan. 175, 182, 679 P.2d 720 (1984).

14. Severed crops are farm products, not "growing crops"; if in farm debtor's possession, financing statement needs no property description. In re Roberts, 38 B.R. 128, 129, 132 (1984).

15. Security interest not listing items creates no secured status; creditor cannot pursue remedies in K.S.A. 84-9-501 et seq. Farmers State Bank v. Haflich, 10 Kan. App. 2d 333, 338, 699 P.2d 553 (1985).

16. Cited in holding additional digit in vehicle identification number not fatal to security interest. Dick Hatfield Chevrolet, Inc. v. Bob Watson Motors, Inc., 10 Kan. App. 2d 350, 353, 699 P.2d 566 (1985).

17. Pre-UCC Kansas cash sale case law changed; later security agreement containing error encompassed by original financing statement. Dick Hatfield Chevrolet, Inc. v. Bob Watson Motors, Inc., 238 Kan. 41, 44, 708 P.2d 494 (1985).

18. References to townships in security agreement and financing statement adequate for crops on land owned by debtor; inadequate as to land leased. In re Law, 54 B.R. 434, 436 (1985).

19. Cited; neither owner's name nor specific tract in section required in land description for financing statement covering growing crops. United States v. Collingwood Grain, Inc., 792 F.2d 972, 973 (1986).

20. Cited; certain formal requirements that must be met before security interest may be enforced against debtor examined. Maxl Sales Co. v. Critiques, Inc., 796 F.2d 1293, 1297, 62 B.R. [168] [171] (1986).

21. Land description in security agreement covering crops sufficient for security interest to maintain conversion action for unauthorized sale. U.S. v. Smoky Valley Bean, Inc., 673 F. Supp. 1551, 1554 (1987).

22. Grain company's possession with unperfected security interest examined where debtors permitted to sell grain and pay other creditors. In re Lewis, 70 B.R. 699, 701 (1987).

23. Motor vehicle purchase agreement and bill of sale not security agreement where purchase agreement contained no words of grant. In re Newman, 71 B.R. 698, 699 (1987).

24. PIK certificates as nonnegotiable, creditor's protection of security interest therein, right to proceeds therefrom determined. In re George, 85 B.R. 133, 145 (1988).

25. Court's belief in written document, rather than interested party's explanation of certain changes found therein examined. Bird v. Plains State Bank, 86 B.R. 660, 663 (1988).

26. Cited; effect of Minnesota financing statements filed in Kansas with no after-acquired clauses on another's security interest examined. Farmers State Bank v. Production Cred. Ass'n of St. Cloud, 243 Kan. 87, 95, 755 P.2d 518 (1988).

27. Perfection of security interest in instrument, mortgagee's assignment of notes and mortgages as security, relative priority of interests examined. Army Nat'l Bank v. Equity Developers, Inc., 245 Kan. 3, 13, 774 P.2d 919 (1989).

28. Agreement to purchase can give rise for sufficient rights in debtor for security interest to attach, regardless whether title obtained. U.S. v. Ables, 739 F. Supp. 1439, 1443 (1990).

29. Security agreement need contain only broad description of obligation secured; corporations guaranty of sister corporations indebtedness; dragnet clause. Bank of Kansas v. Nelson Music Co., Inc., 949 F.2d 321 (1991).

30. Summary judgment granted to payee of promissory notes against guarantors and to foreclose security interests. FDIC v. Central Air Control, Inc., 785 F. Supp. 898 (1992).

31. Security interest in crops given by owner attaches only owner's share under crop-share lease. Colorado Nat'l Bank-Longmont v. Fegan, 16 Kan. App. 2d 662, 665, 827 P.2d 796 (1992).

32. Inadequate land description of growing crops in security interest does not merge with reasonable identification in financing statement to perfect security interest. Garst Seed Co. v. Wilson, 17 Kan. App. 2d 130, 133, 833 P.2d 138 (1992).

33. Security interest in wife's interest in equipment unperfected; financing statement not listing her name seriously misleading. In re Griffin, 141 B.R. 207, 208, 213 (1992).

34. Whether debtor had sufficient interest in annuity payments to validly grant security interest examined. In re Hayes, 168 B.R. 717, 725 (1994).

35. Whether lessor may acquire security interest in accounts receivable to protect ownership interest in leased property examined. Baldwin v. Hays Asphalt Constr., Inc., 20 Kan. App. 2d 853, 854, 893 P.2d 275 (1995).

36. Where party to security agreement executed in Kansas disposes of collateral out-of-state venue proper in county agreement executed. State v. Jurdan, 258 Kan. 848, 853, 893 P.2d 267 (1995).

37. Interest of estate in proceeds of crops planted held free of any claim or lien of creditor. In re Stout, 284 B.R. 511, 513 (2002).

38. Bank had lien in mortgagor's mobile home under Kansas' version of the Uniform Commercial Code. In re Brooks, 452 B.R. 809 (Bkrtcy. D. Kan. 2011).

39. Security agreement "reasonably identified" membership units in limited liability company even though security agreement failed to characterize units as "general intangibles" under the facts of the case. In re Brown, 479 B.R. 112 (Bkrtcy. D. Kan. 2012).

40. Retailers' sales slips are security agreements under the facts of the case. In re Cunningham, 489 B.R. 602 (Bkrtcy. D. Kan. 2013).

41. Liens attached to vehicles under composite document theory; weekly payment agreement, bill of sale and title documents collectively were sufficient to qualify as an authenticated security agreement. In re Brannan, 532 B.R. 834, 842-843 (Bankr. D. Kan. 2015).

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KANSAS COMMENT, 1996

This section has not been amended and does not vary from the 1995 Official Text. It authorizes two of the most important components of the "floating lien," after-acquired property clauses (except for most consumer transactions) and future advances. The other components of the floating lien, which in total give a creditor great flexibility in documenting and enforcing security interests, include the right to claim proceeds automatically (see 84-9-203(3) and 84-9-306), the simplicity of notice filing (see 84-9-402), and allowing debtor dominion over the collateral and proceeds without any penalty to the creditor (see 84-9-205).

Subsection (1). This subsection broadly authorizes after-acquired property clauses in the security agreement in order to pick up property which the debtor does not own at the time the agreement is originally executed. The result is that it is not necessary to execute new security agreements each time the debtor acquires new collateral, either in an expansion or as replacements of old collateral. Moreover, a single financing statement can cover all the collateral. The only requirement is to file a continuation statement every five years (see 84-9-403). While after-acquired property clauses are most important in the financing of inventory and receivables (usually accounts and chattel paper, both of which, by their nature, are constantly turning over), such a clause could also extend to farm products, equipment, investment property and other types of collateral. Agricultural lenders can also enter into a single security agreement with the debtor to cover crops, livestock and equipment existing now or in the future; moreover, a single financing statement will be good for a full five years, though it must be continued at five-year intervals in order to avoid lapse of perfection. Although an after-acquired property clause is of great utility for the secured creditor, it will be subordinate to a later purchase money security interest in the same collateral if a later perfected secured party follows the rules of 84-9-312(2), 84-9-312(3) and 84-9-312(4). See Kansas Comment 1996 to those subsections. If an after acquired property clause is desired, it is rarely implied, and failure to include an after-acquired property clause in a security agreement covering inventory can be fatal for the secured creditor. See John Deere Co. v. Butler County Implement, Inc., 232 K. 273, 655 P.2d 124 (1982).

Subsection (2). This subsection imposes restrictions on after-acquired property clauses covering consumer goods. In general, no security interest can attach to consumer goods coming into existence more than ten days after the secured party extends credit to the debtor. For example, a bank or finance company could not loan $ 5,000 to a consumer and retain a blanket security interest covering "all household goods now owned or hereafter acquired by the debtor." If the debtor later purchased a new suite of furniture without the aid of the bank or finance company, the ten-day limit would almost certainly void the security agreement insofar as it purported to cover the later-acquired furniture. Any attempt to repossess the new furniture would presumably constitute a conversion. On the other hand, if the suite of furniture were financed by the same bank or finance company which made the first loan, the after-acquired collateral probably would have been acquired by the debtor within ten days after the new advance, which would validate the security interest. In short, the ten-day rule normally comes into play when the original financier who claims under the after-acquired property clause does not extend additional credit of the purchase money variety.

Although a dealer claiming under an after-acquired property clause covering items to be sold to the consumer in the future would not normally run afoul of the limit in this subsection, the dealer should be aware of another Kansas limit on consumer collateral found in the Uniform Consumer Credit Code. K.S.A. 16a-3-301 through 16a-3-303 generally limit appliance dealers and the like to purchase money security interests; a dealer financing a new appliance could not also take a security interest in the debtor's car, or a second mortgage on the house. The Uniform Commercial Code does allow after acquired property clauses in consumer goods more than ten days after the secured party gives value for accessions. The application of this exception would appear to be limited to such things as automobile stereo systems and some appliances in vans and mobile homes.

Subsection (3). This subsection broadly authorizes future advances, and thus strikes another solid blow for the "floating lien." And it makes no difference whether the advances are mandatory ("pursuant to commitment" under subsection (k) of 84-9-105—the statutory reference to subsection (1) is an error), or optional. Moreover, if the lender is the first to file a financing statement, and later makes a future advance after an intervening secured creditor loans funds and files, the future-advance lender will have priority under the first-to-file rule of 84-9-312(5). In fact, the first filer will prevail even though the original security agreement contains no future advance clause (or there is no security agreement at all until the later advance). The key Kansas decision upholding this principle is Allis-Chalmers Credit Corp. v. Cheney Investment, Inc., 227 K. 4, 605 P.2d 525 (1980). Nor is the future advance clause under Article 9 limited in amount, as is a real estate mortgage future advance clause when the lender is a Kansas bank. Compare K.S.A. 9-1101(4). (A similar limit on future advance clauses in real estate mortgages of a savings and loan association, found in former K.S.A. 17-5507, was repealed in 1981.) See John Miller Supply Co.,Inc. v. Western State Bank, 199 N.W.2d 161 (Wis. 1972) and In re Laminated Veneers, 471 F.2d 1124 (2nd Cir. 1973).

However, there are judicial limits in Kansas on the breadth of "dragnet clauses" which purport to retain collateral as security for future advances made for a totally different purpose than the original advance. The leading Kansas case limiting a future advance clause where the later advance was of a different class than the original extension of credit is Emporia State Bank & Trust Co. v. Mounkes, 214 K. 178, 519 P.2d 618 (1974), where a dragnet clause in a purchase money home mortgage was not allowed to pick up a loan made eight years later to assist the homeowners' son to start a restaurant business. Although the Mounkes decision involved the homestead rather than personal property under Article 9, the principle seems broad enough to limit dragnet clauses covering personal property, unless they are drafted with great care so that the future advances appear to have been in the original contemplation of lender and debtor. For a Kansas court of appeals decision which follows Mounkes in striking down a dragnet clause in a home mortgage, see First National Bank & Trust Co. v. Lygrisse, 7 K.A.2d 291, 640 P.2d 1274 (1982). Of course if the debtor is a commercial entity rather than a consumer, the courts might well give a broader reading of a dragnet clause, particularly given the clear authorization of optional future advances found in this subsection.

Revisor's Note:

Former section 84-9-204 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Security interests in after-acquired property mentioned with respect to "floor plan financing," Charles H. Oldfather, 14 K.L.R. 571, 575, 589, 590 (1966).

Discussed with reference to secured transactions with a farmer, Van Smith, 35 J.B.A.K. 299, 300, 301 (1966).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 16 K.L.R. 437, 438 (1968).

"The New Kansas Consumer Legislation," Barkley Clark, 42 J.B.A.K. 147, 198 (1973).

Mineral lease exemptions from UCC coverage for security purposes, Bryan E. Nelson, 23 K.L.R. 367 (1975).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 134 (1975).

Legislative survey, "Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 228 (1976).

The uniform commercial code, the statute of frauds, and the farmer, 25 K.L.R. 318, 323 (1977).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 362 (1984).

"Survey of Kansas Law: Real Property," Michael J. Davis, 32 K.L.R. 773 (1984).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 806 (2003).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

CASE ANNOTATIONS

1. Cited in case concerning summary judgment and the requirements therefor. State Bank of Burden v. Augusta State Bank, 207 Kan. 116, 118, 483 P.2d 1068.

2. Subrogation pursuant to surety contract not a "security interest" within meaning of statute. United States Fidelity & Guaranty Co. v. First State Bank, 208 Kan. 738, 740, 494 P.2d 1149.

3. Mentioned in discussion of commercial security interest priority over federal tax liens; circumstances necessary for priority. Donald v. Madison Industries, Inc., 483 F.2d 837, 843.

4. Assignment of oil and gas lease for security purposes not subject to provisions of code. Ingram v. Ingram, 214 Kan. 415, 418, 423, 521 P.2d 254.

5. Bankruptcy proceeding; past due secured note; to determine whether impermissible preference given, date of transfer was date value given; claim not secured. E. F. Corporation v. Smith, 496 F.2d 826, 828.

6. Financing statement failed to satisfy statutory requirements; security interest did not attach until Bank took actual possession. Transport Equipment Co. v. Guaranty State Bank, 518 F.2d 377, 382.

7. Applied; holder of note admitting total failure of consideration not holder in due course. Kaw Valley State Bank & Trust Co. v. Riddle, 219 Kan. 550, 552, 549 P.2d 927.

8. Cited in holding enforceable lien existed between original parties; no action for damages for breach of contract when damage not a result of such breach. Kansas State Bank v. Overseas Motosport, Inc., 222 Kan. 26, 28, 29, 563 P.2d 414.

9. Mentioned in discussing priorities under conflicting security interests. Allis-Chalmers Cred. Corp. v. Cheney Investment, Inc., 227 Kan. 4, 7, 8, 605 P.2d 525.

10. Subsection (5) discussed; compliance herewith required to protect future advances made under security agreement (dissenting opinion). Allis-Chalmers Cred. Corp. v. Cheney Investment, Inc., 227 Kan. 4, 14, 605 P.2d 525.

11. Where nature of property changes daily, financing statement accurately describing property sufficient although reference to after-acquired property omitted. United Cooperatives v. Libel Oil Co., 10 Kan. App. 2d 427, 429, 699 P.2d 1040 (1985).

12. Debtor's granting of security interest in ASCS payments determined granting of security interest in after-acquired property. In re Holman, 85 B.R. 869, 871 (1987).

13. Under Kansas law, financing statement need not indicate it covers after-acquired property. In Re Mobile Travelers, Inc., 117 B.R. 651, 653 (1990).

14. Agreement to purchase can give rise for sufficient rights in debtor for security interest to attach, regardless whether title obtained. U.S. v. Ables, 739 F. Supp. 1439, 1443 (1990).

15. Security agreement need contain only broad description of obligation secured; corporations guaranty of sister corporations indebtedness; dragnet clause. Bank of Kansas v. Nelson Music Co., Inc., 949 F.2d 321 (1991).

16. Whether lessor may acquire security interest in accounts receivable to protect ownership interest in leased property examined. Baldwin v. Hays Asphalt Constr., Inc., 20 Kan. App. 2d 853, 858, 893 P.2d 275 (1995).

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KANSAS COMMENT, 1996

This section, which was not amended, does not vary from the 1995 Official Text. It allows the parties to give the debtor considerable freedom in dealing with the collateral and its proceeds. The rule of Benedict v. Ratner, 268 U.S. 353 (1925) is rejected, and a security interest may be given on a shifting stock of goods, the very essence of inventory lending. The last sentence makes clear that this section does not mean that the holder of an unfiled security interest whose perfection depends on possession of the collateral, personally or by a bailee, may allow the debtor access to and control over the goods without thereby losing his perfected interest. The common law rules on perfection of pledges are not relaxed.

Former K.S.A. 58-805, which accorded with the principle of this section, provided that the assignor of accounts receivable could deal with the property which gave rise to the account, and could grant the account debtor credits, allowances, or adjustments, all without invalidating the assignment of the account, whether the assignee consented to such acts or not. But older Kansas case law was stricter than this section, and if the mortgagee allowed the mortgagor to retain possession of the collateral, and sell it without accounting for the proceeds of applying them to the debt, the transaction was void. Chapin v. Jenkins, 50 K. 385, 31 P. 1084 (1893); Richardson v. Jones, 56 K. 501, 43 P. 1127 (1896); Humphrey v. Mayfield, 63 K. 208, 65 P. 234 (1901). However, the mortgagee could allow the mortgagor to retain possession, sell the collateral, and apply the proceeds to the debt. Saddlery Co. v. Gray, 63 K. 79, 64 P. 987 (1901). Allowing the mortgagor to sell the stock of goods without applying the proceeds on the mortgage debt would, under the old rules, have invalidated the transaction, even though the mortgagor was required to replenish the security as it was sold. Bussert v. Quinlan, 267 F.2d 219 (10th Cir. 1959).

The sharp contrast between pre-UCC Kansas case law and this section epitomizes the philosophy of Article 9 to encourage the "floating lien." For judicial decisions which support this philosophy, see Community Bank v. Jones, 566 P.2d 470 (Ore. 1977); In re Mid State Wood Products Co., 323 F. Supp. 853 (N.D. Ill. 1971); In re United Thrift Stores, Inc., 242 F. Supp. 714 (D.N.J. 1965), aff'd 363 F.2d 11 (3d Cir. 1966); Sowards v. State, 224 S.E.2d 85 (Ga. App. 1976). Nor is there anything in the Bankruptcy Reform Act of 1978 which would preempt this section (see 11 U.S.C. §§ 544 (b) and 548 regarding fraudulent conveyances), although allowing the debtor to build up the aggregate of inventory, accounts and proceeds within 90 days before bankruptcy could cause the increment to be lost to the trustee in bankruptcy as a voidable preference. 11 U.S.C. § 547(c)(5).

Revisor's Note:

Former section 84-9-205 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Cited in article on "floor plan financing," Charles H. Oldfather, 14 K.L.R. 571, 575 (1966).

"Commercial Law—Problems with Identifiable Proceeds and Transfers in Ordinary Course in Floor Plan Financing," Richard L. Cram, 30 K.L.R. 478, 481, 484, 486, 487, 489 (1982).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

CASE ANNOTATIONS

1. Section mentioned; purpose discussed; conviction under K.S.A. 21-3734 upheld. State v. Ferguson, 221 Kan. 103, 107, 558 P.2d 1092.

2. Bank's application of funds in debtor's account to antecedent debt should not be considered transaction in ordinary course of business to defeat perfected security interest (dissenting opinion). Tuloka Affiliates, Inc. v. Security State Bank, 229 Kan. 544, 557, 627 P.2d 816.

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KANSAS COMMENT, 1996

This section, which does not vary from the 1972 Official Text, permits agreements by a buyer of goods not to assert defenses against an assignee (so-called "cutoff clauses" or "waiver of defense clauses") to be enforced if the assignee takes the assignment (1) for value, (2) in good faith, and (3) without notice of a claim or defense. These clauses are validated only as to defenses which could be cut off if a negotiable instrument were used.

Under pre-UCC Kansas case law it was held that a conditional sales contract was not a negotiable instrument, and that the assignee took the instrument subject to the defenses against the assignor. General Motors Acceptance Corp. v. Davis, 169 K. 220, 218 P.2d 181 (1950); Securities Acceptance Corp. v. Perkins, 182 K. 169, 318 P.2d 1058 (1957); Dearborn Motors Credit Corp. v. Neel, 184 K. 437, 337 P.2d 992 (1959). In particular, the Neel case indicated that a cutoff clause was void as against public policy. See also Kaw Valley State Bank & Trust Co. v. Riddle, 219 K. 550, 549 P.2d 927 (1976), where the court refused to recognize the holder in due course doctrine when the dealer and third-party financier (which bought the dealer's installment contracts) were closely connected. Moreover, since January 1, 1974, the Uniform Consumer Credit Code in Kansas has expressly made the assignee of consumer paper subject to all claims and defenses of the consumer debtor. K.S.A. 16a-3-404. The same is true of an "all in the family loan," where a close connection exists between direct lender and dealer. K.S.A. 16a-3-405. Finally, the Federal Trade Commission has promulgated a trade regulation rule which also does away with the holder in due course doctrine by subjecting an assignee of consumer paper to all claims and defenses. 16 C.F.R. Part 433. In short, the "subject to" clause which leads off this subsection has been activated by a variety of judicial, legislative and administrative rules protecting consumer debtors. If a non-consumer debtor is involved, this subsection may authorize a cutoff clause in spite of the broad language in the Neel case, which involved agricultural credit rather than a true consumer. However, the "close-connection doctrine" enunciated in the Riddle case might well still preclude cutoff clauses from being effective under this section under some circumstances.

