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 (10 th 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).