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 (2 nd 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).