Subsection (2) makes it clear that purchase money secured transactions are sales, and that warranty rules for sales remain applicable. So do Article 2 rules governing disclaimers; in this connection, see K.S.A. 50-639.

Revisor's Note:

Former section 84-9-206 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Impact of the Uniform Consumer Credit Code upon Kansas, Barkley Clark, 18 K.L.R. 277, 288 (1970).

Consumer's right to assert personal defenses against lending institution under UCC discussed in "The New Kansas Consumer Legislation," Barkley Clark, 42 J.B.A.K. 147, 195 (1973).

"Beefing Up Product Warranties: A New Dimension In Consumer Protection," Barkley Clark, Michael J. Davis, 23 K.L.R. 567 (1975).

"The U.C.C.C. and Real Estate Financing: A Square Peg in a Round Hole," Thomas L. Griswold, 28 K.L.R. 601, 615 (1980).

"Farmers and the Law: Exemptions and Exceptions," J. W. Looney, 50 J.B.A.K. 7, 16 (1981).

"The holder of U.C.C. Section 3-407(2)(a) and the Windfall Discharge," Charles C. Lewis, 26 W.L.J. 27, 58 (1986).

CASE ANNOTATIONS

1. Whether previously filed but undiscovered financing statement acts as notice to assignee for section's waiver provision purposes examined. Benedictine College v. Century Office Products, 853 F. Supp. 1315, 1321 (1994).

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KANSAS COMMENT, 1996

This section, which was not amended, does not vary from the 1995 Official Text. It applies when the secured party has possession of the collateral before default (i.e., under a pledge), or when he has taken possession of the collateral after default (i.e., repossession). It should be read in conjunction with the 84-9-500's.

Subsections (1) and (3). Subsection (1) states the general duty to preserve collateral; it codifies a pledgee's duty under the common law. Under 84-1-102(3) the duty to exercise reasonable care may not be disclaimed in the security agreement or elsewhere. This changes pre-UCC Kansas law, which gave the pledgee broader freedom of contractual disclaimer. See Hunter v. Hamilton, 52 K. 195, 34 P. 782 (1893).

Since the standard of reasonable care imposed by this subsection is purposely lacking in precision, its meaning will depend on case law. For example, the ancient Kansas decision in Semple & Birge Mfg. Co. v. Detwiler, 30 K. 386, 2 P. 511 (1883), which held that a pledgee of notes who agreed to collect the notes was liable when the notes became barred by the statute of limitations if they were collectible when delivered, should still be good law under this subsection. If the creditor uses repossessed collateral in an unauthorized way prior to foreclosure sale, he may well be liable for damages. See Moran v. Holman, 514 P.2d 817 (Alaska 1973).

Does the secured party have a duty to sell collateral falling in value? The decisions, which typically involve securities held by a pledgee, have been rather protective of the secured creditor. See, e.g., Hutchison v. Southern California First National Bank, 27 Cal. App.3d 572, 103 Cal. Rptr. 816 (1972); Fidelity Bank & Trust Co. v. Production Metals Corp., 366 F. Supp. 613 (E.D. Pa. 1973); New Jersey Bank v. Toffler, 353 A.2d 116 (N.J. Super. 1976); Tepper v. Chase Manhattan Bank, N.A., 376 So.2d 35 (Fla. App. 1979) (pledgee's duty under this section is limited to physical care of collateral). With respect to the duty of a pledgee to convert debentures, where failure to convert means a precipitous loss in value, the courts have generally held in favor of the debtor. See, e.g., Traverse v. Liberty Bank & Trust Co., 5 U.C.C. Rep. 535 (Mass. Super. 1967) (bank liable for failing to convert); Reed v. Central National Bank of Alva, 421 F.2d 113 (10th Cir. 1970) (bank held liable for failing to convert debentures into common stock after demand by debtor).

Subsection (3) sets forth the measure of damages for violation of the duty of care, i.e., "any loss" caused by the creditor's negligence. However, the security interest is not rendered void. In certain cases, misbehavior by a pledgee or repossessing creditor might also constitute conversion. For pre-UCC Kansas cases on this point, see Boam v. Cohen, 94 K. 42, 145 P. 559 (1915) (but pledgee entitled to offset for debt), and Lynn v. McCue, 94 K. 761, 147 P. 808 (1915).

Subsection (2). Guidelines are set forth in this subsection covering various aspects of a pledgee's rights and duties. All of these guidelines are subject to variation by agreement, although 84-1-102(3) would prohibit any attempt to disclaim negligence. Under subsection (2)(a) a pledgee (or foreclosing creditor) may charge back to the debtor reasonable expenses incurred in custody and preservation of the collateral. See, e.g., J. T. Jenkins Co. v. Kennedy, 45 Cal. App. 3d 474, 119 Cal. Rptr. 578 (1975) (delinquent state fuel taxes). Pre-UCC Kansas case law such as Thorp v. Fleming, 78 K. 237, 96 P. 470 (1908) (mortgagee of growing wheat, after taking possession, may harvest the wheat and deduct the expenses of harvesting, threshing, and marketing) should remain good law under this subsection. See also 84-9-504(1)(a).

With respect to subsection (2)(b), the risk of accidental loss is on the debtor "to the extent of any deficiency in any effective insurance coverage." When the secured party's interest is insured and the debtor's is not, the secured party bears the risk of loss. And if the collateral is accidently destroyed, the secured obligation is discharged to the extent of the secured party's insurance protection. The secured party must collect from its insurer; it cannot sue on the debt except with respect to any "deficiency." Thus, a secured creditor whose interest is protected by insurance cannot, upon accidental loss of the collateral, collect both insurance and the debt. Conversely, if the collateral is not insured at all and is accidently destroyed, the risk of loss is on the debtor and the obligation is not discharged.

Subsection (2)(c) provides that the secured party may hold as additional security any increase or profits received from the collateral, such as stock dividends; by contrast, money profits such as cash dividends or bond interest payments may not be held as additional collateral in the absence of a clause in the pledge agreement, but must be remitted to the debtor or used to reduce the debt. Compare the pre-UCC Kansas case, Rundquist v. O'Leary, 184 K. 496, 337 P.2d 1017 (1959), where the court held that interest on securities was not included in the pledge in the absence of an agreement or statute. For an application of this subsection to accounting for profits in a dealer reserve account, see General Electric Credit Corp. v. Alford & Associates, 374 So. 2d 1316 (Ala. 1979).

Under subsection (2)(d), the secured party must keep the collateral identifiable, although fungible collateral can be commingled.

Subsection (2)(e) provides that the secured party may repledge the collateral on terms which do not impair the debtor's right to redeem it. For example, if an individual loans $5,000 to a debtor secured by stock, sale of the stock to X in the absence of the debtor's default would violate the "preservation" duty of subsection (1); but if the pledgee simply repledges the collateral as security for its own debt, this subsection okays the repledge. The repledge does not constitute a conversion. See SEC v. H. L. Rodger & Bros., 444 F.2d 1077 (7th Cir. 1971); McRae v. Vogler, 536 P.2d 509 (Ore. 1975).

Subsection (4). This subsection allows use or operation of the collateral by the secured party (1) to preserve the collateral, (2) pursuant to order of a court, or (3) as provided in the security agreement (except in the case of consumer goods). Reasonable expenses are chargeable to the debtor under subsection (2)(a).

Revisor's Note:

Former section 84-9-207 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 363 (1984).

CASE ANNOTATIONS

1. When a guarantor pays the principal's debt, the guarantor becomes subrogated to the rights of the creditor. The entire debt must be paid before a right of subrogation arises. Halpin v. Frankenberger, 231 Kan. 344, 348, 349, 644 P.2d 452 (1982).

2. When growing crops are subject of security agreement, determining who is responsible for care and preservation is factual question. First Nat'l Bank v. Milford, 239 Kan. 151, 156, 718 P.2d 1291 (1986).

3. Bank's lien on tools on repossessed tools as possessory or nonpossessory security interest examined. In re Sanders, 61 B.R. 381, 384 (1986).

4. Lender's breach of duty to borrower by allowing indiscriminate breeding of purebred cattle was proximate cause of damages. In re Krug, 189 B.R. 948, 960 (1995).

1. No error in judge's conclusion that sale of collateral was made in commercially reasonable manner where defendant sold stock that allegedly could have been sold at a higher value. Ross v. Rothstein, 92 F. Supp. 3d 1041, 1062 (D. Kan. 2015).

2. Vehicle owner could not proceed with claim for improper repossession based upon alleged breach of the peace because the company and the operator were not secured parties; owner and operator repossessed vehicle at the request of the bank that secured the loan for the vehicle. Thomas Cnty. Sheriff's Dep't, 535 F. Supp. 3d 1087 (D. Kan. 2021).

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KANSAS COMMENT, 1996

This section, which was not amended, does not vary from the 1995 Official Text. It is one of the most important, and from the caselaw, one of the most neglected provisions in the UCC. Utilization of 84-9-208 could greatly reduce the priority contests between secured parties. 84-9-208 establishes a procedure whereby a later secured party may find out the interests of prior secured parties and protect themselves. The problem arises from the fact that it is generally in the debtor's interest to understate the amount of any prior debt or the collateral subject to security interests. At the same time, a prior secured party has no duty to later creditors to disclose the details of any existing financing of the debtor, beyond the financing statement, which can be very general. In fact, a secured party might be liable to the debtor for unauthorized disclosures. If an existing secured party does disclose, it might be tempted to overclaim the debt and collateral if it wants to discourage additional financing, or to understate the debt and the collateral to encourage other creditors to fund the debtors repayment of the debt owed the first secured party.

84-9-208 addresses these concerns by requiring the first secured party to respond to informational requests by the debtor, or be liable for damages, which might be responsibility for the failure of the business for lack of financing in extreme cases. Careful later secured parties and other purchasers should require this information as a condition to making the loan or purchase. The later secured party can learn the identity of the earlier creditors from prior filings. If the debtor understates the collateral or the debt, the prior secured party must correct the mistake or be bound by the lesser amount, and must inform the debtor (and thereby the later secured party if the interests have been assigned).

There is a danger that the later secured parties should plan for. First, even if there is no after-aquired property or future advance clause, priority is determined by the first to file rule in 84-9-312(5). Therefore, a later loan and security agreement, secured by new collateral or previously existing but unencumbered collateral of the same type listed in the financing statement under 84-9-402, will have priority over intervening perfected secured parties. (This would not be true for intervening, perfected purchase money secured parties who follow the special rules in 84-9-312 for priority.) To protect itself, the later secured party should enter into a partial or total subordination agreement with the previously filed perfected secured party (84-9-316), take an assignment from the prior party (84-9-302(2), 84-9-405), or, if the earlier secured party will not cooperate, take over all financing of the debtor, pay off the prior debt and force the prior secured party to file a termination statement (84-9-404). If none of these are possible or acceptable, the only safe route is to refuse to deal with the debtor.

Subsection (3) provides a little protection for the earlier secured party from the debtor's possible abuse of his rights under this section.

Revisor's Note:

Former section 84-9-208 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

"Some Secured Transactions With the Farmer," Van Smith, 35 J.B.A.K. 299, 339 (1966).

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Law Review and Bar Journal References:

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 824 (2003).

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KANSAS COMMENT, 1996

This section is identical to the 1995 Official Text with the exception that it allows 20 days, rather than 10, for a purchase money secured party to file, as discussed below. 84-9-201 provides that the secured party will prevail over third parties' interest in a debtor's collateral, except as otherwise provided. The 84-9-300's are provisions describing situations in which third parties prevail over a secured party.

Subsection (1). This subsection, which details the four classes of competitors which defeat an unperfected security interest. This subsection is the primary "exception" to the general rule, naming the many classes of purchasers (84-1-201(32) and (33)) that defeat an unperfected secured party.

Subsection (1)(a) grants priority to those who prevail under 84-9-312, where priorities among conflicting security interests are determined, which is generally a first in time provision, with special rules favoring some purchase money security interests.

Subsection (1)(b) subordinates an unperfected security interest to a lien creditor who becomes such before the security interest is perfected. The term "lien creditor" is defined in subsection (3) to mean a judgment creditor who has obtained a levy of attachment or execution under Kansas law, and includes the trustee in bankruptcy. See Blair Milling & Elevator Co., Inc. v. Wehrkamp, 217 K. 122, 535 P.2d 457 (1975), and § 544(a) of the Bankruptcy Code (11 U.S.C. § 544(a)). Thus, if the security interest is unperfected when a levy of attachment or execution is obtained, or when a petition in bankruptcy is filed, the security interest is subordinate, except as provided in subsection 2. It is irrelevant that the lien creditor knows of the security interest, as it was under pre-UCC Kansas law. See Geiser v. Murray, 84 K. 450, 114 P. 1046 (1911); Paul v. Lingenfelter, 89 K. 871, 132 P. 1179 (1913). This subsection, which is tremendously important in bankruptcy, should be read together with § 544(a) of the Bankruptcy Code.

Subsection (1)(c) discusses the rights of buyers of tangible personal property and most reified intangibles. It gives bulk transferees and other nonordinary course buyers, as well as buyers of farm products in the ordinary course of business, priority over an unperfected security interest so long as these buyers take the collateral without actual knowledge of the unperfected security interest. Knowledge does prevent a buyer from taking priority over an unperfected security interest, and the unperfected security interest will prevail under the terms of 84-9-201 because 84-9-301(1)(c) does not take it away. Ordinary course buyers of inventory are not included because, under 84-9-307(1), they have priority even though the security interest is perfected. Pre-UCC Kansas law is consistent with this rule; buyers of goods were protected from unrecorded conditional sales contracts of which they had no knowledge (see Werner v. Winzer, 109 K. 647, 202 P. 80 (1921)), and from unrecorded chattel mortgages (former K.S.A. 58-301).

Subsection (1)(d) is similar to subsection (1)(c), except that it describes the rights of transferees of intangibles. The subsection does not require taking possession. It also covers investment property. Former K.S.A. 58-804, which governed assignments of accounts receivable for security and otherwise, provided that a protected assignee took subject to prior assignments of which it had written notice.

Subsection (2). This subsection varies from the 1995 Official Text by allowing a purchase money secured party (84-9-107) twenty days after the debtor receives possession of the collateral, instead of ten days in the Official text, to file. If the security interest is perfected within this twenty-day grace period, it will have priority over a "lien creditor" or a bulk transferee in the gap. It should be noted that this is not temporary automatic possession, and other interests, such as buyers without knowledge, will prevail over a purchase money secured party who files within twenty days. On the other hand, there is no grace period for a non-purchase money security interest; the only way to assure priority for such an interest is to be perfected when the debtor receives value, by signing the security agreement, filing the financing statement and making sure the debtor still owns the collateral when the loan is made.

The twenty-day grace period in paragraph 84-9-301(1)(c) has a parallel in the new provisions § 547 of the bankruptcy Code, which in general gives a secured creditor (whether purchase money or not) a grace period of twenty days within which to perfect a security interest in order to avoid attack upon the security interest by the debtor's trustee as a voidable preference. 11 U.S.C. § 547(e)(2). If the security interest is not perfected within twenty days after the extension of credit, and the perfection takes place within 90 days of bankruptcy, the secured party runs the danger of having the security interest voided. Moreover, if the creditor is deemed to be an "insider" (defined in 11 U.S.C. § 101(25)), the trustee can reach back a full year. For the purchase money secured creditor, the lesson is simple: file your financing statement or take possession within the twenty-day grace period. For all other secured parties, be perfected at the time value passes.

Subsection (3). This subsection defines a "lien creditor" to include the trustee in bankruptcy for the purposes of 84-9-301(1).

Subsection (4). This subsection sets forth a special 45-day rule for future advances. The purpose of the subsection is to balance the interests of a future advance lender and a lien creditor by giving priority to the lender for all advances made prior to the judgment lien, and for all optional advances made for 45 days thereafter irrespective of knowledge. So long as the lender has no knowledge of the judgment lien, he may claim priority for future advances made even later than the 45 days. Contrast the 45-day rule governing non-ordinary course buyers under 84-9-307(3), and for the federal tax lien under 26 U.S.C. § 6323(d).

Revisor's Note:

Former section 84-9-301 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Reference made to Official UCC Comment No. 1 in article concerning "floor plan financing," Charles H. Oldfather, 14 K.L.R. 571, 572 (1966).

"Bankruptcy: Physical Possession May Still Be a Voidable Preference," David G. Arst, 38 J.B.A.K. 193, 200 (1969).

Mineral lease exemptions from UCC coverage for security purposes, Bryan E. Nelson, 23 K.L.R. 367 (1975).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 169, 176 (1975).

Legislative survey, "Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 217, 218, 219 (1976).

Warranty violations in tripartite finance lease agreements, Winton A. Winter, Jr., 25 K.L.R. 573, 583 (1977).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 27 K.L.R. 301, 302, 304 (1979).

"The Perfection of Security Interests in Motor Vehicles in Kansas-Perfection or Confusion?" Susan C. Jacobson, 28 K.L.R. 315, 317, 318, 319 (1980).

"Secured Transactions: The Priority of Future Advances," Jennifer A. Strus, 21 W.L.J. 717, 718 (1982).

"Commercial Law—Problems with Identifiable Proceeds and Transfers in Ordinary Course in Floor Plan Financing," Richard L. Cram, 30 K.L.R. 478, 488 (1982).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 358, 366 (1984).

"Agricultural Credit and The Uniform Commercial Code: A Need for Change?" Keith G. Meyer, 34 K.L.R. 469, 478, 494 (1986).

"Is the Agricultural Security Interest Legally Healthy?" David A. Lander, 34 K.L.R. 505, 511 (1986).

"Clear Title: A Buyer's Bonus, A Lender's Loss—Repeal of UCC § 9-307(1) Farm Products Exception by Food Security Act § 1324 [7 U.S.C. § 1631]," Mark V. Bodine, 26 W.L.J. 71, 93, 94 (1986).

"Commercial Law: Identifiable Proceeds and the Knowledge Factor [Farmers State Bank v. Production Credit Association, 243 Kan. 87, 755 P.2d 518 (1988)]," Mahesh I. Patel, 28 W.L.J. 295, 305 (1988).

"Creditor Beware: From Default Through Deficiency Judgment," Wanda M. Temm, 60 J.K.B.A. No. 8, 17 (1991).

"To Be (Transformed) or Not to Be: The Transformation Versus Dual-Status Rules for Purchase-Money Security Interest Under Kansas' Former and Revised Article 9," Christopher Harry, 50 K.L.R. 1095 (2002).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 849 (2003).

Attorney General's Opinions:

Banking code; dissolution; insolvency; receiver in charge of assets; distribution. 85-112.

CASE ANNOTATIONS

1. Assignment of oil and gas lease for security purposes not subject to provisions of code. Ingram v. Ingram, 214 Kan. 415, 418, 423, 521 P.2d 254.

2. Chief place of business of purchasers of truck tractor used in interstate commerce was Kansas; lien required to be perfected hereunder; security interest unprotected. In re Dobbins, 371 F. Supp. 141, 143.

3. Bankruptcy proceeding; past due secured note; to determine whether impermissible preference given, date of transfer was date value given; claim not secured. E. F. Corporation v. Smith, 496 F.2d 826, 828, 831.

4. Applied; determination of priority of temporarily perfected interest and judgment creditor levying on execution. Blair Milling & Elevator Co., Inc. v. Wehrkamp, 217 Kan. 122, 124, 535 P.2d 457.

5. Secured party's interest in collateral prior to that of purchaser if such interest is perfected; if interest not perfected no priority over purchaser for value without knowledge. Farmers State Bank v. Cooper, 227 Kan. 547, 555, 608 P.2d 929.

6. Unperfected security interest is subordinate to rights of buyer not in ordinary course of business if buyer gives value and receives delivery without knowledge of unperfected security interest. Victory Nat'l Bank of Nowata v. Stewart, 6 Kan. App. 2d 847, 852, 636 P.2d 788 (1981).

7. Lease of truck to debtor was true lease and not meant to be security; under facts, lessor could reclaim. In Re Intern. Plastics, Inc., 18 B.R. 583, 584, 585 (1982).

