KANSAS COMMENT, 2010

1. One of the vital terms of every consumer credit agreement is that which sets forth the criteria which will constitute default. By its nature "default" is not a term that is negotiated by the parties — it is generally controlled by the creditor. It is appropriate, therefore, that its content and implications be confined by the law so as to prevent abuse. This section is intended to accomplish that.

2. This section recognizes that there are two entirely distinct sets of circumstances which might constitute default on an installment obligation. The first and most common is the failure to pay an installment as required. A default of this type is susceptible of being cured by the consumer without impairing the continuing contractual relationship between the consumer and the creditor. See K.S.A. 16a-5-110. The second type of default relates to behavior of the consumer which endangers the prospect of a continuing relationship. It may be insolvency, illegal activity, or an impending removal of assets from the jurisdiction. There must, however, be circumstances present which significantly impair the relationship. Useful discussions of the types of factors and circumstances which constitute "significant impairment" can be found in Johnson County Auto Credit, Inc. v. Green, 277 Kan. 148, 83 P.2d 152 (2004); Prairie State Bank v. Hoefgen, 245 Kan. 236, 777 P.2d 811 (1989); and Medling v. Wecoe Credit Union, 234 Kan. 852, 678 P.2d 1115 (1984). The burden of proof is on the creditor to justify action on a claim of default of this type. This differs from the rule of UCC. See K.S.A. 84-1-208.

3. The "significant impairment" rule of subsection (2) prohibits so-called "insecurity clauses" under which default and acceleration can be called whenever the creditor in good faith feels "insecure." This also differs from the rule of UCC. See K.S.A. 84-1-208.

4. Under an administrative interpretation issued by the administrator, a demand or "call" feature may be included in non-real estate consumer loan agreements that are "interest only" — those in which the regularly scheduled payments are only of interest. See Administrative Interpretation No. 1001. This interpretation points out that calling for full payment in the middle of the regularly scheduled term (e.g., in the 30 th month of a 48 month contract) would trigger the consumer's right to refinance the balloon payment under K.S.A. 16a-3-308.

Law Review and Bar Journal References:

Changes in repossession law under the UCCC discussed in "The New Kansas Consumer Legislation," Barkley Clark, 42 J.B.A.K. 147, 197 (1973).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 179 (1975).

"Summary Repossession, Replevin, and Foreclosure of Security Interests," Thomas V. Murray, 46 J.B.A.K. 93, 95 (1977).

"Commercial Transactions Under the New Bankruptcy Act," Paul B. Rasor, 48 J.B.A.K. 199, 215 (1979).

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

Attorney General's Opinions:

Definitions; supervised lender; supervised financial organization. 84-11.

CASE ANNOTATIONS

1. Debtor's conduct warranted creditor's conclusion that prospect for payment, performance or realization was significantly impaired; notice requirements inapplicable. Medling v. Wecoe Credit Union, 234 Kan. 852, 859, 860, 678 P.2d 1115 (1984).

2. Circumstances justifying determination of significant impairment examined. Prairie State Bank v. Hoefgen, 245 Kan. 236, 245, 777 P.2d 811 (1989).

3. Collateral is significantly impaired when debtor does not provide insurance upon vehicle; vehicle may be repossessed by creditor. Johnson County Auto Credit, Inc. v. Green, 31 Kan. App. 2d 250, 62 P.3d 680 (2003).

4. Repossession of vehicle invalid because of no significant impairment of appellant's collateral; $5,000 in attorney fees approved. Johnson County Auto Credit, Inc. v. Green, 277 Kan. 148, 83 P.3d 152 (2004).

5. Filing of bankruptcy not significant impairment of collateral under statute where debtor current on payments. In re Rowe, 342 B.R. 341, 350, 351 (2006).

6. Variety of factors may be considered to determine whether a significant impairment exists. Hall v. Ford Motor Credit Co., 292 Kan. 176, 254 P.3d 526 (2011).