84-9-203. Attachment and enforceability of security interest; proceeds; supporting obligations; formal requisites. (a) Attachment. A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment.
(b) Enforceability. Except as otherwise provided in subsections (c) through (i), a security interest is enforceable against the debtor and third parties with respect to the collateral only if:
(1) Value has been given;
(2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and
(3) one of the following conditions is met:
(A) The debtor has authenticated a security agreement that provides a description of the collateral and, if the security interest covers timber to be cut, a description of the land concerned;
(B) the collateral is not a certificated security and is in the possession of the secured party under K.S.A. 2024 Supp. 84-9-313, and amendments thereto, pursuant to the debtor's security agreement;
(C) the collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under K.S.A. 84-8-301, and amendments thereto, pursuant to the debtor's security agreement; or
(D) the collateral is deposit accounts, electronic chattel paper, investment property, letter-of-credit rights, or electronic documents and the secured party has control under K.S.A. 2024 Supp. 84-7-106, and amendments thereto, and K.S.A. 2024 Supp. 84-9-104, 84-9-105, 84-9-106 or 84-9-107, and amendments thereto pursuant, to the debtor's security agreement.
(c) Other UCC provisions. Subsection (b) is subject to K.S.A. 84-4-210, and amendments thereto, on the security interest of a collecting bank, K.S.A. 84-5-118, and amendments thereto, on the security interest of a letter-of-credit issuer or nominated person, K.S.A. 2024 Supp. 84-9-110, and amendments thereto, on a security interest arising under Article 2 or 2a, and K.S.A. 2024 Supp. 84-9-206, and amendments thereto, on security interests in investment property.
(d) When person becomes bound by another person's security agreement. A person becomes bound as debtor by a security agreement entered into by another person if, by operation of law other than this article or by contract:
(1) The security agreement becomes effective to create a security interest in the person's property; or
(2) the person becomes generally obligated for the obligations of the other person, including the obligation secured under the security agreement, and acquires or succeeds to all or substantially all of the assets of the other person.
(e) Effect of new debtor becoming bound. If a new debtor becomes bound as debtor by a security agreement entered into by another person:
(1) The agreement satisfies subsection (b)(3) with respect to existing or after-acquired property of the new debtor to the extent the property is described in the agreement; and
(2) another agreement is not necessary to make a security interest in the property enforceable.
(f) Proceeds and supporting obligations. The attachment of a security interest in collateral gives the secured party the rights to proceeds provided by K.S.A. 2024 Supp. 84-9-315, and amendments thereto and is also attachment of a security interest in a supporting obligation for the collateral.
(g) Lien securing right to payment. The attachment of a security interest in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage, or other lien.
(h) Security entitlement carried in securities account. The attachment of a security interest in a securities account is also attachment of a security interest in the security entitlements carried in the securities account.
(i) Commodity contracts carried in commodity account. The attachment of a security interest in a commodity account is also attachment of a security interest in the commodity contracts carried in the commodity account.
History: L. 2000, ch. 142, § 13; L. 2007, ch. 90, § 67; July 1, 2008.
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 (10 th 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 (3 rd 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 (8 th 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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