8. Assignment of payments from realty deed governed by Article 9 of UCC; trustee had priority over unperfected bank. In Re Southworth, 22 B.R. 376, 377, 379 (1982).

9. Trustee had priority over creditor whose security interest in note was unperfected. In re Southern, 32 B.R. 761, 762, 765, 766 (1983).

10. Financing statement which listed "McMannis heirs" as landowners adequate; description sufficient to warn of security interest. In re McMannis, 39 B.R. 98, 99, 102 (1983).

11. Unperfected security interest under (1)(b), subordinate to judgment lien, deemed no security interest under federal statute. Adkisson v. Fallier, 565 F. Supp. 850, 855 (1983).

12. If properly employed, UCC protects unpaid sellers in variety of ways. Holiday Rambler Corp. v. First Nat. Bank and Trust, 723 F.2d 1449, 1453 (1983).

13. Severed crops are farm products, not "growing crops"; if in farm debtor's possession, financing statement needs no property description. In re Roberts, 38 B.R. 128, 129, 132 (1984).

14. Buyer not in ordinary course of business without actual knowledge of security interest has priority over unperfected interest (K.S.A. 84-9-103(1)(d)). Broadway National Bank v. G & L Athletic Supplies, Inc., 10 Kan. App. 2d 43, 45, 46, 691 P.2d 400 (1984).

15. Cited; entrustment doctrine (K.S.A. 84-2-403(2)) examined and applied. Executive Financial Services, Inc. v. Pagel, 238 Kan. 809, 812, 715 P.2d 381 (1986).

16. Cited; UCC rather than federal common law determines whether FmHA's interest inferior to rights of purchaser for value. United States v. Central Livestock Corp., 616 F. Supp. 629, 634 (1985).

17. Unperfected secured creditor may recover from auction company for unauthorized sale of encumbered collateral. First Nat. Bank of Amarillo v. SW Livestock, Inc., 616 F. Supp. 1515, 1517, 1521 (1985).

18. Cited; bank's prior interest in crops not diminished by lease between debtor and third party. First Nat'l Bank v. Milford, 239 Kan. 151, 155, 718 P.2d 1291 (1986).

19. Security interest created in inventory but not perfected is subordinated to intervening claim of bankruptcy trustee. Maxl Sales Co. v. Critiques, Inc., 796 F.2d 1293, 1299, 62 B.R. [168] [169] [174] (1986).

20. Security interest filed under debtor's trade name bearing no similarity to legal name can be set aside by bankruptcy trustee. Pearson v. Salina Coffee House, Inc., 61 B.R. 538, 541 (1986).

21. Chapter 7 trustee's rights as superior to grain company in possession with unperfected security interest examined. In re Lewis, 70 B.R. 699, 704 (1987).

22. Cited; rules relating to ownership of property under act relative to security interests stated and applied. City of Arkansas City v. Anderson, 242 Kan. 875, 891, 752 P.2d 673 (1988).

23. Unsecured creditor with knowledge of another's unperfected security interest not entitled to priority. Farmers State Bank v. Production Cred. Ass'n of St. Cloud, 243 Kan. 87, 97, 755 P.2d 518 (1988).

24. Absent authorization, borrower and seller of excavator could not modify lender's perfected security interest. U.S. v. Ables, 739 F. Supp. 1439, 1446 (1990).

25. Since holder of unsecured security interest in motor vehicle cannot recover from bona fide purchasers, holder damaged thereby. Mid American Credit Union v. Board of Sedgwick County Comm'rs, 15 Kan. App. 2d 216, 224, 806 P.2d 479 (1991).

26. Security interest in wife's interest in equipment unperfected; financial statement not listing her name seriously misleading. In re Griffin, 141 B.R. 207, 209, 214 (1992).

27. Whether creditor could reach secured, perfected assets of debtor who allegedly fraudulently transferred assets examined. Printed Media Services v. Solna Web, Inc., 838 F. Supp. 1453, 1461 (1993).

28. Certificates of title sufficient to perfect security interest despite creditor being listed as vehicle owner. In re Charles, 323 F.3d 841, 845 (2003).

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KANSAS COMMENT, 1996

Subsection (1). This subsection, which determines when filing is necessary to perfect a security interest, contains a number of Kansas variations from the 1995 Official Text. The subsection should be read together with 84-9-115 and 84-9-116 (investment properties), 84-9-304 and 84-9-305, and 84-9-313 (fixtures). The provisions together set forth the rules determining how a security interest should be perfected as to various kinds of collateral. Subsection (1)(a) provides that collateral in the secured party's possession (under either a pledge or following repossession upon default) eliminates the need to file, at least if 84-9-305 allows perfection by possession. If stocks and bonds were involved, 84-9-115 generally provides that control is a way to perfect, and control includes possession (84-8-106); if goods were involved, the secured party could perfect either by taking possession or filing; and if accounts receivable were involved, filing under this subsection would be the only way to perfect. Thus, everything depends upon the classification of the collateral. Paragraph (1)(b) eliminates the need for filing or possession when perfection is automatic, as in the case of instruments and documents temporarily perfected under 84-9-304, or proceeds temporarily perfected under 94-9-306. Paragraph (1)(c) gives automatic perfection to an assignment of a beneficial interest in a trust or estate, an exclusion adopted in 1972.

The 1972 Official Text version of subsection (1)(d) provides for automatic perfection of purchase money security interests in consumer goods (except titled motor vehicles and fixture filings). Kansas is one of the few states in the country which has restricted this exception to purchases of $1,000 or less. It would seem that a series of purchases over time, each of which was less than $1,000 could all be automatically perfected, but if the same items were purchased at one time the secured party would have to perfect. With the adoption of § 522(f) of the bankruptcy code, under which nonpurchase money loans using consumer goods as collateral can be set aside in bankruptcy, and 16a-5-103, which prohibits a deficiency judgment if there is a repossession of consumer collateral with a cash price of less than $1,000, there is little incentive for finance companies to use consumer goods as collateral except in a purchase money context. Automatic perfection is also not allowed for most vehicles subject to titling and fixtures.

Paragraph (1)(e) exempts from the filing requirements an assignment of accounts which does not constitute a significant part of the assignor's outstanding accounts. A profession lender should file, however, to avoid litigation regarding how much is "a significant part." Note that certain types of assignments are totally excluded from the scope of Article 9 by 84-9-104(f) and Kansas Comment 1996 thereto.

Paragraph (1)(f) eliminates the need for a collecting bank to file a financing statement to perfect its security interest in an item for which provisional credit has been withdrawn. See 84-4-201 and 84-4-208 and Kansas Comments 1996 to those sections.

Paragraph (1)(g) exempts from the filing requirements of Article 9 an assignment for the benefit of all the transferor's creditors; this exemption was added in 1972 because assignments for the benefit of creditors are not financing transactions in the usual sense.

Paragraph (1)(h) was added to the Official Text in 1994 and is new to Kansas. It exempts the automatically perfected security interests in investment property.

Subsection (2). Subsection (2) provides that an assignment of a perfected security interest need not be filed by the assignee. Pre-UCC Kansas law was in accord. Even though there is no duty to perfect an assignment of a security interest, 84-9-405 sets forth a permissive device whereby a secured party who has assigned all or part of a security interest may have the assignment noted of record.

Subsection (3). Subsection (3)(a) defers to federal law in perfecting a security interest in property subject to a federal statute which provides for national filing. The most obvious example is the FAA Act of 1958, which establishes a preemptive national system for perfecting security interests in civil aircraft. See 49 U.S.C. § 1403 (central filing of liens with FAA office in Oklahoma City). Filing a UCC financing statement covering a private plane will do absolutely no good. Other federal statutes which occupy the field of filing (though not necessarily other aspects of Article 9 such as priorities and rights upon default) include the 1976 Copyright Act (17 U.S.C. § 205), the federal patent assignment statute (35 U.S.C. § 261), and the federal trademark law (15 U.S.C. § 1060).

Subsections (3)(b) and (3)(c) make it clear that security interests in motor vehicles can be perfected only by indication of the security interest on the certificate of title. These matters are governed by K.S.A. 8-135, which must be read in close relationship to this subsection. Of course if the vehicle is not required to be registered, as would be the case with most farm implements, filing under Article 9 would again come into play. On the other hand, mobile homes are generally titled and perfection would be governed by K.S.A. 8-135 rather than Article 9, even though other aspects of the secured transaction would still fall within the scope of the UCC.

A series of three cases applying Kansas law nicely illustrates the interplay between K.S.A. 8-135 and UCC Article 9. In In re Littlejohn, 519 F.2d 356 (10th Cir. 1975), a bank was held to have a perfected security interest in a motor vehicle even though its lien was never noted on the certificate of title. Although the dealer issued the buyers a sales tax receipt and bill of sale showing the bank's lien, the buyers kept the documents and never applied for registration of title to the car. The court of appeals reversed the trial court and found that the bank's security interest was nonetheless perfected since no purchaser could have bought from the debtor without the title, which would have shown the bank's lien if it were issued. In response to the earlier trial court decision holding the security interest was not valid, the Kansas legislature in 1975 amended K.S.A. 8-135, as well as this subsection, to authorize the filing of a "notice of security interest" to cover the secured party in the interim between the financing and notation of the creditor's lien on the certificate of title. This alternative is still available. In In re Kerr, 598 F.2d 1206 (10th Cir. 1979), the bank got its name on the bill of sale as lienholder but the debtor never made application for title and the bank never filed the optional "notice of security interest." Distinguishing Littlejohn, the court held that the bank was unperfected since it had two different ways to perfect and chose to employ neither. See also In re Kern, 443 F. Supp. 219 (D. Kan. 1977), where the bank lost the car as a preference in bankruptcy for failing even to get its name noted on the bill of sale until shortly before bankruptcy. Kern is still good law.

Revisor's Note:

Former section 84-9-302 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Subsections (1), (3) and (4) cited in article concerning "floor plan financing" under UCC, Charles H. Oldfather, 14 K.L.R. 571, 572, 576, 577 (1966).

"Some Secured Transactions With the Farmer," Van Smith, 35 J.B.A.K. 299, 300, 338 (1966).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 16 K.L.R. 437, 439, 440 (1968).

Cited in article concerning sureties, Larry A. Withers, 10 W.L.J. 356, 357 (1971).

Mineral lease exemptions from UCC coverage for security purposes, Bryan E. Nelson, 23 K.L.R. 367, 371 (1975).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 132 (1975).

Legislative survey, "Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 217, 227 (1976).

Tenth Circuit survey on Contracts, U.C.C. and U.C.C.C., Martin R. Ufford, 15 W.L.J. 541, 549, 550 (1976).

Perfecting security interests in mobile homes, 18 W.L.J. 708, 709, 711 (1979).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 27 K.L.R. 301, 303, 305 (1979).

"The Perfection of Security Interests in Motor Vehicles in Kansas-Perfection or Confusion?" Susan C. Jacobson, 28 K.L.R. 315 (1980).

"Secured Transactions: The Priority of Future Advances," Jennifer A. Strus, 21 W.L.J. 717 (1982).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 357, 358 (1984).

"Is the Agricultural Security Interest Legally Healthy?" David A. Lander, 34 K.L.R. 505, 508 (1986).

"Commercial Law: Identifiable Proceeds and the Knowledge Factor [Farmers State Bank v. Production Credit Association, 243 Kan. 87, 755 P.2d 518 (1988)]," Mahesh I. Patel, 28 W.L.J. 295, 305 (1988).

"To Be (Transformed) or Not to Be: The Transformation Versus Dual-Status Rules for Purchase-Money Security Interest Under Kansas' Former and Revised Article 9," Christopher Harry, 50 K.L.R. 1095 (2002).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 835, 837 (2003).

CASE ANNOTATIONS

1. Cited in case concerning summary judgment and the requirements therefor. State Bank of Burden v. Augusta State Bank, 207 Kan. 116, 120, 483 P.2d 1068.

2. There was a genuine issue of fact as to whether the trailers sought to be replevied under a security agreement were "vehicles held as inventory for sale" as that term is used in subsection (3)(c) hereunder. State Bank of Burden v. Augusta State Bank, 207 Kan. 116, 118, 120, 483 P.2d 1068.

3. Subrogation pursuant to surety contract not a "security interest" within meaning of statute. United States Fidelity & Guaranty Co. v. First State Bank, 208 Kan. 738, 749, 494 P.2d 1149.

4. Description of collateral insufficient to give protection as secured creditor in bankruptcy. In re Fuqua, 330 F. Supp. 1050, 1053.

5. Mentioned in discussion of commercial security interest priority over federal tax liens; circumstances necessary for priority. Donald v. Madison Industries, Inc., 483 F.2d 837, 844.

6. Chief place of business of purchasers of truck tractor used in interstate commerce was Kansas; lien required to be perfected hereunder; security interest unprotected. In re Dobbins, 371 F. Supp. 141, 143, 144, 145, 146.

7. Subsection (3)(c) and certificate of title statutes construed; security interest perfected by lien notation on bill of sale. In re Littlejohn, 519 F.2d 356, 357, 358, 359. Rule announced In re Littlejohn abandoned; amendment to subsection (3)(c) changes rule. Matter of Kerr, 598 F.2d 1206, 1207, 1208.

8. Cited in holding enforceable lien existed between original parties; no action for damages for breach of contract when damage not a result of such breach. Kansas State Bank v. Overseas Motosport, Inc., 222 Kan. 26, 28, 29, 563 P.2d 414.

9. Lending bank has obligation to have its lien on mobile home noted on bill of sale. Matter of Kern, 443 F. Supp. 219, 220.

10. Mentioned in discussing priorities under conflicting security interests. Allis-Chalmers Cred. Corp. v. Cheney Investment, Inc., 227 Kan. 4, 7, 605 P.2d 525.

11. Secured party's interest in collateral prior to that of purchaser if such interest is perfected; if interest not perfected no priority over purchaser for value without knowledge. Farmers State Bank v. Cooper, 227 Kan. 547, 554, 608 P.2d 929.

12. Subsection (3)(c) construed; where alternative procedure not utilized, bank's lien held subordinate to trustee's lien. Matter of Kerr, 598 F.2d 1206, 1207, 1208.

13. Cited in discussing perfecting security interest in Kansas perfected in another state. Victory Nat'l Bank of Nowata v. Stewart, 6 Kan. App. 2d 847, 851, 636 P.2d 788 (1981).

14. Notice filing applies to perfection of security interests; same effect as filing financing statement. In Re Key Truck Leasing, Inc., 9 B.R. 837, 838, 841 (1981).

15. Right to receive payments under a contract for deed is a "general intangible"; must be perfected by filing with secretary of state. In re Southern, 32 B.R. 761, 762, 765 (1983).

16. If properly employed, UCC protects unpaid sellers in variety of ways. Holiday Rambler Corp. v. First Nat. Bank and Trust, 723 F.2d 1449, 1453 (1983).

17. Unless financing statement filed no perfected security interest arises. First Nat'l Bank of Gaylord v. Autrey, 9 Kan. App. 2d 96, 98, 673 P.2d 448 (1984).

18. Patent and trademark office filing system as preempting UCC with respect to patent assignments examined. In re Otto Fabric, Inc., 55 B.R. 654, 655 (1985).

19. Cited; action for failing to disclose existence of prior security interest, statute of limitations examined. Borg Warner Acceptance Corp. v. Kansas Secretary of State, 240 Kan. 598, 599, 731 P.2d 301 (1987).

20. Exclusive methods for perfecting security interest in a mobile home contained herein as specifically described in K.S.A. 8-135(c)(5). Beneficial Finance Co. v. Schroeder, 12 Kan. App. 2d 150, 154, 737 P.2d 52 (1987).

21. Land description in financing statement covering crops sufficient for security interest to maintain conversion action for unauthorized sale. U.S. v. Smoky Valley Bean, Inc., 673 F. Supp. 1551, 1554 (1987).

22. Cited; effect of Minnesota financing statements filed in Kansas with no after-acquired clauses on another's security interest examined. Farmers State Bank v. Production Cred. Ass'n of St. Cloud, 243 Kan. 87, 95, 755 P.2d 518 (1988).

23. Federal filing as not required to perfect security interest in patents against trustee in bankruptcy examined. City Bank and Trust Co. v. Otto Fabric, Inc., 83 B.R. 780, 782 (1988).

24. PIK certificates as nonnegotiable, creditor's protection of security interest therein, right to proceeds therefrom determined. In re George, 85 B.R. 133, 134, 145 (1988).

25. When certificate of motor vehicle title issued, lien must appear thereon to be perfected. Mid American Credit Union v. Board of Sedgwick County Comm'rs, 15 Kan. App. 2d 216, 223, 806 P.2d 479 (1991).

26. Seller's security interest in modular home was perfected by notation on home's certificate of title. In re Reed, 147 B.R. 571, 572, 573, 574 (1992).

27. Whether RTC qualified as holder in due course of financial instruments acquired in bulk transfer between itself and savings and loan examined. Resolution Trust Corp. v. A.W. Associates, Inc., 869 F. Supp. 1503, 1504 (1994).

28. Secured creditor's error in listing itself as owner rather than lienholder on certification of title did not render security interest unperfected. In re Charles, 278 B.R. 216, 225 (2002).

29. Creditor's security interest no longer noted on vehicle's certificate of title held unperfected. In re Trible, 290 B.R. 838, 547 (2003).

30. Strict compliance with perfection provisions not required to perfect motor vehicle certificate of title security interest. In re Charles, 323 F.3d 841, 844 (2003).

31. If secured party assigns perfected security interest, no filing required to continue perfected status against creditors. In re Jackson, 358 B.R. 412, 419 (2007).

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KANSAS COMMENT, 1996

This section does not vary from the 1995 Official Text, and is the same as the prior provision. When property becomes subject to a security interest, the security interest has "attached." (See 84-9-203.) Attachment requires three "steps" or "events": agreed upon possession by the secured party or a signed security agreement describing the collateral, the passing of value and the debtor having rights in the collateral. An attached security interest is enforceable against the debtor even though it is not perfected. Kansas State Bank v. Overseas Motosport, Inc., 222 K. 26, 563 P.2d 414 (1977). A perfected security interest may be subordinate to some competing security interests (e.g., those filed earlier or purchase money interests under 84-9-312), but generally after perfection the secured party is protected against creditors, purchasers and the debtor's trustee in bankruptcy. If steps for perfection (normally, filing or possession) have been taken in advance, the security interest is perfected at the moment it attaches. A wise creditor will consider filing a financing statement before the credit is extended, so that its priority will run from the earliest possible date.

Subsection (2) simply provides that, once a security interest is perfected, it is continuously perfected even though it is subsequently perfected in some other way. For example, a creditor with possession can file a financing statement against the collateral and then relinquish possession to the debtor and does not lose its continuously perfected status.

Revisor's Note:

Former section 84-9-303 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Perfection of security interests discussed with respect to "floor plan financing" under article 9 of UCC, Charles H. Oldfather, 14 K.L.R. 571, 589, 590 (1966).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 834 (2003).

CASE ANNOTATIONS

1. Mentioned in discussion of commercial security interest priority over federal tax liens; circumstancesnecessary for priority. Donald v. Madison Industries, Inc., 483 F.2d 837, 843, 844.

2. Bankruptcy proceeding; past due secured note; to determine whether impermissible preference given, date of transfer was date value given; claim not secured. E. F. Corporation v. Smith, 496 F.2d 826, 828, 831.

3. Financing statement failed to satisfy statutory requirements; security interest not perfected until bank took actual possession. Transport Equipment Co. v. Guaranty State Bank, 518 F.2d 377, 382.

4. Mentioned in discussing priorities under conflicting security interests. Allis-Chalmers Cred. Corp. v. Cheney Investment, Inc., 227 Kan. 4, 7, 605 P.2d 525.

5. Unless security interest attaches, contentions concerning perfection irrelevant. First Nat'l Bank of Gaylord v. Autrey, 9 Kan. App. 2d 96, 98, 673 P.2d 448 (1984).

6. Statute contemplates existence of security agreement before security interest perfected; previously filed financing statement alone insufficient. J.I. Case Credit Corp. v. Foos, 11 Kan. App. 2d 185, 187, 717 P.2d 1064 (1986).

7. Land description in security agreement covering crops sufficient for security interest to maintain conversion action for unauthorized sale. U.S. v. Smoky Valley Bean, Inc., 673 F. Supp. 1551, 1554 (1987).

