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 (2 nd Cir. 1987); Idabel National Bank v. Tucker, 544 P.2d 1287 (Okla. App. 1975); Haynes v. GECC, 582 F.2d 869 (4 th 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 (10 th 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).