8. Priority between right of setoff and perfected security interest examined. Bank of Kansas v. Hutchinson Health Services, Inc., 13 Kan. App. 2d 421, 425, 773 P.2d 660 (1989).

9. Inadequate land description of growing crops in security interest does not merge with reasonable identification in financing statement to perfect security interest. Garst Seed Co. v. Wilson, 17 Kan. App. 2d 130, 133, 833 P.2d 138 (1992).

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KANSAS COMMENT, 1996

This section does not vary from the 1995 Official Text, which slightly amended the prior provision. Subsection (1) provides that chattel paper or negotiable documents of title may be perfected by filing; 84-9-305 provides that they may also be perfected by possession; and 84-9-308 and 84-9-309 establish a set of priority rules which makes perfection by possession preferable to filing. If the collateral is proceeds of a letter of credit, money or instruments (defined in 84-9-105(1)(i)), possession is the only way to perfect unless one of the rules governing limited automatic perfection comes into play. Subsections (2) and (3) set forth the rules governing documents of title.

Under subsection (2), as long as a negotiable document covering the goods is outstanding, the proper way to deal with the goods is through the document. Any interest perfected directly in the goods while the document is outstanding is subordinated to the rights in the outstanding negotiable document. The most important Kansas application of this rule is probably the warehouse receipt issued by a grain elevator. Note, however, that a bank with a perfected security interest in growing crops will not automatically be subordinated if the crops are later delivered to an elevator, which issues a negotiable warehouse receipt; in such a case, the bank had a security interest before the goods were delivered to the issuer of the warehouse receipt. In determining priorities in this situation, see also K.S.A. 84-7-501, 84-7-502 and 84-7-503.

Subsection (3) is concerned with nonnegotiable documents of title, such as scale tickets issued by a grain elevator. Since title to the underlying goods is not seen as reified, or "locked in the document," as it is with negotiable documents of title, the secured party may perfect its interest directly in the goods by filing. Two other methods of perfection are also provided: (1) issuance of the document in the secured party's name, and (2) receipt of notification of the secured party's interest by the bailee.

The 21-day grace periods in subsections (4) and (5) were not found in pre-UCC Kansas law. These subsections give protected status in bankruptcy to security interests in instruments and documents for a short period of time, although there has been no filing and the collateral is in the debtor's possession. There is a variety of legitimate reasons, some of them described in subsections (5)(a) and (5)(b) and Official Comment 4, why such collateral has to be temporarily released to a debtor; in such cases, no useful purpose would be served by cluttering the files with records of such exceedingly short-term transactions. However, the creditor relying on the short-term automatic perfection granted by these subsections runs the risk that the debtor will sell the collateral or double-finance by delivering the collateral to an innocent third party which would take free under 84-9-308 or 84-9-309.

Revisor's Note:

Former section 84-9-304 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Secured transactions under the U.C.C., Gerald D. Haag, 21 K.L.R. 107 (1972).

"Close Corporations and the Kansas General Corporation Code of 1972," Edwin W. Hecker, Jr., 22 K.L.R. 489, 535 (1974).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 132 (1975).

"Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 217 (1976).

"Right of Secured Party to Recover Proceeds Commingled in Debtor's Bank Account," Kristen D. Balloun, 28 K.L.R. 325, 326, 327 (1980).

"Is the Agricultural Security Interest Legally Healthy?" David A. Lander, 34 K.L.R. 505, 508 (1986).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 782 (2003).

Attorney General's Opinions:

Banks; trust powers; investment of public moneys by governmental subdivisions, units and entities; repurchase agreements. 92-9.

CASE ANNOTATIONS

1. Mentioned in discussion of commercial security interest priority over federal tax liens; circumstances necessary for priority. Donald v. Madison Industries, Inc., 483 F.2d 837, 844.

2. Possession defined as unequivocal, absolute and notorious; mere physical presence, standing alone, does not perfect security interest. Transport Equipment Co. v. Guaranty State Bank, 518 F.2d 377, 380, 381.

3. Consignor who failed to perfect proceeds within ten-day period not entitled to reclaim proceeds. In re Critiques, Inc., 29 B.R. 941, 942, 946 (1983).

4. Instruments must be perfected by possession. In re Southern, 32 B.R. 761, 762, 765 (1983).

5. Cited; foreclosing creditor's duty to check UCC files, give notice of pending sale, disclose subsequent purchaser's name examined. Utility Trailers of Wichita, Inc. v. Citizens Nat'l Bank & Tr. Co., 11 Kan. App. 2d 421, 726 P.2d 282 (1986).

6. Perfection of security interest in instrument, mortgagee's assignment of notes and mortgages as security, relative priority of interests examined. Army Nat'l Bank v. Equity Developers, Inc., 245 Kan. 3, 4, 13, 774 P.2d 919 (1989).

7. The effect failure to record assignment of mortgage on rights of the assignee in relation to junior mortgagees discussed. Bank Western v. Henderson, 255 Kan. 343, 348, 874 P.2d 632 (1994).

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KANSAS COMMENT, 1996

This section does not vary from the 1995 Official Text. It allows the secured party to perfect its security interest by taking possession of the collateral. It recognizes the common-law pledge. But what is "possession?" There is no definition of that critical term in the UCC, so that case law will have to fill the void. Official Comment 2 of the section gives some guidance: "Possession may be by the secured party himself or by an agent on his behalf: it is of course clear, however, that the debtor or a person controlled by him cannot qualify as such an agent for the secured party." It has been held that an escrow agent can retain possession for the secured party as a "bailee with notice" under this section, even though the creditor did not have exclusive dominion over the escrow agent; lack of control by the debtor was sufficient to put third parties on notice of the security interest. In re Copeland, 531 F.2d 1195 3d Cir. 1976). It has even been held that the debtor's attorney can act as an escrow agent for the secured party if the attorney's role is made clear. See Norwest Bank St. Paul, N.A. v. Bergquist, 823 F.2d 198 (8th Cir. 1987). Conversely, leaving the debtor in possession of the collateral as the secured party's "collection agent" does not bring perfection. In re Bruce Farley Corp., 612 F.2d 1197 (9th Cir. 1980). The presence of employees of the secured party on the debtor's premises where the collateral is located has been held to be insufficient possession. Transport Equip. Co. v. Guaranty State Bank, 518 F.2d 377 (10th Cir. 1975) (applying Kansas law). On the other hand, where a secured party in possession of an instrument (promissory note, stocks or bonds) as pledgee acknowledges and accepts the instructions of the pledgor-debtor to deliver the collateral to the junior secured party after the debt to the senior is satisfied, the senior creditor has been held to be a bailee with notice, so that the junior creditor has a valid Article 9 pledge. See Landmark Land Co. v. Sprague, 33 U.C.C. Rep. 53 (S.D.N.Y. 1981). Of course the safest way for the junior creditor to handle the "double pledge" situation is to document it with a tripartite agreement among debtor, senior and junior.

Revisor's Note:

Former section 84-9-305 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Impact of the Uniform Consumer Credit Code upon Kansas, Barkley Clark, 18 K.L.R. 277, 288 (1970).

"Bankruptcy: Physical Possession May Still Be a Voidable Preference," David G. Arst, 38 J.B.A.K. 193, 199 (1969).

Secured transactions under the U.C.C., Gerald D. Haag, 21 K.L.R. 107 (1972).

"Close Corporations and the Kansas General Corporation Code of 1972," Edwin W. Hecker, Jr., 22 K.L.R. 489, 535 (1974).

"Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 217 (1976).

Tenth Circuit survey on Contracts, U.C.C. and U.C.C.C., Martin R. Ufford, 15 W.L.J. 541, 543, 544 (1976).

"Is the Agricultural Security Interest Legally Healthy?" David A. Lander, 34 K.L.R. 505, 508 (1986).

Attorney General's Opinions:

Banks; trust powers; investment of public moneys by governmental subdivisions, units and entities; repurchase agreements. 92-9.

CASE ANNOTATIONS

1. Mentioned in discussion of commercial security interest priority over federal tax liens; circumstances necessary for priority. Donald v. Madison Industries, Inc., 483 F.2d 837, 844.

2. Possession defined as unequivocal, absolute and notorious; mere physical presence, standing alone, does not perfect security interest. Transport Equipment Co. v. Guaranty State Bank, 518 F.2d 377, 380, 381, 382.

3. Cannot employ elements of filing method to defeat nonretroactivity rule when security interest perfected by possession. Transport Equipment Co. v. Guaranty State Bank, 518 F.2d 377, 382.

4. Financing statement failed to satisfy statutory requirements; security interest not perfected until bank took actual possession. Transport Equipment Co. v. Guaranty State Bank, 518 F.2d 377, 382.

5. Mentioned in considering assignment by one partner of benefits under contract for sale of partnership assets. Wellsville Bank v. Nicolay, 7 Kan. App. 2d 172, 174, 638 P.2d 975 (1982).

6. Right to receive payments under a contract for deed is a "general intangible"; must be perfected by filing with secretary of state. In re Southern, 32 B.R. 761, 762, 765 (1983).

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KANSAS COMMENT, 1996

Subsection (1). This subsection, which does not vary from the 1995 Official Text, defines the term "proceeds." The term is extremely broad. As an example, assume that a bank is financing an appliance dealer. The proceeds generated from the sale of new inventory could include a great variety of proceeds: accounts receivable, instruments, chattel paper, cash, trade-ins, and bank deposit accounts, to name the most obvious. In this list, the cash, checks, credit card drafts and deposit accounts would qualify as "cash proceeds." The accounts receivable, notes, chattel paper and trade-ins would qualify as "noncash proceeds." The distinction between cash proceeds and noncash proceeds becomes important in determining priorities under subsections (3) and (4). The 1972 amendments qualified an insurance payout as "proceeds," even in the absence of a loss payee clause; earlier decisions were in conflict on that issue. Any payments made with respect to investment property is proceeds, as a result of the 1994 amendment of the Official Text. Proceeds also includes proceeds of proceeds, and proceeds claims can be made to collateral even after many exchanges, if the transactions can be traced. Thus a secured party with a security interest in inventory can claim the new inventory acquired with cash proceeds of old inventory as proceeds of proceeds, in addition to any claim from an after acquired property clause. See C.O. Funk and Sons, Inc. v. Sullivan Equipment, Inc. 431 N.E.2d 370 (Ill. 1982)

Subsection (2). Subsection (2), which does not vary from the 1995 Official Text, provides that a security interest continues in collateral, allowing secured parties to claim both the collateral and the proceeds on sale or other disposition, with two exceptions discussed below. Although this may seem like a windfall, the difficulty of tracing either the proceeds or the collateral often means the secured part is at a substantial risk after an unauthorized sale by an often insolvent debtor. The secured party now has an automatic right to proceeds on the disposition of collateral. Nor do proceeds need to be mentioned in the security agreement. 84-9-203(3).

The phrase "Except where this article otherwise provides" is the first exception to a secured party's right to claim the collateral after disposition. The exceptions are contained in the 84-9-300's which detail when a mere secured party is subordinate to third party interests in the collateral, primarily 84-9-301, and when even perfected secured parties are subordinate to third party interests, the most common of which are most of the provisions from 84-9-307 to 84-9-319.

The second exception to the secured party's continued right to the collateral after disposition is if the disposition is authorized by the secured party in the security agreement "or otherwise." The leading Kansas case on point of "or otherwise" is North Central Kansas Production Credit Association v. Washington Sales Co., 223 K. 689, 577 P.2d 35 (1978), which was an action for conversion brought by an Article 9 secured party against a livestock auction firm which had sold encumbered cattle at the direction of the debtor and had paid over the proceeds to the debtor. The secured party sought to recover from the auction company under 84-9-307(1), which provides that persons buying farm products cannot take free as buyers in ordinary course of business; and under this subsection, which provides that a security interest continues in collateral notwithstanding disposition, unless the secured party authorized the disposition. (Since 1986, however, the secured party would have had to comply with the terms of the Food Security Act of 1985, 7 U.S.C. § 1631, discussed in the Kansas Comment 1996 to 84-9-307(1).) The court concluded that the secured party's acceptance of proceeds from the debtor after unauthorized sales, without remonstrating with the debtor for violating the anti-sale provision of the security agreement, did not of itself constitute an implied waiver of the security interest in the cattle. The court did find an express waiver, however, because the PCA loan officer had orally told the debtor that he could sell the cattle so long as he applied the proceeds to the loan. In short, there was no conversion because the secured party had given authorization for sale, not in the security agreement, but "otherwise." The court also rejected the concept of "conditional authorization." On the other hand, if there is no evidence of express consent to sale, the mere acceptance of proceeds from prior sales is presumably not enough to release the security interest in Kansas.

It should be emphasized that, absent authorization to sell, a perfected security interest will continue in both the collateral and any "identifiable proceeds." For example, if a bank has taken a perfected security interest in a farm implement which the debtor without authority trades in to the implement dealer for a new model, and if the implement dealer (or its sales finance company) finances the purchase of the new unit, the bank has several options: (1) it can pursue the old unit under this subsection, by way of replevin or conversion; and (2) it can claim a security interest in the new unit as "proceeds" from disposition of the old, and, (3) if its security agreement contains an after-acquired property clause, it can claim the new model as after-acquired property. Although its security interest may well be subordinate to the implement dealer's purchase money security interest under 84-9-312(4) as to the amount in excess of the value of the trade-in, any equity would go to the bank until its debt was satisfied.

Cash proceeds generated from the sale of inventory or the collection of accounts, and then deposited in a bank account, are also "identifiable cash proceeds" in which the security interest will remain perfected under 84-9-306(3). If the collections are segregated into a special proceeds account, there is no doubt that the perfected status will carry over. Moreover, Kansas and many other jurisdictions hold that the proceeds remain "identifiable" even though they are commingled with other funds in the bank account. See Bank of Kansas v. Hutchinson Health Services, Inc., 12 K.A.2D 87, 735 P.2D 256 (1987). In Tuloka Affiliates, Inc. v. Security State Bank, 229 K. 544, 627 P.2d 816 (1981), the court recognized a bank account as identifiable cash proceeds of an inventory loan, but gave priority to the bank's right to receive payments in the ordinary course of the debtor's business. See 84-9-306 Official Comment 2.(c). Cases in other jurisdictions include C.O. Funk and Sons, Inc. v. Sullivan Equipment, Inc. 431 N.E.2d 370 (Ill. 1982)(court held the secured party could trace proceeds into account and use the lowest intermediate balance rule, but the secured party failed to carry the factual burden of tracing its funds into the account); Michigan Nat'l Bank v. Flowers Mobile Home Sales, Inc., 217 S.E.2d 108 (N.C. App. 1975) (court applies trust principles to allow the commingled proceeds to retain their identifiability); Universal C.I.T. Corp. v. Farmers Bank of Portageville, 358 F. Supp. 317 (E.D. Mo. 1973) (court invokes "lowest intermediate balance rule" for tracing); Brown & Williamson Tobacco Corp. v. First Nat'l Bank, 504 F.2d 998 (7th Cir. 1974) (secured party allowed to trace commingled proceeds).

Subsection (3). This subsection does not vary from the 1995 Official Text. Subsection (3) addresses the problem of whether a perfected secured interest in the collateral is automatically perfected in the proceeds. It does not have any application in cases involving insolvency proceedings, which are addressed in 84-9-306(4). 84-9-306 (3) provides that in most, but not all, cases the security interest in proceeds is automatically continuously perfected, and subsequent creditors, secured parties and other purchasers, such as buyers, will be subject to the perfected security interest in the proceeds. Therefore, third parties should be extremely cautious when dealing with a debtor who is subject to a perfected security interest.

If the secured party had a perfected security interest in the collateral, the security interest in the proceeds is also perfected for ten days, in all cases. 84-9-306(3)(d). It is also continuously perfected automatically if the conditions in 84-9-306(3)(a) through (c) are met, as discussed below.

First, under 84-9-306(3)(a), in the first part of the paragraph, a claim to proceeds will be continuously perfected if the perfected secured party has filed a financing statement covering the original collateral and the proceeds are collateral which could be perfected by a filing in the same office. To illustrate, assume the debtor is in the business of selling inventory and the perfected secured party has filed for inventory with the secretary of state. If the debtor sells inventory on open credit, the proceeds is an account, the security interest in which could be perfected by filing in the secretary of state's office. Therefore the perfected secured party has a continuous perfected security interest in the account. The same would be true if the proceeds were chattel paper (a note and a security interest), trade-ins (used inventory), or property that would be used by the debtor as equipment. All could be perfected by a filing in the secretary of state's office, therefore all are continuously perfected. There would be no automatic perfection for instruments because filing is not effective. Cash proceeds are discussed in 84-9-306(3)(b) and (c), discussed below.

The last part of paragraph 84-9-306(3)(a) provides for a more restrictive rule for proceeds acquired with cash proceeds. In that case, the security interest in the proceeds is continuously perfected only if the filed financing statement for the original collateral indicates the type of property which are the proceeds. Thus, in the hypothetical above, if the debtor received cash proceeds and used them to buy more inventory, the secured party would have a perfected proceeds claim to the new inventory, assuming it could adequately trace them. (This would be in addition to its claim under an after-acquired property clause, if it had one in the security agreement.) Because the vast majority of business filings in Kansas are in the secretary of state's office (see 84-9-401), the security interest in proceeds will usually be continuously perfected.

84-9-306(3)(b) and (c) provide that a security interest is automatically continuously perfected in identifiable cash proceeds. This would include commingled bank accounts, using the lowest intermediate balance rule to trace them. See Bank of Kansas v. Hutchinson Health Services, Inc., 12 K.A.2d 87, 735 P.2d 256 (1987). 84-9-306(1) includes "money, checks, deposit accounts and the like" in the definition of cash proceeds.

84-9-306(3)(d) provides the secured party a continuously perfected security interest in any case in which it is not automatically perfected by the above provisions, if it perfects within the ten day period. The major common application for this provision in the hypothetical given above will be equipment acquired with cash proceeds (defined in 84-9-306(1)). It would be extremely rare for other types of collateral, such as general intangibles, investment property or consumer goods, to be proceeds.

Subsection 4. The 1995 Official Text, sets forth special rules governing the right to proceeds in case of the debtor's insolvency (normally, bankruptcy). A perfected security interest in proceeds will be upheld in all identifiable noncash proceeds (e.g., chattel paper, accounts receivable, trade-ins), and in separate deposit accounts where the proceeds are not commingled with other funds. It will also be upheld in currency and checks which have neither been commingled with other cash nor deposited in a bank account. But if cash proceeds have been commingled with other funds of the debtor, the security interest is subject to any right of setoff if the bank has a superior right of setoff, and it generally is limited to the amount of proceeds received by the debtor within ten days prior to the insolvency proceedings. For a good application of this last rule, see In re Dexter Buick-GMC Truck Co., 28 U.C.C. Rep. 243 (D.R.I. (Bankr.) 1980), where the secured creditor was able to trace proceeds from the sale of motor vehicle inventory into the corporate checking account by using cash receipt journals, invoices, and bank deposit statements. Since the amount of proceeds deposited within ten days prior to bankruptcy far exceeded what was in the account on the date of the petition, the creditor could claim the entire account as identifiable cash proceeds under subsection (4)(d). For decisions involving the ten-day rule as it relates to voidable preferences in bankruptcy, compare In re Gibson Products of Arizona, 543 F.2d 652 (9th Cir. 1976) with Fitzpatrick v. Philco Fin. Corp., 491 F.2d 1288 (7th Cir. 1974). The preferable reading of 84-9-306(4)(d) would be that it creates a fund from which a specific perfected secured party's claim can be satisfied. The fund is any account in which the secured party's proceeds were commingled at any time. The specific secured party's claim is the amount of any proceeds from that particular secured party's collateral within ten days prior to the insolvency proceeding (and less any cash proceeds received under (4)(a), (b) and (c).

Subsection (5). This subsection, which does not vary from the 1995 Official Text, sets forth rules governing returned or repossessed goods. Subsection (5)(a) reinforces 84-9-205 by providing that the original security interest continues in returned goods. For a good application of this subsection, see In re Frontier Mobile Home Sales, Inc., 635 F.2d 726 (8th Cir. 1980). Subsection (5)(b) provides that an unpaid transferee of chattel paper who gave new value and took possession of the chattel paper has a security interest in the goods with priority over the security interest asserted under subsection (5)(a). Subsection (5)(c) allows an unpaid transferee of an account to have a security interest, but it is subordinate to the security interest in the goods provided for in subsection (5)(a). Subsection (5)(d) requires the unpaid transferee under subsections (5)(b) and (5)(c) to perfect its security interest to be protected against creditors of the transferor and purchasers of the returned or repossessed goods.

Revisor's Note:

Former section 84-9-306 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

"Proceeds" discussed in article concerning "floor plan financing," Charles H. Oldfather, 14 K.L.R. 571, 573, 578, 580, 585 (1966).

Inclusion of "proceeds" as collateral in farm financing and continuity thereof discussed, Van Smith, 35 J.B.A.K. 300, 302 (1966).

Secured transactions under the U.C.C., Gerald D. Haag, 21 K.L.R. 107 (1972).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 171 (1975).

"Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 218, 224, 225, 228 (1976).

Survey of contracts, UCCC and UCC, Franklin E. Lynch and Larry Schneider, 15 W.L.J. 324, 334, 335 (1976).

U.C.C. section discussed in note concerning a secured party's claim in excess of identifiable proceeds in bankruptcy proceeding, 16 W.L.J. 738, 739, 741, 742, 743, 744 (1977).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 27 K.L.R. 301, 307 (1979).

"Right of Secured Party to Recover Proceeds Commingled in Debtor's Bank Account," Kristen D. Balloun, 28 K.L.R. 325 (1980).

"Commercial Law—Problems with Identifiable Proceeds and Transfers in Ordinary Course in Floor Plan Financing," Richard L. Cram, 30 K.L.R. 478, 480, 482 (1982).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 359, 365 (1984).

"Agricultural Credit and The Uniform Commercial Code: A Need for Change?" Keith G. Meyer, 34 K.L.R. 469, 479, 483, 485 (1986).

"Clear Title: A Buyer's Bonus, A Lender's Loss—Repeal of UCC § 9-307(1) Farm Products Exception by Food Security Act § 1324 [7 U.S.C. § 1631]," Mark V. Bodine, 26 W.L.J. 71, 73, 75 (1986).

"Commercial Law: Identifiable Proceeds and the Knowledge Factor [Farmers State Bank v. Production Credit Association, 243 Kan. 87, 755 P.2d 518 (1988)]," Mahesh I. Patel, 28 W.L.J. 295, 305 (1988).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 809 (2003).

CASE ANNOTATIONS

1. Mentioned; application of proceeds of collateral to secured debts. State Bank of Downs v. Moss, 203 Kan. 447, 457, 454 P.2d 554.

2. Mentioned in discussion of commercial security interest priority over federal tax liens; circumstances necessary for priority. Donald v. Madison Industries, Inc., 483 F.2d 837, 844.

3. Interest of judgment creditor held inferior to holder of perfected security interest even though secured party failed to file financing statement within ten days of sale. Blair Milling & Elevator Co., Inc. v. Wehrkamp, 217 Kan. 122, 123, 124, 125, 126, 535 P.2d 457.

4. Section mentioned; purpose discussed; conviction under K.S.A. 21-3734 upheld. State v. Ferguson, 221 Kan. 103, 107, 558 P.2d 1092.

5. Applied; under facts there was no conversion where collateral sold at direction of the debtor who received proceeds; consent. North Cent. Kan. Prod. Cred. Ass'n v. Washington Sales Co., 223 Kan. 689, 692, 577 P.2d 35.

6. Although funds debited by bank were identifiable proceeds from sale of collateral, creditor cannot recover same. Tuloka Affiliates, Inc. v. Security State Bank, 229 Kan. 544, 546, 550, 553, 554, 556, 627 P.2d 816.

7. Considered in action by creditor under floor plan arrangement to recover moneys debited from checking account. Tuloka Affiliates, Inc. v. Security State Bank, 229 Kan. 544, 546, 553, 627 P.2d 816 (1981).

8. Credit company's perfected purchase money security interest in cars has priority over bank's security interest; cars not sold to a buyer in ordinary course of business. First National Bank and Trust Co. v. Ford Motor Credit Co., 231 Kan. 431, 437, 646 P.2d 1057 (1982).

9. Collateral "proceeds" are whatever is substituted for original collateral. In Re SMS, Inc., 15 B.R. 496, 499, 500 (1981).

10. Trustee had priority over consignor with perfected security interest in proceeds when cash commingled with other cash proceeds. In re Critiques, Inc., 29 B.R. 941, 942, 944, 945, 946 (1983).

11. Security agreement effective between parties and against purchasers of collateral; security interest continues unless disposition authorized by secured party. Clark Jewelers v. Satterthwaite, 8 Kan. App. 2d 569, 571, 662 P.2d 1301 (1983).

12. Cited in holding assignment of rights in contract not transfer of deposit account. First Nat'l Bank of Gaylord v. Autrey, 9 Kan. App. 2d 96, 97, 673 P.2d 448 (1984).

13. Bank, as secured creditor, had right to proceeds of grain sales by debtor. Iola State Bank v. Bolan, 235 Kan. 175, 183, 679 P.2d 720 (1984).

14. Farm creditor's oral consent at outset of loan, permitting sales conditioned on remitting proceeds, constitutes consent waiving security interest. Peoples Nat'l Bank & Trust v. Excel Corp., 236 Kan. 687, 689, 695, 695 P.2d 444 (1985).

15. Sale of livestock without prior consultation with bank; auction company liable for conversion. First Nat'l Bank & Tr. Co. v. Atchison County Auction Co., 10 Kan. App. 2d 382, 387, 699 P.2d 1032 (1985).

16. Cited; entrustment doctrine (K.S.A. 84-2-403(2)) examined and applied. Executive Financial Services, Inc. v. Pagel, 238 Kan. 809, 815, 715 P.2d 381 (1986).

17. Cited provisions dealing with secured party's interest in proceeds prevailing over default provisions after debtor files bankruptcy examined. Maxl Sales Co. v. Critiques, Inc., 796 F.2d 1293, 1296, 1297, 62 B.R. [168] [169] (1986).

18. Creditor's security interest in engagement ring set taken by codebtor without debtor's permission did not constitute secured claim. In re Elliott, 64 B.R. 429, 431 (1986).

19. Identifiable proceeds construed; perfected security interest in proceeds has priority over bank's right of setoff. Bank of Kansas v. Hutchinson Health Services, Inc., 12 Kan. App. 2d 87, 91, 92, 93, 94, 735 P.2d 256 (1987).

20. Cited; constitutionality of statute on debtor depriving creditor of creditor's own money (K.S.A. 21-3734(1)(c)) examined. State v. Jones, 242 Kan. 385, 389, 748 P.2d 839 (1988).

21. Cited; liability of third-party tortfeasor's insurer to party holding security interest in vehicle after insurer settles with owner-operator examined. Scholfield Bros., Inc. v. State Farm Mut. Auto. Ins. Co., 242 Kan. 848, 855, 752 P.2d 661 (1988).

22. In absence of authorization to sell, transferee of proceeds takes subject to security interest of secured party. Farmers State Bank v. Production Cred. Ass'n of St. Cloud, 243 Kan. 87, 98, 755 P.2d 518 (1988).

23. Auction house agent liable for conversion where owner lacked authority to sell, notwithstanding lack of knowledge of security interest. First Nat. Bank v. Southwestern Livestock, Inc., 859 F.2d 847, 849 (10th Cir. 1988).

24. Secured creditor expressly authorized transfer of collateral from partnership to chapter 11 debtor; security interest therein waived. E-4 Excavating, Inc. v. Lawrence Nat. Bank & Trust, 101 B.R. 269 (1989).

25. Cash in possession of debtor's bankruptcy trustee from sale of "Payment in Kind" certificates covered by financing statement entitling secured creditor to proceeds. In Re George, 119 B.R. 800, 804 (1990).

26. Absent authorization, borrower and seller of excavator could not modify lender's perfected security interest. U.S. v. Ables, 739 F. Supp. 1439, 1446 (1990).

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KANSAS COMMENT, 1996

Subsection (1). This subsection, which gives a super priority to ordinary course buyers of inventory from a dealer, varies from the 1995 Official Text only in the addition of the last sentence, which excludes dairy products from the definition of "farm products" for purposes of the subsection. It has not been amended since 1972. Under this subsection, a buyer in ordinary course of business (defined in 84-1-201(9) as "a person who in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party buys in ordinary course from a person in the business of selling goods of that kind") takes free from a security interest "created by his seller" even though the security interest is perfected and the buyer knows of its existence.

The primary purpose of the subsection is to protect ordinary buyers of a dealer's inventory; the buyer will take free unless the buyer knows that the dealer is forbidden to sell. By contrast, if the sale is a bulk transfer of all the dealer's inventory, a security interest in the inventory will not be cut off by the transferee. 84-9-306(2). Under the rule of this subsection, the inventory financier is not injured since its security interest will extend automatically to the proceeds generated by the ordinary course sale of inventory. However, the ordinary course buyer does not need the shelter of this subsection if the secured party has otherwise authorized the sale (84-9-306(2)), or the security interest is unperfected (84-9-301(1)(c)).

In First National Bank and Trust Co. v. Ford Motor Credit Co., 231 K. 431, 646 P.2d 1057 (1982), an automobile dealer was doing a little double dealing by giving a floorplan security interest in inventory to creditor X (who had properly perfected by filing a financing statement), and then arranging for sham sales of new cars to officers of the dealer corporation, which sales were financed by creditor Y's purchase of chattel paper from the dealer. The court held that the officers did not qualify as "buyers in ordinary course" who took free of a perfected security interest in inventory under 84-9-307(1). And the officers' financier, Y, could claim no better title to the cars sold out of trust. Y did not itself qualify as a "buyer" within the meaning of 84-9-307(1) and 84-1-201(9); instead, Y was a lender. Therefore, the floorplanner's purchase money security interest in the inventory had priority over Y's claim to the vehicles through the chattel paper. The Kansas supreme court strongly suggests that Y could not claim priority under 84-9-308 in a situation where the purported buyer in ordinary course was guilty of fraud; 84-9-308 gives priority to a purchaser of chattel paper claimed merely as proceeds of an inventory loan by a competing floorplan financier. Indeed, priority under 84-9-308 seems dependent upon the absence of fraud on the part of the ordinary course buyer who signs the chattel paper. See also 84-1-203.

In order to take advantage of the superpriority, the security interest must be created by the buyer's seller. Thus, if Bank retains a perfected security interest in X's inventory, X makes a bulk transfer of the inventory to Y, and Z buys a unit of inventory in ordinary course from Y, Bank should be able to replevy the unit back from Z. The security interest was not created by Z's seller (Y), but by a predecessor in title (X). See National Shawmut Bank v. Jones, 236 A.2d 484 (N.H. 1967).

Under the terms of the Official Text, the primary exception to the general rule of this subsection deals with farm products. If farm products (i.e., crops and livestock) are sold in ordinary course, the buyer cannot take advantage of the superpriority. See Kansas Comment 1983 to the prior section, and see North Central Kansas Production Credit Association v. Washington Sales, Co., 223 K. 689, 577 P.2d 35 (1978). Instead, the buyer must argue that the sale was authorized under 84-9-306(2), or that the security interest was unperfected. For a good Kansas case emphasizing that all good faith buyers take free from unperfected security interests, see Farmers State Bank v. Cooper, 227 K. 547, 608 P.2d 929 (1980).

In 1985, the Food Security Act of 1985, 7 U.S.C. § 1631, became law, reversing the farm product priorities of 84-9-307(1), by providing that buyers of farm products generally take free. The act provides that a buyer in the ordinary course of the buyer's business buying farm products from a person engaged in farming operations takes free of a security interest even if it is perfected and even if the buyer knows of the existence of the security agreement. 7 U.S.C. § 1631(d). The buyer takes subject to the security interest, however, if the buyer has received written notice of the security interest within a year before the sale describing the name and address of the secured party and the debtor, the debtor's social security or taxpayer identification number, description of the crops, any payment obligations imposed on the buyer by the secured party, and the buyer fails to meet the payment obligations. § 1631(e). The statement must be amended within three months for material changes, and it will lapse on the sooner of its provisions or after a year. The act also enables the secretary of state to create a central filing system, an option that Kansas has not adopted. Because of this act, the secured party must give written notice to all possible buyers of farm products or risk loss of the collateral on sale to professional buyers. Several articles discussing the Food Security Act are referenced in this section's Law Review and Bar Journal References.

Subsection (2). This subsection does not vary from the Official Text. The subsection was originally omitted from the Kansas UCC when it was adopted in 1965 because Kansas did not allow automatic perfection of purchase money security interests in personal property as did the Official Text of 9-302(1)(d). In 1987 Kansas adopted a modified version of automatic perfection and in 1989 the Official text of 9-307(2) was restored to the Kansas UCC. The subsection provides that a bona fide consumer buyer from a consumer seller will take free of an automatically perfected security interest in consumer goods. It achieves this by providing that it applies only to consumer goods, requiring that the seller be a consumer. The buyer must be buying as a consumer, i.e. for her or his own personal, family or household purposes. Finally, the buyer does not take free if the secured party has filed a financing statement (traditional perfection). Therefore the only person who could be a perfected secured party in the consumer goods without a filed financing statement is a purchase money secured party.

Subsection (3). This subsection, new with the 1972 Official Text, does not vary from the Official Text. It governs the priority between a non-ordinary course buyer of goods (a buyer in the ordinary course (84-1-201(9)) would take free under 84-9-307(1)) and a competing security interest arising from a future advance clause where the advance is made after the sale of the collateral to the buyer. It provides that the buyer takes free of the future advance if the advance is made by the secured party with knowledge of the prior sale of the collateral, or if made without knowledge, if made more than 45 days after the sale to the buyer. This is a shorter of 45 days or knowledge rule. The effect of the rule is that a secured lender making future advances must check to be sure that the debtor still owns the collateral within 45 days before the future advance or be at peril of losing the collateral to a prior buyer. For the leading judicial application of the rule, see Spector United Employees Credit Union v. Smith, 263 S.E.2d 319 (N.C. App. 1980). Compare a similar federal tax lien rule in 26 U.S.C. 6323(d), and the longer of 45 days or knowledge rule in 84-9-301(4) for lien creditors.

Revisor's Note:

Former section 84-9-307 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Section embodies essence of "floor plan financing," Charles H. Oldfather, 14 K.L.R. 571, 578, 579, 580, 582, 584, 585 (1966).

"Floorplan protection" has been extended to buyers of certain farm products, J. Eugene Balloun, 16 K.L.R. 437, 438, 440 (1968).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 166 (1975).

"Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 217, 218, 228 (1976).

Applicability of implied waiver doctrine to article 9 transactions, "Uniform Commercial Code: Farm Creditor Protection," Brian McMahill, 18 W.L.J. 199 (1978).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 27 K.L.R. 301, 307, 309 (1979).

"Commercial Law—Problems with Identifiable Proceeds and Transfers in Ordinary Course in Floor Plan Financing," Richard L. Cram, 30 K.L.R. 478, 483 (1982).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 358, 365, 366 (1984).

"Agricultural Credit and The Uniform Commercial Code: A Need for Change?" Keith G. Meyer, 34 K.L.R. 469, 479, 482, 483 (1986).

"Is the Agricultural Security Interest Legally Healthy?" David A. Lander, 34 K.L.R. 505, 509 (1986).

"Congress's Amendment to the UCC: The Farm Products Rule Change," Keith G. Meyer, 55 J.K.B.A. No. 7, 17, 18 (1986).

"Congress Takes Exception to the Farm Products Exception of the UCC: Retroactivity and Preemption," Drew L. Kershen and J. Thomas Hardin, 36 K.L.R. 1, 29, 52 (1987).

"Commercial Law: Identifiable Proceeds and the Knowledge Factor [Farmers State Bank v. Production Credit Association, 243 Kan. 87, 755 P.2d 518 (1988)]," Mahesh I. Patel, 28 W.L.J. 295, 305 (1988).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 831, 832 (2003).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

CASE ANNOTATIONS

1. Applied; under facts there was no conversion where collateral sold at direction of the debtor who received proceeds; consent. North Cent. Kan. Prod. Cred. Ass'n v. Washington Sales Co., 223 Kan. 689, 693, 577 P.2d 35.

2. Secured party's interest in collateral prior to that of purchaser if such interest is perfected; if interest not perfected no priority over purchaser for value without knowledge. Farmers State Bank v. Cooper, 227 Kan. 547, 555, 608 P.2d 929.

3. Credit company's perfected purchase money security interest in vehicles has priority over bank's security interest; vehicles not sold to a buyer in ordinary course of business. First National Bank and Trust Co. v. Ford Motor Credit Co., 231 Kan. 431, 435, 436, 646 P.2d 1057 (1982).

4. Severed crops are farm products, not "growing crops"; if in farm debtor's possession, financing statement needs no property description. In re Roberts, 38 B.R. 128, 129, 132 (1984).

5. Farm creditor's oral consent at outset of loan, permitting sales conditioned on remitting proceeds, constitutes consent waiving security interest. Peoples Nat'l Bank & Trust v. Excel Corp., 236 Kan. 687, 689, 695, 695 P.2d 444 (1985).

6. Sale of livestock without prior consultation with bank; auction company liable for conversion. First Nat'l & Tr. Co. v. Atchison County Auction Co., 10 Kan. App. 2d 382, 386, 699 P.2d 1032 (1985).

7. A buyer in ordinary course may prevail on entrustment theory (K.S.A. 84-2-403(2)) even though buyer cannot prevail hereunder. Executive Financial Services, Inc. v. Pagel, 238 Kan. 809, 816, 715 P.2d 381 (1986).

8. Unsecured creditor with knowledge of another's unperfected security interest not buyer in ordinary course of business. Farmers State Bank v. Production Cred. Ass'n of St. Cloud, 243 Kan. 87, 97, 755 P.2d 518 (1988).

9. Creditor filing under federal food security act (7 U.S.C. 1631(e)(1)) has priority over UCC farm products exception. First Nat'l Bank & Tr. v. Miami Co. Co-op Ass'n, 257 Kan. 989, 993, 897 P.2d 144 (1995).

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KANSAS COMMENT, 1996

This section, which does not vary from the 1995 Official Text, has not been amended since 1972. It is designed to govern the priority conflict between a secured party claiming chattel paper or an instrument as collateral, and third-party purchasers who adversely take possession of the paper. The policy behind the two rules contained in the section is to encourage the discounting of chattel paper and instruments by giving them a negotiable quality. These are two variations on the bona fide purchase theme.

Subsection (a) covers the case where the secured party relying on permissive filing under 84-9-304(1) or temporary automatic possession under 84-9-304(4) and (5) claims the chattel paper or instrument as more than mere proceeds of an inventory loan. In such a case, the purchaser who takes possession of the paper has priority over the inventory lender only if he has no actual knowledge that the paper is subject to a prior perfected security interest. This would be an unusual situation.

Under subsection (b), a purchaser of chattel paper or an instrument who takes delivery in ordinary course of the purchaser's business has priority over the paper claimed as mere proceeds from a prior inventory loan. Specific inclusion of the term "chattel paper" in the security agreement or financing statement should not change the result; if the paper is in substance claimed as proceeds of an inventory loan, the third-party possessor will have priority even though he knows of the perfected security interest in inventory. The moral for the inventory financier is simple: take possession of your debtor's chattel paper and instruments. The term "chattel paper" is defined in 84-9-105(1)(b) essentially as secured installment contracts. The term "purchaser" is defined broadly in 84-1-201(32) and (33) to include third-party lenders taking the chattel paper or instrument in pledge. For cases applying the rule in subsection (b), see Associates Discount Corp. v. Old Freeport Bank, 220 A.2d 621 (Pa. 1966); International Harvester Credit Corp. v. Associates Financial Servs. Co., 211 S.E.2d 430 (Ga. App. 1974); Commercial Credit Corp. v. National Credit Corp., 473 S.W.2d 876 (Ark. 1971). For an interesting Kansas decision which appears to deny priority under subsection (b) when the buyer who created the chattel paper was closely related to the dealer and was guilty of fraud upon the competing floorplan financier, see First National Bank and Trust Co. v. Ford Motor Credit Co., 231 K. 431, 646 P.2d 1057 (1982), discussed at Kansas Comment 1996 to 84-9-307.

Revisor's Note:

Former section 84-9-308 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

"Floor plan financing," Charles H. Oldfather, 14 K.L.R. 571, 580, 581, 585 (1966).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 172 (1975).

"Kansas' Unique Treatment of Agricultural Liens," Keith G. Meyer, 53 K.L.R. 1141 (2005).

CASE ANNOTATIONS

1. Credit company's security interest had priority over bank's security interest; debtor's signature was forged. First National Bank and Trust Co. v. Ford Motor Credit Co., 231 Kan. 431, 432, 434, 438, 646 P.2d 1057 (1982).

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KANSAS COMMENT, 1996

This section, which does not vary from the 1995 Official Text, was amended in 1994. It is another variation of the bona fide purchase theme which runs throughout Article 9. (Other examples are found in 84-9-307, 84-9-308 and 84-9-310.) This section codifies the doctrine of negotiability, recognizing special priority for holders in due course of negotiable instruments under Article 3, holders of negotiable documents of title under Article 7, and protected purchasers of securities under Article 8. As one example of this rule, a bank claiming a security interest in a negotiable warehouse receipt or bill of lading by permissive filing under 48-9-304(1) loses out to a bona fide purchaser taking possession of the document of title under 84-7-501, 84-7-502 and 84-7-503. As a second example, a lender relying on the 21-day automatic perfection under 84-9-304(4) loses out to holders in due course of instruments (84-3-305) and to good faith purchasers of stocks and bonds (84-8-301), so long as these parties obtain possession. In neither case is the filing of a financing statement effective against the third-party purchasers unless they have actual knowledge of the Article 9 security interest.

Revisor's Note:

Former section 84-9-309 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Applicability to provisions of K.S.A. 84-9-308 discussed, Charles H. Oldfather, 14 K.L.R. 571, 581 (1966).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 172 (1975).

"Right of Secured Party to Recover Proceeds Commingled in Debtor's Bank Account," Kristen D. Balloun, 28 K.L.R. 325, 338 (1980).

"Agricultural Credit and The Uniform Commercial Code: A Need for Change?" Keith G. Meyer, 34 K.L.R. 469, 487 (1986).

"Commercial Law: Identifiable Proceeds and the Knowledge Factor [Farmers State Bank v. Production Credit Association, 243 Kan. 87, 755 P.2d 518 (1988)]," Mahesh I. Patel, 28 W.L.J. 295, 305 (1988).

"To Be (Transformed) or Not to Be: The Transformation Versus Dual-Status Rules for Purchase-Money Security Interest Under Kansas' Former and Revised Article 9," Christopher Harry, 50 K.L.R. 1095 (2002).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 783 (2003).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

"Kansas' Unique Treatment of Agricultural Liens," Keith G. Meyer, 53 K.L.R. 1141 (2005).

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KANSAS COMMENT, 1996

This section, which does not vary from the 1995 Official Text, gives a superpriority to liens arising by statute in Kansas. Although the text of the section talks of liens arising by statute or rule of law, the Kansas supreme court may have indicated there are no common law liens in Kansas. Reimer v. Davis, 224 K. 225, 580 P.2d 81 (1978). There, the supreme court held that K.S.A. 58-201 does not impose a lien for unpaid rentals due to a trailer park under a month-to-month oral agreement. Therefore, a prior security interest in the mobile home took priority over the rental claim. The court never discussed 84-9-310, apparently because there was no statutory lien to compete with the Article 9 security interest. Compare Security National Bank & Trust Co. v. Reisinger, 610 P.2d 1222 (Okla. 1980), where a warehouseman's lien for unpaid storage charges was held to prevail over a prior perfected security interest covering the bailed goods.

Under the section, a person who furnishes services or materials with respect to goods already subject to a perfected Article 9 security interest has priority over that security interest even though it arose earlier, unless a statute reverses the priority. The primary requirement is that the statutory lienor be in possession of the goods. For example, a cattle feeder who does not get paid has priority over an earlier perfected security interest covering the cattle, so long as the feeder retains possession. See K.S.A. 58-207. In United States v. Crittenden, 600 F.2d 478 (5th Cir. 1979), the court imposed a requirement of continuous possession in order to take advantage of the superpriority given by this section; thus, the repairman had priority only for work done after the goods had been returned for the final time.

Many of the Kansas lien provisions in K.S.A 58-200's allow filing after possession is given to the debtor to preserve the lien. See, for example, K.S.A. 58-201 and 58-202. Others require the secured party to maintain possession. K.S.A. 58-215.

Some statutory liens in Kansas have priority over Article 9 security interests independent of this section. The most important example is the repairman's lien under K.S.A. 58-201. See Hockaday Auto Supply Co. v. Huff, 121 K. 113, 245 P. 1013 (1926). In the same category are thresher's liens (K.S.A. 58-218), certain bailing liens (K.S.A. 58-218), and the agister's lien for pasturing livestock (K.S.A. 58-220). Other statutory liens do not indicate whether they have priority under this section only if the lienor retained possession. And still other statutory liens are expressly subordinated to consensual security interests; these include the oil and gas mechanic's lien, which is preferred only to encumbrances attaching subsequent to the commencement of the work which forms the basis for the lien (K.S.A. 55-207), and the transporter's lien, which is subordinate to valid and existing consensual security interests (K.S.A. 55-214).

It should be noted that the Kansas repairman's lien statute (K.S.A. 58-201), probably the most important statutory lien provision in this jurisdiction, has an unusual option under which the lien claimant may file a statement locally within 90 days after the work is finished. This is analogous to the mechanic's lien covering real estate under K.S.A. 60-1101 et seq. Moreover, since K.S.A. 58-201 expressly gives priority to the repairman's lien over consensual security interests, the priority would stick even though the lien claimant chose to file rather than retain possession.

Revisor's Note:

Former section 84-9-310 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 360, 362 (1984).

"Commercial Law: Identifiable Proceeds and the Knowledge Factor [Farmers State Bank v. Production Credit Association, 243 Kan. 87, 755 P.2d 518 (1988)]," Mahesh I. Patel, 28 W.L.J. 295, 305 (1988).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 810 (2003).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

Attorney General's Opinions:

Record of mortgage can be filed as a financing statement covering fixtures with the register of deeds in the county where the collateral is located if such record complies with the fixture filing requirements without using a UCC-1 form. 2009-19.

CASE ANNOTATIONS

1. Bank's application of funds in debtor's account to antecedent debt should not be considered transaction in ordinary course of business to defeat perfected security interest (dissenting opinion). Tuloka Affiliates, Inc. v. Security State Bank, 229 Kan. 544, 553, 627 P.2d 816.

2. Warehouseman lien is given priority over other perfected secured parties unless lien explicitly states otherwise. In Re Ragan, 15 B.R. 376, 377, 378, 379 (1981).

3. Statutory liens as having priority over security interests under certain circumstances examined. Jefferson County Co-op. v. NE Kansas Prod. Credit, 73 B.R. 3, 4 (1982).

4. Landlord's liens not entitled to super priority under super priority section. In re Roberts, 38 B.R. 128, 129, 134 (1984).

5. Basic legal principles of personal property liens reviewed; common-law requirement of possession still overriding consideration. Northeast Kansas Prod. Cred. Ass'n v. Ferbache, 236 Kan. 491, 494, 693 P.2d 1152 (1985).

6. Cited; foreclosing creditor's duty to check UCC files, give notice of pending sale, disclose subsequent purchaser's name examined. Utility Trailers of Wichita, Inc. v. Citizens Nat'l Bank & Tr. Co., 11 Kan. App. 2d 421, 422, 726 P.2d 282 (1986).

7. Resolution of priority dispute between holders of nonpossessory statutory liens and security interest not governed by Article 9. National Supply Co. v. Case Oil & Gas, Inc., 13 Kan. App. 2d 430, 431, 772 P.2d 1255 (1989).

8. Preferences for wages due when receiver appointed (K.S.A. 44-312) as not creating lien or priority over perfected security interests examined. First Nat'l Bank v. Family Medicine Clinic of Medicine Lodge, 14 Kan. App. 2d 749, 751, 798 P.2d 519 (1990).

9. Creditor claiming security interest in airplane for parts properly perfected interest precluding financing statement filing. In re Arcentral, Inc., 289 B.R. 170, 172 (2003).

10. If secured party assigns perfected security interest, no filing required to continue perfected status against creditors. In re Jackson, 358 B.R. 412, 419 (2007).

11. A financing statement must use the identical name as on the debtor's driver's license unless the official safe search harbor is satisfied. In re Prestion, 612 B.R. 770, 774 (Bkrtcy. D. Kan. 2019).

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KANSAS COMMENT, 1996

This section recognizes that in all secured transactions under this Article, the debtor has an interest which he can dispose of and which his unsecured creditors can reach, even though the security agreement prohibits such transfer and makes it a default. The section is a variation on the theme of free alienability of property, and is consistent with 84-9-205, which validates a security interest despite the debtor's right to use or dispose of the property. K.S.A. 60-2406, which should be read in tandem with this section, provides that the interest of a judgment debtor in personal property may be levied upon and sold on execution subject to liens or encumbrances already existing. For a hoary case in which execution was levied on the mortgagor's interest in goods, see Ament v. Greer, Adm'r, 37 K. 648, 16 P. 102 (1887).

Revisor's Note:

Former section 84-9-311 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

"Close Corporations and the Kansas General Corporation Code of 1972," Edwin W. Hecker, Jr., 22 K.L.R. 489, 535 (1974).

"Farm Tractors in Kansas: How to Perfect a Security Interest," Aaron K. Johnstum and Stephen J. Ware, 57 K.L.R. 409 (2009).

CASE ANNOTATIONS

1. Debtor's rights in collateral may be voluntarily transferred, agreement to contrary notwithstanding. Clark Jewelers v. Satterthwaite, 8 Kan. App. 2d 569, 572, 662 P.2d 1301 (1983).

2. While free alienability of debtor's property allowed, property remains subject to preexisting liens or security agreements. First Nat'l Bank v. Milford, 239 Kan. 151, 154, 718 P.2d 1291 (1986).

3. Creditor claiming security interest in airplane for parts properly perfected interest precluding financing statement filing. In re Arcentral, Inc., 289 B.R. 170, 172 (2003).

4. Mere presentation of appropriate documents with fee under vehicle titling statute insufficient to perfect lien. In re Anderson, 351 B.R. 752, 755 (2006).

5. Mentioned; UCC provides that security interest generally subordinate to judicial lien before the security interest is perfected. In re Barker, 358 B.R. 399, 406 (2007).

6. Property subject to certificate of title laws, filing of financing statement not effective to perfect security interest. In re Jackson, 358 B.R. 412, 416, 419 (2007).

7. Perfection of security interest in manufactured home continues until new title issued unless lien release given. In re Wedman, 374 B.R. 819, 823, 828, 829 (2007).

8. Bankruptcy trustee's rights as lienholder not defeated by later issuance of certificate of title noting lienholder. In Re Hicks, 491 F.3d 1136, 1142 (2007).

9. Purchase money security interest in automobiles can be perfected only by compliance with K.S.A. 8-135. Stanley Bank v. Parish, 298 Kan. 755, 317 P.3d 750 (2014).

10. Lender failed to perfect security interest in debtor's refinanced vehicle when submitting incorrect security interest application and fee. In re Anstaett, 651 B.R. 911 (Bankr. D. Kan. 2023).

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KANSAS COMMENT, 1996

This section, which does not vary from the 1995 Official Text, governs priority battles among conflicting security interests in the same collateral, just as 84-9-201 governs the rights of secured creditors and 84-9-301 governs the rights of mere secured creditors as lien creditors and buyers of the collateral. Other sections in Part 3 of Article 9 govern the rights of secured creditors as against purchasers.

The basic rule is laid down in 84-9-312(5), namely, that for perfected secured parties, the first to be perfected is the first in right, whether by filing or by possession, as long as there is no gap in the perfection. For mere secured party versus mere secured party, the rule again is "first in time is first in right," as long as neither is perfected.

Subsection (1). This subsection merely cross references other rules in the UCC which govern priorities involving Article 9 security interests.

Subsection (2). This subsection creates a limited exception to the first in time rule and is a variation of the purchase money theme. It gives priority to a crop production lender over an earlier perfected security interest covering the crops, but only in very limited situations. To qualify for the priority, the production claimant must meet all of the following criteria: (1) he must give new value, in the form of a loan or credit sale; (2) the purpose of the new value must be to enable the farmer to produce the crops during the current production season; (3) the value must be given not more than three months before the crops are planted; and (4) obligations owing to the earlier secured party (such as a lender with an after-acquired property clause covering crops, a real estate lessor or a real estate mortgagee with a crop provision in the mortgage) must have been due more than six months before the crops were planted. The biggest problem for the crop production lender is that the purchase money priority will not come into play, as against a prior lessor or mortgagee of the farm who has a security interest in after-acquired crops, to the extent that the farmer has defaulted in the last six months. If the mortgage has an acceleration clause that is exercised within the six-month period, the production lender is out of luck. In other words, the purchase money security interest is entitled to priority only over obligations more than six months overdue at the time the crops are planted. For a good case which illustrates the very limited utility of this subsection for the short-term production lender, see United States v. Minster Farmers Coop. Exchange, 430 F. Supp. 566 (N.D. Ohio 1977).

Subsection (3). This subsection establishes a special priority rule for purchase money security interests in inventory. If the four hoops are jumped through, the purchase money security interest will prevail over a previously filed financing statement covering "all inventory," as to the inventory financed by the purchase money secured party. If the hoops are not jumped through, the prior filer will have priority under the "first to file" rule of subsection (5). The definition of purchase money security interest is set forth in 84-9-107, and includes both suppliers of inventory and third-party financiers whose loan enables a debtor to purchase the inventory from a supplier.

In order to gain priority under this subsection, the purchase money lender must jump through four hoops: (1) the purchase money security interest must be perfected (normally by an executed security agreement and filing) by the time the debtor receives possession of the inventory, and not one second later; (2) the supplier or third-party purchase money lender must give notification in writing to any competing security interest which has been previously filed; (3) the holder of the competing interest must receive the written notification within the five year period before the debtor receives possession of the inventory (i.e., the purchase money creditor must renew the notification every five years); and (4) the notification must state that the purchase money creditor "has or expects to acquire a purchase money security interest in inventory of the debtor, describing such inventory by item or type." As to this last hoop, for example, a purchase money supplier of computers could describe the goods generally as "computers." As to the first hoop, the only safe approach for the purchase money creditor is to have the security agreement executed and file the financing statement before the first delivery of inventory. If the purchase money secured party is the seller, the selling of the computers on credit and debtor's receipt of them will meet the value and the debtor's rights in the collateral requirements of 84-9-203(b) and (c). If the purchase money secured party is a financier and not the seller, the value is the financier's payment to the seller, and the debtor's rights in the collateral is the receipt of the collateral. See Kansas Comment 1996 to 84-9-107. One notification every five years is sufficient, even if the inventory is delivered in installments. For the leading decisions construing the requirements imposed by the four hoops, see Fedders Financial Corp. v. Chiarelli Bros., 289 A.2d 169 (Pa. Super. 1972) and King's Appliance & Electronics, Inc. v. Citizens & Southern Bank of Dublin, 30 U.C.C. Rep. 1738 (Ga. App. 1981). Finally, it should be mentioned that consignment sellers must jump through exactly the same hoops as traditional purchase money inventory financiers. See 84-9-114 and Kansas Comment 1996 thereto.

The purchase money priority covering inventory does not extend to all proceeds generated by the sale of that inventory. It does cover identifiable cash ("money, checks, deposit accounts and the like," 84-9-306(1)) proceeds received by the dealer on or before delivery of the inventory to a buyer (roughly equivalent to down payments), but it does not extend to trade-ins, accounts receivable or chattel paper generated by the sale of inventory. As to the latter proceeds, an earlier filing for inventory, accounts or chattel paper would have priority to the accounts under the first-to-file rule of subsection (5). Of course the inventory financier would retain its purchase money priority with respect to its inventory still on hand.

Subsection (4). This subsection establishes a superpriority for purchase money security interests in collateral other than inventory, e.g., farm products and equipment. If the purchase money lender wants priority over a prior-filed financing statement covering the collateral under an after-acquired property clause, several hoops must be jumped through, but these hoops are not as difficult as those governing inventory under the previous subsection, and there is an unlimited claim to proceeds. Most important, notification need not be given to competing financiers who have already filed. Instead, the purchase money creditor need only be sure that its security interest is perfected (normally by filing) within twenty days after the debtor receives possession of the collateral. For example, if Bank X has a prior-filed financing statement covering "all equipment of the debtor, now owned or hereafter acquired" and a supplier of new equipment later retains a purchase money interest to secure the price, the supplier will have priority if it properly files a financing statement (e.g., with the secretary of state in Topeka) within twenty days after delivering the equipment to the debtor. If the purchase money filing is not accomplished until the thirtieth day, Bank X will have priority under the first-to-file rule of subsection (5).

The purchase money priority established in this subsection extends not only to the original collateral, but to all proceeds received by the debtor from later disposition of the collateral. One difficult issue is when the "debtor receives possession" for purposes of the twenty-day grace period. In particular, when does the twenty days begin to run if the equipment is bought on approval, or under a lease with a purchase option which is not exercised until some time later? The weight of authority, and the better rule, is that the grace period does not begin to run until the buyer on approval or lessee makes a decision to purchase the equipment outright. See Rainier Nat'l Bank v. Inland Machinery Co., 631 P.2d 389 (Wash. App. 1981); In re Prior Bros., Inc., 632 P.2d 522 (Wash. App. 1981); Brodie Hotel Supply, Inc. v. United States, 431 F.2d 1316 (9th Cir. 1970); In re Ultra Precision Industries, Inc., 503 F.2d 414 (9th Cir. 1974); contra: James Talcott, Inc. v. Associates Capital Co., 491 F.2d 879 (6th Cir. 1974).

Subsection (5). This subsection sets forth the basic residual priority rule to be applied when subsections (2), (3) and (4) are not applicable: As between conflicting security interests, the winner is the first to file or perfect, whichever occurs first. Since this subsection is residuary, a secured creditor who fails to qualify for a superpriority under the prior three subsections will be governed by this subsection, as will all other secured party versus secured party priority contests. The first-to-file-or-perfect rule is based upon the "pure race" concept; knowledge is irrelevant. For example, if X makes a $5000 secured loan to the debtor but fails to file a financing statement, then Y makes a $7000 loan against the same collateral knowing full well that X has an unperfected security interest, then X files, Y would have priority under this subsection. The policy behind the "pure race" concept is the need for certainty in relying upon the public records. The only time actual knowledge could affect priorities is under 84-9-401(2), which provides that a filing made in good faith in an improper place is effective against any person who has actual knowledge of the contents of the financing statement. See Kansas Comment 1996 to that provision.

If both secured parties have perfected by filing, and no superpriority is in the picture, the first to file will prevail. For example, if X makes a $15,000 loan to the debtor and properly files, then Y makes a $20,000 loan to the debtor and properly files, and the collateral only brings $15,000 at foreclosure, Y is out of luck, and will be treated as a general creditor. Before Y made its loan, it could have checked the files and found X's prior financing statement; then Y could have refused to make the loan, obtained other collateral, have entered into a total or partial subordination agreement with X under 84-9-316, or taken over all the financing and forced X to file a termination statement under 84-9-404 or an assignment under 89-9-405. X would also prevail over Y to the extent of the debt to X at the time of default even if X had not made any loan when its financing statement was filed, and did not loan any money to the debtor until long after Y had made its loan.

If Y made the first loan, then X made a loan under an optional future advances clause, or pursuant to a new security agreement, X's priority would relate back to its earlier filing; it would make no difference that Y made a loan first, so that its security interest was first perfected. The leading Kansas case on this point is Allis-Chalmers Credit Corp. v. Cheney Investment, Inc., 227 K. 4, 605 P.2d 525 (1980). In that case, the debtor executed a security agreement in favor of A, A loaned funds to the debtor and properly filed a financing statement, B loaned funds to the debtor and filed against the same collateral, then A made subsequent advances under new security agreements not contemplated by the original security agreement. The Kansas supreme court held that A had priority with respect to all advances under the first-to-file-or-perfect rule of this subsection. B was left out in the cold. The court emphasized the "pure race" philosophy of the subsection, which is reinforced by subsection (7) and Example 5 in Official Comment 7 to 84-9-312 (even though the Cheney Investment case involved facts which predated the adoption of subsection (7) in Kansas as part of the 1972 Official Text). The Cheney Investment case is a classic example of the first-to-file-or-perfect rule, and it illustrates the wisdom of filing as soon as possible in order to establish priority over competing security interests. Later lenders should check the files and use the procedure laid out in 84-9-208 to protect themselves.

To vary the facts somewhat, suppose that Bank A files a financing statement but does not then make a loan to the debtor. Bank B then makes a loan and takes possession of the collateral instead of filing a financing statement. Then Bank A makes a loan, relying for priority on its previously filed financing statement. Since both creditors did not perfect by filing, but A filed before B perfected (by possession), A would have priority. B should have checked the files before making the loan. If Bank B had taken possession before Bank A filed, B would win. Finally, if neither creditor perfects at the time the credit is extended, the first to perfect will win. For example, assume that Dad's Finance Company loans money to Joe, taking household goods as collateral. The next day Mother's Finance Company makes a loan to Joe, taking the same household goods as collateral. Neither Dad's nor Mother's ever perfects its interest by filing. Two months later, Mother's repossesses the collateral upon Joe's default, and with Joe's consent (see 84-9-203(a)). In this case, Mother's would have priority because it was the first to perfect (by taking possession, as allowed by 84-9-305).

A Tenth Circuit decision applying Kansas law under this subsection is Transport Equipment Co. v. Guaranty State Bank, 518 F.2d 377 (10th Cir. 1975). In that case, a supplier sold inventory to the debtor on open account. Sensing the debtor's imminent collapse, the supplier then took a written security agreement and filed a financing statement at 1:57 a.m. on March 22. A bank which had made an earlier unsecured loan to the debtor filed a financing statement in January but never got the debtor to execute a security agreement. When the debtor defaulted, the bank repossessed the inventory at 3:24 a.m. on March 22. The bank argued that the first-to-file rule of this subsection gave it priority since its financing statement was filed before that of the supplier, even though the bank's security interest did not "attach" (by repossession of the collateral) and was thus not perfected until March 22.

The Tenth Circuit gave priority to the supplier as the first to perfect, concluding that the bank could not date its priority from its earlier filing. If the bank had obtained a written security agreement prior to repossession, the result would have been otherwise. Even though the court's reasoning may be open to question, the result seems sound. Since the bank had no written security agreement, its security interest had never "attached" and was thus not enforceable against the debtor. Therefore, the repossession as an event to trigger relation-back to the earlier financing statement should have had no effect. In short, the supplier was arguably the first to perfect because it was the only party to perfect. Moreover, although the court's approach in Transport Equipment somewhat waters down the "first to file or perfect rule" of this subsection, the Kansas supreme court appears to resurrect it in full force in the Cheney Investment case.

Pre-UCC Kansas law governing chattel mortgages and conditional sales contracts did not follow the "pure race" concept of this subsection. Former K.S.A. 58-301 and 58-314. However, former K.S.A. 58-804 established a rule for assignments of accounts receivable comparable to the rule of this subsection, since an assignee took priority over another assignee who filed later than he did, regardless of the relative dates of their assignments. Under former K.S.A. 58-804, an assignee also took subject to prior assignments of which he had written notice.

Revisor's Note:

Former section 84-9-312 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Applicability to certain conflicting security interests discussed, Charles H. Oldfather, 14 K.L.R. 571, 582, 583, 584, 586, 587, 588, 589, 590 (1966).

"Official UCC Comment" and section mentioned in discussing priority of crop loans, Van Smith, 35 J.B.A.K. 299, 301, 302 (1966).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 169 (1975).

"Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 216, 217, 219 (1976).

Tenth Circuit survey on Contracts, U.C.C. and U.C.C.C., Martin R. Ufford, 15 W.L.J. 541, 545 (1976).

"Right of Secured Party to Recover Proceeds Commingled in Debtor's Bank Account," Kristen D. Balloun, 28 K.L.R. 325, 338 (1980).

"Secured Transactions: The Priority of Future Advances," Jennifer A. Strus, 21 W.L.J. 717, 718, 723 (1982).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 361, 366 (1984).

"Agricultural Credit and The Uniform Commercial Code: A Need for Change?" Keith G. Meyer, 34 K.L.R. 469, 476, 477, 478 (1986).

"Is the Agricultural Security Interest Legally Healthy?" David A. Lander, 34 K.L.R. 505, 510 (1986).

"Bank's Right of Setoff—Iola State Bank v. Bolan," SueAnn S. Bradford, 33 K.L.R. 569, 580 (1985).

"Clear Title: A Buyer's Bonus, A Lender's Loss—Repeal of UCC § 9-307(1) Farm Products Exception by Food Security Act § 1324 [7 U.S.C. § 1631]," Mark V. Bodine, 26 W.L.J. 71, 84, 86 (1986).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 779, 811, 863 (2003).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

Attorney General's Opinions:

Banking code; dissolution; insolvency; receiver in charge of assets; distribution. 85-112.

CASE ANNOTATIONS

1. Subsection (5) (a) discussed; financing statement failed to satisfy statutory requirements; security interest not perfected until bank took actual possession. Transport Equipment Co. v. Guaranty State Bank, 518 F.2d 377, 382.

2. Referred to; interest of holder of perfected security interest superior to interest of judgment creditor although failure to file financing statement within 10 days. Blair Milling & Elevator Co., Inc. v. Wehrkamp, 217 Kan. 122, 126, 535 P.2d 457.

3. Subsection (5)(a) discussed and applied; financing statement covers future advances under later security agreements whether or not contemplated by original security agreement. Allis-Chalmers Cred. Corp. v. Cheney Investment, Inc., 227 Kan. 4, 7, 8, 11, 12, 605 P.2d 525.

4. Subsection (5) discussed; protection of future advances had by including an after-acquired property and future advance clause in original security agreement (dissenting opinion). Allis-Chalmers Cred. Corp. v. Cheney Investment, Inc., 227 Kan. 4, 14, 605 P.2d 525.

5. Credit company's perfected purchase money security interest in vehicles has priority over bank's security interest; vehicles not sold to a buyer in ordinary course of business. First National Bank and Trust Co. v. Ford Motor Credit Co., 231 Kan. 431, 434, 646 P.2d 1057 (1982).

6. If properly employed, UCC protects unpaid sellers in variety of ways; mere knowledge that goods unpaid for does not invalidate otherwise legitimate security interest. Holiday Rambler Corp. v. First Nat. Bank and Trust, 723 F.2d 1449, 1453 (1983).

7. Severed crops are farm products, not "growing crops"; if in farm debtor's possession, financing statement needs no property description. In re Roberts, 38 B.R. 128, 129, 132 (1984).

8. Cited; lease-purchase agreement under economic development revenue bond act (K.S.A. 12-1740 et seq.) not complete sale; filing requirements inapplicable. In re Petition of City of Moran, 238 Kan. 513, 519, 522, 713 P.2d 451 (1986).

9. Statute is "pure race" type statute; secured creditor to first file has priority regardless of knowledge. J. I. Case Credit Corp. v. Foos, 11 Kan. App. 2d 185, 189, 717 P.2d 1064 (1986).

10. Cited; bank's prior interest in crops not diminished by lease between debtor and third party. First Nat'l Bank v. Milford, 239 Kan. 151, 155, 718 P.2d 1291 (1986).

11. Cited; action for failing to disclose existence of prior security interest, statute of limitations examined. Borg Warner Acceptance Corp. v. Kansas Secretary of State, 240 Kan. 598, 605, 731 P.2d 301 (1987).

12. Crop production lender's priority over prior perfected secured creditor under certain circumstances determined. In re Cress, 89 B.R. 163 (1988).

13. Purchase money security interest perfected holder who fails to satisfy (3) retains priority over later-filed security interests. In Re Mobile Travelers, Inc., 117 B.R. 651, 655 (1990).

14. No conflict exists between unenforceable security interest and perfected security interest. Garst Seed Co. v. Wilson, 17 Kan. App. 2d 130, 133, 833 P.2d 138 (1992).

15. Cited in holding good faith misfiling exception in K.S.A. 84-9-401(2) applies to improperly perfected purchase money security regardless when prior interests acquired knowledge. Community Nat'l Bank v. Moyer, 17 Kan. App. 2d 218, 220, 836 P.2d 1198 (1992).

16. Purchase money security interest fails because of lack of proper notification to existing security interests. Guaranty State Bank & Trust Co. v. Van Drist Supply Co., 30 Kan. App. 2d 1108, 55 P.3d 357 (2002).

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KANSAS COMMENT, 1996

This section varies from the Official Text only by defining fixtures in accordance with Kansas case law prior to the adoption of the Uniform Commercial Code. The explicit definition of "fixtures" should not result in any nonuniform decisions. It has not been amended since Kansas adopted the 1972 official text in 1975. It should be noted that 84-9-313 only applies to secured party (personal property) versus a realty interest (owner versus tenant with a lien on a fixture or encumbrancer versus owner with a lien on a fixture). The conflicts are usually a landlord owner versus a tenant's financier, or, a mortgage versus an owner's fixture financier. Secured party versus secured party contests are governed by the other provisions of Article 9, usually 84-9-312, and realty contests are governed by Chapter 58.

By way of a general overview, 84-9-313 overrides 9-201 by providing that a real estate interest (the interest of the owner versus a tenant and a secured party with a security interest in the tenant's property, or the interest of an encumbrancer versus a security interest in fixtures added by the owner) prevails unless 84-9-313 provides otherwise. 84-9-313(7). Next, a construction mortgage prevails over most later security interests involved in the construction project, but loses to a prior security interest who has filed fixture filings. 84-9-313(4)(b), (c), (d), and 84-9-313(5) then provide for a limited class of security interests that beat the construction mortgage, prior perfected secured parties, readily removable equipment or replacement consumer goods, or subordination by the construction mortgagee to the secured party or to the debtor.

Subsection (1). This subsection contains three key definitions applicable to the priority rules governing fixtures as provided in this section. The hallmark of a fixture is that it includes things that are not part of the land and retain their identity as goods, but are so integral or connected to it that a buyer would expect them to pass with the land. The definition of "fixtures" set forth in subsection (1)(a) is not found in the 1995 Official Text. Under this Kansas variation, goods become fixtures when they are so annexed to realty that a reasonable third-party vendee of the real estate would assume that they would be sold as part of the real estate. Although this definition offers some guidance, it may be difficult to apply in given cases. For example, if a supplier sells 50 window air conditioning units to the owner of an apartment building, retains a purchase money security interest covering the $10,000 price of the units, and locally files a financing statement in the real estate records under this section on the assumption that the units are "fixtures," the debtor's trustee in bankruptcy might later persuade the court that the units are so easily removable that they qualify as "equipment" for which central filing was required. Compare Peoples State Bank of Cherryvale v. Clayton, 2 K.A.2d 438, 580 P.2d 1375 (1978), where dairy machinery installed in an existing barn was held to be equipment, not fixtures. The court stated the test for determining whether things were fixtures was 1) the annexing party's original intent, 2) how firmly the goods were attached and the ease of removal, 3) how related the operation of the goods is to the realty, and 4) whether a reasonable purchaser of the real estate, with knowledge of the recorded interests of others of record or in possession, would reasonably expect the property to pass with the realty. Therefore, no fixture filing was necessary in order to perfect the creditor's security interest. The court may well have reached a different conclusion if the debtor had built a dairy barn with the same equipment in it. Instead of being a barn with dairy equipment attached, the building could have been described as a dairy barn. Since the court will consider the intent of the annexing party, it is impossible to be certain of the classification. Given the uncertainty as to whether specific items of personal property remain as "equipment" or become "fixtures" under this subsection, the only reasonable advice for the financier is to make two filings, one for each alternative assumption. That will insure the result and negate the expenses of litigation even if the court agrees that an item is or is not a fixture.

Further aid in defining a fixture can be gleaned from other portions of 84-9-313. 84-9-313(2) excludes "ordinary building materials" from the definition of fixtures. It is apparent that the two by fours in a building will not be fixtures, but slate roofs and vinyl siding may be more questionable. 84-9-313(4)(c) may expand the definition of fixtures by implying that "readily removable factory or office machines, or readily removable domestic appliances" may be fixtures. Fixtures may include any attached item that the buyer might request pass on the sale of the property. Caution would thus suggest the only safe course is to double file for anything of value which is attached to the realty or building.

The definition of "fixture filing" in subsection (1)(b) is important because it makes a cross-reference to 84-9-402(5), which in turn sets forth the formal requisites of a financing statement in order to perfect when the collateral qualifies as fixtures. Most importantly, in a nonuniform provision, 84-9-402(5) requires the financing statement must contain a legal description of the real estate and the name of the record owner of the realty. Although 84-9-203 does not expressly require a real estate description in the security agreement, every prudent fixture financier will include one. The financing statement must be filed with the register of deeds where the realty is located, and the register of deeds must cross-index into the general real estate mortgage records. See 84-9-403(7).

Subsection (1)(c) defines the term "construction mortgage" for purposes of the priority established in subsection (6). The definition is broad enough to cover everything from development of a subdivision to remodeling a kitchen.

Subsections (2) and (3). Subsection (2), which does not vary from the 1995 Official Text, makes it clear that no security interest (as a fixture or otherwise) exists in ordinary building materials incorporated into a structure such as lumber, bricks, glass, etc. If a supplier does not get paid for such materials, the proper remedy is the Kansas mechanic's lien statute, K.S.A. 60-1101 et seq. Of course the supplier could also take a consensual mortgage covering the real estate. This latter option is underscored by subsection (3), which allows the financier to use the real estate mortgage provisions, if an item is a fixture. Again, however, if there is any doubt the security interest should also be perfected following the provisions of the 84-9-400's.

Subsection (4). This subsection, which does not vary from the 1995 Official Text, sets forth the basic priorities of a security interest in fixtures. The most important rule, as embodied in subsection (4)(a), is that a proper fixture filing gives a purchase money financier of fixtures priority to them over a prior interest in the real estate (e.g., a prior mortgagee or landlord) so long as the fixture filing is made within ten days after the property is affixed to the real estate. This ten-day rule is similar to that governing purchase money security interests in equipment under 84-9-312(4), but has not varied from the Official Text which only allows ten days, not twenty. Note that a construction mortgage with work in progress will take priority over this purchase money security interest under subsection 84-9-313(6). In essence, the construction mortgage is treated as the "mother of all purchase money interests" in 84-9-313. 84-9-313(4)(a) interests are also at risk for intervening purchases or financiers, as discussed in (4)(b).

Subsection (4)(b) is a variety of the first in time rule. It provides that an existing perfected security interest in fixtures has priority over subsequent interests in the real estate, provided the fixture interest also had priority over the preceding interest. The fixture filing has to be made before the real estate interests are of record. Subsection (4)(b). For example, if wall-to-wall carpeting (which, let us assume, qualifies as a fixture) is delivered to the debtor and installed on April 5, and the debtor sells the real estate to a purchaser on April 10, the purchaser will have priority to the carpeting unless a fixture filing was made before April 10. In order to gain priority for the fixture filer under subsection (4)(b), the only requirement is that the debtor have an interest of record in the realty (as where the owner of an apartment is purchasing the wall-to-wall carpeting), or be in possession (as where the conditional vendee of the carpeting is the tenant).

Paragraph (4)(c) is a very limited priority provision which will allow the "fixture" financier priority over a construction mortgagee for items which a court might or might not find to be fixtures. These should include things like a bolted down piece of equipment or a replacement dishwasher in a house under construction. It is unlikely a construction mortgagee would be relying on these types of items.

Paragraph (4)(d) provides any existing perfected security interest in fixtures, whether perfected pursuant to the 84-9-400's or under 84-9-313 to defeat a lien creditor and the trustee in bankruptcy. Note that if a court decides the items are goods and not fixtures, however, the provision does not apply, so double filing is still cheap insurance.

Subsection (5). This subsection does not vary from the 1995 Official Text. Paragraph (5)(a) provides that a mere secured party will have priority over competing real estate claimants where the claimant has consented in writing to the fixture interest, or has disclaimed any interest in the fixture. Although the grammar of the paragraph does not require a written disclaimer, it will be easier to prove the disclaimer if it is written. It would appear that both exceptions would apply to anyone, and not just a secured party.

Paragraph (5)(b) is like the game of rock, scissors and paper in favor of the fixture financier. If the tenant installed the fixture in which the secured party has an interest, and the tenant has the right to remove it, the secured party prevails over the landlord. The same is true if the owner of mortgaged property has the right to remove the fixture. If the tenant moves, however, the secured party only has "a reasonable time" to remove the fixture.

Subsection (6). This subsection is also consistent with the 1995 Official Text. Under it, a security interest in fixtures is subordinate to a construction mortgage recorded before the goods become fixtures, if the goods are affixed to the realty during construction. This superpriority applies even though the fixture financier made a proper fixture filing. The priority applies only during the period of construction; a long-term financier is not so protected against subsequent fixture secured parties after the construction is completed. If the fixture financier wants priority as to the fixture over the construction lender, it must deliver the goods after construction is complete, or obtain a subordination agreement under 84-9-313(5)(a) or 84-9-316.

Subsection (7). This subsection, the residuary priority rule, does not vary from the 1995 Official Text. It overrides 84-9-201. As one obvious application, a purchase money supplier of a fixture who fails to comply with the ten-day rule of subsection (4)(a) will be subordinated to an earlier-filed real estate mortgage which contains a "fixtures and accessions" clause.

Subsection (8). This subsection, which does not vary from the 1995 Official Text, sets forth the rules governing foreclosure of a fixture security interest. A secured party with priority may remove the fixture from the real estate, but must comply with the provisions of the 9-500's, including not breaching the peace and giving the required notices. The secured party need not reimburse the debtor for any physical damage done to the realty. If an encumbrancer or third-party owner is in the picture, the fixture forecloser must provide such reimbursement for any damage, but not for any diminution in value. If the cost of repair exceeds the used value of the collateral, the secured party might consider waiving its interest in the fixture. Given such a rule, the fixture financier may choose to back off from its Article 9 remedy and proceed under the Kansas mechanic's lien statute, K.S.A. 60-1101 et seq. In Benner-Williams, Inc. v. Romine, 200 K. 483, 437 P.2d 312 (1968), the Kansas supreme court held that retention of a fixture security interest does not waive the mechanic's lien remedy, at least absent any subsequent effort to foreclose on the fixture. For some strong language in Article 9 which supports the concept of cumulative remedies, see 84-9-501(1) and 84-9-501(4).

Revisor's Note:

Former section 84-9-313 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Subsection (1) furnishes same guidelines as to what constitutes a fixture, J. Eugene Balloun, 16 K.L.R. 437 (1968).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 172 (1975).

"Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 213, 214, 215, 216 (1976).

Perfecting security interests in mobile homes, 18 W.L.J. 708, 712 (1979).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 27 K.L.R. 301, 304 (1979).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 810 (2003).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

CASE ANNOTATIONS

1. Dairy equipment installed in barn held equipment, not fixture; section not in conflict with common law. Peoples State Bank of Cherryvale v. Clayton, 2 Kan. App. 2d 438, 439, 440, 581 P.2d 399.

2. Leased light poles were personalty which could be removed by lessor without substantial injury to property. In Re Crew's Chrysler-Plymouth, Inc., 5 B.R. 176, 178 (1980).

3. Cited; exclusive methods for perfecting security interest in a mobile home in K.S.A. 84-9-302(3)(c) as described in K.S.A. 8-135(c)(5) examined. Beneficial Finance Co. v. Schroeder, 12 Kan. App. 2d 150, 151, 737 P.2d 52 (1987).

4. Whether first mortgage holder or purchase money security interest in fixtures holder has priority in mortgage foreclosure sale funds examined. Capitol Fed'l Savings & Loan Ass'n v. Hoger, 19 Kan. App. 2d 1052, 1053, 1060, 880 P.2d 281 (1994).

5. Bankruptcy trustee's attempted avoidance of lien on modular home denied; court distinguishes modular homes from mobile homes. In re Brouillette, 389 B.R. 214, 221 (2008).

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KANSAS COMMENT, 1996

This section, which does not vary from the 1995 Official Text, has not been amended. It determines when a secured party claiming an interest in goods installed in or affixed to other goods is entitled to priority over a party with a security interest in the whole. The priority rules of this section are somewhat parallel to those governing fixtures in the previous section. This section does not apply to goods which are commingled in any manufacturing process so that their original identity is lost; the latter situation is covered by 84-9-315.

The basic rule of this section is that a security interest which attaches to goods (such as a replacement engine on a piece of equipment) before they are affixed to the whole has priority with respect to the accession over the interest in the whole, even though the interest in the whole was previously perfected and even though the security interest in the accession is never perfected. Conversely, a claim to the whole which arises subsequent to the affixation takes priority unless the security interest in the accession is perfected (normally by filing). Thus, the financier of an accession should file even before the goods are affixed to the whole.

Although this section gives priority to the accession financier as against a prior security interest in the whole even without perfection of the accession security interest, it is unclear how this rule would relate to the Kansas certificate of title law, K.S.A. 8-135. For example, if a motor vehicle was subject to a security interest noted on the title, and the owner of the vehicle subsequently purchased a replacement engine on time, could the engine supplier claim first priority to the engine even though its security interest was never noted on the certificate of title? Although the fit between the two statutes is uncertain, at least one decision from another jurisdiction suggests that the certificate of title statute would occupy the field, and that the accession financier would not have priority, particularly if its interest was never noted on the title. Wooden v. Michigan National Bank, 162 S.E.2d 222 (Ga. App. 1968). The mechanic's lien provisions of 58-201 et seq. may provide more certainty.

Pre-UCC Kansas law recognized the general doctrine of accessions. In Johnson v. Interstate Securities Co., 152 K. 346, 103 P.2d 795 (1940), a recorded chattel mortgage on a truck was held inferior to the rights of a good faith purchaser of a grain bed which the mortgagor had attached to the truck, the court concluding that the doctrine of accession was not applicable because the grain bed was removable without injury to the truck. Given the absence of a definition of "accession" in this section, this case may still be good law in Kansas.

Revisor's Note:

Former section 84-9-314 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

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KANSAS COMMENT, 1996

This section does not vary from the 1995 Official Text and has not been amended. It is another variation of the purchase money priority theme outlining when a secured party whose collateral contributes to a product has priority over others who have conflicting claims in the same product. Subsection (1) allows a perfected security interest in goods which have become commingled, so as to lose their identity, to continue in the resulting product. Under subsection (1)(b), the section is applicable to cases where components have been processed or assembled into a unit, even though the specific identity of the components is not lost. A secured party must elect, at the time of filing, whether to claim under this section or to claim a security interest in one component under 84-9-314. Subsection (2) allows equal priority to secured claims which arise under subsection (1), such claims sharing on the basis of the cost of the respective goods.

Does this section apply to fertilizer absorbed by crops or feed gobbled by livestock, on the ground that the fertilizer or feed has "become part of a product or mass"? Although a straightfaced argument could be made to this effect, the Official Comment to the section does not appear to contemplate such agricultural applications of the section. Moreover, the only judicial decision which has dealt with the argument has soundly rejected it, also turning aside the claim that cattle are "proceeds" of feed. First National Bank of Brush v. Bostron, 564 P.2d 964 (Colo. App. 1977).

Pre-UCC Kansas law only recognized the rights of the principal contributor. Arnott and Archer v. K.P. Rly. Co., 19 K. 95 (1877); Timma v. Timma, 72 K. 73, 82 P. 481 (1905).

Revisor's Note:

Former section 84-9-315 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Paragraph (b) of subsection (1) explained with reference to security interest in a crop, Van Smith, 35 J.B.A.K. 299, 339 (1966).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 807, 808, 851, 862 (2003).

CASE ANNOTATIONS

1. Security interest continues notwithstanding sale unless disposition was authorized by secured party. Odette Family Ltd. Partnership v. Agco Finance, 35 Kan. App. 2d 1, 123 P.3d 212 (2006).

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KANSAS COMMENT, 1996

This section does not vary from the 1995 Official Text and has not been amended. It provides one entitled to priority under Part 3 of Article 9 may effectively agree to subordinate that claim. Pre-UCC Kansas law was in accord. In Corbin v. Kincaid, 33 K. 649, 7 P. 145 (1885), it was held that parties may agree on priority between mortgages, and the agreement will be binding even though the mortgage subordinated is executed and recorded prior to the superior mortgage. Nor may a subsequent mortgagee attack a prior mortgage where the subsequent mortgage recites that it is subject to the earlier mortgage. Moffatt v. Fouts, 99 K. 118, 160 P. 1137 (1916). See also Arkansas River Gas Co. v. Molk, 130 K. 30, 285 P. 561 (1930), where the placing of the words "O.K." on a bill of sale by a bank operated as a waiver of the bank's lien or claim of superior title. Former K.S.A. 58-804 provided that written contracts determining priorities concerning assignments of accounts receivable were binding.

The term "agreement" is defined in 84-1-201(3) to mean "the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance as provided in this Act (sections 1-205 and 2-208)." This means, for example, that a subordination agreement need not be in writing; a telephone conversation would be sufficient. Williams v. First National Bank & Trust Co., 482 P.2d 595 (Okla. 1971). And a subordination may arise out of a course of dealing between two competing creditors. See Percival Construction Co. v. Miller & Miller Auctioneers, Inc., 532 F.2d 166 (10th Cir. 1976) (informal subordination agreement by course of dealing voided by mutual mistake of fact). As a general contract matter, a written subordination agreement cannot be contradicted by conflicting parol evidence. Peoples Bank & Trust v. Reiff, 256 N.W.2d 336 (N.D. 1977). A subordination agreement should not render unperfected the security interest of the subordinated creditor. Even in the absence of a subordination agreement under this section, 84-1-103 and 84-1-203 suggests that the general notions of waiver, estoppel and good faith may in some cases be enough to reverse Article 9 priorities. Iola State Bank v. Bolan, 235 K. 175, 679 P.2d 720 (1984).

84-1-209, added to the Code by the Kansas legislature in 1967, makes it clear that a subordination agreement does not of itself create a security interest triggering the filing requirements of Article 9.

Revisor's Note:

Former section 84-9-316 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 851 (2003).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

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KANSAS COMMENT, 1996

This section does not vary from the 1995 Official Text and has not been amended. It establishes that personal liability of a secured party does not result from the fact of the security interest, or from the fact that the secured party has given his debtor liberty of sale or use of the collateral. Pre-UCC Kansas law was probably in accord. See Grieving v. La Plante, 156 K. 196, 131 P.2d 898 (1942), holding that the fact that merchandise is sold under the trade name of the owner of the property does not establish agency between the owner and the seller who occupies the property. Compare Adair v. Transcontinental Oil Co., 184 K. 454, 338 P.2d 79 (1959), allowing an oil and gas lien against a conditional vendor of the lease on a theory of agency by operation of law.

Potentially the most important application of this section is to limit the exposure of an assignee of chattel paper or accounts. For example, if a bank buys chattel paper from a dealer who is selling microwave ovens, the bank could not normally be held liable in tort for radiation injuries sustained by consumer purchasers of the ovens. However, for a decision which deals with the application of this section to the assignee of contract rights of a construction subcontractor, and imposes some affirmative liability on the assignee, see Farmers Acceptance Corp. v. DeLozier, 496 P.2d 1016 (Colo. 1972). For a more detailed discussion of an assignee's exposure, see Kansas Comment 1996 to 84-9-118, which is closely related.

Revisor's Note:

Former section 84-9-317 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 847 (2003).

CASE ANNOTATIONS

1. Interest of estate in proceeds of crops planted held free of any claim or lien of creditor. In re Stout, 284 B.R. 511, 513 (2002).

2. Mentioned; UCC provides that security interest generally subordinate to judicial lien before the security interest is perfected. In re Barker, 358 B.R. 399, 406 (2007).

3. Security interest is subordinate to rights of lien creditor before security interest is perfected. In re Jackson, 358 B.R. 412, 415 (2007).

4. Unperfected security interest is subordinate to rights of lien creditor. In re Wedman, 374 B.R. 819, 825 (2007).

5. Unperfected security interest subordinated to rights of person who became creditor prior to perfection. In re Hicks, 491 F.3d 1136, 1140 (2007).

6. Lender's perfected purchase money security interest in vehicle was superior to creditor's judgment lien and to interest of buyer who purchased vehicle at sheriff's sale. Stanley Bank v. Parish, 46 Kan. App. 2d 422, 264 P.3d 491 (2011).

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KANSAS COMMENT, 1996

This section does not vary from the 1995 Official Text and has not been amended. It sets forth rules governing the assignment of third-party obligations as collateral security for a loan.

Subsection (1). This subsection subjects the rights of the assignee of chattel paper or accounts to defenses of the account debtor arising out of the contract, as well as all the terms of the contract, under subsection (1)(a). For example, if the account debtor had no duty to pay the assignor because the goods delivered were defective, this defense could be raised against the assignee, who steps into the assignor's shoes for this purpose. The rights of the Article 9 assignee are thus much less than those of a holder in due course of a negotiable instrument. Compare 84-3-305(b). The assignee could obtain semi-negotiability by relying on a cutoff or waiver-of-defense clause under 84-9-206, but such clauses are rare. For decisions allowing the account debtor to foil the assignee because of the presence of a "defense or claim", see Ertel v. RCA, 307 N.E.2d 471 (Ind. 1974) and James Talcott, Inc. v. H. Corenzwit & Co., 387 A.2d 350 (N.J. 1978).

A financing assignee also takes subject to the account debtor's right of setoff from defenses or claims arising out of other contracts, under subsection (1)(b), so long as the right of setoff accrues before the account debtor receives notification of the assignment. For cases applying this rule, see Central State Bank v. State of New York, 73 Misc.2d 128, 341 N.Y.S.2d 322 (N.Y. Ct. Cl. 1973); American East India Corp. v. Ideal Shoe Co., 400 F. Supp. 141 (E.D. Pa. 1975).

What is the scope of the assignee's liability under this subsection? 84-9-317 makes it clear that the mere existence of a security interest does not impose affirmative liability on the secured party for assignor misconduct. See Kansas Comment 1996 to that section. In other words, although the assignee may be unable to collect the unpaid balance of the contract proceeds to amortize the debt, he will not be required to cough up damages for the account debtor, or return payments already made. Compare the Kansas Consumer Credit Code (K.S.A. 16a-3-404 and 16a-3-405), where the assignee financing a consumer credit transaction cannot be held liable for affirmative recovery. The judicial decisions also support this general principle. See, e.g., Anderson v. Southwest Savings & Loan Association, 571 P.2d 1042 (Ariz. App. 1977); Michelin Tires (Canada) Ltd. v. First National Bank of Boston, 666 F.2d 673 (1st Cir. 1981) (account debtor could not recover $ 700,000 in progress payments made directly to bank as assignee financing construction project); Marron v. H.O. Penn Machinery Co., 518 F. Supp. 1069 (D. Conn. 1981) (secured party not subject to products liability claim for personal injury caused by defective piece of equipment financed by secured party).

On the other hand, there are some cases which hold that the financing assignee must return certain payments made by the account debtor. Benton State Bank v. Warren, 562 S.W.2d 74 (Ark. 1978); Farmers Acceptance Corp. v. DeLozier, 496 P.2d 1016 (Colo. 1972); Massey-Ferguson Credit Corp. v. Brown, 567 P.2d 440 (Mont. 1977). Any financing assignee seeking to resist return of payments made under the assignment would do well to emphasize 84-9-317, which does indeed seem to insulate the assignee from affirmative liability based upon assignor misbehavior.

Subsection (2). This subsection, which is another example of how an assignee may have very "precarious security," makes good faith modification or substitution by the assignor and account debtor, even after notice of the assignment, effective without the assignee's consent, if the changes are in accordance with reasonable commercial standards. For example, the assignor could broaden the warranties applicable to products sold to the account debtor, thus increasing the possibility of a defense to payment. Such a modification would not need consideration to be binding (84-2-209(1)), and would be effective as against the financing assignee under this subsection. Moreover, good faith modification might in some cases include outright termination. See Official Comment 2.

Subsection (3). This subsection establishes the account debtor's risk of double liability. The account debtor may continue to make payment to the assignor until he receives notice that the account has been assigned and that payment is to be made directly to the assignee. In "non-notification" financing this will not occur until default by the assignor on the credit transaction. If the account debtor continues to make payments to the assignor following notification under this subsection, he runs the risk of double liability. For decisions applying this rule, see Valley National Bank of Arizona v. Flagstaff Dairy, 570 P.2d 200 (Ariz. App. 1977); First National Bank of Rio Arriba v. Mountain States Tel. & Tel. Co., 571 P.2d 118 (N.M. 1977); Bank of Commerce v. Intermountain Gas Co., 523 P.2d 1375 (Idaho 1974). The leading case setting forth the requirements of the notification which can lead to double liability is Surety Savings & Loan Co. v. Kanzig, 372 N.E. 2d 602 (Ohio 1978). The right of the assignee to collect directly from the account debtor upon the assignor's default is established by 84-9-502.

Subsection (4). This subsection denies effectiveness to contractual terms prohibiting assignments of accounts and chattel paper. It is a variation of the theme of free alienability of property. The Federal Assignment of Claims Act (40 U.S.C. @ 270(a)) reflects the same philosophy, expressly authorizing assignment of claims where the U.S. government is the account debtor, so long as special notification of the assignment is given to the government.

Revisor's Note:

Former section 84-9-318 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Paragraph (3) mentioned in discussion of impact of the Uniform Consumer Credit Code upon Kansas, Barkley Clark, 18 K.L.R. 277, 290 (1970).

CASE ANNOTATIONS

1. Priority between bank's perfected security interest and state agency's right of setoff examined. Bank of Kansas v. Hutchinson Health Services, Inc., 246 Kan. 83, 90, 785 P.2d 1349 (1990).

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KANSAS COMMENT, 1996

This is a new nonuniform amendment adopted by the legislature in 1991. Four other states have adopted similar statutes: Texas, Wyoming, New Mexico and Oklahoma. See Terry I. Cross, "Oil and Gas Products Lien Acts — Statutory Purchase Money Security Interests For Producers and Royalty Owners," 22d Annual Oil, Gas & Mineral Law Institute, March 22, 1996. The section declares the contract between the first purchaser of mineral interests is a security agreement, giving the interest owner a security interest in any oil or gas production (defined terms that include a wide variety of mineral interests) and in the proceeds to secure the purchase price and all taxes that should be withheld or paid. The security interest is automatically perfected, and recorded writing serves as the financing statement.

Subsection 1. This subsection declares the signed writing or any other voluntary communication to the interest owner or government agency recognizing the interest owner's right to payment for minerals to be purchased operates as a security agreement for the payment of the purchase price. The security interest runs in favor of the interest owners for the payment of the purchase price by the first purchasers. The "first purchaser" is defined in 84-9-319(16)(c) as the first person that purchases oil and gas from and operator or an operator which collects proceeds from sales for the benefit of the other owners. Paragraph (a) of 84-9-319(16) defines oil and gas very broadly to include oil, natural gas, hydorcarbons, sulfur, helium, their by-products or any combination thereof produced from the ground anywhere in the state of Kansas. The "interest owner" is the person who has a right to payment for "oil and gas production." Paragraph (b).

Subsection 2. The security interest created by 84-9-319(1) is automatically perfected, whether or not there is any recorded evidence of the interest owner's right to the mineral interests. If the interest owner's right to the minerals is evidenced by evidence in a deed or any other recorded real estate record, that recorded document serves as financing statement, but there is no separate filing fee and the requirement in 84-9-403 to file a continuation statement every five years does not apply.

Subsection 3. The security interest covers "oil and gas" production and proceeds from the production. Under 84-9-319(3)(a) the security interest continues for an unlimited time as to the production, raw, refined, manufactured or products of any of the foregoing. It also continues in proceeds as accounts, chattel paper, instruments, documents and "cash proceeds" ("money, checks, deposit accounts and the like") as defined in 84-9-306.

Paragraph (b) provides the security interest in all other proceeds continues as specified in 84-9-306, although it is difficult to imagine there being other proceeds in the ordinary course.

Subsection 4. The subsection creates a lien for taxes which were the responsibility of the first purchaser and a lien for payments which should be made to the interest owner if there is no security agreement under the terms of 84-9-319(1) because there is no signed writing, voluntary communication or possession.

Subsection 5. This subsection essentially treats the perfected security interest of the interest owner in much the same manner as the other provisions of Article 9 treat a perfected security interest in inventory. The security interest has priority over bona fide purchasers who take possession without notice, as described in 84-9-301, but the security interest is cut off by buyers in the ordinary course of the first purchaser-seller's business. Although the subsection cites 84-9-307(a), there is no such provision and it is probable that 84-9-307(1) was intended. After a sale in the ordinary course the security interest attaches to the proceeds. The buyer in the ordinary course of the seller's business must also meet the requirements of 84-1-201(9), which are incorporated into 84-9-307(1).

Subsection 6. Paragraph (a) generally gives the automatically perfected security interest purchase money status under 84-9-312, but it does not explicitly mention which subsection. It does mention that the 84-9-312(3) requirement of notice (to other secured parties of record) is not required. The issue regarding which purchase money priority the interest owner has is important because the priority of proceeds claims vary dramatically between 84-9-312(3), which deals with inventory, and 84-9-312(4), which deals with purchase money security interests in all other collateral. The purchase money security interest in inventory has priority only in the cash proceeds received on or before delivery of the inventory to the buyer, which will restrict the proceeds claim of the interest owner's proceeds claim against the first purchaser's other perfected secured creditors.

Treating the interest owner's perfected security interest in proceeds as similar to a purchase money inventory financier appears consistent with provisions in (b) which subordinate the statutory liens of subsection (4) to other Article 9 perfected secured parties.

Paragraph (b) apparently subordinates the statutory liens created by subsection (4) to all Article 9 perfected security interests, but gives it priority over unperfected Article 9 secured parties, bulk purchasers and buyers not in the ordinary course of business, lien creditors and, presumptively, the trustee in bankruptcy.

Subsection 7. Automatically perfected security interests evidenced by a recorded deed or writing have priority over those not evidenced by a recorded interest, and within the class of security interests evidenced by a recorded interest, the priority created by real estate law for interests in oil and gas in place, that is before production. Perfected security interests evidenced by a recorded writing have priority over automatically perfected security interests not evidenced by a recorded writing, and both have priority over the liens created by 84-9-319(4). Liens for the payment of the purchase price under that subsection have priority over liens for the payment or withholding of taxes.

Subsections 8, 9 and 10. These are miscellaneous provisions. Subsection (8) exempts these security interests and liens from the mechanic's liens mentioned in 84-9-310, but subordinates them to liens held by pipelines which are good in bankruptcy or against the federal tax lien. Subsection (9) applies the rules of 84-9-315 to commingled production subject to several liens. Subsection (10) validates the security interests and liens against the debtor even if assigned by the interest owner, and provides that recording the assignment will have the same affect as filing an amended financing statement, namely that the assignee will be treated as the secured party of record.

Subsection 11. The interest owner is still subject to the right of an operator to set off or use the funds in satisfaction of a debt of the interest holder. Where there is a dispute between an operator and other interest holders, the first purchaser may make payment to the person(s) they agree on, or to the one who proves entitlement thereto, or into court, which will have the effect of a tender of the funds under subsection 12, which will discharge the security interest.

Subsection 12. The first purchaser can terminate the security interest or the lien by making payment, or making and keeping open a tender of the amount believed to be due to the operator, which will cause the operator to be treated as the first purchaser. The payment or tender can also be made to a person designated, or acquiesced to, by the interest owner. Finally the payments or tender may be to the court if there is litigation or bankruptcy.

Subsection 13. This provision attempts to indicate the ways that a remote purchaser can protect itself from the automatically perfected security interests. With the exception of the example given in (a) of buying in the ordinary course from the first purchaser and making sure the first purchaser pays the owner (perhaps by issuing a jointly payable check), all require determining who the interest owner is, which could present major practical problems if the interests have been commingled. Remote purchasers, even buying in the ordinary course of the debtor's business, face the same difficulties buyers do under 84-9-307(1) if the security interest was not created by the seller. If it was not created by the seller, but by a remote prior owner, the remote purchasers take subject to it. Perhaps the only practical solution for remote buyers is to deal with persons who are financially healthy so that the right of recourse is a viable remedy.

Revisor's Note:

Former section 84-9-319 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

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Law Review and Bar Journal References:

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

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Law Review and Bar Journal References:

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 860 (2003).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

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Law Review and Bar Journal References:

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 784, 788 (2003).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

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Law Review and Bar Journal References:

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 813 (2003).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).